-----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, FleBTFH/EiPV/kWiCKi94uWqwkOSN6nwrgvQTo12E3+UwaiEWXC3LpnlFwMv3tCU 5gk/DwMBhnNWr1ExYW7dqA== 0000820027-04-000647.txt : 20040803 0000820027-04-000647.hdr.sgml : 20040803 20040803123423 ACCESSION NUMBER: 0000820027-04-000647 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20040803 EFFECTIVENESS DATE: 20040803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP HIGH YIELD INCOME SERIES INC CENTRAL INDEX KEY: 0000728374 IRS NUMBER: 411458705 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-03848 FILM NUMBER: 04947414 BUSINESS ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6123722772 MAIL ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: AXP EXTRA INCOME FUND INC/MN DATE OF NAME CHANGE: 20000825 FORMER COMPANY: FORMER CONFORMED NAME: IDS EXTRA INCOME FUND INC DATE OF NAME CHANGE: 19920703 N-CSR 1 highyieldincome-nscr.txt AXP HIGH YIELD INCOME SERIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-3848 ------------ AXP HIGH YIELD INCOME SERIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 50606 AXP Financial Center, Minneapolis, Minnesota 55474 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 5/31 -------------- Date of reporting period: 5/31 -------------- AXP(R) High Yield Bond Fund Annual Report for the Period Ended May 31, 2004 AXP High Yield Bond Fund seeks to provide shareholders with high current income as its primary goal and, as its secondary goal, capital growth. (logo) (logo) American AMERICAN Express(R) EXPRESS(R) Funds Table of Contents Fund Snapshot 3 Questions & Answers with Portfolio Management 4 The Fund's Long-term Performance 9 Investments in Securities 10 Financial Statements (Portfolio) 22 Notes to Financial Statements (Portfolio) 25 Report of Independent Registered Public Accounting Firm (Portfolio) 30 Financial Statements (Fund) 31 Notes to Financial Statements (Fund) 34 Report of Independent Registered Public Accounting Firm (Fund) 44 Federal Income Tax Information 45 Board Members and Officers 47 Proxy Voting 49 (logo) Dalbar American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Fund Snapshot AS OF MAY 31, 2004 PORTFOLIO MANAGER Portfolio manager Scott Schroepfer, CFA* Since 3/99 Years in industry 17 * This Fund is managed by a team of portfolio managers led by Scott Schroepfer. This team works in conjunction with the high-yield team led by Jennifer Ponce de Leon. FUND OBJECTIVE For investors primarily seeking high current income and, secondarily, capital growth. Inception dates A: 12/8/83 B: 3/20/95 C: 6/26/00 Y: 3/20/95 Ticker symbols A: INEAX B: IEIBX C: APECX Y: -- Total net assets $2.631 billion Number of holdings 279 Average weighted life** 6.2 years Effective duration*** 4.7 years Weighted average bond rating B STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG HIGH MEDIUM QUALITY X LOW SECTOR COMPOSITION Percentage of portfolio assets (pie chart) Consumer discretionary 29.7% Materials 14.9% Industrials 12.5% Telecommunications 10.3% Utilities 9.2% Health care 5.3% Financials 4.6% Energy 4.2% Other 3.4% Consumer staples 3.0% Short-term securities* 2.5% Technology 0.4% * 1.1% of the securities in this category is due to security lending activity. 1.4% of the short-term securities is the Fund's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of portfolio assets excluding cash equivalents BBB bonds 0.4% BB bonds 21.9 B bonds 60.3 CCC bonds 12.3 CC bond 0.3 C bonds 0.2 Non-rated bonds 4.6 Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. For further detail about these holdings, please refer to the section entitled "Investments in Securities." ** Average weighted life is the average number of years that each dollar of unpaid principal due on a security remains outstanding. *** Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. Higher yield corporate "junk" bond prices may fluctuate more broadly than prices of higher quality bonds. Risk of principal and income also is greater than with higher quality securities. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, Portfolio Manager Scott Schroepfer discusses AXP High Yield Bond Fund's results and positioning for fiscal year 2004. Q: How did AXP High Yield Bond Fund perform this past fiscal year? A: AXP High Yield Bond Fund's Class A shares gained 12.51%, excluding sales charge, for the 12 months ended May 31, 2004. The Fund lagged its benchmark, the JP Morgan Global High Yield Index, which rose 13.23%. However, the Fund outperformed the Lipper High Yield Funds Index, representing the Fund's peer group, which rose 12.11% for the same time frame. Q: What factors most significantly affected the Fund's performance? A: The high yield bond market rally that had begun in mid-October 2002 continued strong through the fourth quarter of 2003, driven by three major factors. First, the U.S. economy continued to improve and interest rates remained low. Second, high yield default rates continued to fall. Third, valuations both within the high yield bond market and when compared to other investment asset classes remained attractive. By February and March of 2004, credit spreads had tightened and valuations within the high yield bond market became less compelling. We believed the high yield bond market was ahead of itself, and indeed in late April and May, there was a market sell-off, driven primarily by a supply/demand imbalance and concerns over rising interest rates. The Fund outperformed its peer group primarily due to effective individual security selection and to strategic shifting of credit quality at the margin. For example, during the first half of the fiscal year, we added riskier CCC rated securities to the portfolio in a selective fashion, being careful to manage (bar chart) PERFORMANCE COMPARISON For the year ended May 31, 2004 15% (bar 1) (bar 2) (bar 3) +12.51% +13.23% +12.11% 12% 9% 6% 3% 0% (bar 1) AXP High Yield Bond Fund Class A (excluding sales charge) (bar 2) JP Morgan Global High Yield Index (unmanaged) (bar 3) Lipper High Yield Funds Index (see "The Fund's Long-term Performance" for Index descriptions) Past performance is no guarantee of future results. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. - -------------------------------------------------------------------------------- 4 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Questions & Answers (begin callout quote)> Several specific bond holdings contributed to performance, including some that were previously beaten down but we stuck with them and benefited from their rebounds. (end callout quote) position sizes. These lower credit quality bonds rebounded dramatically during the high yield market rally throughout much of 2003. Then, in early 2004, in an effort to prepare for a more historically normal market pattern, we reduced the Fund's exposure to CCC rated securities and redeployed those assets into BB rated bonds. When the market sold off in May, we
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class Y (Inception dates) (12/8/83) (3/20/95) (6/26/00) (3/20/95) NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5) as of May 31, 2004 1 year +12.51% +7.15% +11.66% +7.66% +11.71% +11.71% +12.67% +12.67% 3 years +5.00% +3.31% +4.21% +3.38% +4.35% +4.35% +5.16% +5.16% 5 years +2.20% +1.21% +1.42% +1.29% N/A N/A +2.34% +2.34% 10 years +5.33% +4.82% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +4.91% +4.91% +2.53% +2.53% +5.85% +5.85% as of June 30, 2004 1 year +10.81% +5.55% +9.98% +5.98% +10.03% +10.03% +10.98% +10.98% 3 years +6.46% +4.75% +5.66% +4.81% +5.56% +5.56% +6.51% +6.51% 5 years +2.50% +1.51% +1.73% +1.59% N/A N/A +2.65% +2.65% 10 years +5.54% +5.02% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +5.06% +5.06% +2.80% +2.80% +6.00% +6.00%
The performance information shown represents the past performance and is not a guarantee of future results. The investment return and principal value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (888) 723-8476 or visiting www.americanexpress.com/funds. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. (1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. - -------------------------------------------------------------------------------- 5 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Questions & Answers used the opportunity to increase the Fund's allocation to B rated securities. While we attempted to use market weakness to capitalize on yield opportunities, we maintained an emphasis on B rated bonds, focusing on managing downside risk through careful monitoring of securities held, enhancing the Fund's diversification, and avoiding certain securities and sectors. The Fund lagged its benchmark primarily due to its relative positioning. In calendar year 2003, lower credit quality and distressed securities had outperformed both B rated and BB rated bonds. While we added CCC rated securities to the portfolio, the Fund still had a lower-than-index position in these riskier securities for most of the period, and this negatively affected results. Between January and May, all quality tiers of the high yield market performed in line with each other. Q: Which bonds were the best and worst performers for the Fund this past year? A: Several specific bond holdings contributed to performance, including some that were previously beaten down but we stuck with them and benefited from their rebounds. These included the bonds of cable company Charter Communications, credit card company Metris, and the bank loans of transportation company American Commercial Lines. Other strong performers for the Fund were telecommunications tower companies Crown Castle, SBA Communications, and American Tower. These are companies that operate towers that relay and transmit cellular phone signals. The bonds of utility company Utilicorp, an independent power producer transitioning from the unregulated to the regulated arena, also did well for the Fund over the annual period. Our disappointments included the bonds of satellite cable communications company Pegasus Communications. The company was overleveraged, and we eliminated the Fund's position in this issue. The bonds of chemical companies Resolution Performance and Rhodia also performed poorly based primarily on their highly leveraged balance sheets, but we continued to hold these securities. We believe that as the economy improves further, these economically sensitive companies' debt issues will rebound. Q: What changes did you make to the portfolio and how is it currently positioned? A: Our long-term view that the fundamentals of the high yield market were continuing to improve stayed relatively constant throughout the fiscal year. We sought to be opportunistic during the year based on changing market conditions. We tried to sell bonds that had performed well and - -------------------------------------------------------------------------------- 6 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Questions & Answers invest in higher-quality securities. When the market was weaker, we tried to add some riskier issues of names we liked. On a sector level, we added holdings to economically sensitive areas over the annual period, moving to modestly higher-than-index positions in industrials, chemicals, and building materials. We also moved from a neutral to higher-than-index position in health care, mostly through hospital securities. While we maintained a higher-than-index position in telecommunications, which had performed quite well in 2003, we did reduce the Fund's exposure to this sector over the second half of the fiscal year. Together, these changes led to a portfolio turnover rate of 140% for the 12-month period. As of May 31, 2004, the Fund had higher-than-index positions in media, including cable TV, radio, TV, publishing, and telephone directories. Many of these companies demonstrated good cash flow and strong asset values. The Fund had a lesser-than-index position in automobile companies, especially auto suppliers, whose earnings we believe are being squeezed by the large manufacturers. The Fund also had lower-than-index positions in technology and utilities. Within the utilities sector, however, the Fund had a greater-than-index position in pipelines, which are a heavily regulated industry, and a lesser-than-index position in independent power producers and integrated utilities. Compared to its benchmark index, the Fund held a greater-than-index position in bonds rated B and a lower-than-index position in bonds rated BB as of May 31, 2004. The Fund held a relatively neutral weighting in CCC rated bonds. Given current market conditions and the widely anticipated hike in interest rates by the Federal Reserve Board, we may continue this positioning in the months ahead. Q: How do you intend to manage the Fund in the coming months? A: We are generally optimistic about the high yield bond market from a fundamental perspective. Companies are deleveraging their balance sheets and have access to the capital markets. There is a good deal of liquidity in the system. High yield issuer default rates fell dramatically over the past fiscal year, from 6.12% in June 2003 to 3.43% at the end of May 2004 as measured by Moody's Investors Services. Moody's forecast calls for default rates to keep falling to around the 3% level by 2005. All of this should continue to offer a strong underpinning for the high yield bond market. Furthermore, we expect the U.S. economy to continue to improve during the months ahead. We agree with - -------------------------------------------------------------------------------- 7 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Questions & Answers the consensus that interest rates will trend upward over the remainder of the year. Rising rates are typically negative for the fixed income market in general. However, historically high yield bonds have outperformed other fixed income asset classes on a relative basis in a rising rate environment. Finally, yield alternatives among other asset classes remain scarce. We temper our generally constructive view with the possibility of a U.S. economy that either loses too much momentum or grows too fast and with the ongoing uncertainties surrounding geopolitical risk. In the current environment, we also believe the high yield bond market is appropriately valued. As always, we will continue to monitor the pace of U.S. economic growth, the actions of the Federal Reserve Board, and the quality of new issues in the high yield bond market. We intend to use any improvement in valuations to upgrade the portfolio's credit quality emphasis. We continue to believe that good security selection based on quality and in-depth security research is key to performance in the near term. Thus we will continue to seek opportunities to capitalize on attractively valued bonds that have the potential for positive returns. - -------------------------------------------------------------------------------- 8 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT The Fund's Long-term Performance This chart illustrates the total value of an assumed $10,000 investment in AXP High Yield Bond Fund Class A shares (from 6/1/94 to 5/31/04) as compared to the performance of two widely cited performance indices, the JP Morgan Global High Yield Index and the Lipper High Yield Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents the past performance and is not a guarantee of future results. The value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Returns do not reflect taxes payable on distributions and redemptions. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (888) 723-8476 or visiting www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current prospectus. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing.
(line chart) VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP HIGH YIELD BOND FUND AXP High Yield Bond Fund Class A $ 9,525 $10,259 $11,861 $13,156 $14,898 $14,356 $13,957 $13,825 $13,229 $14,226 $16,005 JP Morgan Global High Yield Index(1) $10,000 $11,263 $12,475 $14,175 $15,913 $15,883 $15,429 $15,902 $16,355 $18,321 $20,745 Lipper High Yield Funds Index(2) $10,000 $10,832 $12,048 $13,587 $15,466 $15,342 $14,908 $14,421 $13,894 $15,214 $17,057 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04
(1) JP Morgan Global High Yield Index is an unmanaged index used to mirror the investable universe of the U.S. dollar global high yield corporate debt market of both developed and emerging markets. The securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper High Yield Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. Average Annual Total Returns Class A with Sales Charge as of May 31, 2004 1 year +7.15% 5 years +1.21% 10 years +4.82% Results for other share classes can be found on page 5. - -------------------------------------------------------------------------------- 9 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Investments in Securities High Yield Portfolio May 31, 2004 (Percentages represent value of investments compared to net assets) Bonds (93.4%) Issuer Coupon Principal Value(a) rate amount Aerospace & defense (1.6%) Alliant Techsystems 05-15-11 8.50% $10,605,000 $11,347,350 L-3 Communications 06-15-12 7.63 13,605,000 14,149,200 07-15-13 6.13 13,575,000 12,692,625 TD Funding 07-15-11 8.38 3,310,000 3,310,000 Total 41,499,175 Airlines (0.3%) Northwest Airlines Sr Nts 02-01-09 10.00 13,860,000 9,147,600 Automotive & related (2.0%) Advanced Accessory System Sr Nts 06-15-11 10.75 11,585,000 11,642,925 Arvinmeritor 02-15-09 6.80 12,725,000 12,915,875 Goodyear Tire & Rubber 03-01-11 11.00 6,800,000 7,344,000 Tenneco Automotive Series B 07-15-13 10.25 8,225,000 9,129,750 TRW Automotive Sr Nts 02-15-13 9.38 11,140,000 12,448,950 Total 53,481,500 Broker dealers (1.0%) LaBranche Sr Nts 05-15-09 9.50 10,100,000(d) 10,049,500 05-15-12 11.00 15,000,000(d) 15,300,000 Total 25,349,500 Building materials & construction (1.8%) Associated Materials 04-15-12 9.75 6,960,000 7,621,200 Sr Disc Nts (Zero coupon through 03-01-09, thereafter 11.25%) 03-01-14 11.24 15,830,000(d,f) 10,329,075 Norcraft Companies LP/Finance Sr Sub Nts 11-01-11 9.00 6,415,000(d) 6,767,825 Nortek Sr Sub Nts Series B 06-15-11 9.88 7,825,000 8,646,625 Nortek Holdings Sr Nts (Zero coupon through 11-15-07, thereafter 10.00%) 05-15-11 9.96 18,615,000(d,f) 13,798,369 Total 47,163,094 Cable (7.9%) Cablevision Systems Sr Nts 04-15-12 8.00 12,800,000(d) 12,672,000 CCO Holdings LLC/Capital Sr Nts 11-15-13 8.75 10,725,000(d) 10,376,438 Charter Communications Holdings LLC/Capital Sr Disc Nts 04-01-11 9.92 10,550,000 8,651,000 Sr Disc Nts (Zero coupon through 01-15-07, thereafter 12.13%) 01-15-12 27.93 32,085,000(f) 19,250,999 Sr Nts 05-15-11 10.00 13,890,000 11,389,800 04-30-12 8.00 17,070,000(d) 16,643,250 CSC Holdings Sr Nts 07-15-08 7.25 9,280,000 9,442,400 04-15-12 6.75 7,450,000(d) 7,152,000 Sr Sub Deb 05-15-16 10.50 10,405,000 11,731,638 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Cable (cont.) DirectTV Holdings/Finance Sr Nts 03-15-13 8.38% $12,530,000 $13,908,300 EchoStar DBS Sr Nts 10-01-08 5.75 7,060,000(d) 6,865,850 10-01-11 6.38 9,880,000(d) 9,657,700 Lodgenet Entertainment Sr Sub Deb 06-15-13 9.50 6,275,000 6,839,750 Mediacom LLC/Capital Sr Nts 01-15-13 9.50 21,480,000 20,728,199 NTL Cable (U.S. Dollar) Sr Nts 04-15-14 8.75 13,660,000(c,d) 13,864,900 Pegasus Satellite Sr Nts 01-15-10 11.25 13,295,000(b,d) 6,514,550 Videotron Ltee (U.S. Dollar) 01-15-14 6.88 19,075,000(c) 18,788,875 Total 204,477,649 Cellular telecommunications (6.2%) Alamosa Delaware 07-31-10 11.00 8,645,000 9,466,275 01-31-12 8.50 5,820,000(d) 5,747,250 American Towers 12-01-11 7.25 9,825,000 9,775,875 Crown Castle Intl Sr Nts 08-01-11 9.38 10,705,000 11,588,163 12-01-13 7.50 9,765,000 9,423,225 Nextel Communications Sr Nts 03-15-14 5.95 18,945,000 17,571,488 08-01-15 7.38 24,440,000 24,684,399 Rogers Wireless (U.S. Dollar) 03-01-14 6.38 18,815,000(c,d) 17,592,024 Rural Cellular 03-15-12 8.25 9,990,000(d) 10,264,725 Sr Nts 02-01-10 9.88 6,560,000 6,625,600 Sr Sub Nts 01-15-10 9.75 5,210,000 4,793,200 SBA Communications Sr Nts 02-01-09 10.25 8,605,000 8,518,950 SBA Telecommunications Sr Disc Nts (Zero coupon through 12-15-07, thereafter 9.75%) 12-15-11 9.74 10,600,000(d,f) 7,738,000 Ubiquitel Operating Sr Nts 03-01-11 9.88 8,560,000(d) 8,560,000 US Unwired Series B (Zero coupon through 11-01-04, thereafter 13.38%) 11-01-09 15.40 4,940,000(f) 5,088,200 Western Wireless Sr Nts 07-15-13 9.25 5,680,000 5,850,400 Total 163,287,774 Chemicals (4.3%) Airgas Sr Sub Nts 07-15-14 6.25 5,560,000(d) 5,337,600 Equistar Chemical/Funding 09-01-08 10.13 7,200,000 7,830,000 Sr Nts 05-01-11 10.63 8,930,000 9,800,675 Georgia Gulf Sr Nts 12-15-13 7.13 7,695,000(d) 7,695,000 Huntsman ICI Chemicals LLC 07-01-09 10.13 3,530,000 3,618,250 Huntsman Intl LLC Sr Nts 03-01-09 9.88 8,865,000 9,574,200 Invista (U.S. Dollar) 05-01-12 9.25 5,075,000(c,d) 5,036,938 Noveon Pay-in-kind 08-31-11 13.00 15,039,823(h,i) 15,942,212 Resolution Performance Products Sr Sub Nts 11-15-10 13.50 23,190,000 20,233,275 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Chemicals (cont.) Resolution Performance . Products/Capital 12-15-09 8.00% $8,520,000 $8,754,300 Rhodia (U.S. Dollar) Sr Nts 06-01-10 10.25 13,150,000(c,d) 12,558,250 (U.S. Dollar) Sr Sub Nts 06-01-11 8.88 3,650,000(c,d) 2,847,000 Rockwood Specialties Group Sr Sub Nts 05-15-11 10.63 3,230,000 3,391,500 Sovereign Specialty Chemicals 03-15-10 11.88 1,375,000 1,416,250 Total 114,035,450 Computer software & services (0.4%) UGS Sr Sub Nts 06-01-12 10.00 9,375,000(d) 9,890,625 Energy (2.4%) Chesapeake Energy Sr Nts 09-15-13 7.50 1,900,000 1,961,750 06-15-14 7.50 10,500,000(d) 10,841,250 01-15-16 6.88 1,400,000 1,365,000 01-15-16 6.88 11,245,000(d) 11,020,100 Encore Acquisition 06-15-12 8.38 4,805,000 5,165,375 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 8,885,000 9,062,700 Hilcorp Energy/Finance Sr Nts 09-01-10 10.50 13,090,000(d) 14,268,100 Newfield Exploration Sr Sub Nts 08-15-12 8.38 9,395,000 10,099,625 Total 63,783,900 Energy equipment & services (1.6%) CHC Helicopter (U.S. Dollar) Sr Sub Nts 05-01-14 7.38 5,985,000(c,d) 5,835,375 Grant Prideco Series B 12-01-07 9.63 11,700,000 12,753,000 Grant Prideco Escrow 12-15-09 9.00 2,830,000 3,049,325 Key Energy Services Series C 03-01-08 8.38 4,580,000 4,809,000 Sr Nts 05-01-13 6.38 8,010,000 7,649,550 Offshore Logistics 06-15-13 6.13 9,530,000 8,862,900 Total 42,959,150 Environmental services (0.4%) Waste Services (U.S. Dollar) Sr Sub Nts 04-15-14 9.50 9,930,000(c,d) 10,004,475 Financial services (0.9%) Metris Companies 07-15-06 10.13 6,100,000 5,932,250 05-06-07 10.60 17,500,000(i) 17,062,500 Total 22,994,750 Food (1.4%) Burns Philip Capital Property (U.S. Dollar) 07-15-12 9.75 11,050,000(c) 11,381,500 (U.S. Dollar) Sr Sub Nts 02-15-11 10.75 16,380,000(c) 17,362,800 Del Monte Series B 05-15-11 9.25 6,645,000 7,126,763 Total 35,871,063 Furniture & appliances (0.6%) Sealy Mattress Sr Sub Nts 06-15-14 8.25 10,200,000(d) 9,945,000 Simmons Sr Sub Nts 01-15-14 7.88 6,415,000(d) 6,382,925 Total 16,327,925 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Health care products (0.7%) Valeant Pharmaceuticals Sr Nts 12-15-11 7.00% $4,920,000(d) $4,747,800 VWR Intl Sr Nts 04-15-12 6.88 8,220,000(d) 8,117,250 WH Holdings/WH Capital (U.S. Dollar) Sr Nts 04-01-11 9.50 4,390,000(c,d) 4,499,750 Total 17,364,800 Health care services (4.5%) Ardent Health Services Sr Sub Nts 08-15-13 10.00 12,815,000 13,615,938 Concentra Operating 06-01-12 9.13 7,690,000(d,g) 7,805,350 Fisher Scientific Intl Sr Sub Nts 09-01-13 8.00 5,485,000 5,786,675 Iasis Healthcare 10-15-09 8.50 3,385,000 3,833,513 Inverness Medical Innovations Sr Sub Nts 02-15-12 8.75 11,715,000(d) 11,861,438 NeighborCare Sr Sub Nts 11-15-13 6.88 3,105,000(d) 3,120,525 Province Healthcare Sr Sub Nts 06-01-13 7.50 11,290,000 10,838,400 Tenet Healthcare Sr Nts 12-01-11 6.38 10,470,000 8,925,675 06-01-12 6.50 5,000,000 4,225,000 Triad Hospitals Sr Nts 05-15-12 7.00 21,435,000 21,542,174 Sr Sub Nts 11-15-13 7.00 7,000,000 6,720,000 Vanguard Health Systems 08-01-11 9.75 19,250,000 20,645,625 Total 118,920,313 Home building (2.0%) KB HOME Sr Nts 02-01-14 5.75 6,660,000(d) 6,093,900 Meritage 06-01-11 9.75 9,825,000 10,709,250 Schuler Homes 07-15-11 10.50 8,615,000 9,821,100 Standard Pacific Sr Sub Nts 04-15-12 9.25 2,705,000 2,894,350 WCI Communities 02-15-11 10.63 11,205,000 12,269,475 Sr Sub Nts 10-01-13 7.88 5,495,000 5,453,788 William Lyon Homes Sr Nts 02-15-14 7.50 6,250,000(d) 5,828,125 Total 53,069,988 Household products (1.2%) Amscan Holdings Sr Sub Nts 05-01-14 8.75 12,660,000(d) 12,660,000 Jostens Holding Sr Disc Nts (Zero coupon through 12-01-08, thereafter 10.25%) 12-01-13 10.25 7,860,000(f) 5,266,200 Seminis Vegtable Seeds Sr Sub Nts 10-01-13 10.25 2,485,000(d) 2,696,225 10-01-13 10.25 10,000,000 10,850,000 Total 31,472,425 Industrial services (3.3%) Alliance Laundry System Series B 05-01-08 9.63 2,500,000 2,525,000 Allied Waste North America 11-15-10 6.50 8,580,000(d) 8,322,600 02-15-14 6.13 11,035,000(d) 10,041,850 Series B 09-01-12 9.25 5,630,000 6,235,225 Sr Nts 04-15-14 7.38 12,855,000(d) 12,212,250 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Industrial services (cont.) Da-Lite Screen Sr Nts 05-15-11 9.50% $12,660,000(d) $13,118,925 Interline Brands Sr Sub Nts 05-15-11 11.50 16,025,000 17,066,625 Johnsondiversey Holdings (Zero coupon through 05-15-07, thereafter 10.67%) 05-15-13 9.21 9,030,000(f) 6,682,200 Natl Waterworks Series B 12-01-12 10.50 10,750,000 11,825,000 Total 88,029,675 Industrial transportation (1.3%) Interpool 08-01-07 7.20 3,760,000 3,647,200 08-01-07 7.35 14,890,000 14,443,300 Quality Distribution/QD Capital 11-15-10 9.00 15,810,000(d) 15,098,550 Total 33,189,050 Insurance (0.4%) Leucadia Natl Sr Nts 08-15-13 7.00 10,000,000 9,775,000 Leisure time & entertainment (0.6%) Remington Arms 02-01-11 10.50 5,270,000 5,085,550 Six Flags Sr Nts 06-01-14 9.63 10,095,000(d) 9,994,050 Total 15,079,600 Lodging & gaming (5.2%) Boyd Gaming Sr Sub Nts 04-15-14 6.75 15,000,000(d) 14,100,000 Caesars Entertainment Sr Sub Nts 05-15-11 8.13 15,580,000 16,475,850 Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 4,350,000 4,676,250 Gaylord Entertainment Sr Nts 11-15-13 8.00 6,160,000(d) 6,206,200 Global Cash Access LLC/Finance Sr Sub Nts 03-15-12 8.75 4,580,000(d) 4,740,300 MGM Mirage Sr Nts 02-27-14 5.88 26,480,000 24,361,600 Mohegan Tribal Gaming Sr Sub Nts 07-01-11 8.38 7,125,000 7,605,938 Poster Financial Group 12-01-11 8.75 9,315,000(d) 9,501,300 Premier Entertainment Biloxi LLC/ Finance Biloxi 1st Mtge 02-01-12 10.75 3,110,000(d) 3,273,275 Prime Hospitality Sr Sub Nts Series B 05-01-12 8.38 8,540,000 8,710,800 River Rock Entertainment Sr Nts 11-01-11 9.75 4,730,000(d) 5,013,800 Seneca Gaming Sr Nts 05-01-12 7.25 6,830,000(d) 6,761,700 Starwood Hotels Resorts 05-01-12 7.88 4,580,000 4,809,000 Vail Resorts Sr Sub Nts 02-15-14 6.75 14,405,000(d) 13,324,625 Wynn Las Vegas LLC 2nd Mtge 11-01-10 12.00 5,341,000 6,222,265 Total 135,782,903 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Machinery (3.1%) Case New Holland Sr Nts 06-01-09 6.00% $16,325,000(d) $15,508,750 Columbus McKinnon 08-01-10 10.00 7,090,000 7,550,850 Joy Global Series B 03-15-12 8.75 6,230,000 6,853,000 Motors & Gears Sr Nts Series D 11-15-06 10.75 17,600,000 14,784,000 Mueller Group Sr Sub Nts 05-01-12 10.00 13,020,000(d) 13,345,500 Sensus Metering Systems Sr Sub Nts 12-15-13 8.63 13,325,000(d) 12,592,125 Terex 01-15-14 7.38 4,200,000(d) 4,095,000 Thermadyne Holdings 02-01-14 9.25 8,000,000(d) 7,840,000 Total 82,569,225 Media (7.9%) American Media Operation 01-15-11 8.88 6,885,000 6,730,088 CanWest Media (U.S. Dollar) Series B 04-15-13 7.63 8,975,000(c) 9,266,688 CBD Media/Finance 06-01-11 8.63 6,730,000 7,032,850 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 17,245,000(c) 18,322,812 Dex Media (Zero coupon through 11-15-08, thereafter 9.00%) 11-15-13 10.34 11,000,000(d,f) 7,095,000 11-15-13 10.19 1,400,000(d,f) 903,000 Sr Sub Nts 11-15-13 8.00 19,740,000(d) 18,752,999 Dex Media West/Finance Sr Sub Nts 08-15-13 9.88 10,095,000(d) 11,117,119 Emmis Operating 05-15-12 6.88 15,135,000(d) 14,794,462 Hollinger (U.S. Dollar) 03-01-11 12.88 3,155,000(c,d) 3,584,869 Hollinger Intl Publishing Sr Nts 12-15-10 9.00 5,275,000 5,802,500 Lamar Media 01-01-13 7.25 10,750,000 11,045,625 Lin Television Sr Sub Nts 05-15-13 6.50 12,495,000 12,151,387 Medianews Group Sr Sub Nts 04-01-14 6.38 7,500,000 6,937,500 Nexstar Finance Holdings LLC (Zero coupon through 04-01-08, thereafter 11.38%) 04-01-13 11.67 4,240,000(f) 3,031,600 Paxson Communications (Zero coupon through 01-15-06, thereafter 12.25%) 01-15-09 16.01 10,415,000(f) 8,852,750 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 8,255,000(c) 9,400,381 Radio One Series B 07-01-11 8.88 7,470,000 8,123,625 Sheridan Group 08-15-11 10.25 1,535,000(d) 1,611,750 Sinclair Broadcast Group 03-15-12 8.00 12,590,000 12,873,274 Sun Media (U.S. Dollar) 02-15-13 7.63 8,915,000(c) 9,137,875 Susquehanna Media Sr Sub Nts 04-15-13 7.38 2,660,000 2,713,200 United Artists Theatre 07-01-15 9.30 12,763,477 13,018,747 Von Hoffman 03-15-09 10.25 2,775,000 2,754,188 Total 205,054,289 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 15 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Metals (2.1%) California Steel Inds St Nts 03-15-14 6.13% $10,000,000(d) $9,250,000 Euramax Intl Sr Sub Nts 08-15-11 8.50 9,420,000 9,702,600 Intl Steel Group Sr Nts 04-15-14 6.50 4,690,000(d) 4,373,425 Ispat Inland 04-01-14 9.75 11,830,000(d) 12,096,175 Jorgensen Earle M. 06-01-12 9.75 5,890,000 6,479,000 Peabody Energy Series B 03-15-13 6.88 6,375,000 6,422,813 United States Steel Sr Nts 05-15-10 9.75 6,560,000 7,216,000 Total 55,540,013 Miscellaneous (1.6%) Corrections Corp of America Sr Nts 05-01-11 7.50 7,950,000 8,029,500 NationsRent 10-15-10 9.50 15,180,000(d) 16,090,800 Service Corp Intl Sr Nts 04-01-16 6.75 5,975,000(d) 5,467,125 United Rentals North America 02-15-12 6.50 9,995,000(d) 9,395,300 Sr Sub Nts 02-15-14 7.00 3,570,000(d) 3,213,000 Total 42,195,725 Multi-industry (0.6%) SPX Sr Nts 06-15-11 6.25 11,735,000 11,412,287 01-01-13 7.50 5,115,000 5,204,513 Total 16,616,800 Paper & packaging (6.3%) Abitibi-Consolidated (U.S. Dollar) 06-20-13 6.00 11,925,000(c) 10,617,138 Ainsworth Lumber (U.S. Dollar) Sr Nts 03-15-14 6.75 14,565,000(c,d) 13,482,150 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 5,350,000(c) 5,256,375 Consolidated Container Sr Disc Nts (Zero coupon through 06-15-07, thereafter 10.75%) 06-15-09 9.60 1,820,000(d,f) 1,355,900 Crown Euro Holdings (U.S. Dollar) 03-01-11 9.50 6,670,000(c) 7,236,950 03-01-13 10.88 13,205,000(c) 14,789,599 Crown Paper Sr Sub Nts 09-01-05 11.00 29,470,000(b,i,j) -- Georgia-Pacific 02-01-10 8.88 5,460,000 6,074,250 02-01-13 9.38 10,445,000 11,776,738 06-15-15 7.70 8,140,000 8,384,200 Graphic Packaging Intl Sr Nts 08-15-11 8.50 7,025,000 7,481,625 Jefferson Smurfit 10-01-12 8.25 8,575,000 8,810,813 JSG Funding (U.S. Dollar) Sr Nts 10-01-12 9.63 16,015,000(c) 17,376,274 (U.S. Dollar) Sub Nts Pay-in-kind 10-01-13 15.50 5,472,022(c,d,h) 6,238,105 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 10,350,000(c) 10,168,875 Owens-Brockway Glass 02-15-09 8.88 4,080,000 4,284,000 05-15-11 7.75 1,585,000 1,616,700 11-15-12 8.75 7,310,000 7,693,775 05-15-13 8.25 7,180,000 7,144,100 Pliant (Zero coupon through 12-15-06, thereafter 11.13%) 06-15-09 10.75 8,075,000(d,f) 6,621,500 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 16 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Paper & packaging (cont.) Stone Container Sr Nts 07-01-12 8.38% $10,210,000 $10,516,300 Total 166,925,367 Real estate investment trust (0.3%) Host Marriott LP Sr Nts 11-01-13 7.13 9,255,000 9,000,488 Restaurants (0.4%) Domino's Sr Sub Nts 07-01-11 8.25 11,010,000 11,615,550 Retail -- drugstores (0.3%) Rite Aid 08-15-13 6.88 10,075,000 8,966,750 Retail -- general (2.4%) CSK Auto 01-15-14 7.00 10,135,000(d) 9,704,263 Finlay Fine Jewelry Sr Nts 06-01-12 8.38 3,245,000(d,g) 3,266,521 Flooring America Series B 10-15-07 9.25 9,245,000(b,i) 925 FTD 02-15-14 7.75 5,640,000 5,273,400 General Nutrition Center Sr Sub Nts 12-01-10 8.50 11,020,000(d) 11,350,599 Lazydays RV Center Sr Nts 05-15-12 11.75 6,665,000(d) 6,864,950 Nebraska Book Sr Sub Nts 03-15-12 8.63 4,665,000(d) 4,606,688 PCA LLC/PCA Finance Sr Nts 08-01-09 11.88 12,855,000 13,819,124 United Auto Group 03-15-12 9.63 7,030,000 7,522,100 Total 62,408,570 Telecom equipment & services (3.8%) Centennial Communications Sr Nts 02-01-14 8.13 12,735,000(d) 11,748,038 Cincinnati Bell 07-15-13 7.25 10,020,000 9,418,800 Sr Sub Nts 01-15-14 8.38 15,930,000 14,257,350 Fairpoint Communications Sr Sub Nts 05-01-10 12.50 7,840,000 8,290,800 Sr Sub Nts Series B 05-01-08 9.50 10,855,000 10,637,900 GCI Sr Nts 02-15-14 7.25 13,510,000(d) 12,699,400 Inmarsat Finance (U.S. Dollar) 06-30-12 7.63 6,735,000(c,d) 6,650,813 MCI Sr Nts 05-01-09 6.69 5,000,000 4,687,500 Qwest Capital Funding 02-15-11 7.25 10,000,000 8,275,000 Qwest Services 12-15-10 13.50 11,833,000(d) 13,637,533 Total 100,303,134 Textiles & apparel (0.3%) Levis Strauss Sr Nts 12-15-12 12.25 9,765,000 8,910,563 Utilities -- electric (3.8%) Aquila Sr Nts 11-15-09 7.63 18,600,000 17,344,500 02-01-11 9.95 7,350,000 7,350,000 DPL Sr Nts 09-01-11 6.88 8,145,000 8,145,000 IPALCO Enterprises 11-14-08 8.38 7,960,000 8,676,400 11-14-11 8.63 13,985,000 15,243,650 Midwest Generation LLC 05-01-34 8.75 16,310,000(d) 16,065,350 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 17 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (cont.) NRG Energy 12-15-13 8.00% $23,675,000(d) $23,675,000 Sierra Pacific Power 04-15-12 6.25 3,320,000(d) 3,146,032 Total 99,645,932 Utilities -- natural gas (5.2%) ANR Pipeline 03-15-10 8.88 13,835,000 15,010,974 Dynegy Holdings 07-15-10 9.88 4,480,000(d) 4,704,000 07-15-13 10.13 5,730,000(d) 6,073,800 El Paso 06-15-12 7.88 1,975,000 1,738,000 El Paso Natl Gas Sr Nts Series A 08-01-10 7.63 10,800,000 10,908,000 El Paso Production Holding 06-01-13 7.75 11,320,000 10,697,400 Northwest Pipeline 03-01-10 8.13 4,890,000 5,250,638 Sonat 07-15-11 7.63 7,690,000 6,651,850 Southern Natural Gas 03-15-10 8.88 11,995,000 13,014,575 Southern Star Central 08-01-10 8.50 13,915,000 14,541,175 Transcontinental Gas Pipeline Series B 08-15-11 7.00 9,360,000 9,594,000 Sr Nts Series B 07-15-12 8.88 7,470,000 8,366,400 Williams Companies 03-15-12 8.13 7,225,000 7,622,375 07-15-19 7.63 12,515,000 11,732,813 Sr Nts 06-01-10 8.63 10,700,000 11,663,000 Total 137,569,000 Variable rate senior loan interests (3.3%) American Commercial Lines LLC Term Loan A 06-30-05 5.13 5,471,555 5,061,188 Term Loan B 06-30-06 5.38 8,778,445 8,120,062 Celanese BCP Luxembourg Holding Bridge Term Loan B 04-06-05 9.09 21,357,667(i) 21,357,667 Qwest Term Loan B 06-30-10 6.95 56,280,000 53,254,950 Total 87,793,867 Total bonds (Cost: $2,457,639,053) $2,458,072,657 Common stocks (--%)(b) Issuer Shares Value(a) Arena Brands 111,111(i) $648,888 Link Energy LLC 1,675,884 134,071 Orius 88,405(i,j) -- PFB Telecom Cl B 960,262(i) 1 Stellex Aerostructures 2,460(i,j) -- Total common stocks (Cost: $67,595,635) $782,960 Preferred stocks & other (2.1%) Issuer Shares Value(a) Dobson Communications 13.00% 2,630 $1,788,400 Orius Tranche Series A Warrants 97,954(b,i,j) -- Orius Tranche Series B Warrants 103,111(b,i,j) -- Orius Tranche Series C Warrants 229,133(b,i,j) -- SGW Holding Cm Pay-in-kind Series B 227,301(b,h,i,j) -- Cv Series A 87,091(b,i,j,) -- Warrants 2,750(b,i,j) -- Varde Fund V LP 25,000,000(b,e,i) 46,707,292 Wayland Investment LLC 26,000,000(b,e,i) 5,718,180 Total preferred stocks & other (Cost: $60,356,297) $54,213,872 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Short-term securities (2.5%)(k) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agency (1.4%) Federal Home Loan Mtge Corp Disc Nts 07-20-04 1.03% $6,300,000 $6,290,420 08-24-04 1.14 30,000,000 29,924,400 Total 36,214,820 Commercial paper (1.1%) Household Finance 06-01-04 1.03 13,300,000 13,298,478 Jupiter Securitization 06-15-04 1.04 16,669,000(l) 16,660,332 Total 29,958,810 Total short-term securities (Cost: $66,167,649) $66,173,630 Total investments in securities (Cost: $2,651,758,634)(m) $2,579,243,119 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 19 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of May 31, 2004, the value of foreign securities represented 9.9% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of May 31, 2004, the value of these securities amounted to $833,712,923 or 31.7% of net assets. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (f) 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 maturity. (g) At May 31, 2004, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $10,828,340. (h) 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. (i) 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, 2004, is as follows: Security Acquisition Cost dates Arena Brands Common 09-03-92 $ 5,888,888 Celanese BCP Luxembourg Holding Bridge 9.09% Term Loan B 2005 02-20-04 21,250,879 Crown Paper 11.00% Sr Sub Nts 2005 11-22-96 thru 03-14-00 24,943,013 Flooring America 9.25% Series B 2007 10-09-97 thru 12-17-02 10,309,671 Metris Companies 10.60% 2007 05-04-04 thru 05-19-04 17,316,250 Noveon 13.00% Pay-in-kind 2011 03-10-03 thru 03-09-04 15,129,935 Orius Common 02-04-00 thru 05-07-01 14,247,800 Orius Tranche Series A Warrants 04-22-04 -- Orius Tranche Series B Warrants 04-22-04 -- Orius Tranche Series C Warrants 04-22-04 -- PFB Telecom CIB Common 12-12-97 thru 11-13-00 34,046,050 - -------------------------------------------------------------------------------- 20 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Notes to investments in securities (continued) Security Acquisition Cost dates SGW Holding Cm Pay-in-kind Series B 08-12-97 thru 04-15-03 $ 2,990,754 Cv Series A 08-12-97 899,998 Warrants 08-12-97 867,900 Stellex Aerostructures Common 01-08-03 -- Varde Fund V LP 04-27-00 thru 06-19-00 25,000,000 Wayland Investment Fund LLC 05-17-00 28,911,480 (j) Negligible market value. (k) Cash collateral received from security lending activity is invested in short-term securities and represents 1.1% of this category (see Note 4 to the financial statements). 1.4% of the short-term securities is the Fund's cash equivalent position. (l) 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. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of May 31, 2004, the value of these securities amounted to $16,660,332 or 0.6% of net assets. (m) At May 31, 2004, the cost of securities for federal income tax purposes was $2,641,602,189 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 106,817,043 Unrealized depreciation (169,176,113) ------------ Net unrealized depreciation $ (62,359,070) ------------- - -------------------------------------------------------------------------------- 21 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Financial Statements Statement of assets and liabilities High Yield Portfolio May 31, 2004 Assets Investments in securities, at value (Note 1)* (identified cost $2,651,758,634) $2,579,243,119 Dividends and accrued interest receivable 49,803,666 Receivable for investment securities sold 64,165,028 Other receivable 1,263,974 --------- Total assets 2,694,475,787 ------------- Liabilities Disbursements in excess of cash on demand deposit 451,298 Payable for investment securities purchased 33,731,046 Payable upon return of securities loaned (Note 4) 27,755,670 Accrued investment management services fee 40,956 Other accrued expenses 61,654 ------ Total liabilities 62,040,624 ---------- Net assets $2,632,435,163 ============== * Including securities on loan, at value (Note 4) $ 26,346,593 -------------- See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 22 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Statement of operations High Yield Portfolio Year ended May 31, 2004 Investment income Income: Dividends $ 2,869,331 Interest 223,158,630 Fee income from securities lending (Note 4) 126,528 ------- Total income 226,154,489 ----------- Expenses (Note 2): Investment management services fee 15,136,003 Compensation of board members 16,050 Custodian fees 199,343 Audit fees 39,000 Other 41,511 ------ Total expenses 15,431,907 ---------- Investment income (loss) -- net 210,722,582 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 144,795,596 Foreign currency transactions 542 --- Net realized gain (loss) on investments 144,796,138 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (35,561,090) ----------- Net gain (loss) on investments and foreign currencies 109,235,048 ----------- Net increase (decrease) in net assets resulting from operations $319,957,630 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 23 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Statements of changes in net assets High Yield Portfolio Year ended May 31, 2004 2003 Operations Investment income (loss) -- net $ 210,722,582 $ 193,027,760 Net realized gain (loss) on investments 144,796,138 (377,353,435) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (35,561,090) 350,838,704 ----------- ----------- Net increase (decrease) in net assets resulting from operations 319,957,630 166,513,029 ----------- ----------- Proceeds from contributions 129,597,178 142,825,746 Fair value of withdrawals (261,550,279) (318,702,199) ------------ ------------ Net contributions (withdrawals) from partners (131,953,101) (175,876,453) ------------ ------------ Total increase (decrease) in net assets 188,004,529 (9,363,424) Net assets at beginning of year 2,444,430,634 2,453,794,058 ------------- ------------- Net assets at end of year $2,632,435,163 $2,444,430,634 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT 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 high-yielding, high risk corporate bonds, 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. - -------------------------------------------------------------------------------- 25 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. - -------------------------------------------------------------------------------- 26 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Illiquid securities As of May 31, 2004, 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, 2004 was $107,437,665 representing 4.08% 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. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Portfolio. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when-issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. As of May 31, 2004, the Portfolio has entered into outstanding when-issued securities of $10,828,340. 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. Non-cash dividends or interest included in investment income, if any, are recorded at the fair market value of the security received. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. The Fund may place a debt security on non-accrual status and reduce related interest income when it becomes probable that the interest will not be collected and the amount of uncollectible interest can be reasonably estimated. A defaulted debt security is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured. - -------------------------------------------------------------------------------- 27 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.59% 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. Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other American Express mutual funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $3,656,534,856 and $3,576,843,966, respectively, for the year ended May 31, 2004. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES As of May 31, 2004, securities valued at $26,346,593 were on loan to brokers. For collateral, the Portfolio received $27,755,670 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investments in securities." Income from securities lending amounted to $126,528 for the year ended May 31, 2004. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - -------------------------------------------------------------------------------- 28 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT 5. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results.
Ratios/supplemental data Fiscal period ended May 31, 2004 2003 2002 2001 2000 Ratio of expenses to average daily net assets(a) .58% .59% .58% .59% .57% Ratio of net investment income (loss) to average daily net assets 7.90% 8.80% 9.13% 11.92% 10.69% Portfolio turnover rate (excluding short-term securities) 140% 139% 125% 76% 44% Total return(b) 13.06% 8.06% (3.69%) (.58%) (2.08%)
(a) Expense ratio is based on total expenses of the Portfolio before reduction of earnings credits on cash balances. The ratio does not include feeder fund expenses. (b) Total return is based on a calculated Portfolio NAV and does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 29 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of High Yield Portfolio (a series of Income Trust) as of May 31, 2004, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2004, and the financial highlights for each of the years in the five-year period ended May 31, 2004. These financial statements and the financial highlights are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2004, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of High Yield Portfolio as of May 31, 2004, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 20, 2004 - -------------------------------------------------------------------------------- 30 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP High Yield Bond Fund May 31, 2004 Assets Investment in Portfolio (Note 1) $ 2,632,318,870 Capital shares receivable 853,976 ------- Total assets 2,633,172,846 ------------- Liabilities Dividends payable to shareholders 989,819 Capital shares payable 574,306 Accrued distribution fee 34,811 Accrued service fee 2 Accrued transfer agency fee 10,062 Accrued administrative services fee 3,287 Other accrued expenses 192,146 ------- Total liabilities 1,804,433 --------- Net assets applicable to outstanding capital stock $ 2,631,368,413 =============== Represented by Capital stock -- $.01 par value (Note 1) $ 9,596,133 Additional paid-in capital 4,156,683,549 Undistributed net investment income 17,290,301 Accumulated net realized gain (loss) (Note 4) (1,481,081,996) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (71,119,574) ----------- Total -- representing net assets applicable to outstanding capital stock $ 2,631,368,413 =============== Net assets applicable to outstanding shares: Class A $ 1,809,955,268 Class B $ 781,494,376 Class C $ 39,347,407 Class I $ 9,662 Class Y $ 561,700 Net asset value per share of outstanding capital stock: Class A shares 659,866,082 $ 2.74 Class B shares 285,100,518 $ 2.74 Class C shares 14,438,305 $ 2.73 Class I shares 3,521 $ 2.74 Class Y shares 204,882 $ 2.74 ------- ---------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 31 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Statement of operations AXP High Yield Bond Fund Year ended May 31, 2004 Investment income Income: Dividends $ 2,869,211 Interest 223,164,809 Fee income from securities lending 126,522 ------- Total income 226,160,542 ----------- Expenses (Note 2): Expenses allocated from Portfolio 15,431,258 Distribution fee Class A 4,576,449 Class B 7,870,264 Class C 376,745 Transfer agency fee 3,290,863 Incremental transfer agency fee Class A 237,422 Class B 167,887 Class C 7,074 Service fee -- Class Y 771 Administrative services fees and expenses 1,227,227 Compensation of board members 12,041 Printing and postage 516,940 Registration fees 195,527 Audit fees 13,000 Other 26,738 ------ Total expenses 33,950,206 Earnings credits on cash balances (Note 2) (24,691) ------- Total net expenses 33,925,515 ---------- Investment income (loss) -- net 192,235,027 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 144,789,112 Foreign currency transactions 542 --- Net realized gain (loss) on investments 144,789,654 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (35,559,091) ----------- Net gain (loss) on investments and foreign currencies 109,230,563 ----------- Net increase (decrease) in net assets resulting from operations $301,465,590 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 32 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Statements of changes in net assets AXP High Yield Bond Fund Year ended May 31, 2004 2003 Operations and distributions Investment income (loss) -- net $ 192,235,027 $ 177,316,157 Net realized gain (loss) on investments 144,789,654 (377,342,855) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (35,559,091) 350,828,372 ----------- ----------- Net increase (decrease) in net assets resulting from operations 301,465,590 150,801,674 ----------- ----------- Distributions to shareholders from: Net investment income Class A (134,757,843) (119,679,119) Class B (51,954,829) (47,332,737) Class C (2,504,220) (1,586,489) Class I (302) -- Class Y (58,506) (45,459) Tax return of capital Class A -- (6,864,499) Class B -- (2,714,889) Class C -- (90,997) Class Y -- (2,608) ------------ ------------ Total distributions (189,275,700) (178,316,797) ------------ ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 459,864,402 346,054,593 Class B shares 201,230,467 182,231,463 Class C shares 20,138,072 17,481,732 Class I shares 26,626 -- Class Y shares 802,502 621,295 Reinvestment of distributions at net asset value Class A shares 100,451,105 90,738,834 Class B shares 41,694,620 38,831,129 Class C shares 2,018,581 1,310,775 Class I shares 97 -- Class Y shares 58,365 48,392 Payments for redemptions Class A shares (489,630,961) (436,155,601) Class B shares (Note 2) (243,395,105) (211,944,757) Class C shares (Note 2) (14,666,421) (9,222,933) Class I shares (16,586) -- Class Y shares (1,125,673) (698,094) ------------ ------------ Increase (decrease) in net assets from capital share transactions 77,450,091 19,296,828 ------------ ------------ Total increase (decrease) in net assets 189,639,981 (8,218,295) Net assets at beginning of year 2,441,728,432 2,449,946,727 ------------- ------------- Net assets at end of year $2,631,368,413 $2,441,728,432 ============== ============== Undistributed net investment income $ 17,290,301 $ 14,330,432 -------------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 33 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Notes to Financial Statements AXP High Yield Bond Fund 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP High Yield Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP High Yield Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. Effective March 4, 2004, the Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. As of May 31, 2004, AEFC and the AXP Portfolio Builder Funds owned 100% of Class I shares. 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 high-yielding, high risk corporate bonds, 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, 2004 was 99.99%. - -------------------------------------------------------------------------------- 34 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT All securities held by the Portfolio are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $542 and accumulated net realized loss has been increased by $542. - -------------------------------------------------------------------------------- 35 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2004 2003 Class A Distributions paid from: Ordinary income $134,757,843 $119,679,119 Long-term capital gain -- -- Tax return of capital -- 6,864,499 Class B Distributions paid from: Ordinary income 51,954,829 47,332,737 Long-term capital gain -- -- Tax return of capital -- 2,714,889 Class C Distributions paid from: Ordinary income 2,504,220 1,586,489 Long-term capital gain -- -- Tax return of capital -- 90,997 Class I* Distributions paid from: Ordinary income 302 N/A Long-term capital gain -- N/A Tax return of capital -- N/A Class Y Distributions paid from: Ordinary income 58,506 45,459 Long-term capital gain -- -- Tax return of capital -- 2,608 * Inception date was March 4, 2004. As of May 31, 2004, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 1,624,008 Accumulated long-term gain (loss) $(1,471,670,697) Unrealized appreciation (depreciation) $ (63,874,761) 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. - -------------------------------------------------------------------------------- 36 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. In addition, AECSC is entitled to charge an annual closed account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $4,238,352 for Class A, $634,215 for Class B and $12,734 for Class C for the year ended May 31, 2004. During the year ended May 31, 2004, the Fund's transfer agency fees were reduced by $24,691 as a result of earnings credits from overnight cash balances. - -------------------------------------------------------------------------------- 37 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2004 Class A Class B Class C Class I* Class Y Sold 167,296,822 73,192,665 7,364,149 9,369 295,282 Issued for reinvested distributions 36,258,216 15,065,058 732,751 34 21,156 Redeemed (177,407,294) (88,507,815) (5,359,957) (5,882) (408,491) ------------ ----------- ---------- ------ -------- Net increase (decrease) 26,147,744 (250,092) 2,736,943 3,521 (92,053) ---------- -------- --------- ----- ------- * Inception date was March 4, 2004. Year ended May 31, 2003 Class A Class B Class C Class I Class Y Sold 140,130,231 73,550,210 7,134,615 N/A 251,069 Issued for reinvested distributions 37,191,962 15,924,113 539,704 N/A 19,784 Redeemed (177,934,640) (86,475,991) (3,779,769) N/A (284,857) ------------ ----------- ---------- ------ -------- Net increase (decrease) (612,447) 2,998,332 3,894,550 N/A (14,004) -------- --------- --------- ------ -------
4. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $1,471,670,697 as of May 31, 2004, that will expire in 2007 through 2013 if not offset by capital gains. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 5. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by Deutsche Bank, whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50% or the higher of the Federal Funds Rate plus 0.25% and the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. The Fund had no borrowings outstanding during the year ended May 31, 2004. - -------------------------------------------------------------------------------- 38 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT 6. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001 2000 Net asset value, beginning of period $2.62 $2.65 $3.07 $3.48 $3.97 Income from investment operations: Net investment income (loss) .21 .21 .25 .38 .39 Net gains (losses) (both realized and unrealized) .11 (.03) (.38) (.41) (.49) Total from investment operations .32 .18 (.13) (.03) (.10) Less distributions: Dividends from net investment income (.20) (.20) (.24) (.38) (.39) Tax return of capital -- (.01) (.05) -- -- Total distributions (.20) (.21) (.29) (.38) (.39) Net asset value, end of period $2.74 $2.62 $2.65 $3.07 $3.48 Ratios/supplemental data Net assets, end of period (in millions) $1,810 $1,662 $1,681 $1,898 $2,224 Ratio of expenses to average daily net assets(b) 1.04% 1.07% 1.03% 1.04% .99% Ratio of net investment income (loss) to average daily net assets 7.47% 8.35% 8.73% 11.54% 10.32% Portfolio turnover rate (excluding short-term securities) 140% 139% 125% 76% 44% Total return(c) 12.51% 7.53% (4.31%) (.94%) (2.78%)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 39 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001 2000 Net asset value, beginning of period $2.62 $2.65 $3.07 $3.48 $3.97 Income from investment operations: Net investment income (loss) .19 .19 .23 .35 .36 Net gains (losses) (both realized and unrealized) .11 (.03) (.38) (.41) (.49) Total from investment operations .30 .16 (.15) (.06) (.13) Less distributions: Dividends from net investment income (.18) (.18) (.22) (.35) (.36) Tax return of capital -- (.01) (.05) -- -- Total distributions (.18) (.19) (.27) (.35) (.36) Net asset value, end of period $2.74 $2.62 $2.65 $3.07 $3.48 Ratios/supplemental data Net assets, end of period (in millions) $781 $748 $748 $807 $917 Ratio of expenses to average daily net assets(b) 1.80% 1.83% 1.79% 1.80% 1.75% Ratio of net investment income (loss) to average daily net assets 6.70% 7.59% 7.94% 10.79% 9.58% Portfolio turnover rate (excluding short-term securities) 140% 139% 125% 76% 44% Total return(c) 11.66% 6.73% (5.05%) (1.69%) (3.53%)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 40 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001(b) Net asset value, beginning of period $2.61 $2.64 $3.05 $3.48 Income from investment operations: Net investment income (loss) .19 .19 .23 .32 Net gains (losses) (both realized and unrealized) .11 (.03) (.37) (.43) Total from investment operations .30 .16 (.14) (.11) Less distributions: Dividends from net investment income (.18) (.18) (.22) (.32) Tax return of capital -- (.01) (.05) -- Total distributions (.18) (.19) (.27) (.32) Net asset value, end of period $2.73 $2.61 $2.64 $3.05 Ratios/supplemental data Net assets, end of period (in millions) $39 $31 $21 $8 Ratio of expenses to average daily net assets(c) 1.80% 1.83% 1.79% 1.80%(d) Ratio of net investment income (loss) to average daily net assets 6.71% 7.52% 7.39% 11.10%(d) Portfolio turnover rate (excluding short-term securities) 140% 139% 125% 76% Total return(e) 11.71% 6.78% (4.76%) (2.92%)(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 41 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Class I Per share income and capital changes(a) Fiscal period ended May 31, 2004(b) Net asset value, beginning of period $2.83 Income from investment operations: Net investment income (loss) .08 Net gains (losses) (both realized and unrealized) (.11) Total from investment operations (.03) Less distributions: Dividends from net investment income (.06) Net asset value, end of period $2.74 Ratios/supplemental data Net assets, end of period (in millions) $-- Ratio of expenses to average daily net assets(c) .65%(d) Ratio of net investment income (loss) to average daily net assets 7.30%(d) Portfolio turnover rate (excluding short-term securities) 140% Total return(e) (1.39%)(f) (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was March 4, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 42 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2004 2003 2002 2001 2000 Net asset value, beginning of period $2.62 $2.65 $3.07 $3.48 $3.97 Income from investment operations: Net investment income (loss) .21 .21 .26 .38 .39 Net gains (losses) (both realized and unrealized) .12 (.03) (.38) (.41) (.49) Total from investment operations .33 .18 (.12) (.03) (.10) Less distributions: Dividends from net investment income (.21) (.20) (.25) (.38) (.39) Tax return of capital -- (.01) (.05) -- -- Total distributions (.21) (.21) (.30) (.38) (.39) Net asset value, end of period $2.74 $2.62 $2.65 $3.07 $3.48 Ratios/supplemental data Net assets, end of period (in millions) $1 $1 $1 $1 $1 Ratio of expenses to average daily net assets(b) .88% .91% .87% .88% .83% Ratio of net investment income (loss) to average daily net assets 7.60% 8.52% 8.80% 11.72% 10.34% Portfolio turnover rate (excluding short-term securities) 140% 139% 125% 76% 44% Total return(c) 12.67% 7.70% (4.17%) (.78%) (2.68%)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 43 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD AND SHAREHOLDERS AXP HIGH YIELD INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities of AXP High Yield Bond Fund (a series of AXP High Yield Income Series, Inc.) as of May 31, 2004, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2004, and the financial highlights for each of the years in the five-year period ended May 31, 2004. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP High Yield Bond Fund, as of May 31, 2004, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota July 20, 2004 - -------------------------------------------------------------------------------- 44 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP High Yield Bond Fund Fiscal year ended May 31, 2004 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 1.46% Dividends Received Deduction for corporations 1.42% Payable date Per share June 23, 2003 $0.01574 July 24, 2003 0.01602 Aug. 22, 2003 0.01600 Sept. 22, 2003 0.01600 Oct. 23, 2003 0.01687 Nov. 21, 2003 0.01700 Dec. 22, 2003 0.02171 Jan. 26, 2004 0.01700 Feb. 25, 2004 0.01700 March 26, 2004 0.01700 April 26, 2004 0.01700 May 26, 2004 0.01740 Total distributions $0.20474 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 1.46% Dividends Received Deduction for corporations 1.42% Payable date Per share June 23, 2003 $0.01402 July 24, 2003 0.01428 Aug. 22, 2003 0.01441 Sept. 22, 2003 0.01426 Oct. 23, 2003 0.01510 Nov. 21, 2003 0.01532 Dec. 22, 2003 0.01991 Jan. 26, 2004 0.01493 Feb. 25, 2004 0.01527 March 26, 2004 0.01524 April 26, 2004 0.01518 May 26, 2004 0.01567 Total distributions $0.18359 - -------------------------------------------------------------------------------- 45 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 1.46% Dividends Received Deduction for corporations 1.42% Payable date Per share June 23, 2003 $0.01403 July 24, 2003 0.01427 Aug. 22, 2003 0.01442 Sept. 22, 2003 0.01427 Oct. 23, 2003 0.01509 Nov. 21, 2003 0.01533 Dec. 22, 2003 0.01991 Jan. 26, 2004 0.01494 Feb. 25, 2004 0.01535 March 26, 2004 0.01521 April 26, 2004 0.01509 May 26, 2004 0.01558 Total distributions $0.18349 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 1.46% Dividends Received Deduction for corporations 1.42% Payable date Per share March 26, 2004 0.02086 April 26, 2004 0.01795 May 26, 2004 0.01830 Total distributions $0.05711 Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 1.46% Dividends Received Deduction for corporations 1.42% Payable date Per share June 23, 2003 $0.01611 July 24, 2003 0.01639 Aug. 22, 2003 0.01635 Sept. 22, 2003 0.01637 Oct. 23, 2003 0.01725 Nov. 21, 2003 0.01737 Dec. 22, 2003 0.02210 Jan. 26, 2004 0.01743 Feb. 25, 2004 0.01737 March 26, 2004 0.01737 April 26, 2004 0.01738 May 26, 2004 0.01776 Total distributions $0.20925 - -------------------------------------------------------------------------------- 46 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 86 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Arne H. Carlson Board member Chair, Board Services Corporation 901 S. Marquette Ave. since 1999 (provides administrative services to Minneapolis, MN 55402 boards). Former Governor of Minnesota Age 69 - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 Corporation (engineering and Materials Company, Inc. Minneapolis, MN 55402 construction) since 1998 (construction Age 66 materials/chemicals) - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Livio D. DeSimone Board member Retired Chair of the Board and Chief Cargill, Incorporated 30 Seventh Street East since 2001 Executive Officer, Minnesota Mining and (commodity merchants and Suite 3050 Manufacturing (3M) processors), General Mills, St. Paul, MN 55101-4901 Inc. (consumer foods), Age 70 Vulcan Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 69 - ---------------------------------- ------------------- ----------------------------------------- ----------------------------- Stephen R. Lewis, Jr.* Board member Retired President and Professor of Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 Economics, Carleton College (manufactures irrigation Minneapolis, MN 55402 systems) Age 65 - ---------------------------------- ------------------- ----------------------------------------- -----------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Columbia Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 47 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Alan K. Simpson Board member Former three-term United States Senator 1201 Sunshine Ave. since 1997 for Wyoming Cody, WY 82414 Age 72 - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Alison Taunton-Rigby Board member since Founder and Chief Executive Officer, 901 S. Marquette Ave. 2002 RiboNovix, Inc. since 2004; President, Minneapolis, MN 55402 Forester Biotech since 2000; prior to Age 60 that, President and CEO, Aquila Biopharmaceuticals, Inc. - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Board Member Affiliated with AEFC** Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - --------------------------------- -------------------- ----------------------------------------- ----------------------------- William F. Truscott Board member Senior Vice President - Chief 53600 AXP Financial Center since 2001, Vice Investment Officer of AEFC since 2001. Minneapolis, MN 55474 President since Former Chief Investment Officer and Age 43 2002 Managing Director, Zurich Scudder Investments - --------------------------------- -------------------- ----------------------------------------- -----------------------------
** Interested person by reason of being an officer, director and/or employee of AEFC. - -------------------------------------------------------------------------------- 48 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Jeffrey P. Fox Treasurer since Vice President - Investment Accounting, 50005 AXP Financial Center 2002 AEFC, since 2002; Vice President - Minneapolis, MN 55474 Finance, American Express Company, Age 49 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Paula R. Meyer President since Senior Vice President and General 596 AXP Financial Center 2002 Manager - Mutual Funds, AEFC, since Minneapolis, MN 55474 2002; Vice President and Managing Age 50 Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - --------------------------------- -------------------- ----------------------------------------- ----------------------------- Leslie L. Ogg Vice President, President of Board Services Corporation 901 S. Marquette Ave. General Counsel, Minneapolis, MN 55402 and Secretary Age 65 since 1978 - --------------------------------- -------------------- ----------------------------------------- -----------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the Web site americanexpress.com/funds; or by searching the Web site of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, after August 2004, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available at http://www.sec.gov. - -------------------------------------------------------------------------------- 49 -- AXP HIGH YIELD BOND FUND -- 2004 ANNUAL REPORT (logo) AMERICAN EXPRESS (R) American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Livio D. DeSimone, Anne P. Jones, and Alan G. Quasha, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees (a) Audit Fees. The fees paid for the years ended May 31, to KPMG LLP for professional services rendered for the audits of the annual financial statements for AXP High Yield Income Series, Inc. were as follows: 2003 - $12,841; 2002 - $12,256 (b) Audit - Related Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 for AXP High Yield Income Series, Inc. were as follows: 2003 - $569; 2002 - $428 (c) Tax Fees. The fees paid for the years ended May 31, to KPMG LLP for tax compliance related services for AXP High Yield Income Series, Inc. were as follows: 2003 - $2,495; 2002 - $2,350 (d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered in connection to proxy filing for AXP High Yield Income Series, Inc. were as follows: 2003 - None; 2002 - $26 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by KPMG LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2003 and 2002 were pre-approved by the audit committee with the exception of the 2002 tax fees. (f) Not applicable. (g) Non-Audit Fees. The fees paid for the years ended May 31, by the registrant for non-audit services to KPMG LLP were as follows: 2003 - None; 2002 - None The fees paid for the years ended May 31, to KPMG LLP by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2003 - $71,000; 2002 - $164,000 (h) For the fees disclosed in item (g) above, 100% and 97% of the fees for services performed during 2003 and 2002, respectively, were pre-approved by the audit committee. The exception was a 2002 tax research request by the adviser on defaulted securities for $5,000. The amounts not pre-approved are compatible with maintaining KPMG LLP's independence. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 9. Submission of matters to a vote of security holders. Not applicable. Item 10. Controls and Procedures. (a) The registrant's Principal Executive Officer and Principal Financial Officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) At the date of filing this Form N-CSR, the registrant's Principal Executive Officer and Principal Financial Officer are aware of no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 11. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP High Yield Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2004 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 3, 2004 EX-99.CODE ETH 2 code-ethics.txt CODE OF ETHICS AMERICAN EXPRESS FUNDS PREFERRED MASTER TRUST GROUP (THE AXP FUNDS) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Purpose of the Code; Covered Officers This code of ethics ("Code") for the AXP Funds (collectively, "Funds," and each, "Fund") applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers," each of whom is identified in Exhibit A) for the purpose of promoting, in connection with his or her duties: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely, and understandable disclosure in reports and documents that a Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; o compliance with laws and governmental rules and regulations applicable to the conduct of the Funds' business and their financial reporting; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions, such as the purchase or sale of securities or other property, with the Funds because of their status as "affiliated persons" of the Funds. The compliance programs and -1- procedures of the Funds and of American Express Financial Corporation ("AEFC"), the investment adviser to the Funds, are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Funds and AEFC, of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Funds or for AEFC, or for both, be involved in establishing policies and implementing decisions that will have different effects on AEFC and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and AEFC and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds. Each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds; o not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds; o not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; III. Disclosure and Compliance o Each Covered Officer should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including to the Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and AEFC with the goal of promoting full, fair, accurate, timely, and understandable disclosure in the reports -2- and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules, and regulations. IV. Reporting and Accountability Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code; o annually thereafter affirm to the Board that he or she has complied with the requirements of the Code; o not retaliate against any other Covered Officer or any employee of AEFC or its affiliated persons for reports of potential violations that are made in good faith; and o notify the general counsel of the Funds ("Funds General Counsel") promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Funds General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officers will be considered by the Board Effectiveness Committees (the "Committees"). The Funds will follow these procedures in investigating and enforcing this Code: o The Funds General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, the Funds General Counsel believes that no violation has occurred, he or she is not required to take any further action; o Any matter that the Funds General Counsel believes is a violation will be reported to the Committees; o If the Committees concur that a violation has occurred, they will inform the Board, and the Board will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Committees will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, AEFC, or any -3- affiliate of AEFC govern or purport to govern the activities of the Covered Officers, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. AEFC's code of ethics under Rule 17j-1 under the Investment Company Act is a separate requirement applying to the Covered Officers and others, and is not part of this Code. VI. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Fund's Board, including a majority of its independent directors. Date: July, 2003 -4- Exhibit A Persons Covered by this Code of Ethics Paula R. Meyer President Jeffrey P. Fox Treasurer -5- EX-99.CERT 3 ex99-cert.txt CERTIFICATION PURSUANT TO 270.30A-2 OF THE INVESTMENT COMPANY ACT OF 1940 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Paula Meyer, certify that: 1. I have reviewed this report on Form N-CSR of AXP High Yield Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 30, 2004 /s/ Paula R. Meyer -------------------------------- Name: Paula R. Meyer Title: President and Chief Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey Fox, certify that: 1. I have reviewed this report on Form N-CSR of AXP High Yield Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 30, 2004 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 4 ex99-906cert.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION AXP High Yield Income Series, Inc. (the Registrant) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned below certifies that 1. This report on Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: July 30, 2004 /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Chief Executive Officer Date: July 30, 2004 /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR filed with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----