-----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, GYuevdpUTyLO75Ayg9iT2+EZLBs2ylidevIrcZ/Q9BKbPYgruQSxCKq0Q2uPfRA4 Vmld2XeSRIqLw65vRTupzw== 0000820027-05-000049.txt : 20050128 0000820027-05-000049.hdr.sgml : 20050128 20050128091146 ACCESSION NUMBER: 0000820027-05-000049 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20041130 FILED AS OF DATE: 20050128 DATE AS OF CHANGE: 20050128 EFFECTIVENESS DATE: 20050128 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-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00499 FILM NUMBER: 05555771 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-CSRS 1 income-nscrs.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: 11/30 -------------- AXP(R) Selective Fund Semiannual Report for the Period Ended Nov. 30, 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 Performance Summary 4 Questions & Answers with Portfolio Management 6 Investments in Securities 9 Financial Statements (Portfolio) 16 Notes to Financial Statements (Portfolio) 19 Financial Statements (Fund) 24 Notes to Financial Statements (Fund) 27 Fund Expenses Example 36 Proxy Voting 38 [dalbar logo] 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 SEMIANNUAL REPORT Fund Snapshot AT NOV. 30, 2004 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 16 Scott Kirby 2/03 26 Tom Murphy, CFA 2/03 18 FUND OBJECTIVE For investors seeking current income and preservation of capital. Inception dates by class A: 4/6/45 B: 3/20/95 C: 6/26/00 Y: 3/20/95 Ticker symbols by class A: INSEX B: ISEBX C: ASLCX Y: IDEYX Total net assets $937.8 million Number of holdings 222 Weighted average life(1) 7.0 years Effective duration(2) 3.9 years Weighted average bond rating(3) AAA (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. SECTOR COMPOSITION Percentage of portfolio assets [pie chart] Mortgage-backed securities 38.1% U.S. government obligations & agencies 30.0% Corporate bonds* 16.7% CMBS/ABS** 10.3% Short-term securities*** 4.1% Foreign government bonds 0.8% * Includes 6.7% Financials, 3.4% Consumer discretionary, 2.1% Telecommunication services, 1.4% Utilities, 1.2% Information technology, 0.6% Energy, 0.6% Healthcare, 0.4% Consumer staples, 0.2% Telecommunications and 0.1% Industrials. ** Commercial mortgage-backed/Asset-backed securities *** Of the 4.1%, 3.1% is due to security lending activity and 1.0% is the Portfolio's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of portfolio assets excluding cash equivalents AAA bonds 83.7% AA bonds 1.3 A bonds 5.8 BBB bonds 9.2 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. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Performance Summary [bar chart] PERFORMANCE COMPARISON For the six-month period ended Nov. 30, 2004 (bar 1) (bar 2) (bar 3) +3.59% +3.82% +3.93% (bar 1) AXP Selective Fund Class A (excluding sales charge) (bar 2) Lehman Brothers Aggregate Bond Index(1) (unmanaged) (bar 3) Lipper Corporate Debt - A rated Funds Index(2) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. (1) The Lehman Brothers 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 includes the 30 largest corporate debt A rated funds tracked by Lipper Inc. The index's returns include net reinvested dividends. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. AXP Selective Fund SEC YIELDS Class A Class B Class C Class Y As of Nov. 30, 2004 3.23% 2.64% 2.64% 3.57% As of Dec. 31, 2004 3.39% 2.81% 2.81% 3.73% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 5 for additional performance information. STYLE MATRIX DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW Shading within the style matrix indicates areas in which the Fund generally invests. - -------------------------------------------------------------------------------- 4 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Performance Summary
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) at Nov. 30, 2004 6 months* +3.59% -1.33% +3.20% -1.80% +3.20% +2.20% +3.69% +3.69% 1 year +3.96% -0.98% +3.18% -0.82% +3.19% +3.19% +4.02% +4.02% 3 years +2.67% +1.02% +1.89% +0.96% +1.89% +1.89% +2.79% +2.79% 5 years +5.04% +4.02% +4.25% +4.08% N/A N/A +5.18% +5.18% 10 years +6.41% +5.90% N/A N/A N/A N/A N/A N/A Since inception +6.73% +6.64% +5.23% +5.23% +4.42% +4.42% +6.17% +6.17% at Dec. 31, 2004 6 months* +3.97% -0.97% +3.58% -1.42% +3.58% +2.58% +4.18% +4.18% 1 year +3.90% -1.04% +3.12% -0.88% +3.13% +3.13% +4.07% +4.07% 3 years +3.15% +1.49% +2.37% +1.42% +2.37% +2.37% +3.32% +3.32% 5 years +5.23% +4.21% +4.43% +4.26% N/A N/A +5.39% +5.39% 10 years +6.40% +5.88% N/A N/A N/A N/A N/A N/A Since inception +6.73% +6.64% +5.26% +5.26% +4.50% +4.50% +6.21% +6.21%
* Not annualized. (1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. - -------------------------------------------------------------------------------- 5 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, AXP Selective Fund's portfolio management team discusses the Fund's positioning and results for the first half of the current fiscal year. Q: How did AXP Selective Fund perform for the six-month period ended Nov. 30, 2004? A: AXP Selective Fund's Class A shares (excluding sales charge) gained 3.59% for the six months ended Nov. 30, 2004. The Lehman Brothers Aggregate Bond Index (Lehman Index) rose 3.82%, while the Lipper Corporate Debt - A rated Funds Index, representing the Fund's peer group, advanced 3.93%. Q: What factors most significantly affected performance? A: Intermediate and long-term Treasuries provided surprisingly positive returns for the six months ended November 30. This occurred despite a doubling of the Federal Reserve Board's (Fed) short-term interest rate target to 2.00% (2.25% as of Dec. 14). Investment grade corporate bonds performed well. U.S. economic growth was moderate while U.S. job growth was slower than expectations. Overall, the difference in interest rates between Treasuries and both mortgages and corporate bonds narrowed substantially, reaching multi-year lows. Amid this rally in long-term fixed-income securities, the riskiest segments of the bond market -- high yield corporate bonds and emerging markets bonds -- offered the highest returns for the six-month period ended November 30. During the fiscal period, the Fund benefited from the outperformance of long-term U.S. Treasuries, an area where the Fund had relatively greater exposure. The Fund's corporate bond positioning also served us well. Corporate bonds benefited from solid profits and improved balance sheets. Mortgage-backed securities were also an attractive source of income for the Fund. The Fund's small global bond position, which included holdings denominated in euros, benefited from a renewed decline in the value of the U.S. dollar this past autumn. However, overall Fund returns were negatively affected by our relatively short duration, given that long-term bonds rallied to a greater degree than many investors expected. Detracting from Fund performance, too, was a focus within the mortgage sector on higher coupon bonds. While these bonds offered both attractive yields and potential protection from higher rates, lower coupon bonds outperformed for the fiscal period. Also, the Fund's prospectus precludes us from owning high yield corporate or emerging market bonds. These two sectors, held by many funds in our peer group, significantly outpaced the Lehman Index for the semiannual period. We remained cautious regarding the Fund's exposure to both mortgages and corporate bonds through most of the period. We saw mortgage valuations as expensive by historical standards and continue to view these securities as vulnerable if the Fed takes a more aggressive policy stance. We also viewed corporate bonds, or credit, as modestly overvalued relative to company fundamentals. Within the corporate sector, we favored higher quality bonds. - -------------------------------------------------------------------------------- 6 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Questions & Answers (begin callout quote)> Intermediate and long-term Treasuries provided surprisingly positive returns for the six months ended November 30.(end callout quote) Q: What changes did you make to the Fund and how is it currently positioned? A: We modestly adjusted the Fund's bond sector allocations throughout the year in response to changes in valuation and market conditions. These opportunistic weighting changes resulted in a portfolio turnover rate of 138%, the lowest rate for the Fund since fiscal year 2000. As economic data improved in the last six weeks or so of the most recent fiscal period, the fixed income market across the yield curve sold off significantly. Given our view that the yield curve had already flattened dramatically, we began to modify the Fund's short duration stance. While we continued to favor longer maturities versus shorter maturities, we began to sell some of these securities. Mortgages typically perform well when interest rates move within a narrow range and underperform when rates move sharply higher or lower, as refinancing activity becomes more difficult to estimate. Plus, higher overnight lending rates take away incentive for investors employing leverage, such as hedge funds, to invest in mortgages. Thus, we see potential weakness in the mortgage sector ahead as rates move higher. We viewed AAA-rated commercial mortgage-backed securities (CMBS) as an excellent alternative to both high quality corporate bonds and lower coupon mortgages, and we positioned the Fund accordingly. This was a positive contributor to the Fund's performance during the period, as the CMBS market was able to digest a large amount of new bonds coming to market. High quality corporate bond yields, in our view, already reflect most, if not all, of the good news about the U.S. economy. Also, in recent months, company-specific risk (event risk) has increased through share buy-backs, increased dividends, and the re-emergence of the risk that companies will issue more debt to "go private" through a leveraged buyout. Throughout the period, we constantly re-evaluated all of the Fund's positions as we sought to have the best risk/reward opportunities in the Fund across sectors, with an eye toward holding greater positions in securities that offered the highest likelihood of outperforming the Lehman Index. Q: How do you intend to manage the Fund in the coming months? A: We remain cautious on interest rates, as U.S. economic growth, higher inflation and a persistent Fed may weigh on the fixed income markets in 2005. Moreover, in our view, the U.S. dollar will continue its decline. While this trend may benefit global bonds, it may also put more pressure on the Fed to raise U.S. interest rates to 1) attract foreign demand for U.S. Treasuries and 2) avoid higher inflation. We believe the Fed will - -------------------------------------------------------------------------------- 7 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Questions & Answers (begin callout quote)> We believe the Fed will continue to tighten monetary policy at least gradually, with the risks in favor of it raising rates more aggressively rather than pausing. (end callout quote) continue to tighten monetary policy at least gradually, with the risks in favor of it raising rates more aggressively rather than pausing. Thus, we expect to keep the Fund's duration shorter than the Lehman Index until we believe the market reflects more Fed monetary tightening. As always, we maintain a disciplined focus on individual security selection. [line chart] U.S. TREASURY YIELDS (Nov. 30, 2004 compared to June 1, 2004) Yield [solid line] 2.223% 2.432% 2.997% 3.251% 3.691% 4.349% 5.002% [dotted line] 1.111% 1.398% 2.589% 3.119% 3.836% 4.7% 5.396% 3 mos. 6 mos. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 30 yrs. Maturity Treasury yields as of: [solid line] 11/30/04 [dotted line] 6/1/04 Source: Bloomberg This chart compares the income potential of U.S. Treasury bills, notes and bonds as of Nov. 30, 2004 compared to six months earlier. This is known as the yield curve. - -------------------------------------------------------------------------------- 8 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Investments in Securities Quality Income Portfolio Nov. 30, 2004 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (100.4%) Issuer Coupon Principal Value(a) rate amount Foreign government (0.8%) Bundesrepublik Deutschland (European Monetary Unit) 07-04-10 5.25% 1,885,000(c) $2,766,506 Pemex Project Funding Master Trust (U.S. Dollar) 12-15-14 7.38 4,742,000(c) 5,173,522 Total 7,940,028 U.S. government obligations & agencies (31.3%) Federal Home Loan Bank 09-22-05 2.13 7,100,000 7,065,728 05-22-06 2.88 14,730,000 14,692,748 12-17-07 3.25 2,585,000 2,563,312 06-14-13 3.88 14,970,000(m) 14,262,563 Federal Home Loan Mtge Corp 07-15-06 5.50 8,000,000 8,302,328 07-15-09 4.25 10,000,000 10,133,990 01-15-12 5.75 14,425,000 15,603,984 07-15-13 4.50 8,650,000 8,561,338 Federal Natl Mtge Assn 02-15-05 7.13 8,000,000 8,077,504 (U.S. Dollar) 05-15-11 6.00 3,520,000 3,851,725 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 4,444,444 4,760,844 U.S. Treasury 12-31-05 1.88 11,080,000 10,982,617 11-15-06 3.50 16,270,000 16,422,531 10-15-09 3.38 5,975,000(m) 5,890,275 11-15-09 3.50 53,845,000(m) 53,357,057 11-15-14 4.25 11,740,000 11,639,106 08-15-23 6.25 19,435,000 22,300,147 02-15-26 6.00 66,414,000(l) 74,417,417 02-15-31 5.38 1,545,000 1,626,113 Total 294,511,327 Commercial mortgage-backed(f)/ Asset-backed securities (10.7%) AmeriCredit Automobile Receivables Trust Series 2004-CA Cl A3 03-06-09 3.00 2,000,000 1,983,126 Series 2004-DF Cl A3 (FSA) 07-06-09 2.98 1,500,000(j) 1,480,782 Banc of America Commercial Mtge Series 2004-5 Cl A4 11-10-41 4.94 1,300,000 1,306,864 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 3,124,410 3,083,199 Series 2004-PWR5 Cl A5 07-11-42 4.98 1,000,000 997,480 Series 2004-T16 Cl A3 02-13-46 4.03 600,000 590,469 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 9,401,725(d) 9,529,168 Commercial Mtge Pass-Through Certificates Series 2004-CNL Cl A1 09-15-14 2.32 3,280,000(d,g) 3,254,744 Series 2004-LB3A Cl A2 07-10-37 4.71 1,225,000 1,250,358 Series 2004-LB3A Cl A3 07-10-37 5.09 3,500,000 3,607,185 Series 2004-LB3A Cl A5 07-10-37 5.44 1,500,000(g) 1,551,945 CS First Boston Mtge Securities Series 2004-C1 Cl A2 01-15-37 3.52 1,550,000 1,523,487 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,250,000 3,223,838 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 2,200,000 2,378,445 JPMorgan Chase Commercial Mtge Securities Series 2003-CB6 Cl A2 07-12-37 5.26 1,500,000 1,548,864 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 9 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) JPMorgan Chase Commercial Mtge Securities (cont.) Series 2004-C2 Cl A3 05-15-41 5.39% $1,550,000(g) $1,588,711 Series 2004-CBX Cl A3 01-12-37 4.18 1,000,000 997,718 Series 2004-CBX Cl A5 01-12-37 4.65 1,500,000 1,493,197 Series 2004-CBX Cl A6 01-12-37 4.90 1,900,000 1,888,177 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 2,790,000 2,932,351 Series 2002-C4 Cl A4 09-15-26 4.56 1,800,000 1,809,939 Series 2002-C8 Cl A3 11-15-27 4.83 1,150,000 1,164,341 Series 2003-C3 Cl A2 05-15-27 3.09 5,800,000 5,644,628 Series 2003-C7 Cl A2 09-15-27 4.06 2,573,500 2,567,413 Series 2003-C8 Cl A2 11-15-27 4.21 5,130,000 5,150,982 Series 2003-C8 Cl A4 11-15-32 5.12 2,900,000 2,955,738 Series 2004-C2 Cl A2 03-15-29 3.25 4,935,000 4,767,259 Series 2004-C4 Cl A4 06-15-29 5.31 1,265,000(g) 1,306,777 Series 2004-C6 Cl A2 08-15-29 4.19 2,250,000 2,241,765 Series 2004-C7 Cl A2 10-15-29 3.99 1,000,000 989,190 Series 2004-C8 Cl A2 12-15-29 4.20 2,300,000(b) 2,295,238 Series 2004-C8 Cl A6 12-15-29 4.80 3,100,000(b) 3,068,395 Metris Master Trust Series 2004-2 Cl M 10-20-10 2.44 1,000,000(g) 1,000,460 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 1,500,000 1,487,623 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 4,475,572 4,288,856 Series 2004-IQ8 Cl A2 06-15-40 3.96 2,200,000 2,200,792 Morgan Stanley, Dean Witter Capital 1 Series 2002-TOP7 Cl A2 01-15-39 5.98 2,235,000 2,417,020 Nissan Auto Lease Trust Series 2004-A Cl A3 08-15-07 2.90 1,450,000 1,442,298 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 980,000 970,555 Residential Asset Securities Series 2002-KS1 Cl AI4 11-25-29 5.86 2,092,965 2,106,778 WFS Financial Owner Trust Series 2004-3 Cl A3 03-17-09 3.30 5,000,000 4,988,259 Total 101,074,414 Mortgage-backed securities (39.8%)(f,k) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02-25-35 5.29 2,268,335(e) 2,288,922 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 2,760,809 2,828,007 Bank of America Mtge Securities Series 2004-F Cl B1 07-25-34 4.16 1,843,440(e) 1,769,961 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75 1,806,980 1,802,687 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.67 1,174,414(e) 1,159,194 CS First Boston Mtge Securities Series 2004-AR5 Cl CB1 06-25-34 4.45 1,195,913(e) 1,174,746 Federal Home Loan Mtge Corp 05-01-13 4.50 2,353,497 2,371,608 11-01-14 7.50 2,079,113 2,222,018 07-01-16 8.00 146 159 01-01-17 8.00 1,216 1,337 03-01-17 8.50 14,284 15,762 06-01-17 8.50 4,255 4,695 07-01-17 7.00 6,804,161 7,213,584 05-01-18 5.50 2,220,029 2,291,412 09-01-18 5.00 3,955,608 4,016,695 10-01-18 5.00 6,239,821 6,337,434 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Home Loan Mtge Corp (cont.) 01-01-19 5.50% $878,625 $906,877 09-01-19 8.50 37,223 41,043 04-01-20 9.00 65,135 73,053 04-01-21 9.00 129,767 145,229 03-01-22 8.50 266,864 294,531 08-01-22 8.50 258,265 284,786 02-01-25 8.00 356,675 388,182 06-01-32 7.00 1,803,447 1,922,055 07-01-32 7.00 6,138,265 6,510,103 04-01-33 6.00 6,250,262 6,496,553 06-01-33 5.50 3,797,413 3,849,328 09-01-33 4.56 3,592,018(e) 3,569,388 12-01-33 5.00 3,217,677 3,187,231 08-01-34 5.20 2,959,496(e) 2,976,745 Collateralized Mtge Obligation 02-15-27 5.00 4,000,000 4,077,742 10-15-27 5.00 7,425,000 7,531,246 06-15-28 5.00 4,625,000 4,694,317 11-15-28 4.50 2,076,610 2,080,763 01-15-33 5.00 1,200,418 1,199,643 02-15-33 5.50 3,702,082 3,806,062 07-25-43 7.00 1,861,140 1,970,482 Interest Only 02-15-14 7.40 1,715,904(h) 131,696 Federal Natl Mtge Assn 12-01-11 5.10 433,843 446,170 11-01-12 4.84 1,844,223 1,868,678 01-01-13 4.92 1,367,080 1,389,917 04-01-14 6.00 3,015,876 3,168,105 03-01-17 6.50 3,678,325 3,900,329 04-01-17 6.50 1,924,492 2,040,644 08-01-17 6.00 6,797,633 7,124,236 09-01-17 6.00 7,560,374 7,923,625 04-01-18 5.00 6,080,527 6,185,055 05-01-18 5.50 5,250,423 5,441,509 05-01-18 6.00 4,768,521 5,002,104 06-01-18 4.50 1,811,827 1,804,496 06-01-18 5.00 2,070,310 2,104,597 08-01-18 4.50 6,099,905 6,073,933 10-01-18 4.50 3,357,170 3,343,587 01-01-19 5.50 1,079,405 1,115,604 02-01-19 5.00 2,756,133 2,796,768 07-01-23 5.00 3,062,759 3,069,384 07-01-23 5.50 3,542,726 3,613,995 09-01-23 5.50 4,082,657 4,164,788 12-01-26 8.00 507,348 552,777 04-01-27 7.50 564,852 606,382 08-01-27 8.00 570,913 621,979 01-01-28 6.50 319,653 337,182 07-01-28 5.50 1,998,106 2,029,508 11-01-28 5.50 3,485,299 3,540,073 04-01-29 5.00 4,871,499 4,822,707 01-01-30 8.00 450,826 490,755 06-01-31 7.00 4,637,315 4,936,258 03-01-32 7.50 644,528 690,833 04-01-32 7.50 662,023 709,023 05-01-32 7.50 686,516 735,895 06-01-32 7.50 1,703,849 1,824,814 07-01-32 6.50 1,201,284 1,265,513 08-01-32 6.50 6,890,489 7,256,580 08-01-32 7.00 771,773 819,045 11-01-32 6.50 1,586,176 1,672,962 01-01-33 6.00 5,230,557 5,404,804 02-01-33 6.00 10,456,721 10,815,966 04-01-33 5.50 22,631,657 23,007,273 04-01-33 6.00 10,890,115 11,318,624 05-01-33 5.50 6,044,463 6,133,256 07-01-33 4.85 2,354,605(e) 2,364,660 07-01-33 5.00 4,854,574 4,802,052 07-01-33 5.50 3,820,985 3,871,420 08-01-33 5.50 915,851 927,939 10-01-33 6.50 4,826,189 5,070,891 01-01-34 6.50 1,813,671 1,916,954 03-01-34 5.00 14,877,278 14,716,319 09-01-34 4.85 4,149,104(b,e) 4,200,585 12-01-34 6.50 9,900,000(b) 10,379,556 01-01-35 6.00 4,000,000(b) 4,141,240 Collateralized Mtge Obligation 05-25-16 4.00 3,000,000 2,998,734 02-25-21 4.50 4,967,000 4,999,994 12-25-26 8.00 1,868,799 2,007,326 06-25-44 7.50 1,887,750 2,024,706 Interest Only 12-25-12 13.29 1,607,992(h) 91,138 12-25-31 1.19 1,537,027(h) 316,127 Principal Only 09-01-18 4.06 31,713(i) 28,431 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10-25-34 5.46 2,360,032 2,402,796 Series 2004-FA1 Cl 1A1 10-25-34 6.25 5,242,985 5,406,947 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Govt Natl Mtge Assn 05-15-26 7.50% $907,217 $978,673 12-15-32 6.00 11,164,561 11,558,690 07-15-33 5.00 3,173,631 3,164,081 10-15-33 5.00 2,943,261 2,933,486 10-15-33 5.50 4,587,467 4,673,442 03-20-34 6.50 1,595,146 1,682,387 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 1,371,895(h) 175,831 08-20-32 0.00 5,365,964(h) 896,789 GSR Mtge Loan Trust Series 2004-6F Cl 2A2 05-25-34 5.50 1,811,200 1,849,911 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.45 1,467,821(e) 1,446,802 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 4,421,117 4,530,938 Series 2004-7 Cl 8A1 08-25-19 5.00 1,856,697 1,867,521 Series 2004-8 Cl 7A1 09-25-19 5.00 2,593,830 2,610,404 Structured Adjustable Rate Mtge Loan Series 2004-5 Cl B1 05-25-34 4.63 1,348,101(e) 1,331,331 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 6,412,336 6,425,333 Washington Mutual Series 2004-CB2 Cl 6A 07-25-19 4.50 1,822,637 1,803,463 Total 374,401,906 Automotive & related (0.3%) DaimlerChrysler NA Holding 11-15-13 6.50 1,175,000(l) 1,253,290 Ford Motor 02-01-29 6.38 2,460,000(l) 2,152,977 Total 3,406,267 Banks and savings & loans (2.0%) Banknorth Group Sr Nts 05-01-08 3.75 1,510,000(l) 1,495,731 US Bank NA Minnesota 08-01-11 6.38 1,165,000 1,287,318 Wachovia Bank NA Sub Nts 11-01-14 4.80 2,395,000 2,346,762 Washington Mutual Bank FA Sub Nts 06-15-11 6.88 2,215,000 2,477,196 08-15-14 5.65 5,695,000 5,807,305 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 5,674,000 6,284,778 Total 19,699,090 Cable (1.2%) Comcast 03-15-11 5.50 11,625,000 12,102,555 Cellular telecommunications (0.2%) US Cellular Sr Nts 12-15-33 6.70 2,405,000 2,401,251 Energy equipment & services (0.6%) Halliburton 10-15-10 5.50 6,270,000 6,560,295 Finance companies (1.3%) Citigroup Sub Nts 09-15-14 5.00 8,450,000(d) 8,392,236 GMAC 09-15-11 6.88 3,870,000 3,947,396 Total 12,339,632 Financial services (1.1%) KFW Intl Finance 10-17-05 2.50 6,275,000 6,245,351 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 1,400,000(b,j) 1,400,000 Pricoa Global Funding I 06-15-08 4.35 2,980,000(d) 3,012,184 Total 10,657,535 Health care services (0.6%) Cardinal Health 06-15-15 4.00 6,435,000 5,642,652 Household products (0.2%) Clorox 01-15-10 4.20 2,000,000(b,d) 1,998,240 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Insurance (2.1%) ASIF Global Financing XIX 01-17-13 4.90% $14,340,000(d) $14,401,232 Prudential Financial 09-20-14 5.10 5,595,000 5,526,607 Total 19,927,839 Leisure time & entertainment (0.4%) Time Warner 05-15-29 6.63 4,100,000 4,295,410 Media (0.6%) News America 12-15-14 5.30 6,385,000(b,d) 6,380,403 Multi-industry (0.1%) Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 825,000(c) 921,857 Real estate (0.2%) Archstone-Smith OPR Trust 08-15-14 5.63 1,860,000 1,901,608 Retail -- drugstores (0.2%) CVS 09-15-14 4.88 2,045,000 2,014,382 Retail -- general (0.3%) May Department Stores 07-15-14 5.75 3,280,000(d) 3,337,016 Telecom equipment & services (1.3%) Sprint Capital 11-15-28 6.88 4,985,000 5,297,031 TELUS (U.S. Dollar) 06-01-11 8.00 6,282,500(c) 7,352,033 Total 12,649,064 Textiles & apparel (0.4%) Jones Apparel Group 11-15-09 4.25 1,910,000(d) 1,894,023 11-15-14 5.13 1,900,000(d) 1,863,032 Total 3,757,055 Utilities -- electric (1.5%) Columbus Southern Power Sr Nts Series C 03-01-13 5.50 480,000 495,784 Dayton Power & Light 1st Mtge 10-01-13 5.13 2,135,000(d) 2,143,882 Duquesne Light 1st Mtge Series Q 05-15-14 5.70 420,000 442,957 Indianapolis Power & Light 1st Mtge 07-01-13 6.30 1,120,000(d) 1,201,536 Metropolitan Edison 03-15-13 4.95 4,130,000 4,067,174 1st Mtge 04-01-14 4.88 2,625,000 2,550,135 Progress Energy 1st Mtge 03-01-13 4.80 2,375,000 2,356,499 Tampa Electric 08-15-12 6.38 775,000 840,436 Total 14,098,403 Utilities -- telephone (2.1%) Telecom Italia Capital (U.S. Dollar) 09-30-34 6.00 6,785,000(c,d) 6,457,834 Verizon New York Series B 04-01-32 7.38 3,335,000 3,699,816 Verizon Pennsylvania Series A 11-15-11 5.65 9,770,000 10,188,253 Total 20,345,903 Total bonds (Cost: $941,783,410) $942,364,132 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Short-term securities (4.3%)(n) Issuer Effective Amount Value(a) yield payable at maturity U.S. government agencies (3.8%) Federal Home Loan Bank Disc Nt 12-06-04 1.75% $10,300,000 $10,296,944 Federal Natl Mtge Assn Disc Nts 12-09-04 1.82 7,400,000 7,396,578 12-14-04 1.85 20,000,000 19,985,771 Total 37,679,293 Commercial paper (0.3%) Edison Asset Securitization 12-13-04 1.89% $3,000,000 $2,997,963 Total short-term securities (Cost: $40,679,026) $40,677,256 Total investments in securities (Cost: $982,462,436)(o) $983,041,388 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At Nov. 30, 2004, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $33,976,538. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. At Nov. 30, 2004, the value of foreign securities represented 2.4% 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 Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At Nov. 30, 2004, the value of these securities amounted to $63,865,530 or 6.8% of net assets. (e) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Nov. 30, 2004. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Nov. 30, 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 at Nov. 30, 2004. (i) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at Nov. 30, 2004. - -------------------------------------------------------------------------------- 14 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Notes to investments in securities (continued) (j) The following abbreviation is used in the portfolio security descriptions to identify the insurer of the issue: FSA -- Financial Security Assurance (k) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at Nov. 30, 2004: Security Principal Settlement Proceeds Value amount date receivable Federal Natl Mtge Assn 12-01-19 5.00% $ 2,625,000 12-16-04 $ 2,663,964 $ 2,658,626 12-01-34 5.50 23,550,000 12-13-04 23,930,054 23,800,101 01-01-35 5.00 10,000,000 01-13-05 9,906,252 9,837,500 (l) 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 Sale contracts U.S. Treasury Notes, Dec. 2004, 5-year $ 4,100,000 U.S. Treasury Notes, Dec. 2004, 10-year 13,100,000 U.S. Treasury Notes, March 2005, 5-year 100,000 U.S. Treasury Notes, March 2005, 10-year 83,800,000 (m) At Nov. 30, 2004, security was partially or fully on loan. See Note 4 to the financial statements. (n) Cash collateral received from security lending activity is invested in short-term securities and represents 3.2% of net assets. See Note 4 to the financial statements. 1.1% of net assets is the Portfolio's cash equivalent position. (o) At Nov 30, 2004, the cost of securities for federal income tax purposes was approximately $982,462,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 6,254,000 Unrealized depreciation (5,675,000) ---------- Net unrealized appreciation $ 579,000 ----------- How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.americanexpress.com/funds. - -------------------------------------------------------------------------------- 15 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Financial Statements Statement of assets and liabilities Quality Income Portfolio Nov. 30, 2004 (Unaudited) Assets Investments in securities, at value (Note 1)* (identified cost $982,462,436) $ 983,041,388 Accrued interest receivable 7,510,740 Receivable for investment securities sold 95,931,462 Unrealized appreciation on foreign currency contracts held, at value (Note 6) 4,026 ----- Total assets 1,086,487,616 ------------- Liabilities Disbursements in excess of cash on demand deposit 245,837 Payable for investment securities purchased 80,840,879 Unrealized depreciation on foreign currency contracts held, at value (Note 6) 13,206 Payable upon return of securities loaned (Note 4) 30,284,125 Accrued investment management services fee 13,355 Other accrued expenses 6,723 Forward sale commitments, at value (proceeds receivable $36,500,270) (Note 1) 36,296,227 ---------- Total liabilities 147,700,352 ----------- Net assets $ 938,787,264 ============== * Including securities on loan, at value (Note 4) $ 29,192,096 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 16 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Statement of operations Quality Income Portfolio Six months ended Nov. 30, 2004 (Unaudited) Investment income Income: Interest $21,511,491 Fee income from securities lending (Note 4) 43,721 ------ Total income 21,555,212 ---------- Expenses (Note 2): Investment management services fee 2,521,362 Compensation of board members 5,482 Custodian fees 49,600 Audit fees 16,500 Other 22,674 ------ Total expenses 2,615,618 Earnings credits on cash balances (Note 2) (28) --- Total net expenses 2,615,590 --------- Investment income (loss) -- net 18,939,622 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 2,903,439 Foreign currency transactions (8,628) Futures contracts (1,791,354) ---------- Net realized gain (loss) on investments 1,103,457 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,258,297 ---------- Net gain (loss) on investments and foreign currencies 16,361,754 ---------- Net increase (decrease) in net assets resulting from operations $35,301,376 ===========
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 17 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets Quality Income Portfolio Nov. 30, 2004 May 31, 2004 Six months ended Year ended (Unaudited) Operations Investment income (loss) -- net $ 18,939,622 $ 43,667,562 Net realized gain (loss) on investments 1,103,457 10,488,305 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,258,297 (66,112,279) ---------- ----------- Net increase (decrease) in net assets resulting from operations 35,301,376 (11,956,412) ---------- ----------- Proceeds from contributions 25,644,377 8,835,237 Fair value of withdrawals (111,784,838) (465,582,594) ------------ ------------ Net contributions (withdrawals) from partners (86,140,461) (456,747,357) ----------- ------------ Total increase (decrease) in net assets (50,839,085) (468,703,769) Net assets at beginning of period 989,626,349 1,458,330,118 ----------- ------------- Net assets at end of period $ 938,787,264 $ 989,626,349 ============= ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 18 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Notes to Financial Statements Quality Income Portfolio (Unaudited as to Nov. 30, 2004) 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. - -------------------------------------------------------------------------------- 19 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts 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. - -------------------------------------------------------------------------------- 20 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. At Nov. 30, 2004, the Portfolio has entered into outstanding when-issued securities of $20,189,733 and other forward-commitments of $13,786,805. 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. Forward sale commitments The Portfolio may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Portfolio as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." Guarantees and indemnifications Under the Portfolio's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Portfolio. In addition, certain of the Portfolio's contracts with its service providers contain general indemnification clauses. The Portfolio's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Portfolio cannot be determined and the Portfolio has no historical basis for predicting the likelihood of any such claims. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. - -------------------------------------------------------------------------------- 21 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT 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 that declines from 0.52% to 0.395% annually as the Portfolio's assets increase. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other American Express mutual funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. During the six months ended Nov. 30, 2004, the Portfolio's custodian fees were reduced by $28 as a result of earnings credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $1,245,785,967 and $1,314,480,357, respectively, for the six months ended Nov. 30, 2004. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES At Nov. 30, 2004, securities valued at $29,192,096 were on loan to brokers. For collateral, the Portfolio received $30,284,125 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 $43,721 for the six months ended Nov. 30, 2004. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - -------------------------------------------------------------------------------- 22 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT 5. INTEREST RATE FUTURES CONTRACTS At Nov. 30, 2004, investments in securities included securities valued at $1,482,707 that were pledged as collateral to cover initial margin deposits on 1,011 open sale contracts. The notional market value of the open sale contracts at Nov. 30, 2004 was $112,016,157 with a net unrealized gain of $712,097. See "Summary of significant accounting policies" and "Notes to investments in securities." 6. FORWARD FOREIGN CURRENCY CONTRACTS At Nov. 30, 2004, the Fund had forward foreign currency exchange contracts that obligate it to deliver currencies at specified future dates. The unrealized appreciation and/or depreciation on these contracts is included in the accompanying financial statements. See "Summary of significant accounting policies." The terms of the open contracts are as follows:
Exchange date Currency to Currency to Unrealized Unrealized be delivered be received appreciation depreciation Dec. 1, 2004 2,096,435 2,773,584 $ -- $13,206 European Monetary Unit U.S. Dollar Dec. 3, 2004 2,118,408 2,820,025 4,026 -- European Monetary Unit U.S. Dollar ------ ------- Total $4,026 $13,206 ------ -------
7. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results.
Ratios/supplemental data Fiscal period ended May 31, 2004(e) 2004 2003 2002 2001 Ratio of expenses to average daily net assets(a) .54%(b) .54% .52% .53% .52% Ratio of net investment income (loss) to average daily net assets 3.90%(b) 3.62% 4.33% 4.89% 6.44% Portfolio turnover rate (excluding short-term securities) 138% 292% 263% 389% 150% Total return(c) 3.81%(d) (.77%) 6.56% 5.34% 12.06%
(a) Expense ratio is based on total expenses of the Portfolio before reduction of earnings credits on cash balances. The ratio does not include feeder fund expenses. (b) Adjusted to an annual basis. (c) Total return is based on a calculated Portfolio NAV and does not reflect payment of a sales charge. (d) Not annualized. (e) Six months ended Nov. 30, 2004 (Unaudited). - -------------------------------------------------------------------------------- 23 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Selective Fund Nov. 30, 2004 (Unaudited) Assets Investment in Portfolio (Note 1) $938,661,170 Capital shares receivable 79,932 ------ Total assets 938,741,102 ----------- Liabilities Dividends payable to shareholders 599,002 Capital shares payable 223,221 Accrued distribution fee 8,662 Accrued service fee 172 Accrued transfer agency fee 1,612 Accrued administrative services fee 1,283 Other accrued expenses 69,742 ------ Total liabilities 903,694 ------- Net assets applicable to outstanding capital stock $937,837,408 ============ Represented by Capital stock -- $.01 par value (Note 1) $ 1,084,666 Additional paid-in capital 966,920,928 Excess of distributions over net investment income (264,834) Accumulated net realized gain (loss) (Note 5) (31,400,081) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 1,496,729 --------- Total -- representing net assets applicable to outstanding capital stock $937,837,408 ============ Net assets applicable to outstanding shares: Class A $652,763,698 Class B $148,412,656 Class C $ 4,942,877 Class I $ 68,622,798 Class Y $ 63,095,379 Net asset value per share of outstanding capital stock: Class A shares 75,490,706 $ 8.65 Class B shares 17,166,066 $ 8.65 Class C shares 571,679 $ 8.65 Class I shares 7,935,445 $ 8.65 Class Y shares 7,302,748 $ 8.64 --------- ------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Statement of operations AXP Selective Fund Six months ended Nov. 30, 2004 (Unaudited) Investment income Income: Interest $21,508,721 Fee income from securities lending 43,715 ------ Total income 21,552,436 ---------- Expenses (Note 2): Expenses allocated from Portfolio 2,615,249 Distribution fee Class A 867,512 Class B 838,132 Class C 26,754 Transfer agency fee 640,094 Incremental transfer agency fee Class A 43,249 Class B 21,207 Class C 833 Service fee -- Class Y 38,468 Administrative services fees and expenses 245,970 Compensation of board members 4,482 Printing and postage 126,400 Registration fees 21,540 Audit fees 5,500 Other 6,040 ----- Total expenses 5,501,430 Expenses waived/reimbursed by AEFC (Note 2) (378,028) -------- 5,123,402 Earnings credits on cash balances (Note 2) (10,311) ------- Total net expenses 5,113,091 --------- Investment income (loss) -- net 16,439,345 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 2,903,368 Foreign currency transactions (8,710) Futures contracts (1,791,414) ---------- Net realized gain (loss) on investments 1,103,244 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,256,397 ---------- Net gain (loss) on investments and foreign currencies 16,359,641 ---------- Net increase (decrease) in net assets resulting from operations $32,798,986 ===========
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 25 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets AXP Selective Fund Nov. 30, 2004 May 31, 2004 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss) -- net $ 16,439,345 $ 36,407,873 Net realized gain (loss) on investments 1,103,244 10,487,801 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,256,397 (66,106,407) ---------- ----------- Net increase (decrease) in net assets resulting from operations 32,798,986 (19,210,733) ---------- ----------- Distributions to shareholders from: Net investment income Class A (12,210,854) (26,365,292) Class B (2,305,297) (5,744,369) Class C (73,980) (180,386) Class I (479,154) -- Class Y (1,409,406) (4,136,231) ---------- ---------- Total distributions (16,478,691) (36,426,278) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 29,384,864 79,211,532 Class B shares 5,195,064 22,932,095 Class C shares 271,222 1,212,212 Class I shares 68,359,276 -- Class Y shares 8,650,931 34,353,219 Reinvestment of distributions at net asset value Class A shares 9,543,263 21,394,439 Class B shares 2,035,278 5,231,020 Class C shares 64,463 159,927 Class I shares 433,942 -- Class Y shares 1,383,020 4,205,827 Payments for redemptions Class A shares (104,911,870) (311,025,257) Class B shares (Note 2) (51,580,826) (142,694,010) Class C shares (Note 2) (1,058,766) (4,975,937) Class I shares (23,352) -- Class Y shares (34,853,219) (123,235,606) ----------- ------------ Increase (decrease) in net assets from capital share transactions (67,106,710) (413,230,539) ----------- ------------ Total increase (decrease) in net assets (50,786,415) (468,867,550) Net assets at beginning of period 988,623,823 1,457,491,373 ----------- ------------- Net assets at end of period $ 937,837,408 $ 988,623,823 ============= ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 26 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Notes to Financial Statements AXP Selective Fund (Unaudited as to Nov. 30, 2004) 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. Effective July 15, 2004, the Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At Nov. 30, 2004, AEFC and the AXP Portfolio Builder Series funds owned 100% of Class I shares, which represents 7.32% of the Fund's net assets. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in 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 at Nov. 30, 2004 was 99.99%. - -------------------------------------------------------------------------------- 27 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT All securities held by the portfolio are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, 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. 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. - -------------------------------------------------------------------------------- 28 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.05% to 0.025% annually as the Fund's assets increase. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. In addition, AECSC is entitled to charge an annual closed account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $210,457 for Class A, $123,802 for Class B and $885 for Class C for the six months ended Nov. 30, 2004. - -------------------------------------------------------------------------------- 29 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT For the six months ended Nov. 30, 2004, AEFC and its affiliates waived certain fees and expenses to 0.94% for Class A, 1.69% for Class B, 1.69% for Class C, 0.67% for Class I and 0.77% for Class Y. Of these waived fees and expenses, the class specific transfer agency fees waived for Class A, Class B, Class C and Class Y were $269,815, $74,171, $2,577 and $31,417, respectively, which represent 0.08%, 0.09%, 0.10% and 0.08%, respectively, of the Fund's average daily net assets. In addition, AEFC and its affiliates have agreed to waive certain fees and expenses until May 31, 2005. Under this agreement, net expenses will not exceed 0.945% for Class A, 1.695% for Class B, 1.695% for Class C, 0.735% for Class I and 0.775% for Class Y of the Fund's average daily net assets. During the six months ended Nov. 30, 2004, the Fund's transfer agency fees were reduced by $10,311 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
Six months ended Nov. 30, 2004 Class A Class B Class C Class I* Class Y Sold 3,420,234 602,920 31,483 7,888,295 1,005,016 Issued for reinvested distributions 1,104,782 235,786 7,462 49,853 160,432 Redeemed (12,191,238) (6,006,077) (123,183) (2,703) (4,041,029) ----------- ---------- -------- ------ ---------- Net increase (decrease) (7,666,222) (5,167,371) (84,238) 7,935,445 (2,875,581) ---------- ---------- ------- --------- ---------- * Inception date was July 15, 2004. Year ended May 31, 2004 Class A Class B Class C Class I Class Y Sold 9,074,746 2,637,527 139,541 N/A 3,953,216 Issued for reinvested distributions 2,467,221 603,159 18,441 N/A 485,010 Redeemed (35,892,994) (16,404,096) (573,651) N/A (14,229,946) ----------- ----------- -------- -------- ----------- Net increase (decrease) (24,351,027) (13,163,410) (415,669) N/A (9,791,720) ----------- ----------- -------- -------- ----------
4. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding during the six months ended Nov. 30, 2004. - -------------------------------------------------------------------------------- 30 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $30,375,277 at May 31, 2004 that if not offset by capital gains will expire as follows: 2011 2013 $24,224,582 $6,150,695 It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 6. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2004(g) 2004 2003 2002 2001 Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .15 .28 .33 .40 .52 Net gains (losses) (both realized and unrealized) .15 (.38) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .30 (.10) .51 .42 .94 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.15) (.28) (.33) (.40) (.52) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.15) (.28) (.37) (.42) (.52) ----- ----- ----- ----- ----- Net asset value, end of period $8.65 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $653 $707 $955 $1,042 $1,004 Ratio of expenses to average daily net assets(b) .94%(c),(d) 1.00% .98% .98% .97% Ratio of net investment income (loss) to average daily net assets 3.50%(d) 3.17% 3.89% 4.45% 6.01% Portfolio turnover rate (excluding short-term securities) 138% 292% 263% 389% 150% Total return(e) 3.59%(f) (1.17%) 6.05% 4.85% 11.52%
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class A would have been 1.02% for the six months ended Nov. 30, 2004. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2004 (Unaudited). - -------------------------------------------------------------------------------- 31 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2004(g) 2004 2003 2002 2001 Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .12 .21 .27 .33 .45 Net gains (losses) (both realized and unrealized) .15 (.38) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .27 (.17) .45 .35 .87 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.12) (.21) (.27) (.33) (.45) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.12) (.21) (.31) (.35) (.45) ----- ----- ----- ----- ----- Net asset value, end of period $8.65 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $148 $190 $315 $342 $264 Ratio of expenses to average daily net assets(b) 1.69%(c),(d) 1.76% 1.74% 1.73% 1.73% Ratio of net investment income (loss) to average daily net assets 2.75%(d) 2.40% 3.12% 3.67% 5.25% Portfolio turnover rate (excluding short-term securities) 138% 292% 263% 389% 150% Total return(e) 3.20%(f) (1.92%) 5.25% 4.06% 10.69%
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class B would have been 1.78% for the six months ended Nov. 30, 2004. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2004 (Unaudited). - -------------------------------------------------------------------------------- 32 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2004(h) 2004 2003 2002 2001(b) Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.40 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .12 .21 .27 .33 .42 Net gains (losses) (both realized and unrealized) .15 (.38) .18 .02 .34 ----- ----- ----- ----- ----- Total from investment operations .27 (.17) .45 .35 .76 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.12) (.21) (.27) (.33) (.42) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.12) (.21) (.31) (.35) (.42) ----- ----- ----- ----- ----- Net asset value, end of period $8.65 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $5 $6 $10 $9 $4 Ratio of expenses to average daily net assets(c) 1.69%(d),(e) 1.76% 1.75% 1.74% 1.73%(e) Ratio of net investment income (loss) to average daily net assets 2.75%(e) 2.40% 3.07% 3.64% 5.16%(e) Portfolio turnover rate (excluding short-term securities) 138% 292% 263% 389% 150% Total return(f) 3.20%(g) (1.92%) 5.24% 4.06% 9.27%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class C would have been 1.79% for the six months ended Nov. 30, 2004. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. (h) Six months ended Nov. 30, 2004 (Unaudited). - -------------------------------------------------------------------------------- 33 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Class I Per share income and capital changes(a) Fiscal period ended May 31, 2004(b) Net asset value, beginning of period $8.55 ----- Income from investment operations: Net investment income (loss) .12 Net gains (losses) (both realized and unrealized) .10 ----- Total from investment operations .22 ----- Less distributions: Dividends from net investment income (.12) Distributions from realized gains -- ----- Total distributions (.12) ----- Net asset value, end of period $8.65 ----- Ratios/supplemental data Net assets, end of period (in millions) $69 Ratio of expenses to average daily net assets(c) .67%(d) Ratio of net investment income (loss) to average daily net assets 3.82%(d) Portfolio turnover rate (excluding short-term securities) 138% Total return(e) 2.63%(f) (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was July 15, 2004 (Unaudited). (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 34 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2004(g) 2004 2003 2002 2001 Net asset value, beginning of period $8.49 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .16 .29 .35 .42 .53 Net gains (losses) (both realized and unrealized) .15 (.39) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .31 (.10) .53 .44 .95 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.16) (.29) (.35) (.42) (.53) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.16) (.29) (.39) (.44) (.53) v ----- ----- ----- ----- ----- Net asset value, end of period $8.64 $8.49 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $63 $86 $177 $188 $218 Ratio of expenses to average daily net assets(b) .77%(c),(d) .84% .82% .81% .82% Ratio of net investment income (loss) to average daily net assets 3.67%(d) 3.30% 4.04% 4.61% 6.16% Portfolio turnover rate (excluding short-term securities) 138% 292% 263% 389% 150% Total return(e) 3.69%(f) (1.13%) 6.22% 5.02% 11.70%
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class Y would have been 0.85% for the six months ended Nov. 30, 2004. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. (g) Six months ended Nov. 30, 2004 (Unaudited). - -------------------------------------------------------------------------------- 35 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Nov. 30, 2004. Actual Expenses The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - -------------------------------------------------------------------------------- 36 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT
Beginning Ending Expenses paid account value account value during the period June 1, 2004 Nov. 30, 2004 June 1, 2004-Nov. 30, 2004 Class A Actual(a) $1,000 $1,035.90 $4.88(b) Hypothetical (5% return before expenses) $1,000 $1,020.69 $4.84(b) Class B Actual(a) $1,000 $1,032.00 $8.75(c) Hypothetical (5% return before expenses) $1,000 $1,016.87 $8.68(c) Class C Actual(a) $1,000 $1,032.00 $8.75(d) Hypothetical (5% return before expenses) $1,000 $1,016.87 $8.68(d) Class I Actual(a) N/A N/A N/A(e) Hypothetical (5% return before expenses) N/A N/A N/A(e) Class Y Actual(a) $1,000 $1,036.90 $4.00(f) Hypothetical (5% return before expenses) $1,000 $1,021.56 $3.97(f)
(a) Based on the actual return for the six months ended Nov. 30, 2004: +3.59% for Class A, +3.20% for Class B, +3.20% for Class C and +3.69% for Class Y. (b) Expenses are equal to the Fund's Class A annualized expense ratio of 0.94%, multiplied by the average account value over the period, multiplied by 186/365 (to reflect the one-half year period). (c) Expenses are equal to the Fund's Class B annualized expense ratio of 1.69%, multiplied by the average account value over the period, multiplied by 186/365 (to reflect the one-half year period). (d) Expenses are equal to the Fund's Class C annualized expense ratio of 1.69%, multiplied by the average account value over the period, multiplied by 186/365 (to reflect the one-half year period). (e) The values and expenses paid are not presented because Class I does not have a full six months of history. The inception date for Class I was July 15, 2004. (f) Expenses are equal to the Fund's Class Y annualized expense ratio of 0.77%, multiplied by the average account value over the period, multiplied by 186/365 (to reflect the one-half year period). - -------------------------------------------------------------------------------- 37 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website americanexpress.com/funds; or by searching the website of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at http://www.sec.gov. - -------------------------------------------------------------------------------- 38 -- AXP SELECTIVE FUND -- 2004 SEMIANNUAL REPORT (logo) AMERICAN EXPRESS (R) American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Not applicable for semi-annual reports. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date January 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date January 28, 2005 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date January 28, 2005 EX-99.CERT 2 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-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) 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; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this 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: January 21, 2005 /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-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) 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; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this 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: January 21, 2005 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 3 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: January 21, 2005 /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Chief Executive Officer Date: January 21, 2005 /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-----