-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fsp7hbNP9G+Rzd2xYJ0eiN9jrRaeG5f1cWZw3IE4osR5gxe6JaQdWSR82jK0+TGT 0c1DoShuI6NSi/CbfJRE3Q== 0000820027-03-000547.txt : 20030731 0000820027-03-000547.hdr.sgml : 20030731 20030731095827 ACCESSION NUMBER: 0000820027-03-000547 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030731 EFFECTIVENESS DATE: 20030731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP INCOME SERIES INC CENTRAL INDEX KEY: 0000052407 IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-00499 FILM NUMBER: 03813189 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 MAIL ADDRESS: STREET 1: 80 S. 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: AXP SELECTIVE FUND INC /MN/ DATE OF NAME CHANGE: 20000829 FORMER COMPANY: FORMER CONFORMED NAME: IDS SELECTIVE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 N-CSR 1 income-nscr.txt AXP INCOME SERIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-499 ------------ AXP INCOME SERIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 200 AXP Financial Center, Minneapolis, Minnesota 55474 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 5/31 -------------- Date of reporting period: 5/31 -------------- Item 1. Reports to Shareholders. AXP(R) Selective Fund Annual Report for the Period Ended May 31, 2003 AXP Selective Fund seeks to provide shareholders with current income and preservation of capital. (This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- Table of Contents Fund Snapshot 3 Questions & Answers with Portfolio Management 4 The Fund's Long-term Performance 8 Investments in Securities 9 Financial Statements (Portfolio) 16 Notes to Financial Statements (Portfolio) 19 Independent Auditors' Report (Portfolio) 23 Financial Statements (Fund) 24 Notes to Financial Statements (Fund) 27 Independent Auditors' Report (Fund) 33 Federal Income Tax Information 34 Board Members and Officers 37 (logo) Dalbar American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Fund Snapshot AS OF MAY 31, 2003 PORTFOLIO MANAGER Portfolio manager Team led by Tom Murphy, CFA Since 2/03 Years in industry 17 FUND OBJECTIVE For investors seeking current income and preservation of capital. Inception dates A: 4/6/45 B: 3/20/95 C: 6/26/00 Y: 3/20/95 Ticker symbols A: INSEX B: ISEBX C: ASLCX Y: IDEYX Total net assets $1.457 billion Number of holdings approximately 270 STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH MEDIUM LOW SECTOR COMPOSITION Percentage of portfolio assets (pie chart) Government obligations & agencies 32.9% Mortgage-backed securities 32.6% Financials 11.1% Cash & equivalents 10.9% Energy & utilities 3.2% Discretionary cyclical 2.6% Telecommunications 2.6% Industrials 2.5% Staples 1.0% Materials 0.5% Health care 0.1% CREDIT QUALITY SUMMARY Percentage of portfolio assets AAA bonds 68.7% AA bonds 1.0 A bonds 9.6 BBB bonds 9.3 Non-investment grade bonds 0.4 For further detail about these holdings, please refer to the section entitled "Investments in Securities." Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Q: How did AXP Selective Fund perform in fiscal year 2003? A: AXP Selective Fund's Class A shares, excluding sales charge, rose 6.05% for the 12-month period ended May 31, 2003. The Lehman Brothers Aggregate Bond Index climbed 11.58% while the Lipper Corporate Debt - A rated Funds Index, representing the fund's peer group, advanced 11.23%. An untimely positioning in corporate bonds and negative company-specific news affecting a few of the Fund's corporate bond holdings in calendar year 2002 led to disappointing results. Q: What factors affected the Fund's performance? A: For the year as a whole, bond prices rose dramatically, spurred by the anticipation of war in Iraq, as well as lingering uncertainty about the timing and strength of the U.S. economic recovery. However, weak corporate bond returns had a significant impact on the Fund's results during the first half of the fiscal year. During the second half, we began to see the positive effects of strategic changes in the Fund's management philosophy and investment process. A year ago, corporate bonds were out of favor. Anticipating a rebound in the sector, we had increased the Fund's corporate bond allocation. Unfortunately, continuing allegations of corporate malfeasance in the telecommunications, food distribution and utility industries postponed the expected rebound and drove prices even lower. The Fund's overweight in corporate bonds and its limited diversification in the sector detracted from performance as several portfolio holdings were tainted by scandal. In the second part of the year, the Fund began to benefit from a dramatic shift in the performance of corporate bonds and changes to the Fund's management process. The Fund's margin of underperformance narrowed during the (bar graph) PERFORMANCE COMPARISON For the year ended May 31, 2003 12% (bar 2) (bar 3) +11.58% +11.23% 10% 8% (bar 1) 6% +6.05% 4% 2% 0% (bar 1) AXP Selective Fund Class A (excluding sales charge) (bar 2) Lehman Brothers Aggregate Bond Index (unmanaged) (bar 3) Lipper Corporate Debt - A 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 expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. - -------------------------------------------------------------------------------- 4 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Questions & Answers (begin callout quote) > In the second part of the year, the Fund began to benefit from a dramatic shift in the performance of corporate bonds and changes to the Fund's management process. (end callout quote) period. For the six-months ended May 31, 2003, the Fund's Class A shares, excluding sales charges, rose 5.80%, while the Lehman Brothers Aggregate Bond Index advanced 6.29% and the Lipper Corporate Debt - A rated Funds Index climbed 7.16%. Since autumn 2002, we have broadened the diversification of our corporate position and increased our focus on research in all portfolio sectors. In October 2002, a long-delayed corporate bond rebound finally took hold as the sector benefited from renewed confidence in corporate America and continued low interest rates. During the final seven months of our fiscal year, corporate bonds turned in one of their best performances ever and the portfolio benefited from its overweight allocation. AVERAGE ANNUAL TOTAL RETURNS as of May 31, 2003
Class A Class B Class C Class Y (Inception dates) (4/6/45) (3/20/95) (6/26/00) (3/20/95) NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5) 1 year +6.05% +1.01% +5.25% +1.25% +5.24% +5.24% +6.22% +6.22% 5 years +5.33% +4.31% +4.54% +4.38% N/A N/A +5.48% +5.48% 10 years +6.25% +5.73% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +6.06% +6.06% +6.32% +6.32% +7.01% +7.01%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. The performance shown for each class of shares will vary due to differences in sales charges and fees. Short term performance may be higher or lower than the figures shown. Visit americanexpress.com for current information. - -------------------------------------------------------------------------------- 5 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Questions & Answers Q: What changes have been made to the portfolio's positioning? A: Over the course of the last six months, we took advantage of the corporate rally to slightly reduce our overweight position in corporate bonds. In our view, the tremendous advance has outpaced the corporate sector's fundamentals, increasing the possibility of a future decline. We also upgraded the quality of the portfolio as the reward/risk profile of lower-quality corporate bonds became less attractive. As described on page 5, we enhanced the diversification of the corporate bond position, increasing our active positions from about 35 issuers to approximately 75 issuers. This diversification level still provides opportunities to add value through effective security selection, while reducing the potential negative impact any one security would have on the Fund. We increased our weighting in Treasuries and mortgage-backed securities using assets reallocated from the corporate sector. The fairly stable interest rate environment has made mortgages an attractive option even in light of prepayment concerns. One of our team's key strengths is in selecting pools of mortgages. This has been particularly important since historically low interest rates have increased prepayment risk and reduced the effectiveness of traditional mortgage analysis models. Within our mortgage allocation, we sought opportunities to add relative value by focusing on mortgage pools that historically have had lower-than-average prepayment risks. Mortgage prepayments have contributed somewhat to a decline in the portfolio's income level, but the interest rate environment has also been a significant factor -- the yield on the 10-year Treasury has fallen more than 1.5 percentage points since May 31, 2002 to the lowest level in several decades. Q: How can the portfolio's new management process potentially enhance the Fund? A: We have moved to a sector-based management approach. There are eight separate sector teams, covering different areas of the fixed income market, such as mortgages or corporate bonds. Our process begins with the entire fixed income group developing an overall market view on interest rate trends, the yield curve, expected volatility and corporate bond conditions. We then establish a corresponding strategy for each bond portfolio, including AXP Selective Fund. Using input from the sector teams, we decide how much money should be allocated to various sectors. Then each sector team, which includes a sector manager and three to six specialists, selects securities within its own specialty. - -------------------------------------------------------------------------------- 6 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Questions & Answers This approach creates focused teams accountable for performance and reaffirms the important role of research in our actively managed portfolios. We believe the new structure will result in more effective allocations and bond selections, supporting our ultimate goal of rewarding shareholders with consistent, superior long-term performance. Q: What is your outlook for interest rates, the bond market and the Fund? A: We are facing an interesting time. The Federal Reserve has expressed concern about deflation and the economy appears to be at a pivot point between doing dramatically better in the second half of the year as many people expect or muddling along, which is more in line with our near-term expectations. The stock market has recovered; yet activity in the bond market suggests continued economic sluggishness. As the Fed looks for non-traditional ways to stimulate the economy, long-term rates have moved lower, flattening the yield curve. This means longer term bonds now offer less yield advantage over shorter maturity securities. We believe interest rates are likely to remain in a trading range, given the Fed's indication that it will keep rates at the low end, with a further reduction more likely than an increase. Such an environment remains favorable to mortgages and we have positioned the portfolio accordingly. Regarding the Fund's corporate bond position, we anticipate maintaining our conservative approach as we look for more definitive signs of economic momentum. Once we are confident the recovery is on solid ground, we may look to increase our corporate allocation. We avoid significant bets on interest rate moves. Consequently, the portfolio's current duration, a measure of interest rate sensitivity, is minimally longer than our benchmark. Our goal is to add performance to the portfolio through our allocation among Treasuries, mortgages and corporate securities, and through individual security selection. - -------------------------------------------------------------------------------- 7 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT The Fund's Long-term Performance This chart illustrates the total value of an assumed $10,000 investment in AXP Selective Fund Class A shares (from 6/1/93 to 5/31/03) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Corporate Debt - A 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 SELECTIVE FUND $25,000 $18,750 (dotted line) Lehman Brothers Aggregate Bond Index(1) (dashed line) Lipper Corporate Debt - A rated Funds Index(2) $12,500 (solid line) AXP Selective Fund Class A $6,250 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 (solid line) AXP Selective Fund Class A $17,463 (dotted line) Lehman Brothers Aggregate Bond Index(1) $20,468 (dashed line) Lipper Corporate Debt - A rated Funds Index(2) $19,329 (1) The 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 - A 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 May 31, 2003 1 year +1.01% 5 years +4.31% 10 years +5.73% Since inception N/A Results for other share classes can be found on page 5. - -------------------------------------------------------------------------------- 8 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Investments in Securities Quality Income Portfolio May 31, 2003 (Percentages represent value of investments compared to net assets) Bonds (95.2%) Issuer Coupon Principal Value(a) rate amount Government obligations & agencies (35.1%) Federal Home Loan Bank 01-14-05 4.13% $26,370,000 $27,554,013 06-14-13 3.88 18,970,000 19,184,513 Federal Home Loan Mtge Corp 09-15-07 3.50 15,000,000 15,761,340 12-20-07 3.53 23,000,000 23,867,537 Federal Natl Mtge Assn 02-15-05 7.13 8,000,000 8,778,280 07-26-07 4.32 13,910,000 14,592,981 05-15-08 6.00 35,750,000 41,552,367 05-15-11 6.00 3,520,000 4,159,211 02-21-13 4.75 16,240,000 16,861,342 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 6,111,111 6,809,794 Province of British Columbia (U.S. Dollar) 10-29-08 5.38 4,760,000(c) 5,392,418 Province of Ontario (U.S. Dollar) 09-17-07 3.50 6,350,000(c) 6,647,523 Province of Quebec (U.S. Dollar) 07-17-09 5.00 6,350,000(c) 7,034,765 U.S. Treasury 07-31-04 2.25 21,500,000 21,772,104 01-31-05 1.63 19,500,000 19,631,021 05-31-05 1.25 500,000 499,219 11-15-05 5.75 11,170,000(h) 12,331,937 08-15-07 3.25 7,380,000(h) 7,743,236 11-15-07 3.00 15,780,000 16,372,365 02-15-08 3.00 5,255,000 5,444,674 05-15-08 2.63 22,486,000 22,851,398 05-15-13 3.63 16,361,000 16,735,520 02-15-15 11.25 7,100,000 12,290,491 11-15-16 7.50 20,910,000 28,862,324 08-15-21 8.13 8,000,000(h) 11,921,872 08-15-22 7.25 8,000,000 11,056,248 02-15-26 6.00 15,925,000 19,505,020 08-15-27 6.38 17,580,000 22,567,639 08-15-29 6.13 15,800,000 19,855,544 05-15-30 6.25 10,650,000(h) 13,653,630 02-15-31 5.38 18,325,000 21,291,359 Principal Only 08-15-21 4.72 50,000,000(f) 21,406,500 United Mexican States (U.S. Dollar) 01-16-13 6.38 8,220,000(c) 8,873,490 Total 512,861,675 Mortgage-backed securities (34.7%) Federal Home Loan Mtge Corp 11-01-14 7.50 3,541,255 3,795,629 07-01-16 8.00 235 257 01-01-17 8.00 1,354 1,476 03-01-17 8.50 32,751 35,399 06-01-17 8.50 15,861 17,333 07-01-17 6.00 9,805,942 10,176,184 07-01-17 7.00 11,951,722 12,733,069 09-01-19 8.50 38,904 42,446 04-01-20 9.00 297,091 331,807 04-01-21 9.00 257,432 287,702 03-01-22 8.50 539,453 588,140 04-01-22 6.50 17,958,198 18,723,403 08-01-22 8.50 583,098 634,833 06-01-24 7.50 2,144,944 2,296,140 02-01-25 8.00 865,437 940,684 04-01-32 7.00 3,551,216 3,725,352 06-01-32 7.00 11,374,274 11,932,018 07-01-32 7.00 14,848,806 15,576,926 09-01-32 6.50 2,887,337 3,003,819 04-01-33 6.00 7,947,336 8,239,443 06-01-33 5.50 4,500,000 4,665,234 Collateralized Mtge Obligation 02-25-42 6.50 6,752,213 7,500,426 Interest Only 02-15-14 12.29 2,000,000(g) 235,400 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 9 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn 11-01-12 4.79% $12,809,000 $13,537,313 01-01-13 4.78 4,280,000 4,608,524 01-01-13 4.92 1,393,874 1,504,114 02-01-13 4.83 2,547,784 2,731,749 02-01-13 4.87 3,642,215 3,930,177 04-01-14 6.00 6,822,185 7,124,160 04-01-14 6.50 120,004 126,135 03-01-17 6.50 8,993,143 9,445,355 04-01-17 6.50 4,497,939 4,724,114 08-01-17 6.00 12,400,070 12,919,604 09-01-17 5.50 3,980,266 4,134,048 01-01-18 5.50 3,728,980 3,873,054 04-01-18 5.00 4,010,560 4,161,604 05-01-18 5.50 7,000,552 7,271,069 06-01-18 5.00 11,500,000(b) 11,870,185 07-01-18 4.50 7,500,000(b) 7,657,050 08-01-18 4.50 18,970,000(b) 19,296,095 12-01-26 8.00 1,256,535 1,367,352 04-01-27 7.50 1,645,336 1,753,254 08-01-27 8.00 1,451,824 1,575,204 01-01-28 6.50 913,449 953,233 01-01-30 8.00 1,148,014 1,242,800 06-01-31 7.00 9,612,574 10,220,397 02-01-32 7.50 1,113,243 1,183,520 03-01-32 7.50 1,496,411 1,590,886 04-01-32 7.50 1,728,794 1,837,930 05-01-32 7.50 2,020,208 2,147,694 06-01-32 7.50 6,924,981 7,362,144 08-01-32 6.50 12,197,527 12,710,799 08-01-32 7.00 17,877,094 18,831,905 09-01-32 6.00 13,130,826 13,645,160 09-01-32 6.50 24,120,827 25,137,692 10-01-32 6.50 2,489,497 2,594,529 11-01-32 6.50 2,509,326 2,615,195 01-01-33 6.00 22,939,040 23,837,374 02-01-33 6.00 22,504,465 23,385,551 03-31-33 5.50 7,250,000 7,558,125 04-01-33 5.50 48,067,944 49,920,217 04-01-33 6.00 14,394,085 14,957,595 07-01-33 5.00 13,600,000(b) 13,884,784 Collateralized Mtge Obligation 10-25-19 8.50 1,448,659 1,611,707 09-25-42 5.00 2,570,000 2,724,200 06-25-43 2.57 5,000,000 5,023,438 Interest Only 12-25-12 1.29 2,000,000(g) 183,781 Principal Only 09-01-18 4.95 127,030(f) 115,928 Govt Natl Mtge Assn 05-15-26 7.50 2,350,279 2,506,853 12-15-32 6.00 17,004,082 17,818,460 08-01-33 5.50 10,000,000(b) 10,359,400 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 3,000,000(g) 473,520 08-20-32 0.00 9,249,800(g) 1,573,580 Total 507,101,677 Aerospace & defense (0.1%) Raytheon 04-01-13 5.38 820,000 876,410 Airlines (0.2%) Continental Airlines Series 2001-1 06-15-21 6.70 3,193,868 2,950,282 Northwest Airlines 02-01-20 6.81 583,164 481,921 Total 3,432,203 Automotive & related (0.9%) DaimlerChrysler North America Holding 01-15-08 4.75 860,000 903,688 06-04-08 4.05 9,200,000(b) 9,206,495 Ford Motor 02-01-29 6.38 4,060,000 3,360,125 Total 13,470,308 Banks and savings & loans (2.3%) ABN Amro North American Holding Capital 12-08-49 6.52 1,670,000(d) 1,920,057 AmSouth Bank NA Sub Nts 04-01-13 4.85 2,720,000 2,858,394 Bank of America 01-15-11 7.40 8,020,000 9,793,302 Banknorth Group 05-01-08 3.75 1,210,000 1,241,871 Capital One Bank Sr Nts 02-01-06 6.88 680,000 726,533 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Banks and savings & loans (cont.) FleetBoston Financial 09-15-05 7.25% $3,800,000 $4,243,981 US Bank National Association Minnesota 08-01-11 6.38 2,150,000 2,526,616 Washington Mutual Bank 06-15-11 6.88 4,730,000 5,648,613 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 4,250,000 5,011,430 Total 33,970,797 Beverages & tobacco (0.3%) Diageo Capital (U.S. Dollar) 11-19-07 3.50 2,560,000(c) 2,650,568 03-20-08 3.38 1,490,000(c) 1,532,465 Total 4,183,033 Building materials & construction (0.2%) Tyco Intl Group (U.S. Dollar) Company Guaranty 02-15-11 6.75 750,000(c) 766,875 Weyerhaeuser 03-15-12 6.75 2,000,000 2,307,892 Total 3,074,767 Chemicals (0.2%) Dow Chemical 02-01-11 6.13 2,170,000 2,401,204 Praxair 04-01-12 6.38 500,000 589,767 Total 2,990,971 Communications equipment & services (1.6%) AT&T Wireless Services Sr Nts 03-01-11 7.88 640,000 759,014 03-01-31 8.75 2,210,000 2,851,123 Deutsche Telekom Intl Finance (U.S. Dollar) 06-15-10 8.50 2,870,000(c) 3,537,370 Verizon Global Funding 12-01-10 7.25 1,530,000 1,837,958 06-15-12 6.88 1,940,000 2,294,293 Verizon Maryland 03-01-12 6.13 2,080,000 2,361,798 Verizon New England Sr Nts 09-15-11 6.50 6,090,000 7,134,314 Vodafone Group (U.S. Dollar) 11-30-32 6.25 2,830,000(c) 3,141,526 Total 23,917,396 Energy (0.9%) Anadarko Finance Company Guaranty Series B 05-01-11 6.75 3,370,000 3,980,644 Conoco Funding (U.S. Dollar) Company Guaranty 10-15-11 6.35 5,670,000(c) 6,670,681 ConocoPhillips Company Guaranty 10-15-12 4.75 1,290,000 1,374,227 FirstEnergy Series B 11-15-11 6.45 1,170,000 1,289,796 Total 13,315,348 Energy equipment & services (0.1%) Progress Energy Sr Nts 03-01-06 6.75 1,850,000 2,055,748 Financial services (9.0%) American General Finance 10-01-12 5.38 2,850,000 3,112,571 Bank of America First Union NB Commercial Mtge Series 2001-3 Cl A2 04-11-37 5.46 1,580,000 1,760,352 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-09 4.46 9,676,929(d) 10,215,835 Chase Manhattan Bank-First Union Natl Series 1999-1 Cl A2 08-15-31 7.44 3,000,000 3,638,494 Citibank Credit Card Issuance Trust Series 2003-A5 Cl A5 04-07-08 2.50 4,580,000 4,647,143 Series 2003-A6 Cl A6 05-17-10 2.90 3,300,000 3,323,001 Citigroup 02-01-08 3.50 4,095,000 4,216,376 Sub Nts 10-01-10 7.25 11,870,000 14,502,326 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Financial services (cont.) Commercial Mtge Acceptance Series 1998-C1 C1 A2 07-15-31 6.49% $6,100,000 $7,051,643 Credit Suisse First Boston USA 01-15-12 6.50 2,240,000 2,561,758 GMAC 09-15-11 6.88 4,320,000 4,470,517 02-01-12 7.00 5,580,000 5,839,425 Goldman Sachs Group 01-15-11 6.88 1,310,000 1,549,665 04-01-13 5.25 500,000 532,196 Greenwich Capital Commercial Funding Series 2002-C1 Cl A4 01-11-35 4.95 1,645,000 1,763,754 Household Finance 10-15-11 6.38 5,770,000 6,574,292 HSBS Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 2,200,000(c) 2,364,201 Intl Finance (U.S. Dollar) 04-15-08 3.00 5,000,000(c) 5,119,735 John Hancock Financial Services Sr Nts 12-01-08 5.63 2,850,000 3,184,955 LB-UBS Commercial Mtge Trust Collateralized Mtge Obligation Series 2002-C2 Cl A3 06-15-26 5.39 2,790,000 3,099,509 Series 2002-C2 Cl A4 06-15-31 5.59 1,860,000 2,084,584 Series 2003-C3 Cl A2 06-15-36 3.09 5,800,000(b) 5,845,313 Lehman Brothers Holdings 01-22-08 4.00 1,680,000 1,759,834 MBNA Credit Card Master Note Trust Series 2003-A1 Cl A1 07-15-10 3.30 2,300,000 2,366,148 Merrill Lynch 11-15-07 4.00 1,860,000 1,945,004 Morgan Stanley 04-15-11 6.75 1,000,000 1,177,504 04-01-12 6.60 3,840,000 4,476,019 03-01-13 5.30 2,480,000 2,667,017 Morgan Stanley Capital I Series 1999-CAM1 Cl B 05-30-33 3.27 5,000,000(b) 5,018,750 Morgan Stanley, Dean Witter Capital 1 Series 2002-IQ2 Cl A2 12-15-35 5.16 650,000 712,428 Series 2002-IQ2 Cl A3 12-15-35 5.52 1,150,000 1,284,275 Series 2002-IQ2 Cl A4 12-15-35 5.74 1,850,000 2,087,600 Series 2002-TOP7 Cl A2 01-15-39 5.98 2,235,000 2,571,731 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 980,000 997,411 SLM 03-17-08 3.63 2,110,000 2,175,693 TIAA Global Markets Company Guaranty 01-22-08 3.88 3,700,000(d) 3,877,193 Total 130,574,252 Food (0.8%) General Mills 02-15-07 5.13 2,850,000 3,114,566 02-15-12 6.00 310,000 354,129 Kellogg Series B 04-01-11 6.60 3,270,000 3,855,068 Kraft Foods 11-01-11 5.63 3,860,000 4,208,557 Total 11,532,320 Health care services (0.1%) Tenet Healthcare Sr Nts 06-01-12 6.50 930,000 903,263 Insurance (0.6%) Allstate 06-01-33 5.35 940,000(b) 945,720 ASIF Global Financing 01-17-13 4.90 3,470,000(d) 3,688,263 MetLife 05-15-05 3.91 1,550,000 1,609,342 Prudential Funding LLC 05-15-08 6.60 490,000(d) 566,200 Travelers Property Casualty Sr Nts 03-15-13 5.00 1,890,000 1,978,981 Total 8,788,506 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Leisure time & entertainment (0.3%) Viacom Company Guaranty 05-15-11 6.63% $3,280,000 $3,923,661 Media (1.4%) AOL Time Warner Company Guaranty 04-15-11 6.75 2,415,000 2,741,926 05-01-12 6.88 6,140,000 6,972,363 Comcast 03-15-11 5.50 8,340,000 8,909,122 Comcast Cable Communications Sr Nts 01-30-11 6.75 460,000 526,944 Cox Communications 06-01-13 4.63 580,000 581,073 Total 19,731,428 Miscellaneous (0.4%) EOP Operating LP Company Guaranty 02-15-12 6.75 2,980,000 3,436,715 ERP Operating LP 04-01-13 5.20 1,930,000 2,049,079 Total 5,485,794 Multi-industry conglomerates (0.9%) Commonwealth Edison 02-01-08 3.70 2,180,000 2,269,336 General Electric 02-01-13 5.00 6,800,000 7,243,700 General Electric Capital 06-15-12 6.00 5,630,000 6,393,428 Total 15,906,464 Paper & packaging (0.1%) Domtar (U.S. Dollar) 10-15-11 7.88 1,660,000(c) 2,046,785 Retail (0.2%) Kroger Company Guaranty 04-01-11 6.80 1,700,000 1,958,029 06-15-12 6.20 745,000 829,267 Total 2,787,296 Transportation (0.9%) Burlington North Santa Fe 12-15-05 6.38 2,415,000 2,679,998 Canadian Natl Railways (U.S. Dollar) 10-15-11 6.38 3,330,000(c) 3,886,800 CSX 03-15-11 6.75 3,250,000 3,818,194 Norfolk Southern Sr Nts 02-15-11 6.75 260,000 307,900 Union Pacific 01-15-11 6.65 1,760,000 2,069,843 Total 12,762,735 Utilities -- electric (2.3%) American Electric Power Sr Nts 03-15-10 5.38 1,510,000 1,612,546 Carolina Power & Light 07-15-12 6.50 380,000 447,172 Cincinnati Gas & Electric 09-15-12 5.70 620,000 685,726 Consolidated Natural Gas Sr Nts 04-15-11 6.85 630,000 747,678 Consumers Energy 1st Mtge 04-15-08 4.25 1,330,000(d) 1,384,756 Dominion Resources 02-15-08 4.13 3,020,000 3,160,158 Sr Nts Series B 06-30-12 6.25 1,520,000 1,730,614 Duke Energy 03-05-08 3.75 1,460,000(d) 1,520,736 01-15-12 6.25 2,875,000 3,245,717 Exelon Sr Nts 05-01-11 6.75 580,000 681,970 Florida Power 1st Mtge 03-01-13 4.80 4,430,000 4,672,498 Florida Power & Light 1st Mtge 02-01-13 4.85 4,500,000 4,825,529 FPL Group Capital 04-11-06 3.25 810,000 830,777 Midamerican Energy 01-15-13 5.13 1,240,000 1,334,986 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (cont.) NiSource Finance Company Guaranty 11-15-10 7.88% $1,900,000 $2,236,177 Northern States Power - Minnesota 1st Mtge Series B 08-28-12 8.00 1,900,000 2,420,853 Sempra Energy 02-01-13 6.00 330,000 365,678 Tampa Electric 08-15-07 5.05 350,000(i) 381,815 Xcel Energy Sr Nts 12-01-10 7.00 640,000 739,174 Total 33,024,560 Utilities -- gas (0.1%) Texas Eastern Transmission Sr Nts 07-15-07 5.25 1,410,000 1,518,848 Utilities -- telephone (1.2%) AT&T Sr Nts 11-15-06 7.00 2,980,000 3,287,941 British Telecom (U.S. Dollar) 12-15-10 8.38 3,610,000(c) 4,533,965 Citizens Communications 05-15-06 8.50 1,390,000 1,611,961 05-15-11 9.25 440,000 571,408 France Telecom (U.S. Dollar) 03-01-11 9.25 890,000(c,i) 1,113,015 SBC Communications 03-15-11 6.25 2,430,000 2,814,834 Sprint Capital 03-15-12 8.38 2,620,000 3,058,667 Total 16,991,791 Total bonds (Cost: $1,334,169,966) $1,387,228,036 Short-term securities (11.7%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (4.8%) Federal Home Loan Bank Disc Nt 07-18-03 1.16% $39,000,000 $38,938,422 Federal Natl Mtge Assn Disc Nts 06-04-03 1.16 8,900,000 8,898,660 06-24-03 1.16 22,600,000 22,581,794 Total 70,418,876 Commercial paper (6.9%) Barton Capital 06-02-03 1.36 10,100,000(e) 10,098,855 CAFCO 07-01-03 1.25 5,700,000(e) 5,693,667 Citigroup 06-02-03 1.24 6,900,000 6,899,287 Delaware Funding 07-08-03 1.25 10,000,000(e) 9,986,458 Dexia Bank (Delaware) 07-01-03 1.25 10,000,000 9,988,889 Edison Asset Securitization 06-26-03 1.25 7,900,000(e) 7,892,594 Greyhawk Funding 07-10-03 1.25 7,700,000(e) 7,689,038 Park Avenue Receivables 06-25-03 1.26 10,000,000(e) 9,990,900 Sheffield Receivables 06-19-03 1.25 9,900,000(e) 9,893,125 Sigma Finance 07-22-03 1.25 10,000,000(e) 9,981,597 Swedbank 06-10-03 1.23 11,500,000 11,495,678 Total 99,610,088 Total short-term securities (Cost: $170,034,631) $170,028,964 Total investments in securities (Cost: $1,504,204,597)(j) $1,557,257,000 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $83,611,662. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of May 31, 2003, the value of foreign securities represented 4.5% 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) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (f) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal-only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows as of May 31, 2003. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest-only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing of future cash flows as of May 31, 2003. (h) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 6 to the financial statements): Type of security Notional amount Purchase contracts U.S. Treasury Notes, Sept. 2003, 5-year $ 24,600,000 Sale contracts U.S. Treasury Notes, Sept. 2003, 10-year 124,000,000 (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2003. (j) At May 31, 2003, the cost of securities for federal income tax purposes was $1,504,753,342 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $53,208,204 Unrealized depreciation (704,546) -------- Net unrealized appreciation $52,503,658 ----------- - -------------------------------------------------------------------------------- 15 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Financial Statements Statement of assets and liabilities Quality Income Portfolio May 31, 2003 Assets Investments in securities, at value (Note 1)* (identified cost $1,504,204,597) $1,557,257,000 Dividends and accrued interest receivable 11,038,084 Receivable for investment securities sold 71,046,308 ---------- Total assets 1,639,341,392 ------------- Liabilities Disbursements in excess of cash on demand deposit 1,089,219 Payable for investment securities purchased 77,241,928 Payable for securities purchased on a when-issued basis (Note 1) 77,770,014 Payable upon return of securities loaned (Note 4) 24,860,000 Accrued investment management services fee 20,493 Other accrued expenses 29,620 ------ Total liabilities 181,011,274 ----------- Net assets $1,458,330,118 ============== *Including securities on loan, at value (Note 4) $ 24,469,360 -------------- See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 16 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Statement of operations Quality Income Portfolio Year ended May 31, 2003 Investment income Income: Interest $ 73,564,057 Fee income from securities lending (Note 4) 161,817 ------- Total income 73,725,874 ---------- Expenses (Note 2): Investment management services fee 7,763,060 Compensation of board members 15,288 Custodian fees 88,980 Audit fees 33,000 Other 33,305 ------ Total expenses 7,933,633 Earnings credits on cash balances (Note 2) (5,560) ------ Total net expenses 7,928,073 --------- Investment income (loss) -- net 65,797,801 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) (9,427,257) Futures contracts (25,023,942) Options contracts written (Note 5) 828,477 ------- Net realized gain (loss) on investments (33,622,722) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 61,670,469 ---------- Net gain (loss) on investments and foreign currencies 28,047,747 ---------- Net increase (decrease) in net assets resulting from operations $ 93,845,548 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 17 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Statements of changes in net assets Quality Income Portfolio Year ended May 31, 2003 2002 Operations Investment income (loss) -- net $ 65,797,801 $ 78,356,400 Net realized gain (loss) on investments (33,622,722) 26,212,306 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 61,670,469 (22,814,230) ---------- ----------- Net increase (decrease) in net assets resulting from operations 93,845,548 81,754,476 ---------- ---------- Proceeds from contributions 41,557,984 162,938,975 Fair value of withdrawals (260,762,982) (152,745,069) ------------ ------------ Net contributions (withdrawals) from partners (219,204,998) 10,193,906 ------------ ---------- Total increase (decrease) in net assets (125,359,450) 91,948,382 Net assets at beginning of year 1,583,689,568 1,491,741,186 ------------- ------------- Net assets at end of year $1,458,330,118 $1,583,689,568 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 18 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Notes to Financial Statements Quality Income Portfolio 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and 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 Portfolio 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 Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. - -------------------------------------------------------------------------------- 19 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio 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 Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. 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. The Portfolio 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 Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. As of May 31, 2003, the Portfolio has entered into outstanding when-issued securities of $77,770,014 and other forward-commitments of $5,841,648. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. - -------------------------------------------------------------------------------- 20 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. 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 amortization of premium and discount using the effective interest method, is accrued daily. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the year ended May 31, 2003, the Portfolio's custodian fees were reduced by $5,560 as a result of earnings credits from overnight cash balances. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $3,912,096,739 and $4,133,187,726, respectively, for the year ended May 31, 2003. For the same period, the portfolio turnover rate was 263%. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES As of May 31, 2003, securities valued at $24,469,360 were on loan to brokers. For collateral, the Portfolio received $24,860,000 in cash. Income from securities lending amounted to $161,817 for the year ended May 31, 2003. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - -------------------------------------------------------------------------------- 21 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT 5. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written are as follows: Year ended May 31, 2003 Puts Calls Contracts Premiums Contracts Premiums Balance May 31, 2002 -- $ -- -- $ -- Opened 3,022 1,154,589 9,578 1,946,192 Closed (2,080) (1,045,324) (3,423) (1,629,393) Expired (942) (109,265) (6,155) (316,799) ---- -------- ------ -------- Balance May 31, 2003 -- $ -- -- $ -- ------ ---------- ------ ---------- See "Summary of significant accounting policies." 6. INTEREST RATE FUTURES CONTRACTS As of May 31, 2003, investments in securities included securities valued at $1,964,630 that were pledged as collateral to cover initial margin deposits on 246 open purchase contracts and 1,240 open sale contracts. The notional market value of the open purchase contracts as of May 31, 2003 was $28,459,125 with a net unrealized gain of $168,141. The notional market value of the open sale contracts as of May 31, 2003, was $146,862,500 with a net unrealized loss of $869,591. See "Summary of significant accounting policies." - -------------------------------------------------------------------------------- 22 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Independent Auditors' Report THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 2003, the related statement of operations for the year then ended and the statements of changes in net assets for each of the years in the two-year period ended May 31, 2003. These financial statements are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio as of May 31, 2003, and the results of its operations and the changes in its net assets for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 11, 2003 - -------------------------------------------------------------------------------- 23 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Selective Fund May 31, 2003 Assets Investment in Portfolio (Note 1) $1,458,207,666 Capital shares receivable 224,059 ------- Total assets 1,458,431,725 ------------- Liabilities Dividends payable to shareholders 699,627 Capital shares payable 116,452 Accrued distribution fee 15,465 Accrued service fee 486 Accrued transfer agency fee 3,737 Accrued administrative services fee 1,936 Other accrued expenses 102,649 ------- Total liabilities 940,352 ------- Net assets applicable to outstanding capital stock $1,457,491,373 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 1,640,464 Additional paid-in capital 1,446,702,379 Excess of distributions over net investment income (165,135) Accumulated net realized gain (loss) (43,033,074) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 52,346,739 ---------- Total -- representing net assets applicable to outstanding capital stock $1,457,491,373 ============== Net assets applicable to outstanding shares: Class A $ 955,186,688 Class B $ 315,365,210 Class C $ 9,520,277 Class Y $ 177,419,198 Net asset value per share of outstanding capital stock: Class A shares 107,507,955 $ 8.88 Class B shares 35,496,847 $ 8.88 Class C shares 1,071,586 $ 8.88 Class Y shares 19,970,049 $ 8.88 ---------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Statement of operations AXP Selective Fund Year ended May 31, 2003 Investment income Income: Interest $ 73,567,144 Fee income from securities lending -- net 161,803 ------- Total income 73,728,947 ---------- Expenses (Note 2): Expenses allocated from Portfolio 7,927,463 Distribution fee Class A 2,489,195 Class B 3,312,585 Class C 96,246 Transfer agency fee 1,962,144 Incremental transfer agency fee Class A 111,195 Class B 69,437 Class C 2,698 Service fee -- Class Y 178,194 Administrative services fees and expenses 738,688 Compensation of board members 11,955 Printing and postage 241,135 Registration fees 30,789 Audit fees 11,000 Other 27,557 ------ Total expenses 17,210,281 Earnings credits on cash balances (Note 2) (27,259) ------- Total net expenses 17,183,022 ---------- Investment income (loss) -- net 56,545,925 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (9,426,715) Futures contracts (25,022,032) Options contracts written 828,416 ------- Net realized gain (loss) on investments (33,620,331) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 61,665,598 ---------- Net gain (loss) on investments and foreign currencies 28,045,267 ---------- Net increase (decrease) in net assets resulting from operations $ 84,591,192 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 25 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Statements of changes in net assets AXP Selective Fund Year ended May 31, 2003 2002 Operations and distributions Investment income (loss) -- net $ 56,545,925 $ 69,091,733 Net realized gain (loss) on investments (33,620,331) 26,210,072 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 61,665,598 (22,812,371) ---------- ----------- Net increase (decrease) in net assets resulting from operations 84,591,192 72,489,434 ---------- ---------- Distributions to shareholders from: Net investment income Class A (38,956,124) (47,043,251) Class B (10,439,800) (11,539,596) Class C (297,144) (244,581) Class Y (7,246,098) (10,201,699) Net realized gain Class A (4,035,818) (3,121,437) Class B (1,350,735) (955,224) Class C (39,140) (21,274) Class Y (745,149) (705,355) -------- -------- Total distributions (63,110,008) (73,832,417) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 135,100,624 217,863,403 Class B shares 84,299,721 163,154,275 Class C shares 3,528,889 7,922,122 Class Y shares 67,684,417 96,619,335 Reinvestment of distributions at net asset value Class A shares 34,789,046 39,469,070 Class B shares 10,767,133 11,261,219 Class C shares 300,242 241,633 Class Y shares 8,060,258 10,975,199 Payments for redemptions Class A shares (271,175,749) (218,862,352) Class B shares (Note 2) (126,824,914) (94,748,640) Class C shares (Note 2) (3,881,995) (2,556,903) Class Y shares (88,889,251) (137,754,814) ----------- ------------ Increase (decrease) in net assets from capital share transactions (146,241,579) 93,583,547 ------------ ---------- Total increase (decrease) in net assets (124,760,395) 92,240,564 Net assets at beginning of year 1,582,251,768 1,490,011,204 ------------- ------------- Net assets at end of year $1,457,491,373 $1,582,251,768 ============== ============== Undistributed (excess of distributions over) net investment income $ (165,135) $ 230,395 -------------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 26 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Notes to Financial Statements AXP Selective Fund 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Income Series, Inc. (formerly AXP Selective Fund, Inc.) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio The Fund invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund as of May 31, 2003 was 99.99%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. - -------------------------------------------------------------------------------- 27 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, 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 decreased by $2,289 and accumulated net realized loss has been decreased by $ 2,289. The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2002 2002 Class A Distributions paid from: Ordinary income $40,044,319 $47,611,117 Long-term capital gain 2,947,623 2,553,571 Class B Distributions paid from: Ordinary income 10,804,013 11,713,375 Long-term capital gain 986,522 781,445 Class C Distributions paid from: Ordinary income 307,698 248,451 Long-term capital gain 28,586 17,404 Class Y Distributions paid from: Ordinary income 7,447,015 10,330,020 Long-term capital gain 544,232 577,034 As of May 31, 2003, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 542,301 Accumulated gain (loss) $(38,591,537) Unrealized appreciation (depreciation) $ 47,897,393 Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative - -------------------------------------------------------------------------------- 28 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 Under terms of a prior agreement that ended April 30, 2003, the Fund paid a transfer agency fee at an annual rate per shareholder account of $19.50 for Class A, $20.50 for Class B, $20 for Class C and $17.50 for Class Y. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $993,130 for Class A, $445,551 for Class B and $5,701 for Class C for the year ended May 31, 2003. During the year ended May 31, 2003, the Fund's transfer agency fees were reduced by $27,259 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2003 Class A Class B Class C Class Y Sold 15,626,061 9,752,400 408,574 7,829,635 Issued for reinvested distributions 4,031,980 1,248,789 34,818 934,006 Redeemed (31,360,558) (14,671,741) (448,963) (10,287,933) ----------- ----------- -------- ----------- Net increase (decrease) (11,702,517) (3,670,552) (5,571) (1,524,292) ----------- ---------- ------ ---------- Year ended May 31, 2002 Class A Class B Class C Class Y Sold 24,549,245 18,395,624 893,392 10,879,769 Issued for reinvested distributions 4,462,460 1,273,680 27,348 1,240,318 Redeemed (24,742,938) (10,713,888) (289,398) (15,570,378) ----------- ----------- -------- ----------- Net increase (decrease) 4,268,767 8,955,416 631,342 (3,450,291) --------- --------- ------- ----------
- -------------------------------------------------------------------------------- 29 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT 4. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by Deutsche Bank, whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The agreement went into effect Sept. 24, 2002. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50% or the higher of the Federal Funds Rate plus 0.25% and the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $200 million with U.S. Bank, N.A. The Fund had no borrowings outstanding during the year ended May 31, 2003. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $38,591,537 as of May 31, 2003 that will expire in 2011 if not offset by capital gains. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 6. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $8.74 $8.74 $8.32 $8.96 $9.23 Income from investment operations: Net investment income (loss) .33 .40 .52 .52 .54 Net gains (losses) (both realized and unrealized) .18 .02 .42 (.46) (.20) Total from investment operations .51 .42 .94 .06 .34 Less distributions: Dividends from net investment income (.33) (.40) (.52) (.53) (.54) Distributions from realized gains (.04) (.02) -- (.17) (.07) Total distributions (.37) (.42) (.52) (.70) (.61) Net asset value, end of period $8.88 $8.74 $8.74 $8.32 $8.96 Ratios/supplemental data Net assets, end of period (in millions) $955 $1,042 $1,004 $949 $1,170 Ratio of expenses to average daily net assets(c) .98% .98% .97% .97% .89% Ratio of net investment income (loss) to average daily net assets 3.89% 4.45% 6.01% 6.17% 5.85% Portfolio turnover rate (excluding short-term securities) 263% 389% 150% 62% 30% Total return(e) 6.05% 4.85% 11.52% .83% 3.68%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 30 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $8.74 $8.74 $8.32 $8.96 $9.23 Income from investment operations: Net investment income (loss) .27 .33 .45 .46 .47 Net gains (losses) (both realized and unrealized) .18 .02 .42 (.47) (.20) Total from investment operations .45 .35 .87 (.01) .27 Less distributions: Dividends from net investment income (.27) (.33) (.45) (.46) (.47) Distributions from realized gains (.04) (.02) -- (.17) (.07) Total distributions (.31) (.35) (.45) (.63) (.54) Net asset value, end of period $8.88 $8.74 $8.74 $8.32 $8.96 Ratios/supplemental data Net assets, end of period (in millions) $315 $342 $264 $187 $210 Ratio of expenses to average daily net assets(c) 1.74% 1.73% 1.73% 1.73% 1.65% Ratio of net investment income (loss) to average daily net assets 3.12% 3.67% 5.25% 5.41% 5.10% Portfolio turnover rate (excluding short-term securities) 263% 389% 150% 62% 30% Total return(e) 5.25% 4.06% 10.69% .06% 2.89%
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2003 2002 2001(b) Net asset value, beginning of period $8.74 $8.74 $8.40 Income from investment operations: Net investment income (loss) .27 .33 .42 Net gains (losses) (both realized and unrealized) .18 .02 .34 Total from investment operations .45 .35 .76 Less distributions: Dividends from net investment income (.27) (.33) (.42) Distributions from realized gains (.04) (.02) -- Total distributions (.31) (.35) (.42) Net asset value, end of period $8.88 $8.74 $8.74 Ratios/supplemental data Net assets, end of period (in millions) $10 $9 $4 Ratio of expenses to average daily net assets(c) 1.75% 1.74% 1.73%(d) Ratio of net investment income (loss) to average daily net assets 3.07% 3.64% 5.16%(d) Portfolio turnover rate (excluding short-term securities) 263% 389% 150% Total return(e) 5.24% 4.06% 9.27%(f)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 31 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $8.74 $8.74 $8.32 $8.96 $9.23 Income from investment operations: Net investment income (loss) .35 .42 .53 .54 .55 Net gains (losses) (both realized and unrealized) .18 .02 .42 (.47) (.20) Total from investment operations .53 .44 .95 .07 .35 Less distributions: Dividends from net investment income (.35) (.42) (.53) (.54) (.55) Distributions from realized gains (.04) (.02) -- (.17) (.07) Total distributions (.39) (.44) (.53) (.71) (.62) Net asset value, end of period $8.88 $8.74 $8.74 $8.32 $8.96 Ratios/supplemental data Net assets, end of period (in millions) $177 $188 $218 $167 $196 Ratio of expenses to average daily net assets(c) .82% .81% .82% .81% .81% Ratio of net investment income (loss) to average daily net assets 4.04% 4.61% 6.16% 6.33% 5.93% Portfolio turnover rate (excluding short-term securities) 263% 389% 150% 62% 30% Total return(e) 6.22% 5.02% 11.70% .97% 3.77%
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 32 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Independent Auditors' Report THE BOARD AND SHAREHOLDERS AXP INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities of AXP Selective Fund (a series of AXP Income Series, Inc.) as of May 31, 2003, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2003, and the financial highlights for the each of the years in the five-year period ended May 31, 2003. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Selective Fund as of May 31, 2003, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 11, 2003 - -------------------------------------------------------------------------------- 33 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Selective Fund Fiscal year ended May 31, 2003 Class A Income distributions taxable as dividend income: Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00% Dividends Received Deduction for corporations: 1.51% Payable date Per share June 26, 2002 $0.03357 July 26, 2002 0.03158 Aug. 26, 2002 0.03131 Sept. 26, 2002 0.03512 Oct. 25, 2002 0.03498 Nov. 25, 2002 0.03411 Dec. 20, 2002 0.04240 Jan. 22, 2003 0.02919 Feb. 21, 2003 0.02109 March 24, 2003 0.01837 April 24, 2003 0.01607 May 23, 2003 0.01984 Total $0.34763 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2002 $0.02576 Total distributions $0.37339 The distribution of $0.06816 per share, payable Dec. 20, 2002, consisted of $0.03289 from net investment income, $0.00951 from net short-term capital gains (a total of $0.04240 taxable as dividend income) and $0.02576 from net long-term capital gains. - -------------------------------------------------------------------------------- 34 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Class B Income distributions taxable as dividend income: Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00% Dividends Received Deduction for corporations: 1.51% Payable date Per share June 26, 2002 $0.02758 July 26, 2002 0.02620 Aug. 26, 2002 0.02577 Sept. 26, 2002 0.02953 Oct. 25, 2002 0.02978 Nov. 25, 2002 0.02857 Dec. 20, 2002 0.03793 Jan. 22, 2003 0.02327 Feb. 21, 2003 0.01568 March 24, 2003 0.01275 April 24, 2003 0.01046 May 23, 2003 0.01452 Total $0.28204 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2002 $0.02576 Total distributions $0.30780 The distribution of $0.06369 per share, payable Dec. 20, 2002, consisted of $0.02842 from net investment income, $0.00951 from net short-term capital gains (a total of $0.03793 taxable as dividend income) and $0.02576 from net long-term capital gains. Class C Income distributions taxable as dividend income: Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00% Dividends Received Deduction for corporations: 1.51% Payable date Per share June 26, 2002 $0.02751 July 26, 2002 0.02615 Aug. 26, 2002 0.02572 Sept. 26, 2002 0.02947 Oct. 25, 2002 0.02973 Nov. 25, 2002 0.02853 Dec. 20, 2002 0.03789 Jan. 22, 2003 0.02321 Feb. 21, 2003 0.01564 March 24, 2003 0.01271 April 24, 2003 0.01041 May 23, 2003 0.01448 Total $0.28145 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2002 $0.02576 Total distributions $0.30721 The distribution of $0.06365 per share, payable Dec. 20, 2002, consisted of $0.02838 from net investment income, $0.00951 from net short-term capital gains (a total of $0.03789 taxable as dividend income) and $0.02576 from net long-term capital gains. - -------------------------------------------------------------------------------- 35 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Class Y Income distributions taxable as dividend income: Qualified Dividend Income for individuals (effective Jan. 1, 2003): 0.00% Dividends Received Deduction for corporations: 1.51% Payable date Per share June 26, 2002 $0.03484 July 26, 2002 0.03271 Aug. 26, 2002 0.03249 Sept. 26, 2002 0.03631 Oct. 25, 2002 0.03609 Nov. 25, 2002 0.03529 Dec. 20, 2002 0.04335 Jan. 22, 2003 0.03045 Feb. 21, 2003 0.02224 March 24, 2003 0.01956 April 24, 2003 0.01726 May 23, 2003 0.02096 Total $0.36155 Capital gain distribution taxable as long-term capital gain. Payable date Per share Dec. 20, 2002 $0.02576 Total distributions $0.38731 The distribution of $0.05960 per share, payable Dec. 20, 2002, consisted of $0.03384 from net investment income, $0.00951 from net short-term capital gains (a total of $0.04335 taxable as dividend income) and $0.02576 from net long-term capital gains. - -------------------------------------------------------------------------------- 36 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 83 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held with Principal occupation during past five Other directorships Fund and length of years service - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Arne H. Carlson Board member since Chair, Board Services Corporation 901 S. Marquette Ave. 1999 (provides administrative services to Minneapolis, MN 55402 boards). Former Governor of Minnesota Age 68 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Philip J. Carroll, Jr. Board member since Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan 901 S. Marquette Ave. 2002 Corporation (engineering and Materials Company, Inc. Minneapolis, MN 55402 construction) since 1998 (construction Age 65 materials/chemicals) - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Livio D. DeSimone Board member since Retired Chair of the Board and Chief Cargill, Incorporated 30 Seventh Street East 2001 Executive Officer, Minnesota Mining and (commodity merchants and Suite 3050 Manufacturing (3M) processors), General Mills, St. Paul, MN 55101-4901 Inc. (consumer foods), Vulcan Age 69 Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Heinz F. Hutter* Board member since Retired President and Chief Operating P.O. Box 2187 1994 Officer, Cargill, Incorporated (commodity Minneapolis, MN 55402 merchants and processors) Age 74 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Anne P. Jones Board member since Attorney and Consultant 5716 Bent Branch Rd. 1985 Bethesda, MD 20816 Age 68 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Stephen R. Lewis, Jr.** Board member since Retired President and Professor of Valmont Industries, Inc. 222 South 9th Street #440 2002 Economics, Carleton College (manufactures irrigation Minneapolis, MN 55402 systems) Age 64 - -------------------------------- -------------------- ------------------------------------------- -------------------------------
* Interested person of AXP Partners International Aggressive Growth Fund and AXP Partners Aggressive Growth Fund by reason of being a security holder of J P Morgan Chase & Co., which has a 45% interest in American Century Companies, Inc., the parent company of the subadviser of two of the AXP Partners Funds, American Century Investment Management, Inc. ** Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Liberty Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 37 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position held with Principal occupation during past five Other directorships Fund and length of years service - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Alan G. Quasha Board member since President, Quadrant Management, Inc. Compagnie Financiere 720 Fifth Avenue 2002 (management of private equities) Richemont AG (luxury goods), New York, NY 10019 Harken Energy Corporation Age 53 (oil and gas exploration) and SIRIT Inc. (radio frequency identification technology) - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Alan K. Simpson Board member since Former three-term United States Senator Biogen, Inc. 1201 Sunshine Ave. 1997 for Wyoming (biopharmaceuticals) Cody, WY 82414 Age 71 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Alison Taunton-Rigby Board member since President, Forester Biotech since 2000. 901 S. Marquette Ave. 2002 Former President and CEO, Aquila Minneapolis, MN 55402 Biopharmaceuticals, Inc. Age 59 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Board Members Affiliated with AEFC*** Name, address, age Position held with Principal occupation during past five Other directorships Fund and length of years service - -------------------------------- -------------------- ------------------------------------------- Barbara H. Fraser Board member since Executive Vice President - AEFA Products 1546 AXP Financial Center 2002 and Corporate Marketing of AEFC since Minneapolis, MN 55474 2002. President - Travelers Check Group, Age 53 American Express Company, 2001-2002. Management Consultant, Reuters, 2000-2001. Managing Director - International Investments, Citibank Global, 1999-2000. Chairman and CEO, Citicorp Investment Services and Citigroup Insurance Group, U.S., 1998-1999 - -------------------------------- -------------------- ------------------------------------------- Stephen W. Roszell Board member since Senior Vice President - Institutional 50238 AXP Financial Center 2002, Vice Group of AEFC Minneapolis, MN 55474 President since Age 54 2002 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- William F. Truscott Board member since Senior Vice President - Chief Investment 53600 AXP Financial Center 2001, Vice Officer of AEFC since 2001. Former Chief Minneapolis, MN 55474 President since Investment Officer and Managing Director, Age 42 2002 Zurich Scudder Investments - -------------------------------- -------------------- ------------------------------------------- -------------------------------
*** Interested person by reason of being an officer, director and/or employee of AEFC. - -------------------------------------------------------------------------------- 38 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Roszell, who is vice president, and Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held with Principal occupation during past five Other directorships Fund and length of years service - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Jeffrey P. Fox Treasurer since Vice President - Investment Accounting, 50005 AXP Financial Center 2002 AEFC, since 2002; Vice President - Minneapolis, MN 55474 Finance, American Express Company, Age 48 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Paula R. Meyer President since Senior Vice President and General Manager 596 AXP Financial Center 2002 - Mutual Funds, AEFC, since 2002; Vice Minneapolis, MN 55474 President and Managing Director - Age 49 American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - -------------------------------- -------------------- ------------------------------------------- ------------------------------- Leslie L. Ogg Vice President, President of Board Services Corporation 901 S. Marquette Ave. General Counsel, Minneapolis, MN 55402 and Secretary Age 64 since 1978 - -------------------------------- -------------------- ------------------------------------------- -------------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - -------------------------------------------------------------------------------- 39 -- AXP SELECTIVE FUND -- 2003 ANNUAL REPORT The policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities can be found in the Fund's Statement of Additional Information (SAI) which is available (i) without charge, upon request, by calling toll-free (800) 862-7919; (ii) on the American Express Company Web site at americanexpress.com; and (iii) on the Securities and Exchange Commission Web site at http://www.sec.gov. - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS(R) - -------------------------------------------------------------------------------- American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. Code of Ethics. Not applicable pursuant to SEC Release No. IC-25914 (January 27, 2003). Item 3. Audit Committee Financial Expert. Not applicable pursuant to SEC Release No. IC-25914 (January 27, 2003). Item 4. Principal Accountant Fees and Services. Not applicable pursuant to SEC Release No. IC-25915 (January 28, 2003). Items 5-6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. [Reserved] Item 9. Controls and Procedures. (a) The registrant's Principal Executive Officer and Principal Financial Officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) At the date of filing this Form N-CSR, the registrant's Principal Executive Officer and Principal Financial Officer are aware of no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10. Exhibits. (a) Not applicable pursuant to SEC Release No. IC-25914 (January 27, 2003). (b) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date July 31, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date July 31, 2003 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date July 31, 2003 EX-99.CERT 3 ex99-cert.txt CERTIFICATION PURSUANT TO 270.30A-2 OF THE INVESTMENT COMPANY ACT OF 1940 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Paula Meyer, certify that: 1. I have reviewed this report on Form N-CSR of AXP Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 22, 2003 /s/ Paula R. Meyer -------------------------------- Name: Paula R. Meyer Title: President and Chief Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey Fox, certify that: 1. I have reviewed this report on Form N-CSR of AXP Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 22, 2003 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----