N-30D 1 s6495v.txt AXP BOND FUND, INC. AXP(R) Bond Fund 2002 ANNUAL REPORT (Prospectus Enclosed) AXP Bond Fund seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. (This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) -------------------------------------------------------------------------------- (photo of) Arne H. Carlson From the Chairman Arne H. Carlson Chairman of the board Dear Shareholders, It is a very difficult period for investors caused by corporate management misconduct and its impact on the market as well as the economy. The integrity of corporations at large is being questioned. However, there is optimism that the resulting reforms will give Americans the kind of integrity they deserve. Many corporate leaders are strongly supportive of these reforms. We all have a right to expect financial statements to be fully accurate and business leaders to place the interests of shareholders above personal desires. Your Board is truly independent, comprised of 12 members (nominated by independent members) and three recommended by American Express Financial Corporation. These individuals come from a variety of geographic areas with the diverse skill sets necessary to oversee the operations of the Fund. Investment performance is, and remains, our primary concern. The Fund's auditors, KPMG LLP, are truly independent of American Express Financial Corporation. KPMG serves the interest of shareholders by supporting the work of the Board and certifying unbiased financial reports. The Board has confidence in Ted Truscott, American Express Financial Corporation's new Chief Investment Officer, and shares his enthusiasm in the management changes he has effected to improve the investment performance of all American Express funds. These changes include the hiring of several new portfolio managers and investment leaders and the addition of 10 sub-advised funds. The focus of the Board and American Express Financial Corporation is simple; we strive for consistent, competitive investment performance. If you were a shareholder of record on September 14, you will receive a proxy statement for a shareholder meeting to be held on November 13, 2002. Please take time to consider each proposal and vote promptly. On behalf of the Board, Arne H. Carlson CONTENTS From the Chairman 2 Economic and Market Update 3 Fund Snapshot 5 Questions & Answers with Portfolio Management 6 The Fund's Long-term Performance 9 Investments in Securities 10 Financial Statements 23 Notes to Financial Statements 26 Independent Auditors' Report 37 Federal Income Tax Information 38 Board Members and Officers 40 -------------------------------------------------------------------------------- 2 -- AXP BOND FUND -- 2002 ANNUAL REPORT Economic and Market Update FROM CIO WILLIAM F. "TED" TRUSCOTT (photo of) William F. "Ted" Truscott William F. "Ted" Truscott Chief Investment Officer American Express Financial Corporation Dear Shareholders, Major U.S. financial markets lost ground for the three-month period ending July 31, 2002, although a late rally put them above earlier lows.* The same factors that have driven markets down for most of the year so far were still in play during this period. These include concerns about the truthfulness of accounting practices and the perception that stocks remain too expensive relative to company earnings. I expect we'll need to see consistent improvement in earnings before stocks rebound significantly. If corporate revenue growth becomes apparent and widespread, it will effectively make stock valuations cheaper. Increased demand should then have a positive impact on prices. Economic fundamentals have continued to look positive despite volatility in the financial markets. Inflation and interest rates remain low, unemployment and job growth are at reasonable levels, and there are signs that business spending is beginning to pick up. In addition, a weaker dollar should help U.S. companies that export goods overseas, even though it crimps our wallets when we travel abroad. These and other factors make it highly unlikely that we will experience a so-called "double-dip" recession. I remain optimistic about the direction of the economy and believe that, eventually, markets will start paying attention to these very favorable conditions. Nevertheless, we should remember that risk still exists. For one, bonds have been experiencing their own bear market. This has created something of a credit crunch for businesses, as liquidity declines and spreads widen. Related to this has been a crisis of confidence -- the unfortunate legacy of recent corporate scandal. In some cases, investors who thought they were buying high-quality corporate bonds were actually getting riskier high-yield securities due to dishonest accounting. Everyone agrees that some type of reform is needed, but the challenge for regulators will be to discourage misleading practices without sacrificing entrepreneurial incentive. Prudent regulation will boost confidence, while misguided efforts will simply make markets less efficient. What I think all investors need to understand is that we're still working through the excess capacity and inflated demand forecasts that were created in the late `90s. This process has been painful, but it has helped to reorient expectations to levels that are more sustainable. Historically speaking, the late `90s were an aberration and will likely not be repeated soon. -------------------------------------------------------------------------------- 3 -- AXP BOND FUND -- 2002 ANNUAL REPORT Economic and Market Update However, a more sober outlook need not be cause for special concern. We should all ask ourselves, "Have my goals changed in the last couple of years?" For many of us, the answer will be "no." If you're saving for long-term goals like retirement, I would still advise a substantial weighting in equities for your portfolio. Over time, stocks will probably continue to outperform bonds or other investments. And if you're in retirement or getting close, you may want to invest more heavily in bonds and cash, with a smaller portion devoted to equities. See your financial advisor or retirement plan administrator for more information about different types of securities and asset allocation. As always, thank you for investing with American Express Financial Advisors. William F. Truscott * Please see portfolio manager Q&A for fiscal year economic coverage. KEY POINTS -- Economic fundamentals remain positive. -- Credit "crunch" for business sector persists. -- Re-evaluation of personal financial goals key. -------------------------------------------------------------------------------- 4 -- AXP BOND FUND -- 2002 ANNUAL REPORT Fund Snapshot AS OF AUG. 31, 2002 PORTFOLIO MANAGER Portfolio manager Ray Goodner, CFA Tenure/since 5/1/00 Years in industry 31 FUND OBJECTIVE For investors seeking a high level of current income while conserving the value of the investment for the longest period of time. Inception dates A: 10/3/74 B: 3/20/95 C: 6/26/00 Y: 3/20/95 Ticker symbols A: INBNX B: ININX C: AXBCX Y: IDBYX Total net assets $3.806 billion Number of holdings approximately 400 STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT LONG X HIGH X MEDIUM QUALITY X LOW PORTFOLIO ASSET MIX Percentage of portfolio assets (pie graph) Bonds 90.0% Cash & cash equivalents 9.0% Other 0.1% TOP FIVE SECTORS Percentage of portfolio assets Mortgage-backed securities 23.6% Government obligations & agencies 10.2 Financial services 7.3 Utilities -- electric 5.3 Retail 3.5 CREDIT QUALITY SUMMARY Percentage of portfolio assets AAA bonds 37.4% AA bonds 3.4 A bonds 13.1 BAA bonds 23.0 Non-investment grade bonds 14.0 Fund holdings are subject to change. -------------------------------------------------------------------------------- 5 -- AXP BOND FUND -- 2002 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Q: How did the Fund perform for the one-year period ended Aug. 31, 2002? A: For the one-year period ended Aug. 31, 2002, the Fund's Class A shares (excluding sale charge) returned 3.13% versus the Lipper Corporate Debt - BBB rated Funds Index, which returned 3.06%. The Lehman Brothers Aggregate Bond Index generated a return of 8.11% over the same timeframe. Q: What factors significantly impacted performance? A: We began the fiscal year with interest rates relatively low from a historic perspective, with the 10-year Treasury bond yielding just over 4.8%. While we anticipated that an economic recovery was on the horizon, which typically sends interest rates higher, the year began instead with the terrorist attacks. That was the first of many events that shook confidence in the likelihood of a smooth economic rebound. Although rates drifted higher mid-way through the 12-month period, disappointment with the trend of economic growth and ongoing uncertainty with the world situation drove rates down as the year came to a close. By the end of August 2002, the yield on the 10-year Treasury bond dipped to slightly over 4.0%. Early in the period, in light of the events of September 11, investors poured money into perceived safe havens, namely bonds issued by the U.S. government. While that portion of the portfolio performed well in the early months of the period, our position in corporate bonds, including low-grade debt securities, lagged the market. Then, corporate issues enjoyed a recovery in the closing months of 2001, which helped the portfolio at that time. We were positioned for economic recovery and the Fund was more heavily skewed toward corporate bonds than U.S. government bonds. (bar graph) PERFORMANCE COMPARISON For the period ended Aug. 31, 2002 10% (bar 2) 8% +8.11% 6% 4% (bar 1) (bar 3) +3.13% +3.06% 2% 0% (bar 1) AXP Bond Fund Class A (excluding sales charge) (bar 2) Lehman Brothers Aggregate Bond (bar 3) Lipper Corporate Devt - BBB rated Funds Index (see "The Fund's Long-term Performance" for Index descriptions) Past performance is no guarantee of future results. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in sales charges and fees. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. -------------------------------------------------------------------------------- 6 -- AXP BOND FUND -- 2002 ANNUAL REPORT Questions & Answers (begin callout quote) > Our primary focus in this environment is to generate attractive returns while preserving capital. (end callout quote) Interest rates moved higher in January and February, but corporate bonds weathered the challenging environment quite well. However, since March, bond investors have resumed the "flight-to-quality" that marked the post- September 11 period, and our prominent position in corporate issues again suffered. In hindsight, the environment for corporates turned treacherous in the wake of corporate defaults, and this impacted some of our corporate investments. Q: What changes did you make to the portfolio? A: We started the year with a conservative approach in terms of structuring the Fund for interest rate sensitivity, since at that time, we believed rates were headed higher in what we expected to be a rapidly improving economy. While rates crept up slightly periodically, this trend was offset overall by a weaker-than-expected economic recovery. As the year progressed, and as interest rates held steady, we began to take a more aggressive stance. We placed increasing emphasis on corporate bonds, which typically pay higher yields than government issues, but also carry more risk. Along with owning some very high-quality corporate issues, we AVERAGE ANNUAL TOTAL RETURNS as of Aug. 31, 2002 At Net Asset Value (NAV)(1) Class A Class B Class C Class Y 1 year +3.13% +2.35% +2.35% +3.29% 5 years +5.23% +4.43% N/A +5.36% 10 years +7.03% N/A N/A N/A Since inception N/A +6.39%(2) +6.57%(3) +7.34%(2) With Sales Charge Class A Class B Class C Class Y 1 year -1.76% -1.56% +2.35% +3.29% 5 years +4.21% +4.28% N/A +5.36% 10 years +6.51% N/A N/A N/A Since inception N/A +6.39%(2) +6.57%(3) +7.34%(2) (1) Excluding sales charge. (2) Inception date was March 20, 1995. (3) Inception date was June 26, 2000. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. The performance shown for each class of shares will vary due to differences in sales charges and fees. Short term performance may be higher or lower than the figures shown. Visit americanexpress.com for current information. -------------------------------------------------------------------------------- 7 -- AXP BOND FUND -- 2002 ANNUAL REPORT Questions & Answers also purchased select high-yield (low-grade) bonds issued by companies with sound business fundamentals. In addition, our in-depth, proprietary research indicated these bonds offered good value. Finally, we looked to take advantage of the sudden trend of a weakened U.S. dollar, and added some Japanese and European government bonds into the mix. Q: What is your outlook for the year ahead? A: While the bond market enjoyed another strong run over the past year, a number of challenges remain on the horizon. The fact that interest rates are at such low levels at this point, capital appreciation potential appears to be limited for many parts of the bond market. In addition, corporate bonds continue to struggle in an environment of sagging investor confidence. On a more positive note, inflation has not been a threat, and there seems no reason to think that this will change anytime soon. Given that the U.S. and world economies don't appear to be on the verge of a dramatic growth spurt, but rather are likely to maintain a moderate rate of growth at best in the near term, it seems reasonable to expect that any hikes in interest rates will be mild. Q: How are you positioning the Fund in light of your outlook? A: Our primary focus in this environment is to generate attractive returns while preserving capital. With corporate bonds making up more than half of the portfolio, we don't expect to increase that position in any significant way. We continue to hold low-grade bonds in the portfolio, which we believe are extremely attractive in the current environment and can be added at value prices. With limited near-term risk of a significant interest rate increase, we anticipate maintaining a slightly aggressive stance in the Fund's interest-rate sensitivity. -------------------------------------------------------------------------------- 8 -- AXP BOND FUND -- 2002 ANNUAL REPORT The Fund's Long-term Performance This chart illustrates the total value of an assumed $10,000 investment in AXP Bond Fund Class A shares (from 9/1/92 to 8/31/02) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Corporate Debt - BBB rated Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. Past performance is no guarantee of future results. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Returns do not reflect taxes payable on distributions and redemptions. Also see "Past Performance" in the Fund's current prospectus. (line graph) VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP BOND FUND $30,000 $22,500 (dotted line) (dashed line) $15,000 (solid line) $7,500 8/92 8/93 8/94 8/95 8/96 8/97 8/98 8/99 8/00 8/01 8/02 (solid line) AXP Bond Fund Class A $18,781 (dotted line) Lehman Brothers Aggregate Bond Index(1) $20,286 (dashed line) Lipper Corporate Debt - BBB rated Funds Index(s) $18,846 (1) Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper Corporate Debt - BBB rated Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. Average Annual Total Returns Class A with Sales Charge as of Aug. 31, 2002 1 year -1.76% 5 years +4.21% 10 years +6.51% Since inception N/A Results for other share classes can be found on page 7. -------------------------------------------------------------------------------- 9 -- AXP BOND FUND -- 2002 ANNUAL REPORT Investments in Securities AXP Bond Fund, Inc. Aug. 31, 2002 (Percentages represent value of investments compared to net assets) Bonds (97.1%) Issuer Coupon Principal Value(a) rate amount Government obligations & agencies (13.9%) Bundesschatzanweisungen (European Monetary Unit) 02-16-07 4.00% 20,075,000(c) $19,697,393 Federal Natl Mtge Assn 04-15-04 3.63 25,000,000 25,580,000 07-15-05 7.00 80,100,000 89,425,001 Federal Republic of Brazil (U.S. Dollar) 07-26-07 11.25 4,000,000(c) 2,760,000 01-11-12 11.00 13,000,000(c) 7,930,000 Kingdom of Spain (Japanese Yen) 07-22-04 4.63 1,127,000,000(c) 10,319,448 Resolution Funding Corp Zero Coupon 10-15-02 6.19 24,660,000(f) 24,617,321 U.S. Treasury 01-31-03 4.75 50,000,000 50,614,500 02-15-06 5.63 14,500,000 15,900,729 11-15-16 7.50 169,115,000 215,872,591 11-15-24 7.50 29,900,000 39,397,914 United Mexican States (U.S. Dollar) 01-14-12 7.50 27,000,000(c) 27,675,000 Total 529,789,897 Mortgage-backed securities (25.2%) Federal Home Loan Mtge Corp 07-01-07 6.50 2,042 2,070 03-01-13 5.50 6,456,474 6,661,302 04-01-15 7.50 7,851,800 8,393,626 04-01-17 8.00 140,745 152,067 08-01-24 8.00 2,305,427 2,478,892 12-01-27 6.00 7,000,436 7,193,075 10-01-28 7.00 17,636,020 18,386,336 11-01-29 7.00 12,045,143 12,554,563 02-01-31 7.50 9,996,753 10,529,820 07-01-32 7.00 47,004,253 48,965,879 Collateralized Mtge Obligation 03-15-22 7.00 9,134,911 9,625,194 07-15-22 7.00 9,104,711 9,850,660 Federal Natl Mtge Assn 07-01-08 6.50 3,459,255 3,632,385 11-01-09 9.00 763 826 06-01-10 6.50 7,847,053 8,239,784 08-01-11 8.50 7,076,828 7,679,280 05-01-13 6.50 19,110,652 20,046,637 03-01-14 5.50 22,122,650 22,789,052 04-01-14 6.50 5,337,470 5,598,884 08-01-16 6.00 21,923,852 22,720,503 10-01-17 5.00 33,000,000(h) 33,067,031 04-01-23 8.50 2,813,359 3,065,324 05-01-23 6.50 17,402,259 18,078,483 08-01-23 6.50 1,349,636 1,402,080 09-01-23 6.50 1,823,100 1,893,944 11-01-23 6.50 4,033,621 4,190,362 01-01-24 6.50 27,644,393 28,718,612 02-01-24 6.50 3,133,710 3,251,489 05-01-24 6.00 32,947,303 33,919,678 06-01-24 9.00 2,127,312 2,349,896 02-01-25 8.00 1,092,329 1,174,791 09-01-25 6.50 11,005,305 11,412,803 09-01-25 8.00 2,421,786 2,603,091 02-01-26 6.00 12,941,037 13,310,681 03-01-26 7.00 6,870,566 7,180,951 06-01-28 6.00 21,480,207 22,035,371 08-01-28 6.50 14,465,175 14,963,688 10-01-28 6.00 13,983,950 14,345,370 11-01-28 6.50 7,043,714 7,286,461 12-01-28 6.00 15,607,335 16,010,713 12-01-28 6.50 2,887,487 2,986,998 01-01-29 6.50 22,619,252 23,414,656 03-01-29 6.50 13,788,410 14,260,153 05-01-29 6.50 17,923,687 18,536,911 06-01-29 7.00 52,917 55,163 07-01-29 6.00 20,000,000(h) 20,400,000 07-01-29 6.50 25,000,000(h) 25,820,313 07-01-29 7.00 18,834,688 19,634,358 08-01-29 6.00 142,000,000(h) 144,285,312 09-01-29 7.00 45,428,267 47,357,028 01-01-31 7.50 14,430,073 15,195,606 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 10 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 06-01-32 7.00% $81,701,588 $85,123,572 10-01-32 5.50 59,000,000(h) 58,787,968 Collateralized Mtge Obligation 06-25-23 5.25 11,553,126 11,867,488 Govt Natl Mtge Assn 02-15-24 8.00 1,087,605 1,169,709 02-15-25 9.00 161,906 179,219 06-15-26 8.00 1,536,515 1,647,321 08-15-26 8.00 2,376,736 2,548,135 Total 959,031,564 Aerospace & defense (0.7%) Alliant Techsystems Company Guaranty 05-15-11 8.50 4,725,000 4,949,438 L-3 Communications Sr Sub Nts 06-15-12 7.63 7,000,000(d) 7,245,000 United Technologies 11-15-19 8.88 10,000,000 13,050,790 Total 25,245,228 Airlines (1.5%) American Airlines 10-01-06 7.80 6,500,000 5,870,037 Series 2001-1 05-23-16 7.38 10,948,558 10,763,856 Continental Airlines Series 1996B 10-15-13 7.82 3,825,737 3,770,493 Series 1998A 09-15-17 6.65 11,716,247 10,512,877 Delta Air Lines 05-15-10 10.13 10,000,000 8,400,000 Series 2002-1 01-02-12 7.78 7,000,000 6,601,420 Northwest Airlines 06-01-06 8.88 6,000,000 4,200,000 United Air Lines 10-01-10 7.03 6,631,022 5,310,056 Total 55,428,739 Automotive & related (1.8%) DaimlerChrysler North America Holding Company Guaranty 09-01-04 6.90 7,000,000 7,409,640 01-15-12 7.30 9,000,000 9,674,325 Ford Motor 07-16-31 7.45 9,400,000 8,181,158 Ford Motor Credit 07-16-04 6.70 18,000,000 18,306,360 02-01-11 7.38 15,000,000 14,569,380 Hertz Sr Nts 06-01-12 7.63 12,000,000 11,279,640 Total 69,420,503 Banks and savings & loans (2.5%) Capital One Bank Sr Nts 02-01-06 6.88 12,350,000 11,286,332 Central Fidelity Capital Company Guaranty Series A 04-15-27 2.86 16,500,000(m) 16,007,970 Comerica Bank Sub Nts 10-01-08 6.00 9,780,000 10,345,147 FleetBoston Financial 09-15-05 7.25 22,000,000 23,843,930 Marshall & Ilsley Series E 09-01-06 5.75 8,000,000 8,494,480 Sovereign Bancorp Sr Nts 11-15-06 10.50 3,165,000 3,513,150 U.S. Bancorp Zero Coupon Cv 08-06-21 1.44 1,100,000(f) 818,125 Union Planters Capital Company Guaranty 12-15-26 8.20 4,000,000 4,269,428 Washington Mutual Bank 06-15-11 6.88 15,000,000 16,386,975 Total 94,965,537 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 11 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Beverages & tobacco (0.4%) Constellation Brands Sr Sub Nts Series B 01-15-12 8.13% $6,575,000 $6,772,250 Cott Beverages Company Guaranty 12-15-11 8.00 8,000,000 8,140,000 Total 14,912,250 Building materials & construction (2.4%) Associated Materials Sr Sub Nts 04-15-12 9.75 3,550,000(d) 3,603,250 Beazer Homes USA Sr Nts 04-15-12 8.38 3,575,000(d) 3,592,875 Collins & Aikman Floor Cover Sr Sub Nts 02-15-10 9.75 915,000(d) 915,000 Louisiana Pacific Sr Nts 08-15-10 8.88 2,260,000 2,364,595 Sr Sub Nts 08-15-05 8.50 3,230,000 3,250,129 Masco Zero Coupon Cv 07-20-31 2.23 1,460,000(f) 613,200 Meritage Company Guaranty 06-01-11 9.75 4,140,000 4,140,000 Nortek Sr Nts Series B 09-01-07 9.13 3,000,000 3,037,500 08-01-08 8.88 3,600,000 3,600,000 Pulte Homes Company Guaranty 08-01-11 7.88 10,800,000 11,768,263 Sr Nts 12-15-03 7.00 7,700,000 7,958,173 Standard Pacific Sr Sub Nts 04-15-12 9.25 4,995,000 4,770,225 Tech Olympic USA Sr Sub Nts 07-01-12 10.38 2,765,000(d) 2,536,888 Tyco Intl Group (U.S. Dollar) 10-15-11 6.38 12,000,000(c) 9,900,000 WCI Communities Company Guaranty 02-15-11 10.63 4,525,000 4,525,000 05-01-12 9.13 1,000,000 920,000 Weyerhaeuser 03-15-07 6.13 12,000,000(d) 12,612,120 03-15-32 7.38 8,000,000(d) 8,487,680 (U.S. Dollar) Company Guaranty 01-15-04 8.50 3,000,000(c) 3,179,370 Total 91,774,268 Chemicals (2.8%) Airgas Company Guaranty 10-01-11 9.13 8,000,000 8,480,000 Allied Waste North America Company Guaranty Series B 12-01-08 8.50 1,700,000 1,691,500 01-01-09 7.88 6,980,000 6,805,500 08-01-09 10.00 1,500,000 1,477,500 Compass Minerals Group Company Guaranty 08-15-11 10.00 6,000,000 6,240,000 Dow Chemical 08-15-05 7.00 1,575,000 1,700,178 10-01-12 6.00 5,000,000 5,089,500 Equistar Chemical/Funding Company Guaranty 09-01-08 10.13 6,500,000 6,240,000 IMC Global Company Guaranty Series B 06-01-08 10.88 5,205,000 5,621,400 06-01-11 11.25 1,295,000 1,398,600 Lyondell Chemical Series B 05-01-07 9.88 4,000,000 3,960,000 MacDermid 07-15-11 9.13 3,670,000 3,816,800 Noveon Company Guaranty Series B 02-28-11 11.00 3,850,000 4,119,500 Resolution Performance Sr Sub Nts 11-15-10 13.50 2,050,000 2,326,750 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 12 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Chemicals (cont.) Waste Management Company Guaranty 05-15-09 6.88% $20,000,000 $19,947,599 Sr Nts 10-01-07 7.13 15,000,000 15,599,325 07-15-28 7.00 12,500,000 11,228,538 Total 105,742,690 Communications equipment & services (1.7%) AT&T Wireless Services Sr Nts 03-01-11 7.88 24,550,000 20,867,500 03-01-31 8.75 10,680,000 8,223,600 EchoStar DBS Sr Nts 02-01-09 9.38 4,500,000 4,477,500 Verizon Global Funding 06-15-12 6.88 7,000,000 6,774,621 06-15-32 7.75 11,600,000 11,095,284 Verizon New England Sr Nts 09-15-11 6.50 13,000,000 12,703,860 Total 64,142,365 Computers & office equipment (--%) Comverse Technology Cv 12-01-05 1.50 550,000 427,625 Siebel Systems Cv 09-15-06 5.50 400,000 370,000 Veritas Software Cv 08-13-06 1.86 490,000 382,813 Total 1,180,438 Electronics (0.2%) Agilent Technologies Cv 12-01-21 3.00 360,000(m) 286,200 Arrow Electronic Zero Coupon Cv 02-21-21 4.36 1,330,000(f) 583,538 Celestica (U.S. Dollar) Zero Coupon Cv 08-01-20 3.41 1,950,000(c,f) 840,937 Integrated Process Equipment Cv 09-15-04 6.25 430,000 395,063 Intl Rectifier Cv 07-15-07 4.25 650,000 512,688 Reliance Electric 04-15-03 6.80 6,000,000 6,139,553 STMicroelectronics (U.S. Dollar) Zero Coupon Cv 11-16-10 3.75 950,000(c,d,f) 609,188 Total 9,367,167 Energy (3.3%) Anadarko Finance Company Guaranty Series B 05-01-11 6.75 14,000,000 15,410,332 Ashland Medium-term Nts Series J 08-15-05 7.83 14,000,000 15,557,234 Conoco Funding Company Guaranty 10-15-11 6.35 13,000,000 14,063,296 Devon Energy Cv 08-15-08 4.90 630,000 618,975 El Paso Energy Partners Company Guaranty 06-01-11 8.50 5,860,000(d) 5,801,400 Company Guaranty Series B 06-01-11 8.50 805,000 792,925 Encore Acquisition Company Guaranty 06-15-12 8.38 1,080,000(d) 1,085,400 FirstEnergy Series B 11-15-11 6.45 10,000,000 9,473,600 Forest Oil Sr Nts 12-15-11 8.00 9,705,000 9,826,313 Hanover Equipment Trust Sr Nts 09-01-08 8.50 6,010,000(d) 5,589,300 Kerr-McGee Cv 02-15-10 5.25 350,000 376,250 Luscar Coal (U.S. Dollar) Sr Nts 10-15-11 9.75 2,525,000(c) 2,701,750 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 13 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Energy (cont.) Magnum Hunter Resources Sr Nts 03-15-12 9.60% $2,410,000(d) $2,458,200 Newfield Exploration Sr Nts 03-01-11 7.63 6,500,000 6,702,215 Sr Sub Nts 08-15-12 8.38 2,360,000 2,348,200 Phillips Petroleum 05-25-10 8.75 15,000,000 18,312,600 Tesoro Petroleum Sr Sub Nts 04-01-12 9.63 2,015,000(d) 1,481,025 Westport Resources Company Guaranty 11-01-11 8.25 4,850,000 4,995,500 XTO Energy Sr Nts 04-15-12 7.50 6,230,000 6,479,200 Total 124,073,715 Energy equipment & services (0.2%) Key Energy Services Sr Nts 03-01-08 8.38 5,000,000 5,150,000 Nabors Inds Zero Coupon Cv 06-20-20 6.91 920,000(f) 586,500 Total 5,736,500 Financial services (7.8%) Amvescap (U.S. Dollar) Sr Nts 01-15-07 5.90 6,000,000(c) 6,271,506 Citigroup Sub Nts 10-01-10 7.25 20,000,000 22,406,660 08-27-12 5.63 12,000,000 12,176,400 Credit Suisse First Boston USA 01-15-12 6.50 20,000,000 20,925,060 First Union- Lehman Brothers Cl A3 Series 1997-C2 12-18-07 6.65 20,000,000 21,938,080 GMAC 09-15-06 6.13 25,000,000 25,224,000 09-15-11 6.88 51,800,000 51,605,127 Goldman Sachs Group 01-15-11 6.88 21,800,000 23,697,603 Household Finance 01-24-06 6.50 20,000,000 20,471,920 10-15-11 6.38 6,850,000 6,605,154 Indah Kiat Finance Mauritius (U.S. Dollar) Company Guaranty 07-01-07 10.00 9,225,000(b,c) 2,490,750 John Hancock Financial Services Sr Nts 12-01-08 5.63 9,602,000 9,964,927 LaBranche Sr Nts 08-15-04 9.50 6,930,000 7,456,403 Sr Sub Nts 03-02-07 12.00 7,100,000 7,668,000 Legg Mason Sr Nts 07-02-08 6.75 11,300,000 12,230,216 Lehman Brothers Holdings Cv 04-01-22 .96 620,000(m) 618,450 MBNA 01-17-07 6.25 5,500,000 5,571,869 Ohio Savings Capital Company Guaranty 06-03-27 9.50 9,500,000(d) 9,534,390 Prudential Bache Collateralized Mtge Obligation 04-01-19 7.97 3,506,951 3,534,857 Salomon Smith Barney Holdings 01-15-03 6.13 15,000,000 15,223,380 Swiss Re America Holdings Cv 11-21-21 3.25 420,000(d) 353,126 Verizon Global Funding 12-01-30 7.75 12,000,000 11,360,784 Total 297,328,662 Food (1.2%) B&G Foods Company Guaranty Series D 08-01-07 9.63 5,765,000 5,865,888 Burns Philp Capital Property Company Guaranty 07-15-12 9.75 2,695,000(d) 2,708,475 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Food (cont.) Del Monte Company Guaranty Series B 05-15-11 9.25% $8,830,000 $8,918,300 Delhaize America Company Guaranty 04-15-06 7.38 15,000,000 14,949,225 Fleming Companies Company Guaranty 06-15-10 9.25 3,500,000 3,377,500 Kellogg Series B 04-01-11 6.60 10,000,000 11,036,500 Total 46,855,888 Furniture & appliances (0.1%) Interface Company Guaranty 04-01-08 7.30 1,000,000 863,750 Sr Nts 02-01-10 10.38 2,325,000 2,339,531 Total 3,203,281 Health care (0.6%) Allergan Zero Coupon Cv 11-01-20 2.50 650,000(f) 407,875 Amgen Zero Coupon Cv 03-01-32 3.60 930,000(f) 654,488 Aviron Cv 02-01-08 5.25 680,000 621,350 Enzon Cv 07-01-08 4.50 520,000 365,950 Johnson & Johnson Zero Coupon Cv 07-28-20 0.92 470,000(f) 368,950 Laboratory Corp of America Zero Coupon Cv 09-11-21 1.90 540,000(f) 363,150 Medtronic Cv 09-15-21 1.25 620,000 626,975 Wyeth 02-15-05 7.90 3,000,000 3,245,994 03-15-11 6.70 15,000,000 15,970,425 Total 22,625,157 Health care services (2.2%) HCA 06-01-06 7.13 20,260,000 21,410,809 02-01-11 7.88 5,400,000 5,900,132 Insight Healthcare Services Company Guaranty Series B 11-01-11 9.88 4,000,000 3,910,000 Paracelsus Healthcare Escrow Sr Sub Nts 08-15-06 -- 13,100,000(b,j) -- Tenet Healthcare Sr Nts 06-01-12 6.50 34,070,000 35,739,089 Triad Hospitals Company Guaranty 05-01-09 8.75 10,200,000 10,608,000 Vanguard Health Systems Company Guaranty 08-01-11 9.75 6,395,000 6,458,950 Total 84,026,980 Industrial equipment & services (0.2%) Joy Global Company Guaranty Series B 03-15-12 8.75 3,000,000 3,060,000 Terex Company Guaranty 07-15-11 9.25 3,000,000 2,947,500 Total 6,007,500 Insurance (2.4%) American General Institute Capital Company Guaranty Series A 12-01-45 7.57 10,000,000(d) 11,087,720 American Intl Group Zero Coupon Cv 11-09-31 1.40 1,050,000(f) 654,938 Americo Life Sr Sub Nts 06-01-05 9.25 9,400,000 9,212,000 Executive Risk Capital Company Guaranty Series B 02-01-27 8.68 11,500,000 12,949,552 Florida Windstorm Sr Nts (MBIA Insured) 08-25-07 6.85 15,000,000(d,l) 16,767,734 Hartford Financial Services Group Sr Nts 09-01-07 4.70 4,500,000 4,512,645 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 15 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Insurance (cont.) Hartford Life 06-15-27 7.65% $7,115,000 $7,761,170 Lincoln Natl 12-15-11 6.20 5,600,000 5,777,856 Principal Mutual 03-01-44 8.00 10,000,000(d) 10,325,190 XL Capital Zero Coupon Cv 05-23-21 2.42 970,000(f) 585,638 Zurich Capital Trust I Company Guaranty 06-01-37 8.38 13,785,000(d) 11,519,780 Total 91,154,223 Leisure time & entertainment (1.8%) Ameristar Casinos Company Guaranty 02-15-09 10.75 2,000,000 2,165,000 Argosy Gaming Company Guaranty 06-01-09 10.75 2,000,000 2,175,000 Carnival (U.S. Dollar) Cv 04-15-21 2.00 580,000(c) 577,825 Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 6,000,000 6,180,000 Coast Hotels & Casino Company Guaranty 04-01-09 9.50 1,315,000 1,364,313 HMH Properties Company Guaranty Series B 08-01-08 7.88 2,185,000 2,075,750 MGM Mirage Sr Nts 10-15-06 7.25 11,785,000 11,690,025 Mohegan Tribal Gaming Sr Sub Nts 04-01-12 8.00 7,200,000 7,326,000 Station Casinos Sr Nts 02-15-08 8.38 6,000,000 6,240,000 Sr Sub Nts 07-01-10 9.88 2,000,000 2,135,000 Steinway Musical Instruments Company Guaranty 04-15-11 8.75 2,665,000 2,678,325 United Artists Theatre Series 1995A 07-01-15 9.30 11,279,576 10,602,802 Viacom Company Guaranty 05-15-11 6.63 13,650,000 14,718,139 Total 69,928,179 Media (3.6%) American Media Operation Company Guaranty Series B 05-01-09 10.25 5,000,000 5,175,000 Belo (AH) 11-01-08 8.00 6,550,000 6,931,931 Charter Communications Holdings LLC/Capital Sr Nts 10-01-09 10.75 3,000,000 2,100,000 05-15-11 10.00 12,285,000 8,538,075 Comcast Cable Communications Sr Nts 06-15-13 7.13 27,025,000 24,592,749 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 6,510,000(c) 6,558,825 CSC Holdings Sr Nts Series B 04-01-11 7.63 8,000,000 6,680,000 Cumulus Media Company Guaranty 07-01-08 10.38 530,000 553,850 Emmis Communications Company Guaranty Series B 03-15-09 8.13 2,470,000 2,457,650 Entravision Communications Company Guaranty 03-15-09 8.13 1,910,000 1,938,650 Mediacom Broadband LLC Company Guaranty 07-15-13 11.00 2,675,000 2,447,625 News Corp 06-24-10 10.15 2,981,301(k) 3,496,678 Radio One Company Guaranty Series B 07-01-11 8.88 2,000,000 2,065,000 Sinclair Broadcast Group Company Guaranty 03-15-12 8.00 4,000,000 3,960,000 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (cont.) Time Warner 08-15-06 8.11% $4,095,000 $3,803,821 Time Warner Companies 02-01-24 7.57 15,875,000 13,106,194 Time Warner Entertainment 03-15-23 8.38 17,000,000 16,092,574 Turner Broadcasting 07-01-13 8.38 10,000,000 9,097,000 02-01-24 8.40 19,500,000 16,037,268 Total 135,632,890 Metals (0.7%) AK Steel Company Guaranty 06-15-12 7.75 7,520,000(d) 7,482,400 Imexsa Export Trust (U.S. Dollar) 05-31-03 10.13 1,589,748(c,d) 794,874 Inco (U.S. Dollar) Cv 03-15-16 7.75 4,718,000(c) 4,694,410 Jorgensen Earle M. 06-01-12 9.75 1,500,000 1,471,875 Normandy Yandal Operations (U.S. Dollar) Sr Nts 04-01-08 8.88 5,000,000(c) 5,100,000 Peabody Energy Company Guaranty Series B 05-15-08 9.63 5,700,000 5,985,000 Total 25,528,559 Miscellaneous (1.7%) American Commercial Lines LLC Series B 06-30-06 7.37 3,056,014 2,658,732 Series C 03-30-07 7.62 4,284,771 3,727,751 AOA Holdings LLC Sr Nts 06-15-08 11.00 6,000,000(k) 6,000,000 Bistro Trust 12-31-02 9.50 14,000,000(d) 13,160,000 Brinker Intl Zero Coupon Cv 10-10-21 2.5 630,000(f) 384,300 Emulex Cv 02-01-07 1.75 550,000 384,313 EOP Operating LP Sr Nts 07-15-11 7.00 14,000,000 14,864,710 ERP Operating LP 03-02-11 6.95 10,000,000 10,783,100 ISG Resources 04-15-08 10.00 5,555,000 5,555,000 MSX Intl Company Guaranty 01-15-08 11.38 4,270,000 2,786,175 Prime Succession Holding Cv Pay-in-kind 08-29-04 14.25 205,788(b,g,j) -- Von Hoffman Company Guaranty 03-15-09 10.25 3,255,000(d) 3,206,175 Total 63,510,256 Multi-industry conglomerates (--%) Danaher Zero Coupon Cv 01-22-21 0.6 1,200,000(f) 784,500 Paper & packaging (2.3%) Berry Plastics Sr Sub Nts 07-15-12 10.75 1,405,000(d) 1,412,025 Bowater Canada Finance (U.S. Dollar) Company Guaranty 11-15-11 7.95 11,600,000(c) 11,605,336 Carter Holt Harvey (U.S. Dollar) 12-01-04 8.88 10,500,000(c) 10,743,065 Crown Paper Sr Sub Nts 09-01-05 11.00 6,950,000(b) 556,000 Doman Inds (U.S. Dollar) Sr Nts Series B 11-15-07 9.25 3,395,000(b,c) 712,950 Fort James Sr Nts 09-15-07 6.88 1,500,000 1,365,000 Graphic Packaging Company Guaranty 02-15-12 8.63 4,000,000(d) 4,060,000 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 17 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Paper & packaging (cont.) Intl Paper 11-15-12 5.13% $9,000,000 $8,482,320 Zero Coupon Cv 06-20-21 2.82 1,220,000(f) 626,775 Packaging Corp of America Company Guaranty 04-01-09 9.63 7,000,000 7,560,000 Pactiv 06-15-17 8.13 5,000,000 5,595,790 Plastipak Holdings Company Guaranty 09-01-11 10.75 6,025,000 6,416,625 Pliant Sr Sub Nts 06-01-10 13.00 3,790,000 3,808,950 Quno (U.S. Dollar) Sr Nts 05-15-05 9.13 7,000,000(c) 7,105,518 Riverwood Intl Company Guaranty 08-01-07 10.63 2,875,000 2,975,625 Silgan Holdings Sr Sub Deb 06-01-09 9.00 1,275,000 1,319,625 06-01-09 9.00 4,725,000(d) 4,890,375 Stone Container Sr Nts 07-01-12 8.38 7,500,000(d) 7,593,750 Total 86,829,729 Real estate investment trust (0.1%) Meristar Hospitality Company Guaranty 01-15-11 9.13 2,500,000 2,350,000 Sr Sub Nts 08-15-07 8.75 2,000,000 1,660,000 RFS Partnership LP Company Guaranty 03-01-12 9.75 1,050,000 1,050,000 Total 5,060,000 Restaurants & lodging (0.6%) Extended Stay America Sr Sub Nts 06-15-11 9.88 3,000,000 2,902,500 Park Place Entertainment Sr Nts 11-15-06 8.50 1,125,000 1,161,879 Sr Sub Nts 09-15-08 8.88 6,000,000 6,209,999 03-15-10 7.88 4,125,000 4,145,625 05-15-11 8.13 1,875,000 1,905,469 Starwood Hotels Resorts 05-01-12 7.88 6,250,000(d) 6,109,375 Total 22,434,847 Retail (3.8%) Albertson's Sr Nts 02-15-11 7.50 20,000,000 22,628,880 American Stores 06-01-26 8.00 10,000,000 11,481,600 Autonation Company Guaranty 08-01-08 9.00 1,000,000 1,045,000 Dairy Mart Convenience Stores Sr Sub Nts 03-15-04 10.25 5,925,000(b) 1,777,500 Federated Dept Stores Sr Nts 09-01-08 6.63 12,300,000 13,210,815 Gap 05-01-03 5.63 3,200,000 3,136,000 09-15-07 6.90 1,000,000 890,000 Kohl's Zero Coupon Cv 06-12-20 2.53 630,000(f) 408,713 Kroger Company Guaranty 03-01-08 7.45 10,000,000 11,272,670 Sr Nts 07-15-06 8.15 13,000,000 14,722,890 Lowe's Companies Zero Coupon Cv 02-16-21 1.32 530,000(f) 410,088 Safeway 03-01-06 6.15 23,369,000 25,257,261 Target 01-15-11 6.35 15,000,000 16,571,700 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 18 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Retail (cont.) United Auto Group Sr Sub Nts 03-15-12 9.63% $3,500,000(d) $3,535,000 Wal-Mart CRAVE 401 07-17-06 7.00 8,764,225(d) 9,318,474 Wal-Mart Stores 06-29-11 8.88 3,500,000 3,564,190 William Carter Company Guaranty Series B 08-15-11 10.88 3,215,000 3,528,463 Total 142,759,244 Transportation (2.1%) ArvinMeritor 03-01-12 8.75 7,000,000 7,371,910 Enterprise Rent-A-Car USA Finance 02-15-08 6.80 10,000,000(d) 10,756,150 01-15-11 8.00 15,500,000(d) 17,382,723 Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-07 9.50 3,640,000(b,c) 1,929,200 Interpool 08-01-07 7.35 3,355,000 3,137,093 Union Pacific 01-15-11 6.65 32,700,000 35,694,077 Vectura Group Company Guaranty 01-01-08 11.25 2,603,986 1,822,790 Company Guaranty Pay-in-kind 07-01-08 12.00 2,206,122(g) 882,449 Total 78,976,392 Utilities -- electric (5.7%) Appalachian Power 1st Mtge Medium-term Nts 12-01-22 8.50 5,000,000 5,331,650 Cleveland Electric Illuminating 1st Mtge Series B 05-15-05 9.50 18,790,000 18,892,706 CMS Energy Sr Nts 07-01-03 8.38 15,000,000 12,900,000 Dominion Resources Sr Nts Series C 07-15-03 7.60 8,200,000 8,502,629 EIP Funding-PNM 10-01-12 10.25 5,729,000 5,765,608 El Paso Electric 1st Mtge Series E 05-01-11 9.40 10,000,000 10,496,440 Indiana & Michigan Power Sale Lease-backed Obligation Series F 12-07-22 9.82 4,963,702 5,519,885 IPALCO Enterprises 11-14-11 7.63 10,000,000 8,787,390 Midland Funding II Series A 07-23-05 11.75 14,900,000 14,900,000 Northern States Power 1st Mtge 08-29-12 8.00 15,850,000(d) 16,012,621 NRG Northeast Generating Company Guaranty Series A1 12-15-04 8.07 1,185,938 890,841 Company Guaranty Series B1 06-15-15 8.84 4,000,000 2,600,440 Ohio Edison 1st Mtge 04-01-23 7.88 6,000,000 6,113,820 Pacific Gas & Electric 1st Mtge Series 1992B 05-01-25 8.38 4,100,000 3,690,000 PowerGen US Funding LLC 10-15-04 4.50 8,000,000 8,183,160 PSI Energy 08-01-05 6.50 10,000,000 10,360,500 RGS (AEGCO) Funding Sale Lease-backed Obligation Series F 12-07-22 9.82 4,963,708 5,526,791 Salton Sea Funding Series C 05-30-10 7.84 10,000,000 8,872,700 Sithe Independence Funding Series A 06-30-07 8.50 7,500,000 8,157,450 12-30-13 9.00 4,700,000 5,231,617 Texas Utilities Electric 01-01-05 9.45 2,033,000 2,289,506 1st Mtge 07-01-25 7.63 10,000,000 10,173,780 10-01-25 7.38 3,000,000 3,016,290 Tucson Electric Power 10-01-09 8.50 3,250,000 3,312,949 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 19 -- AXP BOND FUND -- 2002 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (cont.) Virginia Electric & Power Sr Nts Series A 03-31-06 5.75% $20,000,000 $21,150,300 Westar Energy 1st Mtge 05-01-07 7.88 2,610,000(d) 2,488,632 WPD Holdings (U.S. Dollar) 12-15-17 7.25 8,000,000(c,d) 7,720,176 Total 216,887,881 Utilities -- gas (1.3%) Coastal 02-15-37 7.42 6,000,000 4,680,000 El Paso Sr Nts 05-15-09 6.75 4,900,000 4,165,000 12-15-12 7.38 12,850,000 10,665,500 01-15-32 7.75 10,500,000 8,699,460 Southern California Gas 1st Mtge Series BB 03-01-23 7.38 6,900,000 6,853,839 Southern Natural Gas 03-01-32 8.00 7,700,000 7,296,112 Southwest Gas 02-15-11 8.38 7,900,000 8,545,588 Total 50,905,499 Utilities -- telephone (2.5%) ALLTEL Sr Nts 03-01-06 7.50 17,470,000 18,736,575 Citizens Communications 05-15-11 9.25 26,500,000 24,115,000 Dobson/Sygnet Communications Sr Nts 12-15-08 12.25 1,700,000 1,071,000 France Telecom (U.S. Dollar) 03-01-11 8.25 5,000,000(c,m) 5,180,750 03-01-31 9.00 12,400,000(c,m) 13,085,968 Liberty Media Cv 03-15-31 3.25 400,000 361,000 Nextel Communications Sr Nts 11-15-09 9.38 2,000,000 1,560,000 Pacific Bell 10-15-34 6.63 5,000,000 4,777,445 Vodafone Group (U.S. Dollar) 02-15-10 7.75 22,700,000(c) 25,139,115 Total 94,026,853 Total bonds (Cost: $3,648,944,319) $3,695,277,381 Common stocks (--%) Issuer Shares Value(a) Davel Communications 703,793(b) $21,114 Prime Succession Holdings 289,791(b,j) -- Total common stocks (Cost: $7,356,937) $21,114 Other (0.1%) Issuer Shares Value(a) Asia Pulp & Paper Warrants 8,500(b,c,d,j) $-- Wayland Investment Fund LLC 6,000,000(b,e,k) 3,372,476 Total other (Cost: $6,673,172) $3,372,476 Short-term securities (9.7%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (5.8%) Federal Home Loan Bank Disc Nts 09-04-02 1.71% $7,000,000 $6,998,428 09-20-02 1.72 95,800,000 95,707,094 10-18-02 1.63 25,000,000 24,942,725 Federal Home Loan Mtge Corp Disc Nts 09-03-02 1.72 16,300,000 16,296,885 10-17-02 1.73 30,000,000 29,937,324 Federal Natl Mtge Assn Disc Nt 10-30-02 1.64 46,600,000 46,476,045 Total 220,358,501 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 20 -- AXP BOND FUND -- 2002 ANNUAL REPORT Short-term securities (continued) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity Commercial paper (3.9%) Amsterdam Funding 09-05-02 1.73% $9,500,000(i) $9,497,261 Charta 10-04-02 1.77 3,300,000(i) 3,293,903 Corporate Receivables 11-18-02 1.77 12,100,000(i) 12,052,676 Delaware Funding 09-25-02 1.76 9,700,000(i) 9,687,670 Falcon Asset Securitization 09-03-02 1.76 6,400,000(i) 6,398,749 10-08-02 1.78 5,000,000(i) 4,990,358 Fleet Funding 09-23-02 1.73 5,000,000(i) 4,994,233 ING US Funding 09-26-02 1.73 20,000,000 19,974,050 Marsh & McLennan 09-06-02 1.75 9,700,000(i) 9,696,699 Morgan Stanley, Dean Witter & Co 10-03-02 1.74 5,000,000 4,991,783 Park Avenue Receivables 09-17-02 1.78 20,000,000(i) 19,981,617 09-20-02 1.75 4,900,000(i) 4,894,998 Receivables Capital 10-17-02 1.79 5,100,000(i) 5,081,943 Sheffield Receivables 09-25-02 1.75 12,800,000(i) 12,783,822 Toyota Motor Credit 09-24-02 1.73 18,700,000(i) 18,677,534 Total 146,997,296 Total short-term securities (Cost: $367,366,738) $367,355,797 Total investments in securities (Cost: $4,030,341,166)(n) $4,066,026,768 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 21 -- AXP BOND FUND -- 2002 ANNUAL REPORT Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Aug. 31, 2002, the value of foreign securities represented 5.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (f) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (g) Pay-in-kind securities are securities in which the issuer makes interest or dividend payments in cash or in additional securities. The securities usually have the same terms as the original holdings. (h) At Aug. 31, 2002, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $281,442,840. (i) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (j) Negligible market value. (k) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Aug. 31, 2002, is as follows: Security Acquisition Cost dates AOA Holdings LLC 11.00% Sr Nts 2008 06-02-02 $6,000,000 News Corp* 10.15% 2010 01-29-93 thru 07-11-02 3,052,941 Wayland Investment Fund LLC 05-17-00 6,671,880 * Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. (l) The following abbreviation may be used in the portfolio security descriptions to identify the insurer of the issue: MBIA -- Municipal Bond Investors Assurance (m) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2002. (n) At Aug. 31, 2002, the cost of securities for federal income tax purposes was $4,031,582,921 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 136,261,775 Unrealized depreciation (101,817,928) ------------ Net unrealized appreciation $ 34,443,847 ------------ -------------------------------------------------------------------------------- 22 -- AXP BOND FUND -- 2002 ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Bond Fund, Inc. Aug. 31, 2002 Assets Investments in securities, at value (Note 1)* (identified cost $4,030,341,166) $4,066,026,768 Capital shares receivable 1,254,927 Dividends and accrued interest receivable 56,142,668 Receivable for investment securities sold 154,163,053 Unrealized appreciation on foreign currency contracts held, at value (Notes 1 and 6) 168,406 ------- Total assets 4,277,755,822 ------------- Liabilities Disbursements in excess of cash on demand deposit 32,596 Dividends payable to shareholders 2,069,134 Capital shares payable 281,576 Payable for investment securities purchased 155,801,381 Payable for securities purchased on a when-issued basis (Note 1) 281,442,840 Unrealized depreciation on foreign currency contracts held, at value (Notes 1 and 6) 4,152 Payable upon return of securities loaned (Note 5) 31,650,000 Accrued investment management services fee 50,480 Accrued distribution fee 46,005 Accrued service fee 813 Accrued transfer agency fee 10,940 Accrued administrative services fee 4,469 Other accrued expenses 379,664 ------- Total liabilities 471,774,050 ----------- Net assets applicable to outstanding capital stock $3,805,981,772 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 8,020,292 Additional paid-in capital 4,008,637,862 Undistributed net investment income 1,145,568 Accumulated net realized gain (loss) (Note 8) (247,713,626) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) 35,891,676 ---------- Total -- representing net assets applicable to outstanding capital stock $3,805,981,772 ============== Net assets applicable to outstanding shares: Class A $2,437,618,151 Class B $1,047,376,708 Class C $ 23,783,540 Class Y $ 297,203,373 Net asset value per share of outstanding capital stock: Class A shares 513,696,897 $ 4.75 Class B shares 220,707,415 $ 4.75 Class C shares 5,006,164 $ 4.75 Class Y shares 62,618,744 $ 4.75 ---------- -------------- * Including securities on loan, at value (Note 5) $ 30,495,800 --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 23 -- AXP BOND FUND -- 2002 ANNUAL REPORT
Statement of operations AXP Bond Fund, Inc. Year ended Aug. 31, 2002 Investment income Income: Dividends $ 2,142,910 Interest 235,358,173 Less foreign taxes withheld (36,057) ------- Total income 237,465,026 ----------- Expenses (Note 2): Investment management services fee 18,809,556 Distribution fee Class A 5,975,677 Class B 10,167,795 Class C 174,866 Transfer agency fee 5,224,256 Incremental transfer agency fee Class A 269,926 Class B 205,439 Class C 4,306 Service fee -- Class Y 466,036 Administrative services fees and expenses 1,778,050 Compensation of board members 32,147 Custodian fees 207,894 Printing and postage 330,811 Registration fees 255,923 Audit fees 42,500 Other 8,259 ----- Total expenses 43,953,441 Earnings credits on cash balances (Note 2) (89,672) ------- Total net expenses 43,863,769 ---------- Investment income (loss) -- net 193,601,257 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) (103,891,868) Foreign currency transactions (324,305) -------- Net realized gain (loss) on investments (104,216,173) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,330,971 ---------- Net gain (loss) on investments and foreign currencies (82,885,202) ----------- Net increase (decrease) in net assets resulting from operations $ 110,716,055 =============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 24 -- AXP BOND FUND -- 2002 ANNUAL REPORT
Statements of changes in net assets AXP Bond Fund, Inc. Year ended Aug. 31, 2002 2001 Operations and distributions Investment income (loss) -- net $ 193,601,257 $ 231,113,578 Net realized gain (loss) on investments (104,216,173) (30,599,694) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,330,971 152,685,406 ---------- ----------- Net increase (decrease) in net assets resulting from operations 110,716,055 353,199,290 ----------- ----------- Distributions to shareholders from: Net investment income Class A (121,329,296) (148,004,415) Class B (44,277,498) (52,812,958) Class C (754,797) (260,922) Class Y (24,276,463) (34,391,779) Tax return of capital Class A (7,330,284) -- Class B (2,675,088) -- Class C (45,602) -- Class Y (1,466,697) -- ------------ ------------ Total distributions (202,155,725) (235,470,074) ------------ ------------ Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 524,025,978 431,339,070 Class B shares 398,928,016 303,309,149 Class C shares 18,470,000 10,226,857 Class Y shares 271,716,616 379,466,999 Reinvestment of distributions at net asset value Class A shares 96,090,237 108,087,106 Class B shares 40,340,249 45,446,779 Class C shares 691,608 226,849 Class Y shares 24,587,425 34,534,077 Payments for redemptions Class A shares (516,477,447) (451,380,639) Class B shares (Note 2) (322,964,143) (290,178,522) Class C shares (Note 2) (5,410,217) (1,167,551) Class Y shares (520,331,103) (281,589,615) ------------ ------------ Increase (decrease) in net assets from capital share transactions 9,667,219 288,320,559 --------- ----------- Total increase (decrease) in net assets (81,772,451) 406,049,775 Net assets at beginning of year 3,887,754,223 3,481,704,448 ------------- ------------- Net assets at end of year $3,805,981,772 $3,887,754,223 ============== ============== Undistributed (excess of distributions over) net investment income $ 1,145,568 $ (3,323,120) -------------- --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 25 -- AXP BOND FUND -- 2002 ANNUAL REPORT Notes to Financial Statements AXP Bond Fund, Inc. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Fund invests primarily in corporate bonds and other debt securities. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. -------------------------------------------------------------------------------- 26 -- AXP BOND FUND -- 2002 ANNUAL REPORT Option transactions To produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Fund also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. 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. 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 traded on any U.S. or foreign exchange. The Fund also may buy and write put and call options on these 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. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. -------------------------------------------------------------------------------- 27 -- AXP BOND FUND -- 2002 ANNUAL REPORT The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. Illiquid securities As of Aug. 31, 2002, investments in securities included issues that are illiquid which the Fund currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities as of Aug. 31, 2002 was $12,869,154 representing 0.34% of net assets. These securities are valued at fair value according to methods selected in good faith by the board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. 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, can take place one month or more after the transaction date. During this period, when-issued securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. As of Aug. 31, 2002, the Fund has entered into outstanding when-issued securities of $281,442,840. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $1,505,485 and accumulated net realized loss has been increased by $1,254,328 resulting in a net reclassification adjustment to decrease paid-in capital by $251,157. -------------------------------------------------------------------------------- 28 -- AXP BOND FUND -- 2002 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended Aug. 31, 2002 2001 Class A Distributions paid from: Ordinary income $121,329,296 $148,004,415 Long-term capital gain -- -- Tax return of capital 7,330,284 -- Class B Distributions paid from: Ordinary income 44,277,498 52,812,958 Long-term capital gain -- -- Tax return of capital 2,675,088 -- Class C Distributions paid from: Ordinary income 754,797 260,922 Long-term capital gain -- -- Tax return of capital 45,602 -- Class Y Distributions paid from: Ordinary income 24,276,463 34,391,779 Long-term capital gain -- -- Tax return of capital 1,466,697 -- As of Aug. 31, 2002, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ -- Accumulated gain (loss) $(241,331,805) Unrealized appreciation (depreciation) $ 32,724,557 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. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including level-yield amortization of premium and discount, is accrued daily. -------------------------------------------------------------------------------- 29 -- AXP BOND FUND -- 2002 ANNUAL REPORT 2. EXPENSES AND SALES CHARGES The Fund has agreements with American Express Financial Corporation (AEFC) to manage its portfolio and provide administrative services. Under an Investment Management Services Agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $19.50 o Class B $20.50 o Class C $20.00 o Class Y $17.50 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 distribution fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $5,110,211 for Class A, $957,926 for Class B and $13,026 for Class C for the year ended Aug. 31, 2002. During the year ended Aug. 31, 2002, the Fund's custodian and transfer agency fees were reduced by $89,672 as a result of earnings credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $6,345,835,691 and $6,156,608,407, respectively, for the year ended Aug. 31, 2002. Realized gains and losses are determined on an identified cost basis. -------------------------------------------------------------------------------- 30 -- AXP BOND FUND -- 2002 ANNUAL REPORT 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended Aug. 31, 2002 Class A Class B Class C Class Y Sold 109,760,309 83,489,844 3,858,357 56,720,131 Issued for reinvested distributions 20,137,632 8,455,159 145,079 5,140,336 Redeemed (108,208,221) (67,735,175) (1,133,847) (108,994,850) ------------ ----------- ---------- ------------ Net increase (decrease) 21,689,720 24,209,828 2,869,589 (47,134,383) ---------- ---------- --------- ----------- Year ended Aug. 31, 2001 Class A Class B Class C Class Y Sold 90,085,921 63,371,133 2,133,169 79,681,999 Issued for reinvested distributions 22,682,885 9,535,719 47,319 7,237,196 Redeemed (94,825,425) (60,827,005) (243,972) (58,909,366) ----------- ----------- -------- ----------- Net increase (decrease) 17,943,381 12,079,847 1,936,516 28,009,829 ---------- ---------- --------- ----------
5. LENDING OF SECURITIES At Aug. 31, 2002, securities valued at $30,495,800 were on loan to brokers. For collateral, the Fund received $31,650,000 in cash. Income from securities lending amounted to $29,095 for the year ended Aug. 31, 2002. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 6. FOREIGN CURRENCY CONTRACTS As of Aug. 31, 2002, the Fund has foreign currency exchange contracts that obligate it to deliver currencies at specified future dates. The unrealized appreciation and/or depreciation on these contracts is included in the accompanying financial statements. See "Summary of significant accounting policies." The terms of the open contracts are as follows: Currency to Currency to Unrealized Unrealized Exchange date be delivered be received appreciation depreciation Sept. 17, 2002 1,127,000,000 9,679,968 $168,406 $ -- Japanese Yen U.S. Dollar Oct. 3, 2002 20,780,000 20,374,790 -- 4,152 European Monetary Unit U.S. Dollar ---------------------- ----------- -------- ------ Total $168,406 $4,152 -------- ------ -------------------------------------------------------------------------------- 31 -- AXP BOND FUND -- 2002 ANNUAL REPORT 7. BANK BORROWINGS The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than five business days plus 367% of advances over five business days. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 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 0.05% per annum. The Fund had no borrowings outstanding during the year ended Aug. 31, 2002. 8. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $241,331,805 as of Aug. 31, 2002, that will expire in 2007 through 2011 if not offset by subsequent capital gains. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. -------------------------------------------------------------------------------- 32 -- AXP BOND FUND -- 2002 ANNUAL REPORT 9. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended Aug. 31, 2002 2001 2000 1999 1998 Net asset value, beginning of period $4.86 $4.70 $4.82 $5.11 $5.22 Income from investment operations: Net investment income (loss) .25 .31 .33 .33 .36 Net gains (losses) (both realized and unrealized) (.10) .17 (.12) (.25) (.03) Total from investment operations .15 .48 .21 .08 .33 Less distributions: Dividends from net investment income (.25) (.32) (.33) (.33) (.36) Distributions from realized gains -- -- -- (.04) (.08) Tax return of capital (.01) -- -- -- -- Total distributions (.26) (.32) (.33) (.37) (.44) Net asset value, end of period $4.75 $4.86 $4.70 $4.82 $5.11 Ratios/supplemental data Net assets, end of period (in millions) $2,438 $2,390 $2,229 $2,591 $2,709 Ratio of expenses to average daily net assets(c) .95% .94% .93% .86% .83% Ratio of net investment income (loss) to average daily net assets 5.17% 6.51% 7.04% 6.56% 6.79% Portfolio turnover rate (excluding short-term securities) 169% 115% 64% 57% 43% Total return(e) 3.13% 10.48% 4.67% 1.64% 6.30%
See accompanying notes to financial highlights. -------------------------------------------------------------------------------- 33 -- AXP BOND FUND -- 2002 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2002 2001 2000 1999 1998 Net asset value, beginning of period $4.86 $4.70 $4.82 $5.11 $5.22 Income from investment operations: Net investment income (loss) .21 .27 .30 .29 .32 Net gains (losses) (both realized and unrealized) (.10) .17 (.13) (.24) (.03) Total from investment operations .11 .44 .17 .05 .29 Less distributions: Dividends from net investment income (.21) (.28) (.29) (.30) (.32) Distributions from realized gains -- -- -- (.04) (.08) Tax return of capital (.01) -- -- -- -- Total distributions (.22) (.28) (.29) (.34) (.40) Net asset value, end of period $4.75 $4.86 $4.70 $4.82 $5.11 Ratios/supplemental data Net assets, end of period (in millions) $1,047 $954 $867 $1,093 $1,057 Ratio of expenses to average daily net assets(c) 1.71% 1.70% 1.69% 1.63% 1.59% Ratio of net investment income (loss) to average daily net assets 4.40% 5.74% 6.28% 5.79% 6.03% Portfolio turnover rate (excluding short-term securities) 169% 115% 64% 57% 43% Total return(e) 2.35% 9.65% 3.88% .87% 5.50%
See accompanying notes to financial highlights. -------------------------------------------------------------------------------- 34 -- AXP BOND FUND -- 2002 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2002 2001 2000(b) Net asset value, beginning of period $4.86 $4.71 $4.64 Income from investment operations: Net investment income (loss) .21 .27 .04 Net gains (losses) (both realized and unrealized) (.10) .16 .07 Total from investment operations .11 .43 .11 Less distributions: Dividends from net investment income (.21) (.28) (.04) Distributions from realized gains -- -- -- Tax return of capital (.01) -- -- Total distributions (.22) (.28) (.04) Net asset value, end of period $4.75 $4.86 $4.71 Ratios/supplemental data Net assets, end of period (in millions) $24 $10 $1 Ratio of expenses to average daily net assets(c) 1.72% 1.70% 1.69%(d) Ratio of net investment income (loss) to average daily net assets 4.33% 5.62% 6.80%(d) Portfolio turnover rate (excluding short-term securities) 169% 115% 64% Total return(e) 2.35% 9.43% 2.58%
See accompanying notes to financial highlights. -------------------------------------------------------------------------------- 35 -- AXP BOND FUND -- 2002 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2002 2001 2000 1999 1998 Net asset value, beginning of period $4.86 $4.70 $4.82 $5.11 $5.22 Income from investment operations: Net investment income (loss) .25 .32 .34 .33 .36 Net gains (losses) (both realized and unrealized) (.10) .17 (.12) (.24) (.03) Total from investment operations .15 .49 .22 .09 .33 Less distributions: Dividends from net investment income (.25) (.33) (.34) (.34) (.36) Distributions from realized gains -- -- -- (.04) (.08) Tax return of capital (.01) -- -- -- -- Total distributions (.26) (.33) (.34) (.38) (.44) Net asset value, end of period $4.75 $4.86 $4.70 $4.82 $5.11 Ratios/supplemental data Net assets, end of period (in millions) $297 $533 $385 $296 $224 Ratio of expenses to average daily net assets(c) .78% .78% .77% .77% .76% Ratio of net investment income (loss) to average daily net assets 5.30% 6.66% 7.20% 6.67% 6.90% Portfolio turnover rate (excluding short-term securities) 169% 115% 64% 57% 43% Total return(e) 3.29% 10.65% 4.84% 1.71% 6.40%
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 36 -- AXP BOND FUND -- 2002 ANNUAL REPORT Independent Auditors' Report THE BOARD AND SHAREHOLDERS AXP BOND FUND, INC. We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of AXP Bond Fund, Inc. as of August 31, 2002, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended August 31, 2002, and the financial highlights for each of the years in the five-year period ended August 31, 2002. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2002, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Bond Fund, Inc. as of August 31, 2002, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota October 4, 2002 -------------------------------------------------------------------------------- 37 -- AXP BOND FUND -- 2002 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Bond Fund, Inc. Fiscal year ended Aug. 31, 2002 Class A Income distributions taxable as dividend income, 1.09% qualifying for deduction by corporations. Payable date Per share Sept. 26, 2001 $0.02266 Oct. 26, 2001 0.02267 Nov. 26, 2001 0.02220 Dec. 20, 2001 0.02165 Jan. 25, 2002 0.02080 Feb. 26, 2002 0.02072 March 26, 2002 0.02063 April 26, 2002 0.02126 May 24, 2002 0.02124 June 26, 2002 0.02138 July 26, 2002 0.02080 Aug. 26, 2002 0.02080 Total distributions* $0.25681 Class B Income distributions taxable as dividend income, 1.09% qualifying for deduction by corporations. Payable date Per share Sept. 26, 2001 $0.01965 Oct. 26, 2001 0.01967 Nov. 26, 2001 0.01907 Dec. 20, 2001 0.01926 Jan. 25, 2002 0.01721 Feb. 26, 2002 0.01752 March 26, 2002 0.01785 April 26, 2002 0.01819 May 24, 2002 0.01848 June 26, 2002 0.01811 July 26, 2002 0.01784 Aug. 26, 2002 0.01778 Total distributions* $0.22063 -------------------------------------------------------------------------------- 38 -- AXP BOND FUND -- 2002 ANNUAL REPORT Class C Income distributions taxable as dividend income, 1.09% qualifying for deduction by corporations. Payable date Per share Sept. 26, 2001 $0.01970 Oct. 26, 2001 0.01969 Nov. 26, 2001 0.01912 Dec. 20, 2001 0.01929 Jan. 25, 2002 0.01724 Feb. 26, 2002 0.01752 March 26, 2002 0.01785 April 26, 2002 0.01818 May 24, 2002 0.01847 June 26, 2002 0.01811 July 26, 2002 0.01785 Aug. 26, 2002 0.01777 Total distributions* $0.22079 Class Y Income distributions taxable as dividend income, 1.09% qualifying for deduction by corporations. Payable date Per share Sept. 26, 2001 $0.02331 Oct. 26, 2001 0.02332 Nov. 26, 2001 0.02288 Dec. 20, 2001 0.02217 Jan. 25, 2002 0.02158 Feb. 26, 2002 0.02140 March 26, 2002 0.02122 April 26, 2002 0.02189 May 24, 2002 0.02183 June 26, 2002 0.02208 July 26, 2002 0.02143 Aug. 26, 2002 0.02145 Total distributions* $0.26456 * $0.01 per share represents a tax return of capital. -------------------------------------------------------------------------------- 39 -- AXP BOND FUND -- 2002 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 80 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, Position held with Principal occupations Other directorships Address, Registrant and length of during past five years Age service -------------------------------------- ------------------------------ --------------------------- ---------------------------- H. Brewster Atwater, Jr. Board member since 1996 Retired chair and chief 4900 IDS Tower executive officer, Minneapolis, MN 55402 General Mills, Inc. Born in 1931 (consumer foods) -------------------------------------- ------------------------------ --------------------------- ---------------------------- Arne H. Carlson Chair of the Board since 1999 Chair, Board Services 901 S. Marquette Ave. Corporation (provides Minneapolis, MN 55402 administrative services Born in 1934 to boards), former Governor of Minnesota -------------------------------------- ------------------------------ --------------------------- ---------------------------- Lynne V. Cheney Board member since 1994 Distinguished Fellow, AEI The Reader's Digest American Enterprise Institute Association Inc. For Public Policy Research (AEI) 1150 17th St., N.W. Washington, D.C. 20036 Born in 1941 -------------------------------------- ------------------------------ --------------------------- ---------------------------- Livio D. DeSimone Board member since 2001 Retired chair of the Cargill, Incorporated 30 Seventh Street East board and chief executive (commodity merchants and Suite 3050 officer, Minnesota Mining processors), Target St. Paul, MN 55101-4901 and Manufacturing (3M) Corporation (department Born in 1936 stores), General Mills, Inc. (consumer foods), Vulcan Materials Company (construction materials/chemicals), Milliken & Company (textiles and chemicals) and Nexia Biotechnologies, Inc. -------------------------------------- ------------------------------ --------------------------- ---------------------------- Ira D. Hall Board member since 2001 Private investor; Imagistics International, 183 Long Close Road formerly with Texaco Inc. (office equipment), Stamford, CT 06902 Inc., treasurer, Reynolds & Reynolds Born in 1944 1999-2001 and general Company (information manager, alliance services), TECO Energy, management operations, Inc. (energy holding 1998-1999. Prior to that, company), The Williams director, International Companies, Inc. (energy Operations IBM Corp. distribution company) -------------------------------------- ------------------------------ --------------------------- ---------------------------- Heinz F. Hutter Board member since 1994 Retired president and P.O. Box 2187 chief operating officer, Minneapolis, MN 55402 Cargill, Incorporated Born in 1929 (commodity merchants and processors) -------------------------------------- ------------------------------ --------------------------- ---------------------------- Anne P. Jones Board member since 1985 Attorney and consultant Motorola, Inc. 5716 Bent Branch Rd. (electronics) Bethesda, MD 20816 Born in 1935 -------------------------------------- ------------------------------ --------------------------- ----------------------------
-------------------------------------------------------------------------------- 40 -- AXP BOND FUND -- 2002 ANNUAL REPORT
Independent Board Members (continued) Name, Position held with Principal occupations Other directorships address, Registrant and length of during past five years age service -------------------------------------- ------------------------------ --------------------------- ---------------------------- Stephen R. Lewis, Jr. Board member since 2002 Retired president and 901 S. Marquette Ave. professor of economics, Minneapolis, MN 55402 Carleton College Born in 1939 -------------------------------------- ------------------------------ --------------------------- ---------------------------- William R. Pearce Board member since 1980 RII Weyerhaeuser World 2050 One Financial Plaza Timberfund, L.P. Minneapolis, MN 55402 (develops timber Born in 1927 resources) - management committee; former chair, American Express Funds -------------------------------------- ------------------------------ --------------------------- ---------------------------- Alan G. Quasha Board member since 2002 President, Quadrant Compagnie Financiere 720 Fifth Avenue Management, Inc. Richemont AG (luxury goods) New York, NY 10019 (management of private Born in 1949 equities) -------------------------------------- ------------------------------ --------------------------- ---------------------------- Alan K. Simpson Board member since 1997 Former three-term United Biogen, Inc. 1201 Sunshine Ave. States Senator for Wyoming (bio-pharmaceuticals) Cody, WY 82414 Born in 1931 -------------------------------------- ------------------------------ --------------------------- ---------------------------- C. Angus Wurtele Board member since 1994 Retired chair of the Bemis Corporation 4900 IDS Tower board and chief executive (packaging) Minneapolis, MN 55402 officer, The Valspar Born in 1934 Corporation -------------------------------------- ------------------------------ --------------------------- ---------------------------- Board Members Affiliated with American Express Financial Corporation (AEFC) Name, Position held with Principal occupations Other directorships address, Registrant and length of during past five years age service -------------------------------------- ------------------------------ --------------------------- ---------------------------- David R. Hubers Board member since 1993 Retired chief executive Chronimed Inc. (specialty 50643 AXP Financial Center officer and director of pharmaceutical Minneapolis, MN 55474 AEFC distribution), RTW Inc. Born in 1943 (manages workers compensation programs), Lawson Software, Inc. (technology based business applications) -------------------------------------- ------------------------------ --------------------------- ---------------------------- John R. Thomas Board member since 1987 Senior vice president - 50652 AXP Financial Center information and Minneapolis, MN 55474 technology of AEFC Born in 1937 -------------------------------------- ------------------------------ --------------------------- ---------------------------- William F. Truscott Board member since 2001, Senior vice president - 53600 AXP Financial Center vice president since 2002 chief investment officer Minneapolis, MN 55474 of AEFC; former chief Born in 1960 investment officer and managing director, Zurich Scudder Investments -------------------------------------- ------------------------------ --------------------------- ----------------------------
-------------------------------------------------------------------------------- 41 -- AXP BOND FUND -- 2002 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, Position held with Principal occupations Other directorships address, Registrant and length of during past five years age service -------------------------------------- ------------------------------ --------------------------- ---------------------------- Jeffrey P. Fox Treasurer since 2002 Vice president - 50005 AXP Financial Center investment accounting, Minneapolis, MN 55474 AEFC, since 2002; vice Born in 1955 president - finance, American Express Company, 2000-2002; vice president - corporate controller, AEFC, 1996-2000 -------------------------------------- ------------------------------ --------------------------- ---------------------------- Paula R. Meyer President since 2002 Senior vice president and 596 AXP Financial Center general manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Born in 1954 vice president and managing director - American Express Funds, AEFC, 2000-2002; vice president, AEFC, 1998-2002; president - Piper Capital Management 1997-1998 -------------------------------------- ------------------------------ --------------------------- ---------------------------- Leslie L. Ogg Vice president, general President of Board 901 S. Marquette Ave. counsel and secretary since Services Corporation Minneapolis, MN 55402 1978 Born in 1938 -------------------------------------- ------------------------------ --------------------------- ---------------------------- Stephen W. Roszell Vice president since 2002 Senior vice president - 50239 AXP Financial Center institutional group of Minneapolis, MN 55474 AEFC Born in 1949 -------------------------------------- ------------------------------ --------------------------- ----------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. -------------------------------------------------------------------------------- 42 -- AXP BOND FUND -- 2002 ANNUAL REPORT American Express(R) Funds Growth Funds AXP(R) Emerging Markets Fund AXP Equity Select Fund AXP Focused Growth Fund AXP Global Growth Fund AXP Growth Fund AXP Growth Dimensions Fund AXP New Dimensions Fund(R) AXP Partners International Aggressive Growth Fund AXP Partners Small Cap Growth Fund AXP Strategy Aggressive Fund Blend Funds AXP Blue Chip Advantage Fund AXP Discovery Fund* AXP European Equity Fund AXP Global Balanced Fund AXP International Fund AXP International Equity Index Fund AXP Large Cap Equity Fund AXP Managed Allocation Fund AXP Mid Cap Index Fund AXP Nasdaq 100 Index(R) Fund AXP Partners International Core Fund AXP Partners International Small Cap Fund AXP Partners Small Cap Core Fund AXP Research Opportunities Fund AXP S&P 500 Index Fund AXP Small Cap Advantage Fund AXP Small Company Index Fund AXP Stock Fund AXP Total Stock Market Index Fund Value Funds AXP Diversified Equity Income Fund AXP Equity Value Fund AXP Large Cap Value Fund AXP Mid Cap Value Fund AXP Mutual AXP Partners Fundamental Value Fund AXP Partners International Select Value Fund AXP Partners Select Value Fund AXP Partners Small Cap Value Fund AXP Partners Value Fund AXP Progressive Fund* Income/Tax-Exempt Income Funds AXP Bond Fund AXP Cash Management Fund** AXP Extra Income Fund AXP Federal Income Fund AXP Global Bond Fund AXP High Yield Tax-Exempt Fund AXP Insured Tax-Exempt Fund AXP Intermediate Tax-Exempt Fund AXP Selective Fund AXP State Tax-Exempt Funds AXP Tax-Exempt Bond Fund AXP Tax-Free Money Fund** AXP U.S. Government Mortgage Fund Sector Funds AXP Global Technology Fund AXP Precious Metals Fund AXP Utilities Fund These funds are also listed in the categories above. AXP(R) Partners Funds AXP Partners Fundamental Value Fund AXP Partners International Aggressive Growth Fund AXP Partners International Core Fund AXP Partners International Select Value Fund AXP Partners International Small Cap Fund AXP Partners Select Value Fund AXP Partners Small Cap Core Fund AXP Partners Small Cap Growth Fund AXP Partners Small Cap Value Fund AXP Partners Value Fund International Funds AXP Emerging Markets Fund AXP European Equity Fund AXP Global Balanced Fund AXP Global Bond Fund AXP Global Growth Fund AXP International Fund AXP Partners International Aggressive Growth Fund AXP Partners International Core Fund AXP Partners International Select Value Fund AXP Partners International Small Cap Fund * Closed to new investors. ** An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. For more complete information about our funds, including fees and expenses, please call (800) 862-7919 for prospectuses. Read them carefully before you invest. (10/02) AXP Bond Fund 70100 AXP Financial Center Minneapolis, MN 55474 americanexpress.com -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) -------------------------------------------------------------------------------- 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. S-6495 V (10/02)