-----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, TXPLH3+PbYBnwOqzuJVnReIro4e7xeAPBTYAQeUgJ1Cuk5IHjVrXD+JP9dBaNy7L EvGY9qGbw2l9+5CpbyuX3g== 0000820027-04-000649.txt : 20040803 0000820027-04-000649.hdr.sgml : 20040803 20040803123709 ACCESSION NUMBER: 0000820027-04-000649 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20040803 EFFECTIVENESS DATE: 20040803 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: 04947425 BUSINESS ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 612-671-7981 MAIL ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 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) 50606 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 -------------- AXP(R) Selective Fund Annual Report for the Period Ended May 31, 2004 AXP Selective Fund seeks to provide shareholders with current income and preservation of capital. (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) Table of Contents Fund Snapshot 3 Questions & Answers with Portfolio Management 4 The Fund's Long-term Performance 7 Investments in Securities 8 Financial Statements (Portfolio) 15 Notes to Financial Statements (Portfolio) 17 Report of Independent Registered Public Accounting Firm (Portfolio) 22 Financial Statements (Fund) 23 Notes to Financial Statements (Fund) 26 Report of Independent Registered Public Accounting Firm (Fund) 34 Federal Income Tax Information 35 Board Members and Officers 37 Proxy Voting 39 (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 -- 2004 ANNUAL REPORT Fund Snapshot AS OF MAY 31, 2004 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 16 Scott Kirby 6/03 25 Tom Murphy, CFA 2/03 18 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 $989.6 million Number of holdings 223 Average weighted life* 7.9 years Effective duration** 4.4 years Weighted average bond rating AA * Average weighted life is the average number of years that each dollar of unpaid principal due on a security remains outstanding. ** Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW SECTOR COMPOSITION Percentage of portfolio assets (pie chart) Mortgage-backed securities 31.8% U.S. government obligations & agencies 30.6% Corporate bonds* 23.0% CMBS/ABS** 7.6% Short-term securities*** 5.8% Foreign government bonds 1.2% * Includes 4.6% Banks & brokers, 4.4% Utilities, 3.5% Communications, 2.9% Other financial, 2.0% Insurance, 2.0% Consumer cyclical, 1.1% Energy, 0.9% Technology, 0.8% Basic industries, 0.7% Consumer non-cyclical and 0.1% Capital goods. ** Commercial mortgage-backed/Asset-backed securities. *** 3.3% of the securities in this category is due to security lending activity. 2.5% of the short-term securities is the Fund's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of portfolio assets excluding cash equivalents AAA bonds 77.5% AA bonds 2.8 A bonds 5.8 BBB bonds 13.9 Non-investment grade bonds -- Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. For further detail about these holdings, please refer to the section entitled "Investments in Securities." Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, the Fund's Portfolio Management team discusses the Fund's positioning and results for fiscal year 2004. Q: How did AXP Selective Fund perform for the 12-month period ended May 31, 2004? A: AXP Selective Fund's Class A shares (excluding sales charge) declined 1.17% for the 12 months ended May 31, 2004. The Lehman Brothers Aggregate Bond Index fell 0.44%, while the Lipper Corporate Debt - A rated Funds Index, representing the Fund's peer group, declined 0.32%. To help keep the Fund competitive with its peers, an expense cap was instituted effective June 1, 2004, reducing the maximum level of expenses borne by Class A shareholders from 1.00% of net assets per fiscal year to a maximum of 0.945% per year. Q: What factors most significantly affected performance during the annual period? A: Although the Fund benefited from its duration and yield curve positioning, the Fund's results did not keep pace with either the overall bond market or our peer group as much as we would have liked. Through most of the fiscal year, we positioned the portfolio for what we thought would be a yield curve flattening (a narrowing of the difference between short and long-term interest rates). In the fall of 2003, we also shortened the Fund's duration, a measure of interest rate sensitivity, versus the benchmark. This positioning strategy proved effective, as rates rose and the yield curve flattened. Strong credit and issue selection also had a positive effect on the Fund's relative return. The Fund's emphasis on higher-quality securities, however, detracted from its relative performance overall, as the market favored lower credit quality bonds past the first half of the fiscal year. This focus did boost the Fund's relative return year-to-date in 2004, when a flight-to-quality within the fixed income market (bar chart) PERFORMANCE COMPARISON For the year ended May 31, 2004 0.0% - -0.2% (bar 3) (bar 2) -0.32% - -0.4% -0.44% - -0.6% - -0.8% - -1.0% (bar 1) - -1.2% -1.17% (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 -- 2004 ANNUAL REPORT Questions & Answers (begin callout quote)> We intend to keep the Fund defensively positioned going forward, with both a shorter-than-index duration and a focus on investment grade bonds.(end callout quote) caused higher-quality securities to outperform lower-quality bonds. Similarly, the Fund's less cyclical focus hurt its relative annual return. We favored less cyclical credits and industries not because we doubted the robustness of the economic recovery, but from a risk/reward and relative value perspective.
AVERAGE ANNUAL TOTAL RETURNS 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) as of May 31, 2004 1 year -1.17% -5.86% -1.92% -5.75% -1.92% -1.92% -1.13% -1.13% 3 years +3.19% +1.53% +2.42% +1.48% +2.41% +2.41% +3.32% +3.32% 5 years +4.33% +3.31% +3.54% +3.37% N/A N/A +4.46% +4.46% 10 years +6.01% +5.50% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +5.16% +5.16% +4.16% +4.16% +6.10% +6.10% as of June 30, 2004 1 year -0.52% -5.25% -1.28% -5.13% -1.28% -1.28% -0.48% -0.48% 3 years +3.27% +1.61% +2.49% +1.55% +2.49% +2.49% +3.40% +3.40% 5 years +4.46% +3.45% +3.68% +3.51% N/A N/A +4.60% +4.60% 10 years +6.07% +5.56% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +5.16% +5.16% +4.17% +4.17% +6.09% +6.09%
The performance information shown represents the past performance and is not a guarantee of future results. The investment return and principal value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (888) 723-8476 or visiting www.americanexpress.com/funds. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. (1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. - -------------------------------------------------------------------------------- 5 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Questions & Answers Q: What changes did you make to the portfolio and how is it currently positioned? A: We made no major thematic shifts in portfolio positioning during the period, but rather made adjustments to sector allocations throughout in response to valuations or market developments. These opportunistic weighting changes resulted in an annual portfolio turnover rate of 292%. At the end of the fiscal year, we favored commercial mortgage-backed securities and investment grade corporate bonds over mortgages, asset-backed securities, and government agencies within the spread sectors of the fixed income market, i.e., the non-Treasury sectors. The portfolio had a moderately larger-than-index position in corporate bonds based on our ability to find some strong fundamental credit stories where the valuations were attractive compared to other alternatives. The portfolio had a lower-than-index position in mortgages, given relatively full valuations and concerns about how mortgages will react to the next move higher in yields. The portfolio also had a modest non-dollar position in European bonds, as we believe the euro may strengthen against the U.S. dollar in the months ahead. From a duration perspective, the Fund maintained its defensive bias in anticipation of the Federal Reserve Board potentially raising the targeted federal funds rate sooner than later given continued strong economic growth and the emergence of inflationary pressures. Specifically, the portfolio had a lower duration than its benchmark through the end of the fiscal year and a lower-than-index position in shorter maturity securities, which we believe will likely come under the most pressure when the Federal Reserve Board begins to raise short-term interest rates. Q: How do you intend to manage the fund in the coming months? A: We anticipate a continued rebound in the U.S. economy and labor market as well as a rise in inflation. Thus, we believe the spread sectors are likely to stay under pressure until the market gains more comfort around both a flatter yield curve and the pace of Federal Reserve Board tightening. Based on this view and on current valuations, we intend to keep the Fund defensively positioned going forward, with both a shorter-than-index duration and a focus on investment grade bonds. - -------------------------------------------------------------------------------- 6 -- AXP SELECTIVE FUND -- 2004 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 6/1/94 to 5/31/04) 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. The performance information shown represents the past performance and is not a guarantee of future results. The value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Returns do not reflect taxes payable on distributions and redemptions. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (888) 723-8476 or visiting www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current prospectus. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing.
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP SELECTIVE FUND AXP Selective Fund Class A $ 9,525 $10,732 $11,194 $12,099 $13,327 $13,819 $13,933 $15,538 $16,292 $17,278 $17,076 Lehman Brothers Aggregate Bond Index(1) $10,000 $11,148 $11,636 $12,604 $13,980 $14,588 $14,895 $16,850 $18,215 $20,324 $20,234 Lipper Corporate Debt - A rated Funds Index(2) $10,000 $11,150 $11,579 $12,518 $13,927 $14,289 $14,357 $16,191 $17,306 $19,250 $19,188 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04
(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, 2004 1 year -5.86% 5 years +3.31% 10 years +5.50% Results for other share classes can be found on page 5 - -------------------------------------------------------------------------------- 7 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Investments in Securities Quality Income Portfolio May 31, 2004 (Percentages represent value of investments compared to net assets) Bonds (98.1%) Issuer Coupon Principal Value(a) rate amount Foreign government (1.3%) Bundesobligation (European Monetary Unit) 02-17-06 5.00% 8,570,000(c) $10,895,455 United Mexican States (U.S. Dollar) 03-03-15 6.63 1,990,000(c) 1,987,015 Total 12,882,470 U.S. government obligations & agencies (31.9%) Federal Home Loan Bank 06-14-13 3.88 18,970,000 17,294,418 Federal Home Loan Mtge Corp 08-15-06 2.75 25,350,000 25,243,961 12-20-07 3.53 23,000,000 22,880,975 11-15-13 4.88 1,310,000 1,279,363 01-15-14 4.50 11,000,000 10,389,720 06-01-19 4.50 8,400,000(b) 8,200,500 Federal Natl Mtge Assn 02-15-05 7.13 8,000,000 8,303,320 05-15-11 6.00 3,520,000 3,768,896 06-01-19 4.50 1,900,000(b) 1,854,875 06-01-19 5.00 2,000,000(b) 1,997,500 06-01-19 5.50 785,000(b) 800,455 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 5,000,000 5,404,900 U.S. Treasury 10-31-04 2.13 9,100,000 9,130,567 02-15-07 2.25 16,687,000(i) 16,388,453 05-15-09 3.88 37,659,000 37,794,196 02-15-10 6.50 3,210,000 3,616,392 08-15-10 5.75 1,425,000 1,551,802 05-15-14 4.75 28,451,000 28,664,383 08-15-23 6.25 23,735,000 26,121,483 02-15-26 6.00 77,024,000(i) 82,505,952 02-15-31 5.38 2,030,000 2,037,533 Total 315,229,644 Commercial mortgage-backed/ Asset-backed securities (7.8%)(f) Aesop Funding II LLC Series 2003-3A Cl A3 07-20-09 3.72 2,000,000(d) 1,961,119 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 3,039,061 3,061,641 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 3,212,896 3,134,662 Series 2004-PWR3 Cl A2 02-11-41 3.87 500,000 484,750 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 9,495,619(d) 9,458,797 CS First Boston Mtge Securities Series 2003-8 Cl 5A1 04-25-33 6.50 3,501,811 3,570,096 Series 2004-C1 Cl A2 01-15-37 3.52 3,100,000 3,011,769 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,250,000 3,167,385 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 2,200,000 2,374,043 J.P. Morgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A2 07-12-37 5.26 1,500,000 1,498,379 KSL Resorts Series 2003-1A Cl C 05-15-13 1.99 1,300,000(d) 1,300,575 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 8 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed/ Asset-backed securities (cont.) LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39% $2,790,000 $2,879,656 Series 2002-C2 Cl A4 06-15-31 5.59 1,890,000 1,951,707 Series 2002-C8 Cl A3 11-15-27 4.83 1,150,000 1,136,649 Series 2003-C3 Cl A2 05-15-27 3.09 5,800,000 5,581,147 Series 2003-C7 Cl A2 09-15-27 4.06 2,573,500 2,531,938 Series 2003-C8 Cl A2 11-15-27 4.21 5,130,000 5,083,984 Series 2004-C2 Cl A2 03-15-29 3.25 4,935,000 4,706,411 Morgan Stanley Capital 1 Series 2004-IQ7 Cl A4 06-15-38 5.57 1,500,000 1,515,234 Series 2003-IQ4 Cl A1 05-15-40 3.27 4,712,736 4,454,648 Series 2004-T13 Cl A2 09-13-45 3.94 2,200,000 2,123,968 Morgan Stanley, Dean Witter Capital 1 Series 2002-TOP7 Cl A2 01-15-39 5.98 2,235,000 2,362,435 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 980,000 972,486 Residential Asset Securities Series 2002-KS1 Cl AI4 11-25-29 5.86 2,800,000 2,852,864 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 7,259,629 7,121,686 Total 78,298,029 Mortgage-backed securities (33.0%)(f,k) Federal Home Loan Mtge Corp 05-01-13 4.50 2,601,761 2,608,062 11-01-14 7.50 2,447,687 2,636,783 07-01-16 8.00 211 230 01-01-17 8.00 1,298 1,433 03-01-17 8.50 16,656 18,249 06-01-17 8.50 4,342 4,766 07-01-17 7.00 8,155,936 8,671,064 05-01-18 5.50 2,527,202 2,582,388 09-01-18 5.00 4,385,048 4,408,707 10-01-18 5.00 6,651,925 6,680,148 09-01-19 8.50 37,731 41,340 04-01-20 9.00 153,453 171,760 04-01-21 9.00 154,899 173,130 03-01-22 8.50 323,915 354,996 08-01-22 8.50 354,270 387,834 02-01-25 8.00 465,837 507,261 06-01-32 7.00 2,158,765 2,295,612 07-01-32 7.00 7,661,589 8,048,824 04-01-33 6.00 6,886,796 7,047,935 06-01-33 5.50 4,066,354 4,037,025 09-01-33 4.56 3,823,878(e) 3,809,997 12-01-33 5.00 3,399,851 3,271,259 Collateralized Mtge Obligation 10-15-18 5.00 2,700,000 2,727,859 11-15-18 5.00 6,900,000 6,970,857 01-15-19 5.00 5,200,000 5,246,144 11-15-21 5.00 4,050,000 4,138,632 02-15-27 5.00 4,000,000 4,022,154 11-15-28 4.50 2,152,689 2,142,602 02-15-33 5.50 3,849,074 3,966,971 07-25-43 7.00 2,236,654 2,367,261 Interest Only 02-15-14 7.40 1,933,768(h) 171,448 06-15-18 7.59 1,414,603(h) 88,954 Federal Natl Mtge Assn 01-01-13 4.92 1,376,126 1,378,367 04-01-14 6.00 3,611,867 3,762,488 03-01-17 6.50 4,501,704 4,753,732 04-01-17 6.50 2,407,559 2,542,346 08-01-17 6.00 7,985,504 8,297,707 09-01-17 6.00 8,831,021 9,176,280 01-01-18 5.50 2,743,207 2,803,596 04-01-18 5.00 6,746,840 6,786,175 05-01-18 5.50 6,210,324 6,372,905 06-01-18 5.00 2,203,592 2,216,843 08-01-18 4.50 6,513,100 6,378,767 10-01-18 4.50 3,566,957 3,492,328 01-01-19 5.50 1,111,383 1,139,037 02-01-19 5.00 2,912,560 2,915,592 07-01-23 5.00 3,292,246 3,236,636 07-01-23 5.50 3,796,642 3,825,606 09-01-23 5.50 4,478,228 4,512,392 12-01-26 8.00 669,876 729,427 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 9 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 04-01-27 7.50% $830,738 $889,382 08-01-27 8.00 765,985 832,239 01-01-28 6.50 437,425 458,116 07-01-28 5.50 2,341,111 2,332,016 11-01-28 5.50 3,818,575 3,803,739 04-01-29 5.00 4,992,011 4,816,437 01-01-30 8.00 591,107 640,373 06-01-31 7.00 5,697,127 6,053,559 03-01-32 7.50 790,063 844,106 04-01-32 7.50 845,202 902,364 05-01-32 7.50 901,236 963,433 06-01-32 7.50 2,246,446 2,398,375 07-01-32 6.50 1,449,927 1,507,315 08-01-32 6.50 8,303,929 8,641,319 08-01-32 7.00 988,008 1,041,503 10-01-32 6.50 1,273,903 1,319,942 11-01-32 6.50 2,000,297 2,093,913 01-01-33 6.00 6,196,474 6,311,180 02-01-33 6.00 17,831,578 18,167,847 04-01-33 5.50 24,506,458 24,404,910 04-01-33 6.00 12,111,948 12,389,385 05-01-33 5.50 6,594,479 6,542,976 07-01-33 5.50 4,141,818 4,109,284 08-01-33 5.50 969,370 961,755 10-01-33 6.50 5,981,183 6,206,880 01-01-34 4.80 3,168,468(e) 3,208,943 01-01-34 6.50 1,945,790 2,033,130 Collateralized Mtge Obligation 05-25-16 4.00 3,000,000 2,945,213 10-25-19 8.50 800,254 871,240 12-25-26 8.00 2,151,516 2,302,354 02-25-44 7.00 3,900,000 4,126,078 Interest Only 12-25-12 13.29 1,834,534(h) 139,152 Principal Only 09-01-18 4.43 47,869(g) 41,825 Govt Natl Mtge Assn 05-15-26 7.50 1,197,469 1,290,270 12-15-32 6.00 13,906,980 14,185,389 10-15-33 5.50 5,042,134 5,019,643 03-20-34 6.50 1,988,192 2,052,224 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 1,878,081(h) 293,470 08-20-32 0.00 6,934,578(h) 1,345,180 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 4,861,430 4,902,898 Total 327,311,266 Aerospace & defense (--%) Raytheon 11-01-08 6.15 310,000 330,918 Airlines (0.1%) Northwest Airlines Series 1999-1A 02-01-20 6.81 565,527 499,739 Automotive & related (0.7%) DaimlerChrysler NA Holding 11-15-13 6.50 3,740,000 3,781,701 Ford Motor 02-01-29 6.38 4,060,000 3,418,516 Total 7,200,217 Banks and savings & loans (3.8%) ANZ Capital Trust I 12-29-49 5.36 6,515,000(d) 6,245,071 Banknorth Group Sr Nts 05-01-08 3.75 1,510,000(i) 1,475,874 J.P. Morgan Chase Sub Nts 03-15-14 4.88 4,570,000 4,287,323 US Bank Natl Assn Minnesota 08-01-11 6.38 6,270,000 6,814,236 Washington Mutual Bank FA Sub Nts 06-15-11 6.88 5,790,000 6,387,024 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 9,564,000 10,390,903 World Savings Bank FSB Sr Nts 06-15-09 4.50 1,940,000(b) 1,950,107 Total 37,550,538 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Broker dealers (1.1%) Goldman Sachs Group 04-01-13 5.25% $2,370,000 $2,308,641 07-15-13 4.75 570,000 533,001 Morgan Stanley 03-01-13 5.30 1,335,000 1,311,023 Sub Nts 04-01-14 4.75 5,610,000 5,160,808 Total 9,313,473 Cable (0.9%) Comcast 03-15-11 5.50 7,870,000 7,913,128 Comcast Cable Communications 11-15-08 6.20 950,000 1,012,870 Total 8,925,998 Energy (0.9%) Pemex Project Funding Master Trust 12-15-14 7.38 8,335,000 8,439,188 Energy equipment & services (0.3%) Halliburton 10-15-10 5.50 2,590,000 2,621,124 Finance companies (1.6%) Citigroup 05-05-14 5.13 6,380,000 6,198,233 Ford Motor Credit 10-01-13 7.00 5,000 5,023 GMAC 09-15-11 6.88 4,330,000 4,411,400 02-01-12 7.00 5,580,000(i) 5,713,061 Total 16,327,717 Financial services (1.4%) Capital One Bank Sr Nts 02-01-06 6.88 680,000 721,262 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 8,370,000(c) 8,301,609 TIAA Global Markets 01-22-08 3.88 4,870,000(d) 4,864,107 Total 13,886,978 Food (0.7%) Kellogg Sr Nts 06-01-08 2.88 1,790,000 1,709,038 Kraft Foods 10-01-08 4.00 4,500,000 4,420,080 10-01-13 5.25 520,000 503,207 Total 6,632,325 Insurance (2.1%) ASIF Global Financing 11-26-07 3.85 4,050,000(d) 4,073,551 01-17-13 4.90 10,380,000(d) 10,101,402 Berkshire Hathaway 10-15-13 4.63 1,760,000 1,676,155 MassMutual Global Funding II 07-15-08 2.55 1,250,000(d) 1,178,166 Met Life Global Funding I 06-19-08 2.60 1,340,000(d) 1,264,598 Pacific Life 09-15-33 6.60 2,560,000(d) 2,625,075 Total 20,918,947 Leisure time & entertainment (0.7%) Historic TW 05-15-29 6.63 5,060,000 4,919,797 Time Warner 05-01-32 7.70 1,470,000 1,605,315 Total 6,525,112 Multi-industry (0.1%) Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 750,000(c) 805,859 Paper & packaging (0.9%) Domtar (U.S. Dollar) 12-01-13 5.38 5,325,000(c) 5,066,386 Intl Paper 04-01-10 4.00 2,670,000 2,533,990 MeadWestvaco 04-01-12 6.85 1,060,000 1,134,199 Total 8,734,575 Retail -- general (0.6%) Wal-Mart Stores 02-15-11 4.13 6,640,000 6,369,420 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Retail -- grocery (0.1%) Kroger 02-01-13 5.50% $910,000 $904,313 Telecom equipment & services (1.0%) Sprint Capital 11-15-28 6.88 7,425,000 7,191,945 Telus (U.S. Dollar) 06-01-07 7.50 2,175,000(c) 2,381,394 Total 9,573,339 Utilities -- electric (4.0%) AEP Texas Central Sr Nts Series D 02-15-13 5.50 1,690,000 1,683,502 CenterPoint Energy Houston Electric LLC 03-15-13 5.70 225,000 229,257 01-15-14 5.75 850,000 862,161 Columbus Southern Power Sr Nts Series C 03-01-13 5.50 480,000 482,105 Commonwealth Edison 1st Mtge 08-15-10 4.74 800,000 798,128 Consolidated Natural Gas 12-01-13 6.63 960,000 1,033,531 Consumers Energy 1st Mtge Series C 04-15-08 4.25 4,907,000 4,863,681 Dayton Power & Light 1st Mtge 10-01-13 5.13 1,610,000(d) 1,531,223 Dominion Resources Sr Nts 03-15-13 5.00 940,000 899,010 Sr Nts Series F 08-01-33 5.25 1,615,000 1,533,084 Duke Energy 1st Mtge 03-05-08 3.75 4,720,000 4,670,204 04-01-10 4.50 480,000 473,270 Sr Nts 10-01-08 4.20 2,410,000 2,367,796 Duquesne Light 05-15-14 5.70 1,480,000 1,492,062 Florida Power 1st Mtge 03-01-13 4.80 3,150,000 3,040,506 Metropolitan Edison 03-15-13 4.95 5,565,000 5,284,774 1st Mtge 04-01-14 4.88 1,060,000(d) 986,117 Northern States Power 1st Mtge 08-01-10 4.75 2,220,000 2,232,499 Northern States Power - Minnesota 1st Mtge Series B 08-28-12 8.00 1,160,000 1,375,759 Ohio Power Sr Nts Series H 01-15-14 4.85 1,640,000 1,556,327 Pacific Gas & Electric 1st Mtge 03-01-34 6.05 470,000 439,041 Public Service Co of Colorado 10-01-08 4.38 1,765,000 1,777,408 Tampa Electric 08-15-07 5.38 350,000 361,441 Total 39,972,886 Utilities -- natural gas (0.5%) Consolidated Natural Gas Sr Nts 04-15-11 6.85 630,000 693,120 NiSource Finance 11-01-06 3.20 1,150,000 1,150,288 07-15-14 5.40 1,060,000 1,026,186 Sr Nts 03-01-13 6.15 2,150,000 2,215,622 Total 5,085,216 Utilities -- telephone (2.7%) AT&T Sr Nts 11-15-11 8.05 1,373,000 1,480,667 Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 5,220,000(c) 5,079,164 France Telecom (U.S. Dollar) 03-01-11 8.75 1,660,000(c,j) 1,924,149 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- telephone (cont.) Telecom Italia Capital (U.S. Dollar) 11-15-13 5.25% $6,580,000(c,d) $6,363,400 11-15-33 6.38 670,000(c,d) 645,629 Verizon New York 04-01-32 7.38 3,335,000 3,513,106 Verizon Pennsylvania Series A 11-15-11 5.65 7,810,000 7,951,751 Total 26,957,866 Total bonds (Cost: $988,705,288) $971,297,157 Short-term securities (6.0%)(l) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (4.2%) Federal Home Loan Bank Disc Nt 06-18-04 1.00% $4,700,000 $4,697,303 Federal Home Loan Mtge Corp Disc Nts 08-17-04 1.14 6,600,000 6,584,754 08-24-04 1.18 10,000,000 9,974,800 Federal Natl Mtge Assn Disc Nt 08-18-04 1.16 20,000,000 19,953,200 Total 41,210,057 Commercial paper (1.8%) Deutsche Bank Financial LLC 06-01-04 1.03 8,400,000 8,399,039 Swedbank (ForeningsSparbanken) 07-15-04 1.07 10,000,000 9,985,733 Total 18,384,772 Total short-term securities (Cost: $59,585,573) $59,594,829 Total investments in securities (Cost: $1,048,290,861)(m) $1,030,891,986 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2004, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $14,687,029. (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, 2004, the value of foreign securities represented 4.4% 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. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of May 31, 2004, the value of these securities amounted to $52,598,830 or 5.3% of net assets. (e) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2004. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. - -------------------------------------------------------------------------------- 13 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Notes to investments in securities (continued) (g) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows as of May 31, 2004. (h) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows as of May 31, 2004. (i) 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. 2004, 5-year $20,500,000 Sale contracts U.S. Treasury Notes, June 2004, 10-year 93,700,000 U.S. Treasury Notes, Sept. 2004, 10-year 28,400,000 (j) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2004. (k) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitment as of May 31, 2004: Security Principal Settlement Proceeds Value amount date receivable Federal Natl Mtge Assn 06-01-34 6.00% $17,500,000 06-14-04 $17,631,250 $17,778,915 (l) Cash collateral received from security lending activity is invested in short-term securities and represents 3.4% of this category (see Note 4 to the financial statements) 2.6% of the short-term securities is the Fund's cash equivalent position. (m) At May 31, 2004, the cost of securities for federal income tax purposes was $1,049,095,814 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 4,117,658 Unrealized depreciation (22,321,486) ----------- Net unrealized depreciation $(18,203,828) ------------ - -------------------------------------------------------------------------------- 14 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Financial Statements
Statement of assets and liabilities Quality Income Portfolio May 31, 2004 Assets Investments in securities, at value (Note 1)* (identified cost $1,048,290,861) $1,030,891,986 Dividends and accrued interest receivable 8,576,466 Receivable for investment securities sold 22,010,923 ---------- Total assets 1,061,479,375 ------------- Liabilities Disbursements in excess of cash on demand deposit 16,263 Payable for investment securities purchased 19,990,735 Payable upon return of securities loaned (Note 4) 33,997,125 Accrued investment management services fee 14,121 Other accrued expenses 55,867 Forward sale commitments, at value (proceeds receivable $17,631,250) (Note 1) 17,778,915 ---------- Total liabilities 71,853,026 ---------- Net assets $ 989,626,349 ============== * Including securities on loan, at value (Note 4) $ 33,133,730 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 15 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Statement of operations Quality Income Portfolio Year ended May 31, 2004 Investment income Income: Interest $ 50,026,383 Fee income from securities lending (Note 4) 113,888 ------- Total income 50,140,271 ---------- Expenses (Note 2): Investment management services fee 6,210,559 Compensation of board members 12,183 Custodian fees 186,959 Audit fees 33,000 Other 30,008 ------ Total expenses 6,472,709 --------- Investment income (loss) -- net 43,667,562 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 9,646,597 Foreign currency transactions (41,953) Futures contracts (69,653) Options contracts written (Note 5) 953,314 ------- Net realized gain (loss) on investments 10,488,305 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (66,112,279) ----------- Net gain (loss) on investments and foreign currencies (55,623,974) ----------- Net increase (decrease) in net assets resulting from operations $(11,956,412) ============
Statements of changes in net assets Quality Income Portfolio Year ended May 31, 2004 2003 Operations Investment income (loss) -- net $ 43,667,562 $ 65,797,801 Net realized gain (loss) on investments 10,488,305 (33,622,722) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (66,112,279) 61,670,469 ----------- ---------- Net increase (decrease) in net assets resulting from operations (11,956,412) 93,845,548 ----------- ---------- Proceeds from contributions 8,835,237 41,557,984 Fair value of withdrawals (465,582,594) (260,762,982) ------------ ------------ Net contributions (withdrawals) from partners (456,747,357) (219,204,998) ------------ ------------ Total increase (decrease) in net assets (468,703,769) (125,359,450) Net assets at beginning of year 1,458,330,118 1,583,689,568 ------------- ------------- Net assets at end of year $ 989,626,349 $1,458,330,118 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 16 -- AXP SELECTIVE FUND -- 2004 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. - -------------------------------------------------------------------------------- 17 -- AXP SELECTIVE FUND -- 2004 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, 2004, the Portfolio has entered into outstanding when-issued securities of $14,687,029. 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. - -------------------------------------------------------------------------------- 18 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Forward sale commitments The Portfolio may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Portfolio as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." 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, market discount and original issue discount using the effective interest method, is accrued daily. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. - -------------------------------------------------------------------------------- 19 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other American Express mutual funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. 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 $3,402,594,870 and $3,774,930,498, respectively, for the year ended May 31, 2004. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES As of May 31, 2004, securities valued at $33,133,730 were on loan to brokers. For collateral, the Portfolio received $33,997,125 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investment in securities." Income from securities lending amounted to $113,888 for the year ended May 31, 2004. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 5. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written are as follows: Year ended May 31, 2004 Puts Calls Contracts Premiums Contracts Premiums Balance May 31, 2003 -- $ -- -- $ -- Opened 1,122 743,470 2,654 2,356,983 Closed (979) (612,213) (2,511) (2,082,726) Exercised -- -- (143) (274,257) Expired (143) (131,257) -- -- ---- -------- ------ ---------- Balance May 31, 2004 -- $ -- -- $ -- ---- -------- ------ ---------- See "Summary of significant accounting policies." 6. INTEREST RATE FUTURES CONTRACTS As of May 31, 2004, investments in securities included securities valued at $1,938,804 that were pledged as collateral to cover initial margin deposits on 205 open purchase contracts and 1,221 open sale contracts. The notional market value of the open purchase contracts as of May 31, 2004 was $22,175,235 with a net unrealized loss of $5,006. The notional market value of the open sale contracts as of May 31, 2004 was $133,731,375 with a net unrealized gain of $3,788,399. See "Summary of significant accounting policies" and "Notes to investments in securities." - -------------------------------------------------------------------------------- 20 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT 7. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results.
Ratios/supplemental data Fiscal period ended May 31, 2004 2003 2002 2001 2000 Ratio of expenses to average daily net assets(a) .54% .52% .53% .52% .52% Ratio of net investment income (loss) to average daily net assets 3.62% 4.33% 4.89% 6.44% 6.51% Portfolio turnover rate (excluding short-term securities) 292% 263% 389% 150% 62% Total return(b) (.77%) 6.56% 5.34% 12.06% 1.16%
(a) Expense ratio is based on total expenses of the Portfolio before reduction of earnings credits on cash balances. The ratio does not include feeder fund expenses. (b) Total return is based on a calculated Portfolio NAV and does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 21 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 2004, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2004, and the financial highlights for each of the years in the five-year period ended May 31, 2004. These financial statements and the financial highlights are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2004, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio as of May 31, 2004, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 20, 2004 - -------------------------------------------------------------------------------- 22 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Selective Fund May 31, 2004 Assets Investment in Portfolio (Note 1) $ 989,504,839 Capital shares receivable 194,610 ------- Total assets 989,699,449 ----------- Liabilities Dividends payable to shareholders 178,870 Capital shares payable 796,436 Accrued distribution fee 10,209 Accrued service fee 237 Accrued transfer agency fee 3,626 Accrued administrative services fee 1,356 Other accrued expenses 84,892 ------ Total liabilities 1,075,626 --------- Net assets applicable to outstanding capital stock $ 988,623,823 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 1,163,246 Additional paid-in capital 1,033,949,058 Excess of distributions over net investment income (225,488) Accumulated net realized gain (loss) (Note 5) (32,503,325) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (13,759,668) ----------- Total -- representing net assets applicable to outstanding capital stock $ 988,623,823 ============== Net assets applicable to outstanding shares: Class A $ 706,793,916 Class B $ 189,808,948 Class C $ 5,574,553 Class Y $ 86,446,406 Net asset value per share of outstanding capital stock: Class A shares 83,156,928 $ 8.50 Class B shares 22,333,437 $ 8.50 Class C shares 655,917 $ 8.50 Class Y shares 10,178,329 $ 8.49 ---------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 23 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Statement of operations AXP Selective Fund Year ended May 31, 2004 Investment income Income: Interest $ 50,021,213 Fee income from securities lending 113,874 ------- Total income 50,135,087 ---------- Expenses (Note 2): Expenses allocated from Portfolio 6,472,057 Distribution fee Class A 2,073,295 Class B 2,391,690 Class C 75,078 Transfer agency fee 1,583,377 Incremental transfer agency fee Class A 96,683 Class B 49,188 Class C 1,567 Service fee -- Class Y 126,179 Administrative services fees and expenses 598,158 Compensation of board members 9,925 Printing and postage 177,000 Registration fees 64,703 Audit fees 11,000 Other 16,994 ------ Total expenses 13,746,894 Earnings credits on cash balances (Note 2) (19,680) ------- Total net expenses 13,727,214 ---------- Investment income (loss) -- net 36,407,873 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 9,646,055 Foreign currency transactions (41,948) Futures contracts (69,539) Options contracts written 953,233 ------- Net realized gain (loss) on investments 10,487,801 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (66,106,407) ----------- Net gain (loss) on investments and foreign currencies (55,618,606) ----------- Net increase (decrease) in net assets resulting from operations $(19,210,733) ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Statements of changes in net assets AXP Selective Fund Year ended May 31, 2004 2003 Operations and distributions Investment income (loss) -- net $ 36,407,873 $ 56,545,925 Net realized gain (loss) on investments 10,487,801 (33,620,331) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (66,106,407) 61,665,598 ----------- ---------- Net increase (decrease) in net assets resulting from operations (19,210,733) 84,591,192 ----------- ---------- Distributions to shareholders from: Net investment income Class A (26,365,292) (38,956,124) Class B (5,744,369) (10,439,800) Class C (180,386) (297,144) Class Y (4,136,231) (7,246,098) Net realized gain Class A -- (4,035,818) Class B -- (1,350,735) Class C -- (39,140) Class Y -- (745,149) ----------- ----------- Total distributions (36,426,278) (63,110,008) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 79,211,532 135,100,624 Class B shares 22,932,095 84,299,721 Class C shares 1,212,212 3,528,889 Class Y shares 34,353,219 67,684,417 Reinvestment of distributions at net asset value Class A shares 21,394,439 34,789,046 Class B shares 5,231,020 10,767,133 Class C shares 159,927 300,242 Class Y shares 4,205,827 8,060,258 Payments for redemptions Class A shares (311,025,257) (271,175,749) Class B shares (Note 2) (142,694,010) (126,824,914) Class C shares (Note 2) (4,975,937) (3,881,995) Class Y shares (123,235,606) (88,889,251) ------------ ----------- Increase (decrease) in net assets from capital share transactions (413,230,539) (146,241,579) ------------ ------------ Total increase (decrease) in net assets (468,867,550) (124,760,395) Net assets at beginning of year 1,457,491,373 1,582,251,768 ------------- ------------- Net assets at end of year $ 988,623,823 $1,457,491,373 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 25 -- AXP SELECTIVE FUND -- 2004 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. 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, 2004 was 99.99%. All securities held by the Portfolio are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. - -------------------------------------------------------------------------------- 26 -- AXP SELECTIVE FUND -- 2004 ANNUAL 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. 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 $41,948 and accumulated net realized loss has been decreased by $41,948. The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2004 2003 Class A Distributions paid from Ordinary income $26,365,292 $40,044,319 Long-term capital gain -- 2,947,623 Class B Distributions paid from: Ordinary income 5,744,369 10,804,013 Long-term capital gain -- 986,522 Class C Distributions paid from: Ordinary income 180,386 307,698 Long-term capital gain -- 28,586 Class Y Distributions paid from: Ordinary income 4,136,231 7,447,015 Long-term capital gain -- 544,232 As of May 31, 2004, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 6,520 Accumulated long-term gain (loss) $(30,375,277) Unrealized appreciation (depreciation) $(15,940,854) - -------------------------------------------------------------------------------- 27 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. In addition, AECSC is entitled to charge an annual closed account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. - -------------------------------------------------------------------------------- 28 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Sales charges received by the Distributor for distributing Fund shares were $666,263 for Class A, $365,630 for Class B and $3,082 for Class C for the year ended May 31, 2004. Beginning June 1, 2004, AEFC and its affiliates have agreed to waive certain fees and expenses until May 31, 2005. Under this agreement, net expenses will not exceed 0.945% for Class A, 1.695% for Class B, 1.695% for Class C and 0.775% for Class Y of the Fund's average daily net assets. During the year ended May 31, 2004, the Fund's transfer agency fees were reduced by $19,680 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, 2004 Class A Class B Class C Class Y Sold 9,074,746 2,637,527 139,541 3,953,216 Issued for reinvested distributions 2,467,221 603,159 18,441 485,010 Redeemed (35,892,994) (16,404,096) (573,651) (14,229,946) ----------- ----------- -------- ----------- Net increase (decrease) (24,351,027) (13,163,410) (415,669) (9,791,720) ----------- ----------- -------- ---------- 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) ----------- ---------- ------ ----------
4. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by Deutsche Bank, whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50% or the higher of the Federal Funds Rate plus 0.25% and the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. The Fund had no borrowings outstanding during the year ended May 31, 2004. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $30,375,277 as of May 31, 2004 that will expire in 2011 through 2013 if not offset by capital gains. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. - -------------------------------------------------------------------------------- 29 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT 6. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001 2000 Net asset value, beginning of period $8.88 $8.74 $8.74 $8.32 $8.96 Income from investment operations: Net investment income (loss) .28 .33 .40 .52 .52 Net gains (losses) (both realized and unrealized) (.38) .18 .02 .42 (.46) Total from investment operations (.10) .51 .42 .94 .06 Less distributions: Dividends from net investment income (.28) (.33) (.40) (.52) (.53) Distributions from realized gains -- (.04) (.02) -- (.17) Total distributions (.28) (.37) (.42) (.52) (.70) Net asset value, end of period $8.50 $8.88 $8.74 $8.74 $8.32 Ratios/supplemental data Net assets, end of period (in millions) $707 $955 $1,042 $1,004 $949 Ratio of expenses to average daily net assets(b) 1.00% .98% .98% .97% .97% Ratio of net investment income (loss) to average daily net assets 3.17% 3.89% 4.45% 6.01% 6.17% Portfolio turnover rate (excluding short-term securities) 292% 263% 389% 150% 62% Total return(c) (1.17%) 6.05% 4.85% 11.52% .83%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 30 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001 2000 Net asset value, beginning of period $8.88 $8.74 $8.74 $8.32 $8.96 Income from investment operations: Net investment income (loss) .21 .27 .33 .45 .46 Net gains (losses) (both realized and unrealized) (.38) .18 .02 .42 (.47) Total from investment operations (.17) .45 .35 .87 (.01) Less distributions: Dividends from net investment income (.21) (.27) (.33) (.45) (.46) Distributions from realized gains -- (.04) (.02) -- (.17) Total distributions (.21) (.31) (.35) (.45) (.63) Net asset value, end of period $8.50 $8.88 $8.74 $8.74 $8.32 Ratios/supplemental data Net assets, end of period (in millions) $190 $315 $342 $264 $187 Ratio of expenses to average daily net assets(b) 1.76% 1.74% 1.73% 1.73% 1.73% Ratio of net investment income (loss) to average daily net assets 2.40% 3.12% 3.67% 5.25% 5.41% Portfolio turnover rate (excluding short-term securities) 292% 263% 389% 150% 62% Total return(c) (1.92%) 5.25% 4.06% 10.69% .06%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 31 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001(b) Net asset value, beginning of period $8.88 $8.74 $8.74 $8.40 Income from investment operations: Net investment income (loss) .21 .27 .33 .42 Net gains (losses) (both realized and unrealized) (.38) .18 .02 .34 Total from investment operations (.17) .45 .35 .76 Less distributions: Dividends from net investment income (.21) (.27) (.33) (.42) Distributions from realized gains -- (.04) (.02) -- Total distributions (.21) (.31) (.35) (.42) Net asset value, end of period $8.50 $8.88 $8.74 $8.74 Ratios/supplemental data Net assets, end of period (in millions) $6 $10 $9 $4 Ratio of expenses to average daily net assets(c) 1.76% 1.75% 1.74% 1.73%(d) Ratio of net investment income (loss) to average daily net assets 2.40% 3.07% 3.64% 5.16%(d) Portfolio turnover rate (excluding short-term securities) 292% 263% 389% 150% Total return(e) (1.92%) 5.24% 4.06% 9.27%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 32 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001 2000 Net asset value, beginning of period $8.88 $8.74 $8.74 $8.32 $8.96 Income from investment operations: Net investment income (loss) .29 .35 .42 .53 .54 Net gains (losses) (both realized and unrealized) (.39) .18 .02 .42 (.47) Total from investment operations (.10) .53 .44 .95 .07 Less distributions: Dividends from net investment income (.29) (.35) (.42) (.53) (.54) Distributions from realized gains -- (.04) (.02) -- (.17) Total distributions (.29) (.39) (.44) (.53) (.71) Net asset value, end of period $8.49 $8.88 $8.74 $8.74 $8.32 Ratios/supplemental data Net assets, end of period (in millions) $86 $177 $188 $218 $167 Ratio of expenses to average daily net assets(b) .84% .82% .81% .82% .81% Ratio of net investment income (loss) to average daily net assets 3.30% 4.04% 4.61% 6.16% 6.33% Portfolio turnover rate (excluding short-term securities) 292% 263% 389% 150% 62% Total return(c) (1.13%) 6.22% 5.02% 11.70% .97%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 33 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Report of Independent Registered Public Accounting Firm 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, 2004, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2004, and the financial highlights for the each of the years in the five-year period ended May 31, 2004. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Selective Fund as of May 31, 2004, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 20, 2004 - -------------------------------------------------------------------------------- 34 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Selective Fund Fiscal year ended May 31, 2004 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 23, 2003 $0.02001 July 24, 2003 0.02000 Aug. 22, 2003 0.02000 Sept. 22, 2003 0.02000 Oct. 23, 2003 0.02174 Nov. 21, 2003 0.02200 Dec. 22, 2003 0.03267 Jan. 26, 2004 0.02388 Feb. 25, 2004 0.02452 March 26, 2004 0.02600 April 26, 2004 0.02558 May 26, 2004 0.02356 Total distributions $0.27996 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 23, 2003 $0.01419 July 24, 2003 0.01431 Aug. 22, 2003 0.01481 Sept. 22, 2003 0.01443 Oct. 23, 2003 0.01613 Nov. 21, 2003 0.01676 Dec. 22, 2003 0.02705 Jan. 26, 2004 0.01752 Feb. 25, 2004 0.01934 March 26, 2004 0.02049 April 26, 2004 0.01997 May 26, 2004 0.01824 Total distributions $0.21324 - -------------------------------------------------------------------------------- 35 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 23, 2003 $0.01420 July 24, 2003 0.01427 Aug. 22, 2003 0.01479 Sept. 22, 2003 0.01438 Oct. 23, 2003 0.01606 Nov. 21, 2003 0.01671 Dec. 22, 2003 0.02699 Jan. 26, 2004 0.01748 Feb. 25, 2004 0.01996 March 26, 2004 0.02046 April 26, 2004 0.01992 May 26, 2004 0.01821 Total distributions $0.21343 Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 23, 2003 $0.02123 July 24, 2003 0.02121 Aug. 22, 2003 0.02110 Sept. 22, 2003 0.02117 Oct. 23, 2003 0.02292 Nov. 21, 2003 0.02311 Dec. 22, 2003 0.03386 Jan. 26, 2004 0.02523 Feb. 25, 2004 0.02567 March 26, 2004 0.02717 April 26, 2004 0.02677 May 26, 2004 0.02455 Total distributions $0.29399 - -------------------------------------------------------------------------------- 36 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 86 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Arne H. Carlson Board member Chair, Board Services Corporation 901 S. Marquette Ave. since 1999 (provides administrative services to Minneapolis, MN 55402 boards). Former Governor of Minnesota Age 69 - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 Corporation (engineering and Materials Company, Inc. Minneapolis, MN 55402 construction) since 1998 (construction Age 66 materials/chemicals) - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Livio D. DeSimone Board member Retired Chair of the Board and Chief Cargill, Incorporated 30 Seventh Street East since 2001 Executive Officer, Minnesota Mining and (commodity merchants and Suite 3050 Manufacturing (3M) processors), General Mills, St. Paul, MN 55101-4901 Inc. (consumer foods), Age 70 Vulcan Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 69 - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Stephen R. Lewis, Jr.* Board member Retired President and Professor of Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 Economics, Carleton College (manufactures irrigation Minneapolis, MN 55402 systems) Age 65 - ---------------------------------- ------------------- ----------------------------------------- -----------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Columbia Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 37 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Alan K. Simpson Board member Former three-term United States Senator 1201 Sunshine Ave. since 1997 for Wyoming Cody, WY 82414 Age 72 - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Alison Taunton-Rigby Board member since Founder and Chief Executive Officer, 901 S. Marquette Ave. 2002 RiboNovix, Inc. since 2004; President, Minneapolis, MN 55402 Forester Biotech since 2000; prior to Age 60 that, President and CEO, Aquila Biopharmaceuticals, Inc. - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Board Member Affiliated with AEFC** Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - --------------------------------- -------------------- ----------------------------------------- ----------------------------- William F. Truscott Board member Senior Vice President - Chief 53600 AXP Financial Center since 2001, Vice Investment Officer of AEFC since 2001. Minneapolis, MN 55474 President since Former Chief Investment Officer and Age 43 2002 Managing Director, Zurich Scudder Investments - --------------------------------- -------------------- ----------------------------------------- -----------------------------
** Interested person by reason of being an officer, director and/or employee of AEFC. - -------------------------------------------------------------------------------- 38 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Jeffrey P. Fox Treasurer since Vice President - Investment Accounting, 50005 AXP Financial Center 2002 AEFC, since 2002; Vice President - Minneapolis, MN 55474 Finance, American Express Company, Age 49 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Paula R. Meyer President since Senior Vice President and General 596 AXP Financial Center 2002 Manager - Mutual Funds, AEFC, since Minneapolis, MN 55474 2002; Vice President and Managing Age 50 Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Leslie L. Ogg Vice President, President of Board Services Corporation 901 S. Marquette Ave. General Counsel, Minneapolis, MN 55402 and Secretary Age 65 since 1978 - --------------------------------- -------------------- ----------------------------------------- -----------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the Web site americanexpress.com/funds; or by searching the Web site of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, after August 2004, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available at http://www.sec.gov. - -------------------------------------------------------------------------------- 39 -- AXP SELECTIVE FUND -- 2004 ANNUAL REPORT (logo) AMERICAN EXPRESS (R) American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Livio D. DeSimone, Anne P. Jones, and Alan G. Quasha, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees (a) Audit Fees. The fees paid for the years ended May 31, to KPMG LLP for professional services rendered for the audits of the annual financial statements for AXP Income Series, Inc. were as follows: 2003 - $10,884; 2002 - $10,925 (b) Audit - Related Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 for AXP Income Series, Inc. were as follows: 2003 - $224; 2002 - $293 (c) Tax Fees. The fees paid for the years ended May 31, to KPMG LLP for tax compliance related services for AXP Income Series, Inc. were as follows: 2003 - $2,275; 2002 - $2,150 (d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered in connection to proxy filing for AXP Income Series, Inc. were as follows: 2003 - None; 2002 - $19 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by KPMG LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2003 and 2002 were pre-approved by the audit committee with the exception of the 2002 tax fees. (f) Not applicable. (g) Non-Audit Fees. The fees paid for the years ended May 31, by the registrant for non-audit services to KPMG LLP were as follows: 2003 - None; 2002 - None The fees paid for the years ended May 31, to KPMG LLP by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2003 - $71,000; 2002 - $164,000 (h) For the fees disclosed in item (g) above, 100% and 97% of the fees for services performed during 2003 and 2002, respectively, were pre-approved by the audit committee. The exception was a 2002 tax research request by the adviser on defaulted securities for $5,000. The amounts not pre-approved are compatible with maintaining KPMG LLP's independence. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 9. Submission of matters to a vote of security holders. Not applicable. Item 10. Controls and Procedures. (a) The registrant's Principal Executive Officer and Principal Financial Officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) At the date of filing this Form N-CSR, the registrant's Principal Executive Officer and Principal Financial Officer are aware of no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 11. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2004 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 3, 2004 EX-99.CODE ETH 2 code-ethics.txt CODE OF ETHICS AMERICAN EXPRESS FUNDS PREFERRED MASTER TRUST GROUP (THE AXP FUNDS) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Purpose of the Code; Covered Officers This code of ethics ("Code") for the AXP Funds (collectively, "Funds," and each, "Fund") applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers," each of whom is identified in Exhibit A) for the purpose of promoting, in connection with his or her duties: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely, and understandable disclosure in reports and documents that a Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; o compliance with laws and governmental rules and regulations applicable to the conduct of the Funds' business and their financial reporting; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions, such as the purchase or sale of securities or other property, with the Funds because of their status as "affiliated persons" of the Funds. The compliance programs and -1- procedures of the Funds and of American Express Financial Corporation ("AEFC"), the investment adviser to the Funds, are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Funds and AEFC, of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Funds or for AEFC, or for both, be involved in establishing policies and implementing decisions that will have different effects on AEFC and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and AEFC and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds. Each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds; o not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds; o not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; III. Disclosure and Compliance o Each Covered Officer should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including to the Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and AEFC with the goal of promoting full, fair, accurate, timely, and understandable disclosure in the reports -2- and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules, and regulations. IV. Reporting and Accountability Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code; o annually thereafter affirm to the Board that he or she has complied with the requirements of the Code; o not retaliate against any other Covered Officer or any employee of AEFC or its affiliated persons for reports of potential violations that are made in good faith; and o notify the general counsel of the Funds ("Funds General Counsel") promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Funds General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officers will be considered by the Board Effectiveness Committees (the "Committees"). The Funds will follow these procedures in investigating and enforcing this Code: o The Funds General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, the Funds General Counsel believes that no violation has occurred, he or she is not required to take any further action; o Any matter that the Funds General Counsel believes is a violation will be reported to the Committees; o If the Committees concur that a violation has occurred, they will inform the Board, and the Board will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Committees will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, AEFC, or any -3- affiliate of AEFC govern or purport to govern the activities of the Covered Officers, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. AEFC's code of ethics under Rule 17j-1 under the Investment Company Act is a separate requirement applying to the Covered Officers and others, and is not part of this Code. VI. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Fund's Board, including a majority of its independent directors. Date: July, 2003 -4- Exhibit A Persons Covered by this Code of Ethics Paula R. Meyer President Jeffrey P. Fox Treasurer -5- 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, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 30, 2004 /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, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 30, 2004 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 4 ex99-906cert.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION AXP Income Series, Inc. (the Registrant) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned below certifies that 1. This report on Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: July 30, 2004 /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Chief Executive Officer Date: July 30, 2004 /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR filed with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----