-----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, Kq6X+C+8b02flcshXz6R0XmhYQm2uSlAWaWr9ALxn/aMVtCt9bi/b6THV1sh047+ Vrp1O84XCQ/DTx0PILVHuA== 0000820027-01-500353.txt : 20010801 0000820027-01-500353.hdr.sgml : 20010801 ACCESSION NUMBER: 0000820027-01-500353 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP EXTRA INCOME FUND INC/MN CENTRAL INDEX KEY: 0000728374 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411458705 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03848 FILM NUMBER: 1693877 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 MAIL ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS EXTRA INCOME FUND INC DATE OF NAME CHANGE: 19920703 N-30D 1 s-6370.txt AXP EXTRA INCOME FUND, INC. AXP(R) Extra Income Fund 2001 ANNUAL REPORT (PROSPECTUS ENCLOSED) American Express(R) Funds (icon of) clock AXP Extra Income Fund seeks to provide shareholders with high current income as its primary goal and, as its secondary goal, capital growth. (This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) Bonds with Something Extra Bonds aren't necessarily conservative securities strictly for people willing to settle for modest returns. High-yield corporate bonds, for example, are actually quite aggressive investments, offering high potential returns to investors willing to take more risk. These are the bonds that AXP Extra Income Fund invests in. High-yield bonds are issued by a wide range of companies -- from well-established ones that might be experiencing financial difficulty to new, rapidly growing ones that have yet to build a credit history. Importantly, the Fund spreads its investments among many bonds representing many types of businesses. This helps to spread the investment risk for shareholders. Table of Contents 2001 ANNUAL REPORT The purpose of this annual report is to tell investors how the Fund performed. From the Chairman 3 From the Portfolio Manager 3 Fund Facts 5 The 10 Largest Holdings 6 Making the Most of the Fund 7 The Fund's Long-term Performance 8 Board Members and Officers 10 Independent Auditors' Report (Fund) 12 Financial Statements (Fund) 13 Notes to Financial Statements (Fund) 16 Independent Auditors' Report (Portfolio) 21 Financial Statements (Portfolio) 22 Notes to Financial Statements (Portfolio) 24 Investments in Securities 27 Federal Income Tax Information 38 - ------------------------------------------------------------------------------- 2 AXP EXTRA INCOME FUND (picture of) Arne H. Carlson Arne H. Carlson Chairman of the board From the Chairman First, I want to thank you for being a shareholder in American Express funds. While we strongly believe in the virtues of investment, we also are very sensitive to the fluctuations of the financial markets. That is why we want to re-emphasize the importance of making certain that you frequently review your investments and regularly meet with your financial advisor. By doing so, you can take advantage of shifts in the markets to position your portfolio relative to expected market volatility and, possibly, achieve better overall performance. Second, I strongly advise that you keep a focus on the long-term. Reviewing past performance is helpful, but it should not be viewed as a leading indicator of the future. One constant is the necessity to have a financial plan based on appropriate asset allocation. Make sure that the plan provides what you need and expect. Our job, as a Board, is to monitor and confirm that the Fund complies with its investment objective and that its management style stays on target. We want the Fund to be able to deliver to you, the shareholder, the type of performance you expect and the best results that can be obtained. Toward that end, American Express has made significant changes, and will continue to make changes as it strives to provide a consistent standard of excellence. On behalf of the Board, Arne H. Carlson (picture of) Scott Schroepfer Scott Schroepfer Portfolio manager From the Portfolio Manager The high-yield sector of the bond market was under considerable pressure for most of the past 12 months, as a higher-than-normal level of defaults and concerns about a slowdown in economic growth took a toll on prices. However, substantial interest income made up for most of the price slump, leaving AXP Extra Income Fund's Class A shares with a total-return loss of just 0.94% (excluding the sales charge) for the fiscal year -- June 2000 through May 2001. (Total return includes distributions and change in net asset value.) The first few months of the period were relatively uneventful, although high-yield bonds did experience some price erosion. By fall, however, investors were becoming increasingly worried that the economy might be heading toward a substantial slowdown in growth, which might make it increasingly difficult for some issuers of high-yield bonds to honor their interest and principal payments. With that cloud hanging over the market, the selling pressure on high-yield bonds - ------------------------------------------------------------------------------- 3 ANNUAL REPORT -- 2001 intensified, driving down prices through the end of 2000. Most affected were bonds in the telecommunications sector. The selling pressure was exacerbated by substantial redemptions from high-yield-bond mutual funds. NEW YEAR'S SURPRISE The new year got off to a stunningly good start, thanks to a surprise interest-rate cut by the Federal Reserve that spurred high-yield bonds to a powerful month-long rally. Most of that gain was erased in March, though, as renewed concerns about the economy and, in particular, the viability of telecommunications companies, hurt the high-yield market. The period finished on an even note, as the market essentially treaded water during April and May. To lessen the effect of the periodic price slumps on the Fund's net asset value, last summer I began emphasizing higher-quality bonds and increasing the level of cash reserves in the portfolio. In addition, I began paring back holdings in the telecommunications sector. The trade-off in that strategy was that the Fund's dividend, though still quite high on a historical basis, declined slightly. The downturn that hit the high-yield market last fall was ultimately unsurprising given the increase in defaults the high-yield sector had been experiencing since mid-1999, a condition that was spawned by a huge issuance of high-yield bonds in 1997. (It normally takes two to three years for potential default problems to emerge.) The simple fact is that as the number of bonds issued increases, so does the number of potential defaults. As was true in this case, a big increase in the supply of new bonds usually is accompanied by weaker underwriting standards, which exacerbates the problem when the economy slows down. Looking toward the new fiscal year, it appears that the level of defaults will peak in 2001. If that proves to be the case, it would signal that the worst for high-yield bonds probably is behind us. (Usually, the high-yield market begins to rally ahead of the default peak.) Equally important, the economy seems likely to strengthen in the months ahead, disproving the recession scenario that has plagued the high-yield sector. I'm also encouraged that some relative stability returned to the high-yield market late in the past period. This indicates to me that the market has factored in all the past and potential bad news, and is now focusing on the possibility of a sustainable upturn in high-yield bond prices. In the meantime, I expect the Fund to continue to generate a high level of monthly income. Scott Schroepfer - ------------------------------------------------------------------------------- 4 AXP EXTRA INCOME FUND Fund Facts Class A-- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2001 $3.07 May 31, 2000 $3.48 Decrease $0.41 Distributions -- June 1, 2000 - May 31, 2001 From income $0.38 From long-term capital gains $ -- Total distributions $0.38 Total return** -0.94% Class B-- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2001 $3.07 May 31, 2000 $3.48 Decrease $0.41 Distributions -- June 1, 2000 - May 31, 2001 From income $0.35 From long-term capital gains $ -- Total distributions $0.35 Total return** -1.69% Class C -- June 26, 2000* - May 31, 2001 (All figures per share) Net asset value (NAV) May 31, 2001 $3.05 June 26, 2000* $3.48 Decrease $0.43 Distributions -- June 26, 2000* - May 31, 2001 From income $0.32 From long-term capital gains $ -- Total distributions $0.32 Total return** -2.92%*** Class Y-- 12-month performance (All figures per share) Net asset value (NAV) May 31, 2001 $3.07 May 31, 2000 $3.48 Decrease $0.41 Distributions -- June 1, 2000 - May 31, 2001 From income $0.38 From long-term capital gains $ -- Total distributions $0.38 Total return** -0.78% * Inception date. ** The total return is a hypothetical investment in the Fund with all distributions reinvested. Returns do not include sales load. The prospectus discusses the effect of sales charges, if any, on the various classes. *** The total return for Class C is not annualized. - ------------------------------------------------------------------------------- 5 ANNUAL REPORT -- 2001 The 10 Largest Holdings Percent Value (of net assets) (as of May 31, 2001) CSC Holdings 11.13% Pay-in-kind Series M Preferred 1.61% $43,843,423 Price Communications Wireless 9.13% 2006 1.41 38,323,999 Allied Waste North America 7.88% 2009 1.31 35,721,000 Paxson Communications 12.50% Cm Pay-in-kind Exchangeable Preferred 1.11 30,218,300 Outsourcing Solutions 11.00% 2006 1.10 29,916,000 Trump Atlantic City Assn/Funding 11.25% 2006 1.03 27,891,524 Wayland Investment Fund LLC .98 26,644,020 Sequa 9.00% 2009 .97 26,425,937 Park Place Entertainment 8.13% 2011 .96 26,053,125 Varde Fund V LP .95 25,951,999 For further detail about these holdings, please refer to the section entitled "Investments in Securities." The 10 holdings listed here make up 11.43% of net assets - ------------------------------------------------------------------------------- 6 AXP EXTRA INCOME FUND Making the Most of the Fund BUILD YOUR ASSETS SYSTEMATICALLY One of the best ways to invest in the Fund is by dollar-cost averaging -- a time-tested strategy that can make market fluctuations work for you. To dollar-cost average, simply invest a fixed amount of money regularly. You'll automatically buy more shares when the Fund's share price is low, fewer shares when it is high. The chart below shows how dollar-cost averaging works. In these three hypothetical scenarios, you will see six months of share price fluctuations. This strategy does not ensure a profit or avoid a loss if the market declines. But, if you can continue to invest regularly through changing market conditions even when the price of your shares falls or the market declines, it can be an effective way to accumulate shares to meet your long-term goals. How dollar-cost averaging works Jan Feb Mar Apr May Jun $15 $16 $18 $20 $10 $10 $12 $14 $ 5 Accumulated shares* Average market Your average price per share cost per share 42.25 $15 $14.20 - ------------------------------------------------------------------------------- Jan Feb Mar Apr May Jun $15 $10 $10 $10 $ 5 $8 $5 $5 $8 Accumulated shares* Average market Your average price per share cost per share 85.0 $7.66 $7.05 - ------------------------------------------------------------------------------- Jan Feb Mar Apr May Jun $15 $10 $10 $ 5 $8 $6 $4 $4 $7 Accumulated shares* Average market Your average price per share cost per share 103.5 $6.50 $5.80 - ------------------------------------------------------------------------------- $100 invested per month. Total invested: $600. * Shares purchased is determined by dividing the amount invested per month by the current share price. THREE WAYS TO BENEFIT FROM A MUTUAL FUND: o your shares increase in value when the Fund's investments do well o you receive capital gains when the gains on investments sold by the Fund exceed losses o you receive income when the Fund's stock dividends, interest and short-term gains exceed its expenses. All three make up your total return. You potentially can increase your investment if, like most investors, you reinvest your dividends and capital gain distributions to buy additional shares of the Fund or another fund. - ------------------------------------------------------------------------------- 7 ANNUAL REPORT -- 2001 The Fund's Long-term Performance Average Annual Total Returns (as of May 31, 2001) 1 year 5 years 10 years Since inception Class A -5.66% +2.11% +8.36% N/A Class B -5.22% +2.20% N/A +5.26%* Class C N/A N/A N/A -4.08%** Class Y -0.78% +3.24% N/A +6.19%* * Inception date was March 20, 1995. ** Inception date was June 26, 2000. Assumes: Holding period from 6/1/91 to 5/31/01. Returns do not reflect taxes payable on distributions. Reinvestment of all income and capital gain distributions for the Fund has a value of $14,818. Also see "Past Performance" in the Fund's current prospectus. On the graph above you can see how the Fund's total return compared to two widely cited performance indexes, the Merrill Lynch High Yield Bond Index and the Lipper High Yield Funds Index. In comparing AXPExtra Income Fund (Class A) to these indexes, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indexes. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Average annual total return figures reflect the impact of the maximum applicable sales charge. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. - ------------------------------------------------------------------------------- 8 AXP EXTRA INCOME FUND Merrill Lynch High Yield Bond Index, an unmanaged index, provides a broad-based measure of performance of non-investment grade U.S. domestic bond market. The index currently captures close to $200 billion of the outstanding debt of domestic market issuers rated below investment grade but not in default. The index is "rule-based," which means there is a defined list of criteria that a bond must meet in order to qualify for inclusion in the index. Lipper High Yield Funds Index, an unmanaged index published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. - ------------------------------------------------------------------------------- 9 ANNUAL REPORT -- 2001 Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 68 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board. Independent Board Members
Name, address, age Position held with Principal occupations during Other directorships Registrant and length past five years of service - ------------------------------- ------------------------- ---------------------------------- ----------------------------- H. Brewster Atwater, Jr. Board member since 1996 Retired chair and chief Merck & Co., Inc. 4900 IDS Tower Minneapolis, executive officer, General (pharmaceuticals) MN 55402 Mills, Inc. (consumer foods) Born in 1931 - ------------------------------- ------------------------- ---------------------------------- ----------------------------- Arne H. Carlson Chair of the Board Chair, Board Services 901 S. Marquette Ave. since 1999 Corporation (provides Minneapolis, MN 55402 administrative services to Born in 1934 boards) Former Governor of Minnesota - ------------------------------- ------------------------- ---------------------------------- ----------------------------- Lynne V. Cheney American Board member since 1994 Distinguished Fellow, AEI The Reader's Digest Enterprise Institute for Association Inc. Public Policy Research (AEI) 1150 17th St., N.W. Washington, D.C. 20036 Born in 1941 - ------------------------------- ------------------------- ---------------------------------- ----------------------------- Livio D. DeSimone Board member since 2001 Retired chair of the board and Cargill, Incorporated 30 Seventh Street St. Paul, chief executive officer, (commodity merchants and MN 55101-4901 Minnesota Mining and processors), Target Manufacturing (3M) Corporation (department stores), General Mills, Inc. (consumer foods) and Vulcan Materials Company (construction Born in 1936 materials/chemicals) - ------------------------------- ------------------------- ---------------------------------- ----------------------------- Ira D. Hall Board member since 2001 Treasurer, Texaco Inc. since Texaco, Inc. 1998. Prior to that, director, 2000 Westchester Avenue International Operations IBM White Plains, NY 10650 Corp. Born in 1944 - ------------------------------- ------------------------- ---------------------------------- ----------------------------- Heinz F. Hutter Board member since 1994 Retired president and chief P.O. Box 2187 operating officer, Cargill, Minneapolis, MN 55402 Incorporated (commodity Born in 1929 merchants and processors) - ------------------------------- ------------------------- ---------------------------------- ----------------------------- Anne P. Jones Board member since 1985 Attorney and telecommunications Motorola, Inc. (electronics) 5716 Bent Branch Rd. consultant Bethesda, MD 20816 Born in 1935 - ------------------------------- ------------------------- ---------------------------------- ----------------------------- William R. Pearce Board member since 1980 RII Weyerhaeuser World 2050 One Financial Plaza Timberfund, L.P. (develops Minneapolis, MN 55402 timber resources) - management Born in 1927 committee; Former chair, American Express Funds - ------------------------------- ------------------------- ---------------------------------- -----------------------------
- -------------------------------------------------------------------------------- 10 AXP EXTRA INCOME FUND
Independent Board Members Name, address, age Position held Principal occupations during past Other directorships with five years Registrant and length of service - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- Alan K. Simpson Board member Former three-term United States Biogen, Inc. (bio-pharmaceuticals) 1201 Sunshine Ave. Cody, since 1997 Senator for Wyoming WY 82414 Born in 1931 - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- C. Angus Wurtele Suite Board member Retired chair of the board and chief The Valspar Corporation (paints), 1700, Foshay Tower since 1994 executive officer, The Valspar Bemis Corporation (packaging) Minneapolis, MN 55402 Born Corporation in 1934 - ---------------------------- ---------------- ---------------------------------------- ----------------------------------------
Board Members Affiliated with American Express Financial Corporation (AEFC) Name, address, age Position held Principal occupations during past Other directorships with five years Registrant and length of service - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- David R. Hubers Board member Retired chief executive officer and Chronimed Inc. (specialty 50643 AXP Financial Center since 1993 director and current chair of the pharmaceutical distribution) RTW Inc. Minneapolis, MN 55474 board of AEFC (manages workers compensation Born in 1943 programs) Lawson Software, Inc. (technology based business applications) - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- John R. Thomas Board member Senior vice president - information 50652 AXP Financial Center since 1987, and technology of AEFC Minneapolis, MN 55474 president Born in 1937 since 1997 - ---------------------------- ---------------- ---------------------------------------- ----------------------------------------
The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Thomas, who is president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupations during past Other directorships with five years Registrant and length of service - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- John M. Knight Treasurer Vice president - investment 50005 AXP Financial Center since 1999 accounting of AEFC Minneapolis, MN 55474 Born in 1952 - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- Leslie L. Ogg Vice President of Board Services 901 S. Marquette Ave. president, Corporation Minneapolis, MN 55402 general Born in 1938 counsel and secretary since 1978 - ---------------------------- ---------------- ---------------------------------------- ---------------------------------------- Frederick C. Quirsfeld Vice president Senior vice president - fixed income 53609 AXP Financial Center since 1998 and director of AEFC Minneapolis, MN 55474 Born in 1947 - ---------------------------- ---------------- ---------------------------------------- ----------------------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Thomas, who is president, the Fund's other officers are: Other Officers The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - ------------------------------------------------------------------------------- 11 ANNUAL REPORT -- 2001 Independent Auditors' Report THE BOARD AND SHAREHOLDERS AXP EXTRA INCOME FUND, INC. We have audited the accompanying statement of assets and liabilities of AXP Extra Income Fund, Inc. as of May 31, 2001, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2001, and the financial highlights for each of the years in the five-year period ended May 31, 2001. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AXP Extra Income Fund, Inc. as of May 31, 2001, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 6, 2001 - ------------------------------------------------------------------------------- 12 AXP EXTRA INCOME FUND Financial Statements Statement of assets and liabilities AXP Extra Income Fund, Inc. May 31, 2001 Assets Investment in High Yield Portfolio (Note 1) $2,718,557,036 Capital shares receivable 290,834 - -------------------------------------------------------------------------------- Total assets 2,718,847,870 - -------------------------------------------------------------------------------- Liabilities Dividends payable to shareholders 4,523,491 Accrued distribution fee 35,415 Accrued service fee 2 Accrued transfer agency fee 9,690 Accrued administrative services fee 3,391 Other accrued expenses 117,816 - -------------------------------------------------------------------------------- Total liabilities 4,689,805 - -------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $2,714,158,065 ================================================================================ Represented by Capital stock -- $.01 par value (Note 1) $ 8,851,010 Additional paid-in capital 4,024,462,350 Excess of distributions over net investment income (873,010) Accumulated net realized gain (loss) (Note 4) (725,067,604) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (593,214,681) - -------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $2,714,158,065 ================================================================================ Net assets applicable to outstanding shares: Class A $1,898,150,056 Class B $ 807,342,103 Class C $ 8,042,805 Class Y $ 623,101 Net asset value per share of outstanding capital stock: Class A shares 618,954,958 $ 3.07 Class B shares 263,309,724 $ 3.07 Class C shares 2,633,264 $ 3.05 Class Y shares 203,102 $ 3.07 - -------------------------------------------------------------------------------- See accompanying notes to financial statements. - ------------------------------------------------------------------------------- 13 ANNUAL REPORT -- 2001 Statement of operations AXP Extra Income Fund, Inc. Year ended May 31, 2001 Investment income Income: Dividends $ 38,662,288 Interest 319,189,187 - -------------------------------------------------------------------------------- Total income 357,851,475 - -------------------------------------------------------------------------------- Expenses (Note 2): Expenses allocated from High Yield Portfolio 16,845,169 Distribution fee Class A 5,016,390 Class B 8,306,572 Class C 30,808 Transfer agency fee 3,239,549 Incremental transfer agency fee Class A 254,415 Class B 172,432 Class C 514 Service fee -- Class Y 627 Administrative services fees and expenses 1,334,902 Compensation of board members 11,286 Printing and postage 484,654 Registration fees 249,814 Audit fees 12,000 Other 11,125 - -------------------------------------------------------------------------------- Total expenses 35,970,257 Earnings credits on cash balances (Note 2) (215,983) - -------------------------------------------------------------------------------- Total net expenses 35,754,274 - -------------------------------------------------------------------------------- Investment income (loss) -- net 322,097,201 - -------------------------------------------------------------------------------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (382,732,773) Foreign currency transactions (2,276) - -------------------------------------------------------------------------------- Net realized gain (loss) on investments (382,735,049) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,026,448 - -------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (367,708,601) - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ (45,611,400) ================================================================================ See accompanying notes to financial statements. - ------------------------------------------------------------------------------- 14 AXP EXTRA INCOME FUND Statements of changes in net assets AXP Extra Income Fund, Inc. Year ended May 31, 2001 2000 Operations and distributions Investment income (loss) -- net $ 322,097,201 $ 369,102,894 Net realized gain (loss) on investments (382,735,049) (153,128,652) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,026,448 (311,468,718) - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (45,611,400) (95,494,476) - -------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income Class A (232,680,925) (267,394,597) Class B (90,055,179) (98,425,373) Class C (344,397) -- Class Y (73,820) (94,925) - -------------------------------------------------------------------------------- Total distributions (323,154,321) (365,914,895) - -------------------------------------------------------------------------------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Notes 2 and 6) 450,737,898 543,228,750 Class B shares 209,897,046 309,550,131 Class C shares 9,206,823 -- Class Y shares 536,729 505,504 Reinvestment of distributions at net asset value Class A shares 163,370,284 175,194,772 Class B shares 71,478,524 78,668,584 Class C shares 250,707 -- Class Y shares 74,210 93,810 Payments for redemptions Class A shares (679,544,189) (978,819,213) Class B shares (Note 2) (282,951,069) (415,861,083) Class C shares (Note 2) (1,075,656) -- Class Y shares (529,063) (1,109,891) - -------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (58,547,756) (288,548,636) - -------------------------------------------------------------------------------- Total increase (decrease) in net assets (427,313,477) (749,958,007) Net assets at beginning of year 3,141,471,542 3,891,429,549 - -------------------------------------------------------------------------------- Net assets at end of year $2,714,158,065 $3,141,471,542 ================================================================================ Undistributed (excess of distributions over) net investment income $ (873,010) $ 241,427 - -------------------------------------------------------------------------------- See accompanying notes to financial statements. - ------------------------------------------------------------------------------- 15 ANNUAL REPORT -- 2001 Notes to Financial Statements AXP Extra Income Fund, Inc. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Fund has 10 billion authorized shares of capital stock. Class C shares of the Fund were offered to the public on June 26, 2000. Prior to this date, American Express Financial Corporation (AEFC) purchased 573 shares of capital stock at $3.49 per share, which represented the initial capital in Class C. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in High Yield Portfolio The Fund invests all of its assets in the High Yield 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 long-term corporate bonds in the lower-rating categories, commonly known as junk bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund as of May 31, 2001 was 99.99%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. 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 - ------------------------------------------------------------------------------- 16 AXP EXTRA INCOME FUND recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been decreased by $58,276 and accumulated net realized loss has been decreased by $64,007 resulting in a net reclassification adjustment to decrease paid-in capital by $5,731. Dividends to shareholders Dividends from net investment income, declared daily and paid monthly, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a 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 $19.50 o Class B $20.50 o Class C $20.00 o Class Y $17.50 The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $3,715,625 for Class A and $839,754 for Class B for the year ended May 31, 2001 and $2,108 for Class C for the period ended May 31, 2001. During the year ended May 31, 2001, the Fund's transfer agency fees were reduced by $215,983 as a result of earnings credits from overnight cash balances. - ------------------------------------------------------------------------------- 17 ANNUAL REPORT -- 2001 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2001 Class A Class B Class C* Class Y - ------------------------------------------------------------------------------------------ Sold 138,865,419 64,607,127 2,896,417 168,963 Issued for reinvested distributions 50,473,426 22,066,966 80,205 22,950 Redeemed (208,965,351) (86,509,968) (343,358) (166,782) - ------------------------------------------------------------------------------------------ Net increase (decrease) (19,626,506) 164,125 2,633,264 25,131 - ------------------------------------------------------------------------------------------ * Inception date was June 26, 2000.
Year ended May 31, 2000 Class A Class B Class C Class Y Sold 143,200,689 81,718,196 N/A 134,219 Issued for reinvested distributions 46,607,413 20,948,743 N/A 24,813 Redeemed (259,529,027) (110,417,887) N/A (293,799) - ------------------------------------------------------------------------------------------ Net increase (decrease) (69,720,925) (7,750,948) N/A (134,767) - ------------------------------------------------------------------------------------------
4. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $719,449,395 as of May 31, 2001, that if not offset by subsequent capital gains, will expire in 2003 through 2010. It is unlikely the board will authorize a distribution of any net realized gains until the available capital loss carry-over has been offset or expires. 5. BANK BORROWINGS The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than five business days plus 367% of advances over five business days. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.05% per annum. The Fund had no borrowings outstanding during the year ended May 31, 2001. 6. FUND MERGER As of the close of business on July 14, 2000, AXP Extra Income Fund, Inc. acquired the assets and assumed the identified liabilities of Strategist High Yield Fund. The aggregate net assets of AXP Extra Income Fund, Inc. immediately before the acquisition were $3,092,275,794. The merger was accomplished by a tax-free exchange of 471,445 shares of Strategist High Yield Fund valued at $1,623,708. In exchange for the Strategist High Yield Fund shares and net assets, AXP Extra Income Fund, Inc. issued the following number of shares: Shares Net assets - -------------------------------------------------------------------------------- Class A 468,720 $1,623,708 Strategist High Yield Fund's net assets at that date consisted of capital stock of $2,077,880, accumulated net realized loss of $152,814 and unrealized depreciation of $301,358. - ------------------------------------------------------------------------------- 18 AXP EXTRA INCOME FUND 7. NEW ACCOUNTING PRONOUNCEMENT In November 2000, the AICPA issued a revised Audit and Accounting Guide, Audits of Investment Companies, which is effective for fiscal years beginning after Dec. 15, 2000. Adopting the revised Guide is not expected to have a significant impact on the Fund's financial position, results of operations or changes in its net assets. 8. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. Class A
Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $3.48 $3.97 $4.58 $4.39 $4.34 - ------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .38 .39 .40 .40 .39 Net gains (losses) (both realized and unrealized) (.41) (.49) (.58) .17 .06 - ------------------------------------------------------------------------------------------------------- Total from investment operations (.03) (.10) (.18) .57 .45 - ------------------------------------------------------------------------------------------------------- Less distributions: Dividends from net investment income (.38) (.39) (.43) (.38) (.40) - ------------------------------------------------------------------------------------------------------- Net asset value, end of period $3.07 $3.48 $3.97 $4.58 $4.39 Ratios/supplemental data Net assets, end of period (in millions) $1,898 $2,224 $2,814 $3,112 $2,582 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) 1.04% .99% .91% .89% .92% - ------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 11.54% 10.32% 9.86% 8.90% 9.01% - ------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 76% 44% 47% 81% 92% - ------------------------------------------------------------------------------------------------------- Total return(e) (.94%) (2.78%) (3.67%) 13.24% 10.92% - -------------------------------------------------------------------------------------------------------
Class B
Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $3.48 $3.97 $4.58 $4.39 $4.34 - ------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .35 .36 .37 .37 .36 Net gains (losses) (both realized and unrealized) (.41) (.49) (.58) .16 .06 - ------------------------------------------------------------------------------------------------------- Total from investment operations (.06) (.13) (.21) .53 .42 - ------------------------------------------------------------------------------------------------------- Less distributions: Dividends from net investment income (.35) (.36) (.40) (.34) (.37) - ------------------------------------------------------------------------------------------------------- Net asset value, end of period $3.07 $3.48 $3.97 $4.58 $4.39 - ------------------------------------------------------------------------------------------------------- Ratios/supplemental data Net assets, end of period (in millions) $807 $917 $1,076 $1,046 $613 - ------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) 1.80% 1.75% 1.67% 1.65% 1.68% - ------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 10.79% 9.58% 9.11% 8.23% 8.18% - ------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 76% 44% 47% 81% 92% - ------------------------------------------------------------------------------------------------------- Total return(e) (1.69%) (3.53%) (4.39%) 12.42% 10.07% - -------------------------------------------------------------------------------------------------------
See accompanying notes to financial highlights. - ------------------------------------------------------------------------------- 19 ANNUAL REPORT -- 2001 Class C Per share income and capital changes(a) Fiscal period ended May 31, 2001(b) Net asset value, beginning of period $3.48 - -------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .32 Net gains (losses) (both realized and unrealized) (.43) - -------------------------------------------------------------------------------- Total from investment operations (.11) - -------------------------------------------------------------------------------- Less distributions: Dividends from net investment income (.32) - -------------------------------------------------------------------------------- Net asset value, end of period $3.05 - -------------------------------------------------------------------------------- Ratios/supplemental data Net assets, end of period (in millions) $8 - -------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) 1.80%(d) - -------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 11.10%(d) - -------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 76% - -------------------------------------------------------------------------------- Total return(e) (2.92%) - -------------------------------------------------------------------------------- Class Y
Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $3.48 $3.97 $4.58 $4.39 $4.34 - ------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income (loss) .38 .39 .41 .41 .40 Net gains (losses) (both realized and unrealized) (.41) (.49) (.59) .16 .06 - ------------------------------------------------------------------------------------------------------- Total from investment operations (.03) (.10) (.18) .57 .46 - ------------------------------------------------------------------------------------------------------- Less distributions: Dividends from net investment income (.38) (.39) (.43) (.38) (.41) - ------------------------------------------------------------------------------------------------------- Net asset value, end of period $3.07 $3.48 $3.97 $4.58 $4.39 - ------------------------------------------------------------------------------------------------------- Ratios/supplemental data Net assets, end of period (in millions) $1 $1 $1 $2 $-- - ------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .88% .83% .83% .82% .85% - ------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 11.72% 10.34% 9.93% 10.07% 8.68% - ------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 76% 44% 47% 81% 92% - ------------------------------------------------------------------------------------------------------- Total return(e) (.78%) (2.68%) (3.58%) 13.42% 11.05% - ------------------------------------------------------------------------------------------------------- Notes to financial statements (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge.
- ------------------------------------------------------------------------------- 20 AXP EXTRA INCOME FUND Independent Auditors' Report THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of High Yield Portfolio (a series of Income Trust) as of May 31, 2001, the related statement of operations for the year then ended and the statements of changes in net assets for each of the years in the two-year period ended May 31, 2001. These financial statements are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2001, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of High Yield Portfolio as of May 31, 2001, and the results of its operations and the changes in its net assets for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 6, 2001 - ------------------------------------------------------------------------------- 21 ANNUAL REPORT -- 2001 Financial Statements Statement of assets and liabilities High Yield Portfolio May 31, 2001 Assets Investments in securities, at value (Note 1) Investments in securities of unaffiliated issuers (identified cost $3,148,650,953) $2,597,006,848 Investments in securities of affiliated issuers (identified cost $48,973,125) 5,645,785 - -------------------------------------------------------------------------------- Total investments in securities (identified cost $3,197,624,078) 2,602,652,633 Cash in bank on demand deposit 221,500 Accrued interest and dividends receivable 88,806,338 Receivable for investment securities sold 39,263,760 - -------------------------------------------------------------------------------- Total assets 2,730,944,231 - -------------------------------------------------------------------------------- Liabilities Payable for investment securities purchased 9,885,278 Payable upon return of securities loaned (Note 4) 2,259,100 Accrued investment management services fee 42,363 Other accrued expenses 101,626 - -------------------------------------------------------------------------------- Total liabilities 12,288,367 - -------------------------------------------------------------------------------- Net assets $2,718,655,864 ================================================================================ See accompanying notes to financial statements. - ------------------------------------------------------------------------------- 22 AXP EXTRA INCOME FUND Statement of operations High Yield Portfolio Year ended May 31, 2001 Investment income Income: Dividends $ 38,666,157 Interest 319,213,011 - -------------------------------------------------------------------------------- Total income 357,879,168 - -------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 16,164,094 Compensation of board members 14,961 Custodian fees 234,165 Audit fees 36,000 Other 400,820 - -------------------------------------------------------------------------------- Total expenses 16,850,040 Earnings credits on cash balances (Note 2) (3,214) - -------------------------------------------------------------------------------- Total net expenses 16,846,826 - -------------------------------------------------------------------------------- Investment income (loss) -- net 341,032,342 - -------------------------------------------------------------------------------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) (382,745,726) Foreign currency transactions (2,273) - -------------------------------------------------------------------------------- Net realized gain (loss) on investments (382,747,999) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,016,851 - -------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (367,731,148) - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ (26,698,806) ================================================================================ Statements of changes in net assets High Yield Portfolio Year ended May 31, 2001 2000 Operations Investment income (loss) -- net $ 341,032,342 $ 392,069,684 Net realized gain (loss) on investments (382,747,999) (153,205,238) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 15,016,851 (311,617,708) - -------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (26,698,806) (72,753,262) Net contributions (withdrawals) from partners (405,033,310) (671,455,648) - -------------------------------------------------------------------------------- Total increase (decrease) in net assets (431,732,116) (744,208,910) Net assets at beginning of year 3,150,387,980 3,894,596,890 - -------------------------------------------------------------------------------- Net assets at end of year $2,718,655,864 $3,150,387,980 ================================================================================ See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 23 ANNUAL REPORT -- 2001 Notes to Financial Statements High Yield Portfolio 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES High Yield 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 long-term corporate bonds in the lower-rating categories, commonly known as junk bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. - ------------------------------------------------------------------------------- 24 AXP EXTRA INCOME FUND 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. Illiquid securities As of May 31, 2001, investments in securities included issues that are illiquid which the Portfolio currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities as of May 31, 2001 was $92,709,765 representing 3.41% of net assets. These securities are valued at fair value according to methods selected in good faith by the board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date. Interest income, including level-yield amortization of premium and discount, is accrued daily. - ------------------------------------------------------------------------------- 25 ANNUAL REPORT -- 2001 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with AEFC to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.59% to 0.465% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the year ended May 31, 2001, the Portfolio's custodian fees were reduced by $3,214 as a result of earnings credits from overnight cash balances. The Portfolio also pays custodian fees to American Express Trust Company, an affiliate of AEFC. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,050,147,343 and $2,086,583,748, respectively, for the year ended May 31, 2001. For the same period, the portfolio turnover rate was 76%. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES As of May 31, 2001, securities valued at $2,235,320 were on loan to brokers. For collateral, the Portfolio received $2,259,100 in cash. Income from securities lending amounted to $36,104 for the year ended May 31, 2001. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 5. NEW ACCOUNTING PRONOUNCEMENT In November 2000, the AICPA issued a revised Audit and Accounting Guide, Audits of Investment Companies, which is effective for fiscal years beginning after Dec. 15, 2000. Adopting the revised Guide is not expected to have a significant impact on the Portfolio's financial position, results of operations or changes in its net assets. - ------------------------------------------------------------------------------- 26 AXP EXTRA INCOME FUND Investments in Securities High Yield Portfolio May 31, 2001 (Percentages represent value of investments compared to net assets) Bonds (81.3%) Issuer Coupon Principal Value(a) rate amount Government obligations & agencies (0.4%) Republic of Panama (U.S. Dollar) 02-08-11 9.63% $5,000,000(c) $5,098,045 Republic of Venezuela (U.S. Dollar) 12-18-07 7.38 6,666,600(c,g) 5,620,778 Total 10,718,823 Aerospace & defense (1.9%) Alliant Techsystems Sr Sub Nts 05-15-11 8.50 4,275,000(d) 4,317,750 Compass Aerospace Company Guaranty Series B 04-15-05 10.13 10,890,000(b) 2,409,413 Company Guaranty Series D 04-15-05 10.13 4,000,000(b) 885,000 Fairchild Company Guaranty 04-15-09 10.75 21,400,000 17,120,000 Sequa Sr Nts 08-01-09 9.00 25,750,000 26,425,937 Total 51,158,100 Automotive & related (2.6%) Delco Remy Intl Company Guaranty 05-01-09 11.00 8,125,000(d) 8,450,000 Exide 04-29-05 9.85 4,923,791(l) 4,603,744 French (JL) Auto Casting Company Guaranty Series B 06-01-09 11.50 13,676,000 5,060,120 Hayes Lemmerz Intl Company Guaranty 07-15-06 11.00 3,100,000 2,821,000 Company Guaranty Series B 07-15-07 9.13 7,100,000 5,822,000 Lear Company Guaranty Series B 05-15-09 8.11 20,000,000 20,193,400 MSX Intl Company Guaranty 01-15-08 11.38 13,110,000 12,061,200 Oxford Automotive Company Guaranty Series D 06-15-07 10.13 9,540,000 6,117,525 Venture Holdings Trust Sr Nts Series B 07-01-05 9.50 5,370,000 4,376,550 Total 69,505,539 Beverages & tobacco (0.4%) Constellation Brands Company Guaranty 08-01-06 8.63 10,415,000 10,831,600 Building materials & construction (1.3%) K Hovnanian Enterprises Company Guaranty 10-01-07 10.50 3,300,000 3,456,750 Nortek Sr Nts Series B 03-15-07 9.25 3,000,000 2,962,500 09-01-07 9.13 4,200,000 4,126,500 WCI Communities Sr Sub Nts 02-15-11 10.63 23,235,000(d) 24,396,750 Total 34,942,500 Chemicals (4.0%) Allied Waste North America Company Guaranty Series B 01-01-09 7.88 36,450,000 35,721,000 08-01-09 10.00 10,200,000 10,531,500 Georgia Gulf 11-15-05 7.63 4,500,000 4,351,518 Huntsman Sr Sub Nts 07-01-07 9.50 17,055,000(d) 11,426,850 IMC Global Sr Nts 06-01-08 10.88 15,825,000(d) 16,062,375 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 27 ANNUAL REPORT -- 2001 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Chemicals (cont.) Lyondell Chemical Series B 05-01-07 9.88% $18,900,000 $19,656,000 PMD Group Sr Sub Nts 02-28-11 11.00 6,550,000(d) 6,746,500 Sterling Chemicals Company Guaranty Series B 07-15-06 12.38 5,000,000 3,862,500 Total 108,358,243 Commercial finance (0.3%) Advance Holding Zero Coupon Series B 04-15-03 13.34 11,200,000(i) 8,946,000 Communications equipment & services (10.5%) 360networks (U.S. Dollar) Sr Nts 05-01-08 13.00 15,385,000(c) 1,692,350 08-01-09 12.00 9,900,000(c) 990,000 Birch Telecom Sr Nts 06-15-08 14.00 14,000,000 7,700,000 Cable Satisfaction Intl (U.S. Dollar) 03-01-10 12.75 7,565,000(c) 4,614,650 Celcaribe Sr Nts 03-15-04 14.50 6,184,000 4,452,480 Crown Castle Intl Sr Nts 08-01-11 9.38 15,000,000(d) 14,775,000 Dobson/Sygnet Communications Sr Nts 12-15-08 12.25 16,000,000 16,560,000 EchoStar DBS Sr Nts 02-01-09 9.38 21,815,000 21,978,612 Equinix Sr Nts 12-01-07 13.00 11,260,000 7,009,350 Fairpoint Communications Sr Sub Nts 05-01-10 12.50 6,400,000 5,792,000 Sr Sub Nts Series B 05-01-08 9.50 7,925,000 6,340,000 Global Telesystems (U.S. Dollar) Sr Nts 12-15-07 11.50 19,560,000(b,c) 415,650 06-15-08 10.88 15,340,000(b,c) 325,975 GT Group Telecom 06-30-08 9.89 20,000,000(l) 15,850,000 (U.S. Dollar) Zero Coupon Sr Disc Nts 02-01-05 17.71 23,540,000(c,i) 8,239,000 Horizon PCS Zero Coupon Company Guaranty 10-01-05 14.40 26,625,000(i) 11,049,375 Insight Midwest/Insight Capital Sr Nts 11-01-10 10.50 17,805,000(d) 19,140,375 IPCS Zero Coupon Sr Disc Nts 07-15-05 13.49 14,810,000(i) 6,146,150 NATG Holdings LLC/Orius Capital Company Guaranty Series B 02-01-10 12.75 19,000,000 5,890,000 Nextel Communications Sr Nts 02-01-11 9.50 18,425,000(d) 14,878,188 Nextel Partners Sr Nts 03-15-10 11.00 4,400,000 3,784,000 NTL Sr Nts Series B 02-01-06 11.50 22,400,000 18,480,000 Price Communications Wireless Company Guaranty Series B 12-15-06 9.13 36,850,000 38,323,999 Rural Cellular Sr Sub Nts Series B 05-15-08 9.63 11,375,000 11,033,750 Spectrasite Holdings Zero Coupon Sr Disc Nts 04-15-04 11.67 21,450,000(i) 11,046,750 Telehub Communications Zero Coupon Company Guaranty 07-31-01 13.88 12,000,000(b,h,i) -- UbiquiTel Zero Coupon Company Guaranty 04-15-05 12.73 21,940,000(i) 9,543,900 Voicestream Wireless/Voicestream Wireless Holdings Sr Nts 11-15-09 10.38 15,799,974 18,051,470 Total 284,103,024 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 28 AXP EXTRA INCOME FUND Bonds (continued) Issuer Coupon Principal Value(a) rate amount Computers & office equipment (0.8%) Exodus Communications Sr Nts 07-01-08 11.25% $4,000,000 $2,640,000 07-15-10 11.63 7,600,000 5,054,000 Globix Sr Nts 02-01-10 12.50 38,375,000 14,198,750 Total 21,892,750 Energy (2.7%) AES Drax Energy (U.S. Dollar) 08-30-10 11.50 3,200,000(c,g) 3,480,000 Calpine Canada Energy Finance (U.S. Dollar) Company Guaranty 05-01-08 8.50 20,000,000(c) 19,823,600 Energy Corp of America Sr Sub Nts Series A 05-15-07 9.50 14,900,000 12,292,500 Grant Prideco Sr Nts 12-01-07 9.63 19,500,000(d) 20,670,000 Hurricane Hydrocarbons (U.S. Dollar) Sr Nts 12-31-01 16.00 2,117,160(b,c,d) 2,027,181 Ocean Energy Company Guaranty Series B 07-01-08 8.38 14,000,000 14,775,880 Total 73,069,161 Energy equipment & services (0.2%) SESI LLC Company Guaranty 05-15-11 8.88 4,450,000(d) 4,561,250 Financial services (1.9%) AOA Holdings LLC Sr Nts 06-01-06 10.38 15,500,000 14,880,000 CSC Holdings Sr Nts 04-01-11 7.63 10,000,000(d) 9,710,200 Indah Kiat Finance Mauritius (U.S. Dollar) Company Guaranty 07-01-07 10.00 11,520,000(b,c) 2,534,400 LaBranche Sr Nts 08-15-04 9.50 3,030,000 3,176,470 Sr Sub Nts 03-02-07 12.00 15,900,000 18,126,000 SBA Communications Sr Nts 02-01-09 10.25 3,000,000(d) 2,940,000 Total 51,367,070 Food (1.1%) Aurora Foods Sr Sub Nts Series D 02-15-07 9.88 16,800,000 15,036,000 Del Monte Sr Sub Nts 05-15-11 9.25 8,400,000(d) 8,599,500 RAB Enterprises Company Guaranty 05-01-05 10.50 9,600,000 6,540,000 Total 30,175,500 Furniture & appliances (0.4%) Sealy Mattress Sr Sub Nts 12-15-07 9.88 10,775,000(d) 10,801,938 Health care services (4.0%) DaVita Company Guaranty 04-15-11 9.25 5,600,000(d) 5,824,000 HCA-The Healthcare 05-20-08 7.25 1,600,000 1,556,000 09-01-10 8.75 20,875,000 22,075,313 02-01-11 7.88 13,000,000 13,065,000 Magellan Health Services Sr Nts 11-15-07 9.38 5,600,000(d) 5,684,000 Sr Sub Nts 02-15-08 9.00 8,125,000 7,678,125 Manor Care Sr Nts 03-01-08 8.00 8,025,000(d) 8,197,698 Omnicare Sr Sub Nts 03-15-11 8.13 10,500,000(d) 10,710,000 Paracelsus Healthcare Sr Sub Nts 08-15-06 10.00 26,275,000(b) 8,670,750 Physician Sales & Service Company Guaranty 10-01-07 8.50 9,350,000 8,321,500 Triad Hospitals Sr Nts 05-01-09 8.75 17,555,000(d) 17,993,875 Total 109,776,261 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 29 ANNUAL REPORT -- 2001 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Household products (0.4%) Revlon Consumer Products Sr Nts 02-01-06 8.13% $15,000,000 $11,700,000 Industrial equipment & services(0.7%) Motors & Gears Sr Nts Series D 11-15-06 10.75 19,460,000 19,070,800 Insurance (0.6%) Americo Life Sr Sub Nts 06-01-05 9.25 16,875,000 16,664,063 Leisure time & entertainment (7.8%) Alliance Atlantis Communications (U.S. Dollar) Sr Sub Nts 12-15-09 13.00 10,750,000(c) 11,569,688 Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 12,175,000(d) 12,540,250 Cinemark USA Sr Sub Nts Series B 08-01-08 9.63 4,285,000 3,663,675 Coast Hotels & Casino Company Guaranty 04-01-09 9.50 23,460,000 24,163,800 Hammons (JQ) Hotels 1st Mtge 02-15-04 8.88 17,800,000 17,577,500 Harrahs Entertainment 12-15-05 7.88 8,000,000 8,090,000 Horseshoe Gaming Holdings Company Guaranty Series B 05-15-09 8.63 8,175,000 8,297,625 Horseshoe Gaming LLC Company Guaranty Series B 06-15-07 9.38 6,825,000 7,234,500 Icon Health & Fitness Company Guaranty 09-27-05 12.00 5,550,000(d) 3,330,000 Isle of Capri Casinos/Capital 1st Mtge Series B 08-31-04 13.00 20,850,000 22,622,250 Lodgenet Entertainment Sr Nts 12-15-06 10.25 5,000,000 5,025,000 Premier Cruises Sr Nts 03-15-08 11.00 11,000,000(b,d,h) -- Six Flags Sr Nts 04-01-06 9.25 10,000,000 10,287,500 06-15-07 9.75 13,650,000 14,127,750 02-01-09 9.50 5,740,000(d) 5,955,250 Station Casinos Sr Sub Nts 07-01-10 9.88 11,070,000 11,554,313 Steinway Musical Instruments Sr Nts 04-15-11 8.75 8,600,000(d) 8,772,000 Trump Atlantic City Assn/Funding 1st Mtge Company Guaranty 05-01-06 11.25 42,180,000 27,891,524 United Artists Theatres Series 1995A 07-01-15 9.30 12,555,535 10,672,205 Total 213,374,830 Media (11.4%) Adelphia Communications Sr Nts 10-01-10 10.88 14,550,000 15,350,250 Australis Holdings (U.S. Dollar) Sr Disc Nts 11-01-02 15.00 17,753,000(b,c) 30,890 Australis Media (U.S. Dollar) 05-15-03 15.75 43,500,000(b,c) 435,000 (U.S. Dollar) Sr Disc Nts 05-15-03 15.75 469,560(b,c) 42 Benedek Communications Sr Disc Nts 05-15-06 13.25 8,500,000 5,015,000 CanWest Media (U.S. Dollar) Sr Sub Nts 05-15-11 10.63 15,605,000(c,d) 15,936,606 Charter Communications Holdings LLC Sr Nts 11-15-09 9.63 12,850,000(d) 13,042,750 Charter Communications Holdings/ Charter Capital Sr Nts 04-01-09 10.00 20,900,000 21,527,000 10-01-09 10.75 8,400,000 8,925,000 01-15-10 10.25 7,850,000 8,085,500 Charter Communications LLC/Capital Zero Coupon Sr Disc Nts 04-01-04 14.16 14,650,000(i) 10,255,000 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 30 AXP EXTRA INCOME FUND Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (cont.) Coaxial Communications/Phoenix Company Guaranty 08-15-06 10.00% $16,585,000 $16,709,388 Cumulus Media Company Guaranty 07-01-08 10.38 12,885,000 12,885,000 Golden Sky Systems Company Guaranty Series B 08-01-06 12.38 11,165,000 10,941,700 MDC (U.S. Dollar) Sr Sub Nts 12-01-06 10.50 16,350,000(c) 15,042,000 MediaCom LLC/Capital Sr Nts 01-15-13 9.50 11,200,000(d) 10,794,000 Nexstar Finance LLC Sr Sub Nts 04-01-08 12.00 6,850,000(d) 7,072,625 Paxson Communications Sr Sub Nts 10-01-02 11.63 15,100,000 15,288,750 Pegasus Communications Sr Nts Series B 10-15-05 9.63 9,500,000 8,930,000 Pegasus Media & Communications Series B 07-01-05 12.50 21,550,000 21,819,374 Radio Unica Zero Coupon Company Guaranty 08-01-02 11.74 5,645,000(i) 3,302,325 Regional Independent Medical (U.S. Dollar) Sr Nts 07-01-08 10.50 15,200,000(c) 15,352,000 Sinclair Broadcasting Group Company Guaranty 07-15-07 9.00 11,500,000 11,040,000 Telemundo Holdings Zero Coupon Sr Disc Nts Series B 08-15-03 11.50 12,000,000(i) 9,240,000 TeleWest Communications (U.S. Dollar) Sr Nts 11-01-08 11.25 8,000,000(c) 7,880,000 (U.S. Dollar) Zero Coupon Sr Disc Nts 04-15-04 8.96 13,725,000(c,i) 7,622,865 Telewest Finance (U.S. Dollar) Cv Company Guaranty 07-07-05 6.00 8,400,000(c,d) 6,599,149 Veninfotel (U.S. Dollar) Cv Pay-in-kind 03-01-02 10.00 10,939,556(b,c,k,l)10,939,556 WRC Media/Weekly Read/Compass Sr Sub Nts 11-15-09 12.75 11,610,000 11,029,500 XM Satellite Radio 03-15-10 14.00 10,750,000 7,202,500 Total 308,293,770 Metals (2.4%) AK Steel Sr Nts 12-15-06 9.13 10,000,000 10,250,000 Great Lakes Carbon Company Guaranty Pay-in-kind Series B 05-15-08 10.25 22,075,000(k) 13,024,250 Kaiser Aluminum & Chemical Sr Nts Series B 10-15-06 10.88 9,590,000 9,254,350 Sr Sub Nts 02-01-03 12.75 4,000,000 3,600,000 Maxxam Group Holdings Sr Nts Series B 08-01-03 12.00 19,850,000 16,872,500 Oregon Steel Mills 1st Mtge 06-15-03 11.00 12,940,000(f) 12,163,600 WCI Steel Sr Nts Series B 12-01-04 10.00 1,600,000 1,056,000 Total 66,220,700 Miscellaneous (6.9%) Actuant Company Guaranty 05-01-09 13.00 3,175,000 3,190,875 Adams Outdoor Advertising LP Sr Nts 03-15-06 10.75 16,775,000 17,383,094 Advanced Glassfiber Yarn Sr Sub Nts 01-15-09 9.88 10,465,000 8,999,900 Alliance Imaging Sr Sub Nts 04-15-11 10.38 6,150,000(d) 6,349,875 Argo-Tech Company Guaranty Series D 10-01-07 8.63 8,308,000 7,311,040 Bistro Trust 12-31-02 9.50 10,000,000(d) 8,134,100 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 31 ANNUAL REPORT -- 2001 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Miscellaneous (cont.) Centaur Mining & Exploration (U.S. Dollar) Company Guaranty 12-01-07 11.00% $6,825,000(b,c) $716,625 Consolidated Container LLC/Consolidated Container Capital 07-15-09 10.13 15,900,000 15,860,250 ECM Funding LP 06-10-02 11.92 1,078,342(l) 948,941 Falcon Products Company Guaranty Series B 06-15-09 11.38 10,250,000 9,711,875 ISG Resources 04-15-08 10.00 15,220,000 7,610,000 Meritage Sr Nts 06-01-11 9.75 7,640,000(d) 7,773,700 Nationwide Credit Sr Nts Series A 01-15-08 10.25 6,040,000 1,751,600 NSM Steel Company Guaranty 02-01-06 12.00 10,375,000(b,d) 415,000 02-01-08 12.25 11,700,000(b,d) 234,000 Omega Cabinets Sr Sub Nts 06-15-07 10.50 8,509,000 8,764,270 Outsourcing Solutions Sr Sub Nts Series B 11-01-06 11.00 37,395,000 29,916,000 Park-Ohio Inds Sr Sub Nts 12-01-07 9.25 19,025,000 15,029,750 Poland Telecom Finance (U.S. Dollar) Company Guaranty Series B 12-01-07 14.00 13,200,000(b,c) 132,000 Resolution Performance Sr Sub Nts 11-30-08 10.37 9,260,714(d) 9,353,321 11-15-10 13.50 8,425,000(d) 9,183,250 SC Intl 09-01-07 9.25 16,860,000 17,871,600 Stellex Technologies Sr Sub Nts Series B 11-01-07 9.50 11,450,000(b) 572,500 Total 187,213,566 Multi-industry conglomerates (1.2%) Communications & Power Inds Sr Sub Nts Series B 08-01-05 12.00 7,095,000 3,831,300 Jordan Inds Sr Nts Series D 08-01-07 10.38 18,460,000 16,060,200 Zero Coupon Sr Sub Debs Series B 04-01-02 11.75 17,692,251(i) 9,730,738 Metromedia Intl Group Zero Coupon Sr Disc Nts Series B 03-30-02 7.61 4,516,000(i) 2,574,120 Prime Succession Sr Sub Nts 08-15-04 10.75 13,475,000(b) 1,617,000 Total 33,813,358 Paper & packaging (3.8%) Berry Plastics Company Guaranty Series B 07-15-07 11.00 6,400,000 5,952,000 Company Guaranty Series C 04-15-04 12.25 5,650,000 5,621,750 Sr Sub Nts 04-15-04 12.25 4,360,000 4,338,200 BPC Holding Sr Nts Series B 06-15-06 12.50 14,242,946 9,685,203 Crown Paper Sr Sub Nts 09-01-05 11.00 29,470,000(b) 589,400 Doman Inds (U.S. Dollar) Company Guaranty 07-01-04 12.00 4,750,000(c) 4,916,250 (U.S. Dollar) Sr Nts Series B 11-15-07 9.25 14,745,000(c) 8,847,000 Fibermark Sr Nts 04-15-11 10.75 3,150,000(d) 3,197,250 Packaging Corp of America Company Guaranty 04-01-09 9.63 9,905,000 10,647,875 Riverwood Intl Company Guaranty 08-01-07 10.63 7,500,000 7,725,000 Company Guaranty Sr Nts 04-01-06 10.25 9,250,000 9,435,000 Silgan Holdings 06-01-09 9.00 17,730,000 18,084,600 Stone Container Sr Nts 08-01-16 12.58 12,600,000 13,293,000 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 32 AXP EXTRA INCOME FUND Bonds (continued) Issuer Coupon Principal Value(a) rate amount Paper & packaging (cont.) Tjiwi Kimia Intl (U.S. Dollar) Company Guaranty 08-01-01 13.25% $7,000,000(b,c) $1,120,000 Total 103,452,528 Real estate investment trust (0.9%) Meristar Hospitality Sr Nts 01-15-08 9.00 10,850,000(d) 11,012,750 01-15-11 9.13 13,625,000(d) 14,033,750 Total 25,046,500 Restaurants & lodging (3.3%) BOCA Resorts Company Guaranty 04-15-09 9.88 11,800,000 11,918,000 Domino's Company Guaranty Series B 01-15-09 10.38 10,225,000 10,429,500 MGM Mirage Company Guaranty 09-15-10 8.50 12,500,000 13,007,375 Park Place Entertainment Sr Sub Nts 09-15-08 8.88 9,100,000 9,509,500 05-15-11 8.13 26,250,000(d) 26,053,125 Prime Hospitality Sr Sub Nts Series B 04-01-07 9.75 18,700,000 18,980,500 Total 89,898,000 Retail (1.7%) Dairy Mart Convenience Stores Company Guaranty Series B 03-15-04 10.25 6,250,000 3,875,000 Sr Sub Nts 03-15-04 10.25 17,675,000 10,958,500 Eye Care Centers of America Company Guaranty 05-01-08 9.13 7,525,000 3,085,250 Flooring America Company Guaranty 10-15-07 9.25 9,245,000(b) 69,338 Levi Strauss Sr Nts 01-15-08 11.63 13,785,000 13,785,000 Rite Aid 09-15-02 10.50 15,000,000(d) 15,487,500 Total 47,260,588 Textiles & apparel (0.2%) Galey & Lord Company Guaranty 03-01-08 9.13 12,865,000 6,689,800 Transportation (0.6%) American Architectural Company Guaranty 12-01-07 11.75 12,900,000(b) 3,096,000 Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-04 9.25 3,500,000(b,c) 1,470,000 06-15-07 9.50 5,000,000(b,c) 2,100,000 Interpool 08-01-07 7.35 10,000,000 8,800,000 Total 15,466,000 Utilities -- electric (0.9%) AES Sr Nts 12-15-02 8.75 20,000,000 20,350,000 Pacific Gas & Electric 1st Mtge Series 1992B 05-01-25 8.38 1,600,000 1,328,000 1st Mtge Series 1993C 08-01-03 6.25 800,000 688,000 Southern California Edison 1st Refunding Mtge 09-01-04 5.88 2,400,000 2,040,000 Total 24,406,000 Utilities -- gas (0.2%) El Paso Energy Partners Company Guaranty 06-01-11 8.50 4,125,000(d) 4,176,563 Utilities -- telephone (5.8%) Adelphia Business Solutions Sr Nts Series B 09-01-04 12.25 21,000,000 17,535,000 Allegiance Telecom Sr Nts 05-15-08 12.88 1,600,000 1,488,000 Zero Coupon Sr Disc Nts Series B 02-15-03 12.01 23,410,000(i) 14,514,200 COLT Telecom Group (U.S. Dollar) Zero Coupon Sr Disc Nts 12-15-01 9.52 6,900,000(c,i) 6,900,000 Dobson Communications Sr Nts 07-01-10 10.88 6,600,000 6,748,500 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 33 ANNUAL REPORT -- 2001 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- telephone (cont.) Geotek Communications Escrow Cv Sr Sub Nts 02-15-02 0% $4,135,000(b,h,l) $-- Global Crossing Holdings (U.S. Dollar) Sr Sub Deb 08-01-07 8.70 10,400,000(c,d) 9,412,000 Intermedia Communications Sr Disc Nts 05-15-06 12.50 4,000,000 3,960,000 Zero Coupon Sr Disc Nts Series B 07-15-02 11.08 26,065,000(i) 23,197,850 ITC Deltacom Sr Nts 03-01-08 8.88 10,465,000 6,697,600 11-15-08 9.75 4,500,000 2,970,000 McLeod USA Sr Nts 03-15-08 8.38 980,000 646,800 11-01-08 9.50 5,000,000 3,400,000 02-15-09 8.13 16,855,000 10,787,200 Metromedia Fiber Network Sr Nts 12-15-09 10.00 11,770,000 6,591,200 PSINet Sr Nts 12-01-06 10.50 27,265,000(b) 2,590,175 08-01-09 11.00 5,000,000(b) 450,000 RSL Communications (U.S. Dollar) Company Guaranty 11-15-06 12.25 29,867,000(b,c) 522,673 United Pan-Europe Communications (U.S. Dollar) Sr Nts Series B 08-01-09 10.88 18,200,000(c) 10,010,000 11-01-09 11.25 8,500,000(c) 4,696,250 02-01-10 11.25 8,190,000(c) 4,545,450 02-01-10 11.50 5,550,000(c) 3,080,250 Williams Communications Group Sr Nts 08-01-10 11.88 23,700,000 13,094,250 XO Communications Sr Nts 10-01-07 9.63 800,000 336,000 06-01-09 10.75 7,740,000 3,483,000 Total 157,656,398 Total bonds (Cost: $2,657,209,068) $2,210,611,223 Common stocks (0.6%)(b) Issuer Shares Value(a) Arena Brands 111,111(l) $2,777,776 Aurora Foods 441,087(l) 2,337,761 Communications & Power Inds 3,500(l) 17,500 Gaylord Container Cl A 1,000,000 1,020,000 Gemini Inds 245,278(l) 450,000 Genesys ADR 152,830(c) 2,069,315 Globix 47,212 142,108 Intermedia Communications 6,937 118,415 PhoneTel Technologies 1,786,000(j) 218,785 Premier Holdings 814,645(l) 8,146 Wilshire Financial Services Group 2,412,000(j) 5,427,000 WorldCom 150,000 2,676,000 WRC Media 13,543(l) 135 Total common stocks (Cost: $87,934,388) $17,262,941 Preferred stocks & other (12.0%) Issuer Shares Value(a) Adelphia Communications 13.00% Cm Series B 66,000 $6,633,000 American Restaurant Group 12.00% Pay-in-kind Series B 355(k) 35,500 Australis Holdings Warrants 13,400(c) 134 Benedek Communications Warrants 70,000 140,000 Bestel Warrants 4,000 480,000 Birch Telecom Warrants 14,000 140,000 Cable Satisfaction Intl Warrants 7,565(c) 76 Century Maintenance 13.25% Pay-in-kind Series C 187,899(k) 14,937,971 Citadel Broadcasting 13.25% Cm Pay-in-kind Series B 40,121(k) 4,894,762 Communications & Power Inds 14.00% Pay-in-kind Series B 251,884 (k) 10,610,610 CSC Holdings 11.13% Cm Pay-in-kind Series M 399,940 (k) 43,843,423 11.75% Cm Series H 181,976 20,062,854 Dairy Mart Warrants 311,333 (l) 3,113 Dobson Communications 13.00% Pay-in-kind 11,538(k) 10,946,678 Earthwatch 12.00% Cv Series C 357,031 806,890 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 34 AXP EXTRA INCOME FUND Preferred stocks & other (continued) Issuer Shares Value(a) GT Group Telecom Warrants 23,540 $740,757 HF Holdings Warrants 53,125 53,125 Horizon PCS Warrants 26,625 519,188 Hosiery Corp of America Warrants 10,000 1,000 Intermedia Communications 13.50% Pay-in-kind Series B 23,404 (k) 23,872,080 IPCS Warrants 14,810 296,200 Nextel Communications 11.13% Pay-in-kind Series E 16,602 (k) 9,961,200 13.00% Cm Pay-in-kind Series D 26,474 (k) 18,002,320 NSM Steel Warrants 7,407,184(d) 7 NTL 13.00% Pay-in-kind Series B 33,383 (k) 22,992,541 Paxson Communications 12.50% Cm Pay-in-kind Exchangeable 30,835 (k) 30,218,300 Pegasus Satellite 12.75% Cm Pay-in-kind Series AI 15,920 (k) 15,124,000 PLD Telekom Warrants 8,000 240 Poland Telecom Warrants 13,200(c,d,h) -- RSL Communications Warrants 9,500 570 Rural Cellular 12.25% Pay-in-kind 23,261 (k) 19,655,545 SGW Holding 12.50% Cm Pay-in-kind Series B 173,887 (k,l) 1,738,869 Cv Series A 87,091(l) 435,455 Warrants 2,750 (l) 2,750 Sinclair Capital 11.63% Cm 140,000 13,037,500 Telehub Communications Warrants 12,000 (h) -- UbiquiTel Warrants 21,940 219,400 Varde Fund V LP 25,000,000(l,m) 25,951,999 Wayland Investment Fund LLC 26,000,000(l,m) 26,644,020 XM Satellite Radio Warrants 10,750 94,063 XO Communications 13.50% Pay-in-kind Series E 16,520 (k) 1,982,400 Total preferred stocks & other (Cost: $402,772,110) $325,078,540 Short-term securities (1.8%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (0.5%) Federal Home Loan Bank Disc Nt 06-22-01 4.24% $4,300,000 $4,288,885 Federal Home Loan Mtge Corp Disc Nt 07-17-01 3.93 1,800,000 1,790,811 Federal Natl Mtge Assn Disc Nt 06-07-01 4.87 6,500,000 6,493,705 Total 12,573,401 Commercial paper (1.3%) Charta 08-21-01 3.96 3,000,000(e) 2,972,667 Electronic Data Systems 06-04-01 4.79 8,400,000(e) 8,395,530 06-11-01 4.17 3,100,000(e) 3,096,059 Falcon Asset 06-14-01 4.79 17,100,000(e) 17,066,689 McDonalds 06-05-01 4.00 600,000 599,667 Windmill Funding 06-06-01 4.94 5,000,000(e) 4,995,916 Total 37,126,528 Total short-term securities (Cost: $49,708,512) $49,699,929 Total investments in securities (Cost: $3,197,624,078)(n) $2,602,652,633 See accompanying notes to investments in securities. - ------------------------------------------------------------------------------- 35 ANNUAL REPORT -- 2001 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of May 31, 2001, the value of foreign securities represented 7.61% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (f) Security is partially or fully on loan. See Note 4 to the financial statements. (g) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2001. (h) Negligible market value. (i) For those zero coupon bonds that become coupon paying at a future date, the interest rate disclosed represents the annualized effective yield from the date of acquisition to interest reset date disclosed. (j) Investments representing 5% or more of the outstanding voting securities of the issuer. Transactions with companies that are or were affiliates during the year ended May 31, 2001 are as follows:
Issuer Beginning Purchase Sales Ending Dividend Value(a) cost cost cost cost income - --------------------------------------------------------------------------------------------------------- PhoneTel Technologies $23,769,375 $-- $-- $23,769,375 $-- $ 218,785 Wilshire Financial Services Group 25,203,750 -- -- 25,203,750 -- 5,427,000 - --------------------------------------------------------------------------------------------------------- Total $48,973,125 $-- $-- $48,973,125 $-- $5,645,785 - ---------------------------------------------------------------------------------------------------------
(k) Pay-in-kind securities are securities in which the issuer makes interest or dividend payments in cash or in additional securities. The securities usually have the same terms as the original holdings. - ------------------------------------------------------------------------------- 36 AXP EXTRA INCOME FUND Notes to investments in securities (continued) (l) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at May 31, 2001, is as follows: Security Acquisition Cost dates - -------------------------------------------------------------------------------- Arena Brands Common 09-03-92 $ 5,888,888 Aurora Foods Common 10-17-00 1,102,717 Communications & Power Inds Common 08-17-95 350,000 Dairy Mart Warrants 11-28-95 239,401 ECM Funding LP 11.92% 2002 04-13-92 thru 12-10-99 1,078,342 Exide 9.85% 2005 01-15-01 4,373,791 GT Group Telecom 9.89% 2008 02-09-01 15,851,750 Gemini Inds Common 12-23-96 thru 10-22-99 13,554,000 Geotek Communications 0% 2002 08-26-00 -- Premier Holdings Common 07-19-99 10,706,600 SGW Holdings 12.50% Pay-in-kind Series B 08-12-97 thru 05-08-01 2,821,729 Cv Series A 08-12-97 899,998 Warrants 08-12-97 867,900 Varde Fund V LP 04-27-00 thru 06-19-00 25,000,000 Veninfotel (U.S. Dollar) 10.00% Cv Pay-in-kind 2002 03-05-97 thru 03-09-00 10,939,556 WRC Media Common 05-30-00 thru 10-05-00 3,485 Wayland Investment Fund LLC 05-17-00 28,911,480 (m) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (n) At May 31, 2001, the cost of securities for federal income tax purposes was $3,203,241,964 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 75,807,897 Unrealized depreciation (676,397,228) ------------------------------------------------------------------------ Net unrealized depreciation $(600,589,331) ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- 37 ANNUAL REPORT -- 2001 Federal Income Tax Information (Unaudited) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Extra Income Fund, Inc. Fiscal year ended May 31, 2001 Class A Income distributions taxable as dividend income, 11.89% qualifying for deduction by corporations. Payable date Per share June 21, 2000 $0.03259 July 24, 2000 0.03570 Aug. 24, 2000 0.03364 Sept. 21, 2000 0.03340 Oct. 24, 2000 0.03067 Nov. 21, 2000 0.02955 Dec. 20, 2000 0.03238 Jan. 26, 2001 0.03070 Feb. 26, 2001 0.02911 March 26, 2001 0.03055 April 26, 2001 0.03259 May 24, 2001 0.02803 Total distributions $0.37891 Class B Income distributions taxable as dividend income, 11.89% qualifying for deduction by corporations. Payable date Per share June 21, 2000 $0.03056 July 24, 2000 0.03332 Aug. 24, 2000 0.03143 Sept. 21, 2000 0.03141 Oct. 24, 2000 0.02837 Nov. 21, 2000 0.02768 Dec. 20, 2000 0.03053 Jan. 26, 2001 0.02831 Feb. 26, 2001 0.02704 March 26, 2001 0.02870 April 26, 2001 0.03061 May 24, 2001 0.02623 Total distributions $0.35419 - ------------------------------------------------------------------------------- 38 AXP EXTRA INCOME FUND Class C Income distributions taxable as dividend income, 11.89% qualifying for deduction by corporations. Payable date Per share July 24, 2000 $0.03177 Aug. 24, 2000 0.03157 Sept. 21, 2000 0.03142 Oct. 24, 2000 0.02835 Nov. 21, 2000 0.02765 Dec. 20, 2000 0.03050 Jan. 26, 2001 0.02830 Feb. 26, 2001 0.02906 March 26, 2001 0.02864 April 26, 2001 0.03053 May 24, 2001 0.02618 Total distributions $0.32397 Class Y Income distributions taxable as dividend income, 11.89% qualifying for deduction by corporations. Payable date Per share June 21, 2000 $0.03304 July 24, 2000 0.03622 Aug. 24, 2000 0.03413 Sept. 21, 2000 0.03384 Oct. 24, 2000 0.03117 Nov. 21, 2000 0.02996 Dec. 20, 2000 0.03280 Jan. 26, 2001 0.03123 Feb. 26, 2001 0.02954 March 26, 2001 0.03094 April 26, 2001 0.03302 May 24, 2001 0.02842 Total distributions $0.38431 - ------------------------------------------------------------------------------- 39 ANNUAL REPORT -- 2001 AXP Extra Income Fund 70100 AXP Financial Center Minneapolis, MN 55474 americanexpress.com PRSRT STD AUTO U.S. POSTAGE PAID AMERICAN EXPRESS Ticker Symbol Class A: INEAX Class B: IEIBX Class C: N/A Class Y: N/A This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. S-6370 U (7/01) -----END PRIVACY-ENHANCED MESSAGE-----