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, 2005 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 Funds (R) Table of Contents Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 5 The Fund's Long-term Performance 8 Investments in Securities 10 Financial Statements (Portfolio) 20 Notes to Financial Statements (Portfolio) 23 Report of Independent Registered Public Accounting Firm (Portfolio) 27 Financial Statements (Fund) 28 Notes to Financial Statements (Fund) 31 Report of Independent Registered Public Accounting Firm (Fund) 41 Federal Income Tax Information 42 Fund Expenses Example 45 Board Members and Officers 47 Approval of Investment Management Services Agreement 50 Proxy Voting 51 [DALBAR LOGO] American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. -------------------------------------------------------------------------------- 2 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Fund Snapshot AT MAY 31, 2005 PORTFOLIO MANAGER Portfolio manager Since Years in industry Scott Schroepfer, CFA* 3/99 19 * This Fund is managed by a team of portfolio managers led by Scott Schroepfer. This team is part of 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 by class A: 12/8/83 B: 3/20/95 C: 6/26/00 I: 3/4/04 Y: 3/20/95 Ticker symbols by class A: INEAX B: IEIBX C: APECX I: -- Y: -- Total net assets $2.400 billion Number of holdings 252 Weighted average life(1) 5.8 years Effective duration(2) 4.2 years Weighted average bond rating(3) B (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. 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 31.6% Materials 12.7% Industrials 11.9% Health care 9.0% Utilities 8.0% Telecommunications 6.1% Energy 4.5% Financials 3.5% Short-term securities* 3.1% Consumer staples 3.0% Telecommunication services 3.0% Information technology 1.8% Other 1.8% * Of the 3.1%, 0.1% is due to security lending activity and 3.0% is the Portfolio's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of bond portfolio assets BBB bonds 0.5% BB bonds 22.6 B bonds 62.6 CCC bonds 14.3 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. 1.0% of the portfolio rating above was determined through internal analysis. 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 -- 2005 ANNUAL REPORT Performance Summary PERFORMANCE COMPARISON For the year ended May 31, 2005 +11.56% +10.10% +9.25% +11.56% = AXP High Yield Bond Fund Class A (excluding sales charge) +10.10% = JP Morgan Global High Yield Index (unmanaged) +9.25% = Lipper High Current Yield Bond Funds Index (see "The Fund's Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes.
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class I Class Y (Inception dates) (12/8/83) (3/20/95) (6/26/00) (3/4/04) (3/20/95) After After NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) at May 31, 2005 1 year +11.56% +6.24% +10.72% +5.72% +10.35% +9.35% +11.97% +11.75% 3 years +10.51% +8.73% +9.68% +8.56% +9.59% +9.59% N/A +10.69% 5 years +5.05% +4.03% +4.26% +3.98% N/A N/A N/A +5.22% 10 years +5.70% +5.18% +4.90% +4.90% N/A N/A N/A +5.84% Since inception +8.24% +7.99% +5.47% +5.47% +4.07% +4.07% +8.31% +6.42% at June 30, 2005 1 year +11.36% +6.07% +10.53% +5.53% +10.56% +9.56% +11.77% +11.54% 3 years +13.60% +11.76% +12.90% +11.84% +12.82% +12.82% N/A +13.78% 5 years +5.23% +4.21% +4.43% +4.15% +4.39% +4.39% N/A +5.39% 10 years +5.77% +5.25% +4.97% +4.97% N/A N/A N/A +5.92% Since inception +8.28% +8.04% +5.58% +5.58% +4.31% +4.31% +9.05% +6.52%
(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 eligible investors only, currently limited to AXP Portfolio Builder Series funds, six affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. -------------------------------------------------------------------------------- 4 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, portfolio manager Scott Schroepfer discusses AXP High Yield Bond Fund's results and positioning for the annual period ended May 31, 2005. Q: How did AXP High Yield Bond Fund perform for the 12-month period ended May 31, 2005? A: AXP High Yield Bond Fund rose 11.56% (Class A shares excluding sales charge) for the fiscal year ended May 31, 2005, outperforming its benchmark, the JP Morgan Global High Yield Index (JP Morgan Index), which advanced 10.10% during the period. The Fund also outperformed its peer group, the Lipper High Current Yield Bond Funds Index, which returned 9.25% during the same time frame. Q: What factors most significantly affected performance for the period? A: Much of the Fund's strong performance came from the last two calendar quarters in 2004. There were seven consecutive months of positive performance from June through December 2004. We were rewarded by owning larger positions in the lower rated segments of the market. We had a large exposure to the single B-rated sector of the market and market weight in CCC-rated securities. In 2005, the market experienced a strong sell off from March through mid-May, due largely to two issues. After a big employment number came out early in the period, rates moved up sharply, which, in turn, triggered fear among investors over rates rising too rapidly. At the same time, we were in a somewhat weaker stock environment, which tends to have a negative effect on the high yield sector of the bond market. Both of these issues weighed on the market and contributed to cash outflows out of high yield funds for several weeks. On top of all that, the high yield market was dealt another blow with the endless speculation that General Motors (GM) and Ford would be downgraded from investment grade to junk status. This put pressure on the overall market and contributed to spread widening, in particular in the auto-related credits. By mid-May, GM and Ford had already been downgraded and much of the anxiety over the auto industry seemed to be priced into the market. GM and Ford bonds finally began to stabilize which helped the overall market to rally during the last two weeks of May. SEC YIELDS At May 31, 2005 by class A: 6.21% B: 5.76% C: 5.76% I: 6.93% Y: 6.68% At June 30, 2005 by class A: 5.83% B: 5.35% C: 5.36% I: 6.54% Y: 6.28% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 4 for additional performance information. -------------------------------------------------------------------------------- 5 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> We avoided several dramatic declines in the market place over the last 12 months because of our thorough credit research. [END CALLOUT QUOTE] Q: Which bonds were the best and worst performers for the Fund during the twelve-month period? A: Our large position in Qwest Communications was a positive contributor during the period as well as Nextel Communications, a wireless communication company. In addition, Cablevision Systems and utility company Aquila contributed to performance during the period. On the negative side, General Nutrition Centers (GNC), a health retailer, started showing weaker results and the bonds underperformed. However, we still own the bonds as we believe the situation has stabilized and that the company can deleverage or reduce the borrowed capital on its balance sheet with free cash flow. A key for us during the last fiscal year was good security selection. We avoided several dramatic declines in the market place over the last 12 months because of our thorough credit research. Our internal rating system assigns risk ratings to every bond in the portfolio based on our proactive research. We feel that rating agencies tend to be more backward looking and a little more reactionary when changing credit ratings and therefore, may not always be the best indicator of risk. We also had very good industry selection during the period. We had a large exposure to sectors that performed very well and then brought the exposure to these sectors back down after realizing attractive returns. In addition, we had a smaller position in the auto sector for much of the year, which proved prudent. Q: What changes did you make to the portfolio and how is it currently positioned? A: During 2004, we had large exposures in the chemical manufacturing and industrial sectors, which provided attractive returns for the Fund during the period. However, during the latter part of calendar year 2004, we started lowering those exposures because we felt that valuations no longer justified having as large of positions. Throughout the period, we always had a lower exposure in the auto sector because, in addition to the poor fundamentals, we were worried about the impact that GM -------------------------------------------------------------------------------- 6 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Questions & Answers and Ford would have on the market. This helped us in 2004 and early 2005 when all of the uncertainty about GM caused bonds in the auto sector to decline in value. During that time, we used the opportunity to add some higher quality auto-related names as valuations became compelling. We continue to have a large exposure in the health care sector, in particular hospitals. In addition, the Fund also has large positions in the cable and media area, which includes publishing, radio and TV broadcasting. Finally, we continue to have a large exposure to the telecommunications sector. Q: What is the Fund's tactical view and strategy for the months ahead? A: Going forward, we continue to believe this year is going to be a bond-picker's year and that the key to potential outperformance will be leveraging our strength in credit research. We strive to select the right bonds while maintaining a diligent review of potential credit risks at individual companies. We sell bonds when risks outweigh a bond's income and/or total return potential. We have a large exposure to B-rated securities in the portfolio, a lower exposure to BB- rated securities and a neutral exposure relative to the JP Morgan Index in CCC-rated securities. We continue to believe that we are not getting paid to take inordinate amounts of risk in the market and so we will continue to look for ways to upgrade credit quality in the portfolio. We still have a positive view of the economy going forward and believe company fundamentals will, for the most part, remain decent. We continue to think that interest rates are likely to trend higher in the months ahead. If the Federal Reserve Board continues to raise rates at a measured pace, we do not believe there will be as much risk to high yield from interest rates. We are not expecting a major slow down or recession in the near term; however, having said that, we are no longer at the beginning of an economic expansion, and, therefore, taking incremental risk does not seem as prudent. We believe that default rates have bottomed and are likely to rise modestly over the next 12 months. However, at this time, we do not expect a meaningful rise in high yield defaults over the next 12 months. Over time, as we get further and further along in the economic expansion, the Fund will likely focus on increasing credit quality. We are slowly heading in that direction; however, for now, we think we can still find value in the B-rated segment of the market. -------------------------------------------------------------------------------- 7 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT The Fund's Long-term Performance The chart on the facing page illustrates the total value of an assumed $10,000 investment in AXP High Yield Bond Fund Class A shares (from 6/1/95 to 5/31/05) as compared to the performance of two widely cited performance indices, the JP Morgan Global High Yield Index and the Lipper High Current Yield Bond 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 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 (800) 862-7919 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. DISTRIBUTION SUMMARY The table below details the Fund's income and capital gain distributions for the fiscal years shown. More information on the other classes can be found in the Financial Highlights section of this report's Notes to Financial Statements. Class A Short-term Long-term Fiscal year ended Income capital gains capital gains Total Total May 31, 2005 $0.19 $-- $-- $0.19 May 31, 2004 0.20 -- -- 0.20 May 31, 2003 0.21 -- -- 0.21(1) May 31, 2002 0.29 -- -- 0.29(2) May 31, 2001 0.38 -- -- 0.38 (1) $0.01 per share represents a tax return of capital. (2) $0.05 per share represents a tax return of capital. -------------------------------------------------------------------------------- 8 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT [LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP HIGH YIELD BOND FUND AXP High Yield Bond Fund Class A (includes sales charge) $ 9,525 $11,012 $12,214 $13,832 $13,328 $12,958 $12,836 $12,283 $13,207 $14,860 $16,577 JPMorgan Global High Yield Index(1) $10,000 $11,076 $12,585 $14,127 $14,126 $13,735 $14,166 $14,565 $16,316 $18,477 $20,343 Lipper High Current Yield Bond Funds Index(2) $10,000 $11,123 $12,543 $14,278 $14,164 $13,763 $13,313 $12,827 $14,046 $15,747 $17,203 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
COMPARATIVE RESULTS Results at May 31, 2005 Since 1 year 3 years 5 years 10 years inception(3) AXP High Yield Bond Fund (includes sales charge) Class A Cumulative value of $10,000 $10,624 $12,854 $12,184 $16,577 $52,127 Average annual total return +6.24% +8.73% +4.03% +5.18% +7.99% JP Morgan Global High Yield Index(1) Cumulative value of $10,000 $11,010 $13,967 $14,809 $20,343 N/A Average annual total return +10.10% +11.78% +8.17% +7.36% N/A Lipper High Current Yield Bond Funds Index(2) Cumulative value of $10,000 $10,925 $13,412 $12,498 $17,203 N/A Average annual total return +9.25% +10.28% +4.56% +5.57% N/A
Results for other share classes can be found on page 4. (1) The 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 Current Yield Bond Funds Index includes the 30 largest high yield bond funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from Dec. 8, 1983. The Fund began operating before the inception of the JP Morgan Global High Yield Index and Lipper peer group. -------------------------------------------------------------------------------- 9 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Investments in Securities High Yield Portfolio May 31, 2005 (Percentages represent value of investments compared to net assets) Bonds (93.5%) Issuer Coupon Principal Value(a) rate amount Aerospace & defense (2.8%) Alliant Techsystems 05-15-11 8.50% $3,545,000 $3,726,681 Communications & Power Inds Sr Sub Nts 02-01-12 8.00 6,475,000 6,345,500 CPI Holdco Sr Nts 02-01-15 8.83 9,095,000(h) 8,822,150 DRS Technologies Sr Sub Nts 11-01-13 6.88 6,385,000(d) 6,512,700 L-3 Communications 06-15-12 7.63 13,605,000 14,489,325 07-15-13 6.13 13,575,000 13,439,250 Moog Sr Sub Nts 01-15-15 6.25 3,595,000 3,595,000 Standard Aero Holdings Sr Sub Nts 09-01-14 8.25 9,335,000(d) 9,778,413 Total 66,709,019 Automotive & related (2.1%) Affinia Group 11-30-14 9.00 9,135,000(d) 7,490,700 ArvinMeritor 02-15-09 6.80 7,340,000 7,101,450 Lear Series B 08-01-14 5.75 11,465,000 10,451,505 Tenneco Automotive Series B 07-15-13 10.25 10,250,000 11,428,750 TRW Automotive Sr Nts 02-15-13 9.38 12,220,000 13,197,600 Total 49,670,005 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Broker dealers (0.7%) LaBranche & Co Sr Nts 05-15-09 9.50% $670,000 $696,800 05-15-12 11.00 14,245,000 15,313,375 Total 16,010,175 Building materials & construction (2.1%) Ainsworth Lumber (U.S. Dollar) 10-01-12 7.25 7,915,000(c) 7,440,100 Associated Materials 04-15-12 9.75 9,670,000 9,863,400 Sr Disc Nts (Zero coupon through 03-01-09, thereafter 11.25%) 03-01-14 9.13 3,695,000(e) 2,180,050 Euramax Intl Sr Sub Nts 08-15-11 8.50 10,090,000 11,300,800 Norcraft Companies/Finance Sr Sub Nts 11-01-11 9.00 9,900,000 9,949,500 Norcraft Holdings/Capital Sr Disc Nts (Zero coupon through 09-01-08, thereafter 9.75%) 09-01-12 9.80 13,650,000(e) 8,872,500 Total 49,606,350 Cable (7.7%) Cablevision Systems Sr Nts 04-01-09 7.88 5,690,000(d,h) 5,946,050 04-15-12 8.00 10,045,000(d) 10,484,469 CCO Holdings LLC/Capital Sr Nts 12-15-10 7.14 7,035,000(d,h) 6,929,475 11-15-13 8.75 16,115,000 16,034,425 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 10 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Cable (cont.) Charter Communications Holdings LLC/Capital Sr Disc Nts 01-15-10 11.75% $3,360,000 $2,620,800 04-01-11 9.92 3,625,000 2,637,188 Sr Disc Nts (Zero coupon through 01-15-07, thereafter 12.13%) 01-15-12 20.04 12,520,000(e) 7,261,600 Sr Nts 04-30-12 8.00 17,070,000(d) 17,069,999 CSC Holdings 05-15-16 10.50 7,075,000 7,747,125 DIRECTV Holdings LLC/Finance Sr Nts 03-15-13 8.38 16,220,000 17,963,649 Echostar DBS 10-01-14 6.63 9,825,000(d) 9,849,563 Sr Nts 10-01-11 6.38 10,205,000 10,307,050 GCI Sr Nts 02-15-14 7.25 7,295,000(d) 6,820,825 02-15-14 7.25 17,900,000 16,736,499 Kabel Deutschland (U.S. Dollar) 07-01-14 10.63 12,750,000(c,d) 13,610,625 LodgeNet Entertainment 06-15-13 9.50 6,275,000 6,745,625 Mediacom LLC/Capital Sr Nts 01-15-13 9.50 9,415,000 9,344,388 Videotron Ltee (U.S. Dollar) 01-15-14 6.88 16,860,000(c) 16,881,074 Total 184,990,429 Cellular telecommunications (5.9%) Alamosa Delaware 07-31-10 11.00 5,450,000 6,076,750 Sr Nts 01-31-12 8.50 2,410,000 2,512,425 American Tower Sr Nts 10-15-12 7.13 9,810,000 10,165,613 American Towers 12-01-11 7.25 7,065,000 7,400,588 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Cellular telecommunications (cont.) Centennial Communications/Cellular Operating LLC Sr Nts 02-01-14 8.13% $9,350,000 $9,677,250 Dobson Cellular Systems 11-01-12 9.88 15,790,000(d) 16,184,749 Nextel Communications Sr Nts 10-31-13 6.88 13,980,000 14,923,650 03-15-14 5.95 1,270,000 1,298,575 08-01-15 7.38 14,495,000 15,690,838 Rogers Wireless Communications (U.S. Dollar) 12-15-10 6.14 3,215,000(c,h) 3,351,638 12-15-12 7.25 2,685,000(c) 2,872,950 (U.S. Dollar) Sr Sub Nts 12-15-12 8.00 13,415,000(c) 14,270,206 Rural Cellular 03-15-12 8.25 9,740,000 9,959,150 Sr Sub Nts 01-15-10 9.75 1,070,000 946,950 SBA Telecommunications/Communications Sr Disc Nts (Zero coupon through 12-15-07, thereafter 9.75%) 12-15-11 9.55 18,005,000(e) 15,754,374 UbiquiTel Operating Sr Nts 03-01-11 9.88 6,420,000 6,933,600 US Unwired Series B 06-15-12 10.00 4,340,000 4,752,300 Total 142,771,606 Chemicals (3.7%) BCI US Finance/Borden 2 Nova Scotia 07-15-10 8.78 12,305,000(d,h) 12,305,000 BCP Crystal US Holdings Sr Sub Nts 06-15-14 9.63 7,070,000 7,936,075 Crystal US Holdings 3 LLC/Sub 3 Sr Disc Nts (Zero coupon through 10-01-09, thereafter 10.50%) 10-01-14 10.33 19,395,000(d,e) 13,091,625 Equistar Chemicals LP/Funding Sr Nts 05-01-11 10.63 7,930,000 8,742,825 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 11 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Chemicals (cont.) Georgia Gulf Sr Nts 12-15-13 7.13% $7,695,000 $7,925,850 INVISTA 05-01-12 9.25 25,200,000(d) 27,405,000 PQ 02-15-13 7.50 6,245,000(d) 6,026,425 Rockwood Specialties Group Sr Sub Nts 05-15-11 10.63 3,230,000 3,456,100 Sub Nts 11-15-14 7.50 3,085,000(d) 2,930,750 Total 89,819,650 Electronics (0.8%) Flextronics Intl (U.S. Dollar) Sr Sub Nts 11-15-14 6.25 4,010,000(c) 3,989,950 Sanmina-SCI Sub Nts 03-01-13 6.75 15,015,000(d) 14,189,175 Total 18,179,125 Energy (3.1%) Chesapeake Energy Sr Nts 09-15-13 7.50 1,900,000 2,052,000 06-15-14 7.50 3,458,000 3,743,285 08-15-14 7.00 14,424,000 15,217,320 06-15-15 6.38 5,545,000(d) 5,655,900 01-15-16 6.88 3,000,000 3,135,000 Encore Acquisition 06-15-12 8.38 4,805,000 5,189,400 Sr Sub Nts 04-15-14 6.25 4,005,000 3,904,875 Hilcorp Energy I/Finance Sr Nts 09-01-10 10.50 13,090,000(d) 14,464,450 Newfield Exploration Sr Sub Nts 08-15-12 8.38 9,395,000 10,193,575 09-01-14 6.63 5,950,000 6,083,875 Venoco Sr Nts 12-15-11 8.75 7,170,000(d) 6,919,050 Total 76,558,730 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Energy equipment & services (1.3%) Grant Prideco Series B 12-01-07 9.63% $11,700,000 $13,133,250 Grant Prideco Escrow 12-15-09 9.00 2,830,000 3,113,000 Key Energy Services Series C 03-01-08 8.38 4,330,000 4,459,900 Sr Nts 05-01-13 6.38 9,850,000 9,653,000 Total 30,359,150 Environmental services (2.1%) Allied Waste North America 11-15-10 6.50 5,080,000(i) 4,965,700 02-15-14 6.13 12,250,000 11,208,750 Series B 09-01-12 9.25 3,753,000 4,034,475 Sr Nts 04-15-13 7.88 13,650,000 13,854,750 Clean Harbors 07-15-12 11.25 6,330,000(d) 6,963,000 Waste Services Sr Sub Nts 04-15-14 9.50 9,990,000(d) 9,840,150 Total 50,866,825 Finance companies (0.4%) GMAC 09-15-11 6.88 12,155,000 10,600,303 Financial services (0.8%) IAAI Finance 04-01-13 11.00 9,795,000(d) 10,056,301 Metris Companies 07-15-06 10.13 2,785,000 2,795,444 Triad Acquisition 05-01-13 11.13 6,015,000(d) 5,984,925 Total 18,836,670 Food (1.7%) American Seafoods Group LLC/Finance Sr Disc Nts (Zero coupon through 11-01-08, thereafter 11.50%) 11-01-11 11.72 19,020,000(e) 13,218,900 Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75 25,225,000(c) 27,873,625 Total 41,092,525 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 12 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Furniture & appliances (1.3%) ALH Finance LLC Sr Sub Nts 01-15-13 8.50% $10,680,000 $9,985,800 Sealy Mattress Sr Sub Nts 06-15-14 8.25 7,435,000 7,527,938 Simmons Bedding Sr Disc Nts (Zero coupon through 12-15-09, thereafter 10.00%) 12-15-14 10.00 4,895,000(d,e) 2,153,800 Sr Sub Nts 01-15-14 7.88 14,195,000 12,491,600 Total 32,159,138 Health care products (1.2%) CDRV Investors Sr Disc Nts (Zero coupon through 01-01-10, thereafter 9.63%) 01-01-15 10.42 11,350,000(d,e) 5,561,500 VWR Intl Sr Nts 04-15-12 6.88 4,000,000 3,870,000 Sr Sub Nts 04-15-14 8.00 665,000 625,100 Warner Chilcott 02-01-15 8.75 19,975,000(d) 19,275,875 Total 29,332,475 Health care services (7.6%) Ardent Health Services Sr Sub Nts 08-15-13 10.00 5,035,000 6,119,539 Community Health Systems Sr Sub Nts 12-15-12 6.50 11,300,000 11,243,500 Concentra Operating 06-01-12 9.13 4,610,000 4,771,350 DaVita 03-15-15 7.25 14,735,000(d) 14,808,675 Sr Nts 03-15-13 6.63 8,700,000(d) 8,787,000 HCA 12-01-09 5.50 6,820,000 6,832,597 01-15-15 6.38 11,630,000 11,854,029 Sr Nts 03-15-14 5.75 6,575,000 6,438,805 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Health care services (cont.) IASIS Healthcare LLC/Capital Sr Sub Nts 06-15-14 8.75% $13,950,000 $14,926,500 MedCath Holdings Sr Nts 07-15-12 9.88 10,755,000 12,099,375 NeighborCare Sr Sub Nts 11-15-13 6.88 6,765,000 6,900,300 Select Medical Sr Sub Nts 02-01-15 7.63 12,125,000(d) 11,912,813 Tenet Healthcare Sr Nts 07-01-14 9.88 665,000 714,875 02-01-15 9.25 1,970,000(d) 2,029,100 Triad Hospitals Sr Nts 05-15-12 7.00 18,530,000 19,271,199 US Oncology 08-15-12 9.00 6,105,000 6,532,350 08-15-14 10.75 3,710,000 4,043,900 US Oncology Holdings Sr Nts 03-15-15 8.62 11,725,000(d,h) 11,021,500 Vanguard Health Holding I LLC Sr Disc Nts (Zero coupon through 10-01-09, thereafter 11.25%) 10-01-15 11.07 9,015,000(e) 6,310,500 Vanguard Health Holding II LLC Sr Sub Nts 10-01-14 9.00 14,870,000 16,059,599 Total 182,677,506 Home building (1.7%) Meritage Homes Sr Nts 03-15-15 6.25 9,600,000(d) 8,976,000 Standard Pacific Sr Sub Nts 04-15-12 9.25 2,705,000 2,975,500 WCI Communities 02-15-11 10.63 11,205,000 11,989,350 03-15-15 6.63 12,485,000(d) 11,330,138 William Lyon Homes Sr Nts 02-15-14 7.50 6,250,000 5,625,000 Total 40,895,988 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 13 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Household products (0.7%) Amscan Holdings Sr Sub Nts 05-01-14 8.75% $3,630,000 $3,375,900 Spectrum Brands Sr Sub Nts 02-01-15 7.38 13,425,000(d) 13,089,375 Total 16,465,275 Industrial services (2.9%) Da-Lite Screen Sr Nts 05-15-11 9.50 2,360,000 2,460,300 Interline Brands Sr Sub Nts 05-15-11 11.50 4,036,000 4,439,600 JohnsonDiversey Series B 05-15-12 9.63 2,480,000 2,492,400 NationsRent Companies 10-15-10 9.50 14,430,000 15,476,175 Sr Nts 05-01-15 9.50 5,350,000(d) 5,269,750 Natl Waterworks Series B 12-01-12 10.50 8,240,000 9,249,400 United Rentals North America 02-15-12 6.50 11,905,000 11,711,544 Sr Sub Nts 02-15-14 7.00 18,555,000 17,673,637 Total 68,772,806 Industrial transportation (2.1%) Interpool 08-01-07 7.20 4,590,000 4,681,800 08-01-07 7.35 11,855,000 12,092,100 Quality Distribution LLC/Capital 01-15-12 7.64 30,910,000(d,h) 29,712,238 TFM (U.S. Dollar) 05-01-12 9.38 3,790,000(c,d) 3,922,650 Total 50,408,788 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Leisure time & entertainment (2.8%) Loews Cineplex 08-01-14 9.00% $16,290,000(d) $15,801,300 Six Flags Sr Nts 06-01-14 9.63 9,345,000 8,153,513 Speedway Motorsports Sr Sub Nts 06-01-13 6.75 12,320,000 12,628,000 United Artists Theatre 07-01-15 9.30 12,156,409 12,156,409 Vail Resorts Sr Sub Nts 02-15-14 6.75 19,110,000 19,014,450 Total 67,753,672 Lodging & gaming (4.7%) Boyd Gaming Sr Sub Nts 04-15-14 6.75 22,490,000 22,827,350 MGM MIRAGE Sr Nts 02-27-14 5.88 27,650,000 26,682,250 Mohegan Tribal Gaming Authority Sr Nts 02-15-13 6.13 11,755,000(d) 11,740,306 Sr Sub Nts 04-01-12 8.00 11,345,000 12,167,513 Penn Natl Gaming Sr Sub Nts 03-01-15 6.75 6,790,000(d) 6,620,250 Premier Entertainment Biloxi LLC/Finance 1st Mtge 02-01-12 10.75 2,690,000 2,663,100 River Rock Entertainment Authority Sr Nts 11-01-11 9.75 11,505,000 12,612,356 Seneca Gaming Sr Nts 05-01-12 7.25 6,625,000 6,691,250 Station Casinos Sr Nts 04-01-12 6.00 8,595,000 8,616,488 Wheeling Island Gaming 12-15-09 10.13 1,210,000 1,282,600 Total 111,903,463 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Machinery (0.8%) Case New Holland Sr Nts 06-01-09 6.00% $1,330,000(d) $1,270,150 Gardner Denver Sr Sub Nts 05-01-13 8.00 6,750,000(d) 6,769,190 Kinetek Sr Nts Series D 11-15-06 10.75 2,005,000 1,824,550 Mueller Group Sr Sub Nts 05-01-12 10.00 9,970,000 10,468,500 Total 20,332,390 Media (9.0%) CanWest Media (U.S. Dollar) Series B 04-15-13 7.63 7,575,000(c) 8,105,250 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 15,125,000(c) 16,221,563 Dex Media 11-15-13 8.00 16,130,000 17,138,124 (Zero coupon through 11-15-08, thereafter 9.00%) 11-15-13 10.34 6,800,000(e) 5,406,000 Dex Media West LLC/Finance Sr Sub Nts Series B 08-15-13 9.88 9,860,000 11,265,050 Emmis Operating 05-15-12 6.88 25,285,000 24,937,330 Lamar Media 01-01-13 7.25 11,000,000 11,605,000 Liberty Media Sr Nts 05-15-13 5.70 26,530,000 24,627,002 LIN TV Sr Sub Nts 05-15-13 6.50 4,000,000(d) 3,880,000 05-15-13 6.50 3,740,000 3,627,800 Medianews Group Sr Sub Nts 04-01-14 6.38 7,200,000 6,768,000 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 8,255,000(c) 9,142,413 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (cont.) Radio One Series B 07-01-11 8.88% $7,170,000 $7,689,825 Rainbow Natl Services LLC 09-01-14 10.38 9,280,000(d) 10,579,200 Sr Nts 09-01-12 8.75 14,320,000(d) 15,734,100 RH Donnelley Sr Nts 01-15-13 6.88 16,105,000(d) 16,507,625 Sinclair Broadcast Group 03-15-12 8.00 3,685,000 3,823,188 Sun Media (U.S. Dollar) 02-15-13 7.63 8,615,000(c) 9,045,750 Susquehanna Media Sr Sub Nts 04-15-13 7.38 2,660,000 2,766,400 WDAC Subsidiary Sr Nts 12-01-14 8.38 7,340,000(d) 6,789,500 Total 215,659,120 Metals (0.4%) Earle M Jorgensen 06-01-12 9.75 9,390,000 9,953,400 Miscellaneous (0.7%) AAC Group Holding Sr Disc Nts (Zero coupon through 10-01-08, thereafter 10.25%) 10-01-12 10.07 7,165,000(d,e) 4,585,600 Visant 10-01-12 7.63 8,910,000 8,531,325 Visant Holding Sr Disc Nts (Zero coupon through 12-01-08, thereafter 10.25%) 12-01-13 10.08 6,815,000(e) 4,429,750 Total 17,546,675 Multi-industry (0.3%) TriMas 06-15-12 9.88 7,640,000 6,188,400 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 15 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Paper & packaging (6.3%) Boise Cascade LLC Sr Sub Nts 10-15-14 7.13% $5,260,000(d) $5,010,150 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 10,475,000(c) 10,213,125 Crown European Holdings (U.S. Dollar) 03-01-11 9.50 13,270,000(c) 14,530,650 03-01-13 10.88 6,605,000(c) 7,620,519 Crown Paper Sr Sub Nts 09-01-05 11.00 29,470,000(b,g,k) -- Domtar (U.S. Dollar) 12-01-13 5.38 8,000,000(c) 7,270,568 Georgia-Pacific 02-01-13 9.38 10,445,000 11,828,963 Graham Packaging Sr Nts 10-15-12 8.50 9,595,000(d) 9,642,975 Graphic Packaging Intl Sr Nts 08-15-11 8.50 4,480,000 4,457,600 JSG Funding (U.S. Dollar) Sr Nts 10-01-12 9.63 12,785,000(c) 12,497,338 (U.S. Dollar) Sr Sub Nts 04-01-15 7.75 11,045,000(c,d) 8,628,906 NewPage 05-01-12 10.00 4,670,000(d) 4,564,925 Sr Sub Nts 05-01-13 12.00 21,885,000(d) 21,337,874 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 7,610,000(c) 7,495,850 Owens-Illinois Glass Container 05-15-11 7.75 3,755,000 3,999,075 11-15-12 8.75 7,310,000 8,041,000 05-15-13 8.25 12,375,000 13,365,000 Total 150,504,518 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Retail -- drugstores (0.6%) Duane Reade Sr Sub Nts 08-01-11 9.75% $7,450,000 $5,736,500 Rite Aid 12-15-08 6.13 8,605,000(d) 7,830,550 Total 13,567,050 Retail -- general (1.5%) Flooring America Series B 10-15-07 9.25 9,245,000(b,g,k) -- General Nutrition Centers Sr Nts 01-15-11 8.63 8,460,000(d) 7,571,700 Sr Sub Nts 12-01-10 8.50 12,230,000 9,325,375 Toys "R" Us 04-15-13 7.88 5,765,000 5,159,675 United Auto Group 03-15-12 9.63 13,310,000 13,975,500 Total 36,032,250 Telecom equipment & services (1.0%) Inmarsat Finance (U.S. Dollar) 06-30-12 7.63 6,030,000(c) 6,271,200 Intelsat Bermuda (U.S. Dollar) Sr Nts 01-15-12 7.81 8,220,000(c,d,h) 8,343,300 PanAmSat 08-15-14 9.00 9,124,000 9,922,350 Total 24,536,850 Textiles and apparel (0.1%) Levi Strauss & Co Sr Nts 04-01-12 7.73 3,315,000(d,h) 3,074,663 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (5.1%) Aquila Sr Nts 11-15-09 7.63% $16,220,000 $16,301,100 02-01-11 9.95 6,645,000 7,110,150 CMS Energy Sr Nts 08-01-10 7.75 10,995,000 11,599,725 IPALCO Enterprises 11-14-08 8.38 11,070,000 12,010,950 Midwest Generation LLC 05-01-34 8.75 5,665,000 6,316,475 Series B 01-02-16 8.56 4,895,000 5,311,075 Mirant Americas General LLC Sr Nts 10-01-21 8.50 10,160,000(b) 10,528,300 NRG Energy 12-15-13 8.00 9,984,000(d) 10,533,120 Reliant Energy 12-15-14 6.75 22,435,000 21,369,338 Texas Genco LLC/Financing Sr Nts 12-15-14 6.88 17,392,000(d) 17,870,280 Utilicorp Canada Finance (U.S. Dollar) 06-15-11 7.75 2,995,000(c) 3,009,975 Total 121,960,488 Utilities -- natural gas (2.8%) ANR Pipeline 03-15-10 8.88 15,825,000 17,236,764 Colorado Interstate Gas Sr Nts 03-15-15 5.95 3,410,000(d) 3,299,175 El Paso Natural Gas Sr Nts Series A 08-01-10 7.63 12,295,000 12,972,516 Southern Natural Gas 03-15-10 8.88 11,995,000 13,065,086 Southern Star Central 08-01-10 8.50 10,000,000 10,550,000 Transcontinental Gas Pipe Line Series B 08-15-11 7.00 9,360,000 10,015,200 Total 67,138,741 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- telephone (2.9%) Cincinnati Bell 07-15-13 7.25% $13,580,000 $13,580,000 Sr Nts 02-15-15 7.00 7,210,000(d) 6,903,575 Sr Sub Nts 01-15-14 8.38 7,480,000 7,405,200 Citizens Communications Sr Nts 01-15-13 6.25 16,880,000 16,289,200 Qwest Communications Intl Sr Nts 02-15-09 6.77 3,255,000(d,h) 3,214,313 Qwest Services 12-15-10 13.50 11,833,000(d) 13,489,620 Valor Telecommunications Enterprises LLC/Finance Sr Nts 02-15-15 7.75 9,305,000(d) 9,049,113 Total 69,931,021 Variable rate senior loan interests (1.8%) Qwest Term Loan B 06-30-10 6.95 33,445,000 32,901,519 Waste Services Term Loan B 03-31-11 5.28 10,407,437 10,446,465 Total 43,347,984 Total bonds (Cost: $2,257,138,276) $2,246,213,223 Common stocks (--%) Issuer Shares Value(a) Arena Brands 111,111(b,g) $623,333 Link Energy LLC 1,675,884(b,g,m) 192,727 PFB Telecom Cl B 960,262(b,g) 1 Total common stocks (Cost: $53,347,835) $816,061 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 17 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Preferred stocks & other (1.6%) Issuer Shares Value(a) GNC 12.00% Pay-in-kind Series A 4,590(f) $3,213,000 SGW Holding 12.50% Cm Pay-in-kind Series B 227,301(b,f,g,k) -- Cv Series A 87,091(b,g,k) -- Warrants 2,750(b,g,k) -- Varde Fund V LP 25,000,000(b,g,l) 25,312,500 Wayland Investment LLC 26,000,000(b,g,l) 10,945,480 Total preferred stocks & other (Cost: $38,435,725) $39,470,980 Short-term securities (3.0%)(j) Issuer Effective Amount Value(a) yield payable at maturity Commercial paper Barton Capital 06-01-05 3.02% $15,000,000 $14,998,742 Deutsche Bank 06-01-05 3.07 4,900,000 4,899,582 HSBC Finance 06-01-05 3.07 37,200,000 37,196,828 Jupiter Securitization 06-13-05 3.02 15,000,000 14,983,642 Total short-term securities (Cost: $72,084,900) $72,078,794 Total investments in securities (Cost: $2,421,006,736)(n) $2,358,579,058 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. At May 31, 2005, the value of foreign securities represented 9.3% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2005, the value of these securities amounted to $635,001,193 or 26.4% of net assets. (e) 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. (f) 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. (g) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). These securities are valued at fair value according to methods selected in good faith by the Fund's Board of Directors. Information concerning such security holdings at May 31, 2005, is as follows: Security Acquisition Cost dates Arena Brands Common 09-03-92 $ 5,888,888 Crown Paper 11.00% Sr Sub Nts 2005 1-14-97 thru 03-14-00 24,943,013 Flooring America 9.25% Series B 2007 10-09-97 thru 12-17-02 10,309,671 Link Energy LLC Common 01-25-02 thru 12-30-03 13,412,897 -------------------------------------------------------------------------------- 18 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Notes to investments in securities (continued) Security Acquisition Cost dates PFB Telecom Cl B Common 12-12-97 thru 11-13-00 $34,046,050 SGW Holding 12.50% Cm Pay-in-kind Series B 08-12-97 thru 04-15-03 2,990,747 Cv Series A 08-12-97 899,998 Warrants 08-12-97 867,900 Varde Fund V LP 04-27-00 thru 06-19-00 --* Wayland Investment LLC 05-19-00 28,911,480 * The original cost for this position in the prior year was $25,000,000. During the current year, $25,000,000 was returned to the fund in the form of return of capital. (h) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2005. (i) At May 31, 2005, security was partially or fully on loan. See Note 4 to the financial statements. (j) Cash collateral received from security lending activity is invested in short-term securities and represents 0.1% of net assets. See Note 4 to the financial statements. 2.9% of net assets is the Portfolio's cash equivalent position. (k) Negligible market value. (l) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (m) Investments representing 5% or more of the outstanding voting securities of the issuer. Transactions with companies that are or were affiliates during the year ended May 31, 2005 are as follows:
Issuer Beginning Purchase Sales Ending Dividend Value(a) cost cost cost cost income Link Energy LLC $13,412,897 $0 $0 $13,412,897 $0 $192,727
(n) At May 31, 2005, the cost of securities for federal income tax purposes was $2,402,794,952 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 88,761,106 Unrealized depreciation (132,977,000) ------------ Net unrealized depreciation $ (44,215,894) ------------- How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.americanexpress.com/funds. -------------------------------------------------------------------------------- 19 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Financial Statements
Statement of assets and liabilities High Yield Portfolio May 31, 2005 Assets Investments in securities, at value (Note 1)* Investments in securities of unaffiliated issuers (identified cost $2,407,593,839) $2,358,386,331 Investments in securities of affiliated issuers (identified cost $13,412,897) 192,727 ------- Total investments in securities (identified cost $2,421,006,736) 2,358,579,058 Dividends and accrued interest receivable 43,997,806 Receivable for investment securities sold 16,349,681 Other receivable 1,516,052 --------- Total assets 2,420,442,597 ------------- Liabilities Disbursements in excess of cash on demand deposit 391,147 Payable for investment securities purchased 14,542,789 Payable upon return of securities loaned (Note 4) 2,970,000 Accrued investment management services fee 150,186 Other accrued expenses 124,300 ------- Total liabilities 18,178,422 ---------- Net assets $2,402,264,175 ============== * Including securities on loan, at value (Note 4) $ 2,932,500 --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 20 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Statement of operations High Yield Portfolio Year ended May 31, 2005 Investment income Income: Dividends $ 8,777 Interest 202,581,010 Fee income from securities lending (Note 4) 31,340 Less foreign taxes withheld (2,031) ------ Total income 202,619,096 ----------- Expenses (Note 2): Investment management services fee 14,973,845 Compensation of board members 16,823 Custodian fees 176,750 Audit fees 39,000 Other 97,866 ------ Total expenses 15,304,284 Earnings credits on cash balances (Note 2) (299) ---- Total net expenses 15,303,985 ---------- Investment income (loss) -- net 187,315,111 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on security transactions (Note 3) 99,791,002 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 10,339,916 ---------- Net gain (loss) on investments and foreign currencies 110,130,918 ----------- Net increase (decrease) in net assets resulting from operations $297,446,029 ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 21 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets High Yield Portfolio Year ended May 31, 2005 2004 Operations Investment income (loss) -- net $ 187,315,111 $ 210,722,582 Net realized gain (loss) on security transactions (Note 3) 99,791,002 144,796,138 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 10,339,916 (35,561,090) ---------- ----------- Net increase (decrease) in net assets resulting from operations 297,446,029 319,957,630 ----------- ----------- Proceeds from contributions 29,363,136 129,597,178 Fair value of withdrawals (556,980,153) (261,550,279) ------------ ------------ Net contributions (withdrawals) from partners (527,617,017) (131,953,101) ------------ ------------ Total increase (decrease) in net assets (230,170,988) 188,004,529 Net assets at beginning of year 2,632,435,163 2,444,430,634 ------------- ------------- Net assets at end of year $2,402,264,175 $2,632,435,163 ============== ==============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 22 -- AXP HIGH YIELD BOND FUND -- 2005 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 U.S. generally accepted accounting principles 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. Illiquid securities At May 31, 2005 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 at May 31, 2005 was $37,074,041 representing 1.54% 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. At May 31, 2005, the Portfolio has no outstanding forward-commitments. -------------------------------------------------------------------------------- 23 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. 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. -------------------------------------------------------------------------------- 24 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT 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. Guarantees and indemnifications Under the Portfolio's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Portfolio. In addition, certain of the Portfolio's contracts with its service providers contain general indemnification clauses. The Portfolio's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Portfolio cannot be determined and the Portfolio has no historical basis for predicting the likelihood of any such claims. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. 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 Portfolio 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. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets that declines from 0.59% to 0.465% annually as the Portfolio's assets increase. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. -------------------------------------------------------------------------------- 25 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other American Express mutual funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. During the year ended May 31, 2005, the Portfolio's custodian fees were reduced by $299 as a result of earnings credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,588,076,153 and $2,924,541,994, respectively, for the year ended May 31, 2005. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES At May 31, 2005, securities valued at $2,932,500 were on loan to brokers. For collateral, the Portfolio received $2,970,000 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 $31,340 for the year ended May 31, 2005. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 5. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results.
Ratios/supplemental data Fiscal period ended May 31, 2005 2004 2003 2002 2001 Ratio of expenses to average daily net assets(a) .58% .58% .59% .58% .59% Ratio of net investment income (loss) to average daily net assets 7.10% 7.90% 8.80% 9.13% 11.92% Portfolio turnover rate (excluding short-term securities) 105% 140% 139% 125% 76% Total return(b) 12.05% 13.06% 8.06% (3.69%) (.58%)
(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 net asset value and does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 26 -- AXP HIGH YIELD BOND FUND -- 2005 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, 2005, 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, 2005, and the financial highlights for each of the years in the five-year period ended May 31, 2005. 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, 2005, 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, 2005, 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 U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2005 -------------------------------------------------------------------------------- 27 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP High Yield Bond Fund May 31, 2005 Assets Investment in Portfolio (Note 1) $ 2,402,134,031 Capital shares receivable 1,390,123 --------- Total assets 2,403,524,154 ------------- Liabilities Dividends payable to shareholders 1,906,413 Capital shares payable 1,035,026 Accrued distribution fee 120,242 Accrued service fee 6 Accrued transfer agency fee 32,646 Accrued administrative services fee 12,148 Other accrued expenses 172,405 ------- Total liabilities 3,278,886 --------- Net assets applicable to outstanding capital stock $ 2,400,245,268 =============== Represented by Capital stock -- $.01 par value (Note 1) $ 8,398,580 Additional paid-in capital 3,809,556,949 Undistributed net investment income 24,365,203 Accumulated net realized gain (loss) (Note 4) (1,381,295,830) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (60,779,634) ----------- Total -- representing net assets applicable to outstanding capital stock $ 2,400,245,268 =============== Net assets applicable to outstanding shares: Class A $ 1,734,607,908 Class B $ 628,996,597 Class C $ 36,119,894 Class I $ 10,072 Class Y $ 510,797 Net asset value per share of outstanding capital stock: Class A shares 606,766,116 $ 2.86 Class B shares 220,191,985 $ 2.86 Class C shares 12,717,550 $ 2.84 Class I shares 3,521 $ 2.86 Class Y shares 178,795 $ 2.86 ------- ---------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 28 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Statement of operations AXP High Yield Bond Fund Year ended May 31, 2005 Investment income Income: Dividends $ 8,777 Interest 202,578,288 Fee income from securities lending 31,338 Less foreign taxes withheld (2,031) ------ Total income 202,616,372 ----------- Expenses (Note 2): Expenses allocated from Portfolio 15,303,246 Distribution fee Class A 4,680,366 Class B 7,125,474 Class C 395,850 Transfer agency fee 3,273,718 Incremental transfer agency fee Class A 241,377 Class B 157,521 Class C 8,631 Service fee -- Class Y 546 Administrative services fees and expenses 1,219,476 Compensation of board members 12,473 Printing and postage 392,430 Registration fees 92,580 Audit fees 13,000 Other 44,070 ------ Total expenses 32,960,758 Earnings credits on cash balances (Note 2) (67,675) ------- Total net expenses 32,893,083 ---------- Investment income (loss) -- net 169,723,289 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on security transactions 99,786,166 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 10,339,940 ---------- Net gain (loss) on investments and foreign currencies 110,126,106 ----------- Net increase (decrease) in net assets resulting from operations $279,849,395 ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 29 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets AXP High Yield Bond Fund Year ended May 31, 2005 2004 Operations and distributions Investment income (loss) -- net $ 169,723,289 $ 192,235,027 Net realized gain (loss) on security transactions 99,786,166 144,789,654 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 10,339,940 (35,559,091) ---------- ----------- Net increase (decrease) in net assets resulting from operations 279,849,395 301,465,590 ----------- ----------- Distributions to shareholders from: Net investment income Class A (124,296,625) (134,757,843) Class B (41,852,127) (51,954,829) Class C (2,328,121) (2,504,220) Class I (714) (302) Class Y (37,185) (58,506) ------- ------- Total distributions (168,514,772) (189,275,700) ------------ ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 312,217,159 459,864,402 Class B shares 83,510,353 201,230,467 Class C shares 6,988,226 20,138,072 Class I shares -- 26,626 Class Y shares 142,851 802,502 Reinvestment of distributions at net asset value Class A shares 92,086,192 100,451,105 Class B shares 33,185,884 41,694,620 Class C shares 1,862,449 2,018,581 Class I shares -- 97 Class Y shares 36,976 58,365 Payments for redemptions Class A shares (557,552,614) (489,630,961) Class B shares (Note 2) (300,940,930) (243,395,105) Class C shares (Note 2) (13,741,400) (14,666,421) Class I shares -- (16,586) Class Y shares (252,914) (1,125,673) -------- ---------- Increase (decrease) in net assets from capital share transactions (342,457,768) 77,450,091 ------------ ---------- Total increase (decrease) in net assets (231,123,145) 189,639,981 Net assets at beginning of year 2,631,368,413 2,441,728,432 ------------- ------------- Net assets at end of year $2,400,245,268 $2,631,368,413 ============== ============== Undistributed net investment income $ 24,365,203 $ 17,290,301 -------------- --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 30 -- AXP HIGH YIELD BOND FUND -- 2005 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 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. The Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At May 31, 2005, AEFC owned 100% of Class I shares. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees 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 at May 31, 2005 was 99.99%. -------------------------------------------------------------------------------- 31 -- AXP HIGH YIELD BOND FUND -- 2005 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 U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $5,866,385 resulting in a net reclassification adjustment to decrease paid-in capital by $5,866,385. -------------------------------------------------------------------------------- 32 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2005 2004 Class A Distributions paid from: Ordinary income $124,296,625 $134,757,843 Long-term capital gain -- -- Class B Distributions paid from: Ordinary income 41,852,127 51,954,829 Long-term capital gain -- -- Class C Distributions paid from: Ordinary income 2,328,121 2,504,220 Long-term capital gain -- -- Class I* Distributions paid from: Ordinary income 714 302 Long-term capital gain -- -- Class Y Distributions paid from: Ordinary income 37,185 58,506 Long-term capital gain -- -- * Inception date was March 4, 2004. At May 31, 2005, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 4,830,768 Accumulated long-term gain (loss) $(1,376,361,404) Unrealized appreciation (depreciation) $ (44,273,212) 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 that declines from 0.05% to 0.025% annually as the Fund's assets increase. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. -------------------------------------------------------------------------------- 33 -- AXP HIGH YIELD BOND FUND -- 2005 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 pursuant to Rule 12b-1, 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 $2,644,615 for Class A, $604,647 for Class B and $10,640 for Class C for the year ended May 31, 2005. During the year ended May 31, 2005, the Fund's transfer agency fees were reduced by $67,675 as a result of earnings credits from overnight cash balances. -------------------------------------------------------------------------------- 34 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2005 Class A Class B Class C Class I Class Y Sold 109,138,119 29,051,154 2,446,050 -- 49,400 Issued for reinvested distributions 32,037,784 11,569,033 652,218 -- 12,883 Redeemed (194,275,869) (105,528,720) (4,819,023) -- (88,370) ------------ ----------- ---------- ------ -------- Net increase (decrease) (53,099,966) (64,908,533) (1,720,755) -- (26,087) ------------ ----------- ---------- ------ -------- 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. 4. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $1,376,361,404 at May 31, 2005, that if not offset by capital gains will expire as follows: 2008 2009 2010 2011 $80,574,095 $226,001,198 $517,121,802 $552,664,309 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 The Bank of New York, whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding during the year ended May 31, 2005. -------------------------------------------------------------------------------- 35 -- AXP HIGH YIELD BOND FUND -- 2005 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, 2005 2004 2003 2002 2001 Net asset value, beginning of period $2.74 $2.62 $2.65 $3.07 $3.48 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .19 .21 .21 .25 .38 Net gains (losses) (both realized and unrealized) .12 .11 (.03) (.38) (.41) ----- ----- ----- ----- ----- Total from investment operations .31 .32 .18 (.13) (.03) ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.19) (.20) (.20) (.24) (.38) Tax return of capital -- -- (.01) (.05) -- ----- ----- ----- ----- ----- Total distributions (.19) (.20) (.21) (.29) (.38) ----- ----- ----- ----- ----- Net asset value, end of period $2.86 $2.74 $2.62 $2.65 $3.07 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $1,735 $1,810 $1,662 $1,681 $1,898 Ratio of expenses to average daily net assets(b) 1.04% 1.04% 1.07% 1.03% 1.04% Ratio of net investment income (loss) to average daily net assets 6.67% 7.47% 8.35% 8.73% 11.54% Portfolio turnover rate (excluding short-term securities) 105% 140% 139% 125% 76% Total return(c) 11.56% 12.51% 7.53% (4.31%) (.94%)
(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. -------------------------------------------------------------------------------- 36 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $2.74 $2.62 $2.65 $3.07 $3.48 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .17 .19 .19 .23 .35 Net gains (losses) (both realized and unrealized) .12 .11 (.03) (.38) (.41) ----- ----- ----- ----- ----- Total from investment operations .29 .30 .16 (.15) (.06) ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.17) (.18) (.18) (.22) (.35) Tax return of capital -- -- (.01) (.05) -- ----- ----- ----- ----- ----- Total distributions (.17) (.18) (.19) (.27) (.35) ----- ----- ----- ----- ----- Net asset value, end of period $2.86 $2.74 $2.62 $2.65 $3.07 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $629 $781 $748 $748 $807 Ratio of expenses to average daily net assets(b) 1.79% 1.80% 1.83% 1.79% 1.80% Ratio of net investment income (loss) to average daily net assets 5.92% 6.70% 7.59% 7.94% 10.79% Portfolio turnover rate (excluding short-term securities) 105% 140% 139% 125% 76% Total return(c) 10.72% 11.66% 6.73% (5.05%) (1.69%)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. -------------------------------------------------------------------------------- 37 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001(b) Net asset value, beginning of period $2.73 $2.61 $2.64 $3.05 $3.48 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .17 .19 .19 .23 .32 Net gains (losses) (both realized and unrealized) .11 .11 (.03) (.37) (.43) ----- ----- ----- ----- ----- Total from investment operations .28 .30 .16 (.14) (.11) ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.17) (.18) (.18) (.22) (.32) Tax return of capital -- -- (.01) (.05) -- ----- ----- ----- ----- ----- Total distributions (.17) (.18) (.19) (.27) (.32) ----- ----- ----- ----- ----- Net asset value, end of period $2.84 $2.73 $2.61 $2.64 $3.05 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $36 $39 $31 $21 $8 Ratio of expenses to average daily net assets(c) 1.79% 1.80% 1.83% 1.79% 1.80%(d) Ratio of net investment income (loss) to average daily net assets 5.92% 6.71% 7.52% 7.39% 11.10%(d) Portfolio turnover rate (excluding short-term securities) 105% 140% 139% 125% 76% Total return(e) 10.35% 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. -------------------------------------------------------------------------------- 38 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Class I Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004(b) Net asset value, beginning of period $2.74 $2.83 ----- ----- Income from investment operations: Net investment income (loss) .21 .08 Net gains (losses) (both realized and unrealized) .11 (.11) ----- ----- Total from investment operations .32 (.03) ----- ----- Less distributions: Dividends from net investment income (.20) (.06) ----- ----- Net asset value, end of period $2.86 $2.74 ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $-- $-- Ratio of expenses to average daily net assets(c) .64% .65%(d) Ratio of net investment income (loss) to average daily net assets 7.06% 7.30%(d) Portfolio turnover rate (excluding short-term securities) 105% 140% Total return(e) 11.97% (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. -------------------------------------------------------------------------------- 39 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $2.74 $2.62 $2.65 $3.07 $3.48 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .20 .21 .21 .26 .38 Net gains (losses) (both realized and unrealized) .12 .12 (.03) (.38) (.41) ----- ----- ----- ----- ----- Total from investment operations .32 .33 .18 (.12) (.03) ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.20) (.21) (.20) (.25) (.38) Tax return of capital -- -- (.01) (.05) -- ----- ----- ----- ----- ----- Total distributions (.20) (.21) (.21) (.30) (.38) ----- ----- ----- ----- ----- Net asset value, end of period $2.86 $2.74 $2.62 $2.65 $3.07 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $1 $1 $1 $1 $1 Ratio of expenses to average daily net assets(b) .87% .88% .91% .87% .88% Ratio of net investment income (loss) to average daily net assets 6.84% 7.60% 8.52% 8.80% 11.72% Portfolio turnover rate (excluding short-term securities) 105% 140% 139% 125% 76% Total return(c) 11.75% 12.67% 7.70% (4.17%) (.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. -------------------------------------------------------------------------------- 40 -- AXP HIGH YIELD BOND FUND -- 2005 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, 2005, 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, 2005, and the financial highlights for each of the years in the five-year period ended May 31, 2005. 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, 2005, 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 U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2005 -------------------------------------------------------------------------------- 41 -- AXP HIGH YIELD BOND FUND -- 2005 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, 2005 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.99% Dividends Received Deduction for corporations 0.99% Payable date Per share June 25, 2004 $0.01600 July 26, 2004 0.01500 Aug. 25, 2004 0.01597 Sept. 24, 2004 0.01648 Oct. 25, 2004 0.01650 Nov. 24, 2004 0.01745 Dec. 22, 2004 0.01606 Jan. 27, 2005 0.01517 Feb. 24, 2005 0.01500 March 30, 2005 0.01500 April 28, 2005 0.01600 May 26, 2005 0.01600 Total distributions $0.19063 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.99% Dividends Received Deduction for corporations 0.99% Payable date Per share June 25, 2004 $0.01428 July 26, 2004 0.01317 Aug. 25, 2004 0.01420 Sept. 24, 2004 0.01469 Oct. 25, 2004 0.01464 Nov. 24, 2004 0.01562 Dec. 22, 2004 0.01435 Jan. 27, 2005 0.01296 Feb. 24, 2005 0.01327 March 30, 2005 0.01291 April 28, 2005 0.01425 May 26, 2005 0.01440 Total distributions $0.16874 -------------------------------------------------------------------------------- 42 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.99% Dividends Received Deduction for corporations 0.99% Payable date Per share June 25, 2004 $0.01420 July 26, 2004 0.01312 Aug. 25, 2004 0.01412 Sept. 24, 2004 0.01461 Oct. 25, 2004 0.01454 Nov. 24, 2004 0.01553 Dec. 22, 2004 0.01426 Jan. 27, 2005 0.01289 Feb. 24, 2005 0.01320 March 30, 2005 0.01284 April 28, 2005 0.01418 May 26, 2005 0.01432 Total distributions $0.16781 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.99% Dividends Received Deduction for corporations 0.99% Payable date Per share June 25, 2004 $0.01688 July 26, 2004 0.01593 Aug. 25, 2004 0.01686 Sept. 24, 2004 0.01738 Oct. 25, 2004 0.01745 Nov. 24, 2004 0.01836 Dec. 22, 2004 0.01692 Jan. 27, 2005 0.01601 Feb. 24, 2005 0.01589 March 30, 2005 0.01604 April 28, 2005 0.01689 May 26, 2005 0.01684 Total distributions $0.20145 -------------------------------------------------------------------------------- 43 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.99% Dividends Received Deduction for corporations 0.99% Payable date Per share June 25, 2004 $0.01636 July 26, 2004 0.01538 Aug. 25, 2004 0.01634 Sept. 24, 2004 0.01686 Oct. 25, 2004 0.01689 Nov. 24, 2004 0.01783 Dec. 22, 2004 0.01642 Jan. 27, 2005 0.01563 Feb. 24, 2005 0.01536 March 30, 2005 0.01544 April 28, 2005 0.01636 May 26, 2005 0.01633 Total distributions $0.19520 -------------------------------------------------------------------------------- 44 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2005. Actual Expenses The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 45 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses account value account value paid during Annualized Dec. 1, 2004 May 31, 2005 the period(a) expense ratio Class A Actual(b) $1,000 $1,011.10 $5.16 1.03% Hypothetical (5% return before expenses) $1,000 $1,019.80 $5.19 1.03% Class B Actual(b) $1,000 $1,007.30 $8.96 1.79% Hypothetical (5% return before expenses) $1,000 $1,016.01 $9.00 1.79% Class C Actual(b) $1,000 $1,003.60 $8.94 1.79% Hypothetical (5% return before expenses) $1,000 $1,016.01 $9.00 1.79% Class I Actual(b) $1,000 $1,009.40 $3.26 .65% Hypothetical (5% return before expenses) $1,000 $1,021.69 $3.28 .65% Class Y Actual(b) $1,000 $1,011.80 $4.36 .87% Hypothetical (5% return before expenses) $1,000 $1,020.59 $4.38 .87%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2005: +1.11% for Class A, +0.73% for Class B, +0.36% for Class C, +0.94% for Class I and +1.18% for Class Y. -------------------------------------------------------------------------------- 46 -- AXP HIGH YIELD BOND FUND -- 2005 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 14 Master Trust portfolios and 90 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 Other directorships with Fund and past five years length of service -------------------------------------- --------------- ------------------------------ ----------------------------- Arne H. Carlson Board member Chair, Board Services 901 S. Marquette Ave. since 1999 Corporation (provides Minneapolis, MN 55402 administrative services to Age 70 boards). Former Governor of Minnesota -------------------------------------- --------------- ------------------------------ ----------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 Fluor Corporation Materials Company, Inc. Minneapolis, MN 55402 (engineering and (construction Age 67 construction) since 1998 materials/chemicals) -------------------------------------- --------------- ------------------------------ ----------------------------- Livio D. DeSimone Board member Retired Chair of the Board Cargill, Incorporated 30 Seventh Street East since 2001 and Chief Executive Officer, (commodity merchants and Suite 3050 Minnesota Mining and processors), General Mills, St. Paul, MN 55101-4901 Manufacturing (3M) Inc. (consumer foods), Age 71 Vulcan Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. -------------------------------------- --------------- ------------------------------ ----------------------------- Patricia M. Flynn Board member Trustee Professor of BostonFed Bancorp, Inc. 901 S. Marquette Ave. since 2004 Economics and Management, (holding company) and its Minneapolis, MN 55402 Bentley College since 2002; subsidiary Boston Federal Age 54 former Dean, McCallum Savings Bank Graduate School of Business, Bentley College from 1999 to 2002 -------------------------------------- --------------- ------------------------------ ----------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 70 -------------------------------------- --------------- ------------------------------ ----------------------------- Stephen R. Lewis, Jr. Board member Retired President and Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation Minneapolis, MN 55402 Carleton College systems) Age 66 -------------------------------------- --------------- ------------------------------ -----------------------------
-------------------------------------------------------------------------------- 47 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position Principal occupation during Other directorships held with past five years Fund and length of service -------------------------------------- --------------- ------------------------------- ---------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic Distribution, 901 S. Marquette Ave. since 2004 Management, Inc. (private Inc. (transportation, Minneapolis, MN 55402 real estate and asset distribution and logistics Age 52 management company) since 1999 consultants) -------------------------------------- --------------- ------------------------------- ---------------------------- Alan K. Simpson Board member Former three-term United 1201 Sunshine Ave. since 1997 States Senator for Wyoming Cody, WY 82414 Age 73 -------------------------------------- --------------- ------------------------------- ---------------------------- Alison Taunton-Rigby Board member Founder and Chief Executive Hybridon, Inc. 901 S. Marquette Ave. since 2002 Officer, RiboNovix, Inc. (biotechnology) Minneapolis, MN 55402 since 2004; President, Age 61 Forester Biotech since 2000; prior to that, President and CEO, Aquila Biopharmaceuticals, Inc. -------------------------------------- --------------- ------------------------------- ---------------------------- Board Member Affiliated with AEFC* Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service -------------------------------------- --------------- ------------------------------- ---------------------------- William F. Truscott Board member Senior Vice President - Chief 53600 AXP Financial Center since 2001, Investment Officer of AEFC Minneapolis, MN 55474 Vice President since 2001. Former Chief Age 44 since 2002 Investment Officer and 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 -- 2005 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 Other directorships with Fund and past five years length of service -------------------------------------- --------------- ------------------------------- ---------------------------- Jeffrey P. Fox Treasurer Vice President - Investment 105 AXP Financial Center since 2002 Accounting, AEFC, since Minneapolis, MN 55474 2002; Vice President - Age 50 Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 -------------------------------------- --------------- ------------------------------- ---------------------------- Paula R. Meyer President Senior Vice President and 596 AXP Financial Center since 2002 General Manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Vice Age 51 President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 -------------------------------------- --------------- ------------------------------- ---------------------------- Leslie L. Ogg Vice President of Board Services 901 S. Marquette Ave. President, Corporation Minneapolis, MN 55402 Age 66 General Counsel, and Secretary since 1978 -------------------------------------- --------------- ------------------------------- ---------------------------- Beth E. Weimer Chief Vice President and Chief 172 AXP Financial Center Compliance Compliance Officer, AEFC, Minneapolis, MN 55474 Officer since since 2001; Vice President Age 52 2004 and Chief Compliance Officer, AEFA, 2001-2005; Partner, Arthur Andersen Regulatory Risk Services, 1998-2001 -------------------------------------- --------------- ------------------------------- ----------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. -------------------------------------------------------------------------------- 49 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT Approval of Investment Management Services Agreement American Express Financial Corporation (AEFC), a wholly-owned subsidiary of American Express Company, serves as the investment manager to the Fund. Under an Investment Management Services Agreement (the Agreement), AEFC provides investment advice and other services to the Fund. Throughout the year, the Funds' Board of Directors and the Board's Investment Review Committee monitor these services. Each year the Board determines whether to continue the Agreement by evaluating the quality and level of service received and the costs associated with those services. AEFC prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations to assist the Board in making this determination. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the Agreement. On February 1, 2005, American Express Company announced its intention to pursue a spin-off of AEFC by distributing shares of the common stock of AEFC to shareholders of American Express Company. At a meeting held in person on April 14, 2005, the Board, including a majority of the independent members, approved the continuation of the Agreement for an interim period, not to exceed one year, ending on the later of (i) the effective date of the spin-off or (ii) the approval by the Fund's shareholders of a new investment management services agreement with AEFC (the Interim Period). The spin-off will not result in an "assignment" of the Agreement under the Investment Company Act of 1940 and, therefore, will not cause the termination of the Agreement according to its terms. In connection with the spin-off AEFC has proposed that going forward, services under the Agreement be provided by an affiliate, RiverSource Investments, LLC (RiverSource). Independent counsel advised the Board that it would be prudent, in connection with the spin-off, to consider a new agreement with RiverSource and to seek shareholder approval of that agreement as soon as practical thereafter. Investment performance is a major factor in the evaluation process, and the Board reviewed the Fund's performance over a range of different periods by comparing its performance to relevant Lipper and broader market indices. The Board considered that over time the Fund's investment performance should be above the median for a peer group of funds with similar investment goals and noted that the Fund's investment performance in 2004 exceeded the median. The Board noted that, in addition to portfolio management and investment research, AEFC provides portfolio trading, daily net asset value calculation, management of cash flow, product development, administration of its compliance and legal departments, access to distribution, accounting and recordkeeping, and reporting to the Board and shareholders. To evaluate these services, the Board referred to surveys and benchmarks established by commercial providers, trade associations and AEFC's internal processes. The Board concluded that the services provided were consistent with services provided by investment managers to comparable mutual funds. -------------------------------------------------------------------------------- 50 -- AXP HIGH YIELD BOND FUND -- 2005 ANNUAL REPORT The Board also evaluated the price paid for the services provided by AEFC, noting the existence of a pricing philosophy, established by the Board and AEFC, that seeks to maintain total Fund expenses within a range of the median expenses charged to comparable funds sold through financial advisors. The Board considered detailed information set forth in an annual report on fees and expenses, including, among other things, data showing a comparison of the Fund's expenses with median expenses paid by funds in its comparison group and data showing the Fund's contribution to AEFC's profitability. The Board determined that while the Fund's expenses are somewhat higher than the median for its comparison group, the Fund's strong performance justified the level of expenses. The Board considered the economies of scale that might be realized by AEFC as the Fund grew and took note of the extent to which Fund shareholders also might benefit from such growth. The Board considered that the Agreement provided for lower fees as assets increase at pre-established breakpoints and concluded that the Agreement satisfactorily provided for sharing these economies of scale. The Board took into account the Contracts Committee's discussion comparing the fees AEFC charges to the Fund with those it charges to institutional clients, noting that the relatively higher fees paid by the Fund were principally attributable to the additional services required to manage a regulated mutual fund, like the Fund, and the operation of a large mutual fund family. The Board also considered the profitability realized by AEFC and its affiliates from its relationship with the Fund. The Board took into account the services acquired by AEFC through the use of commission dollars paid by the Fund on portfolio transactions. The Board concluded that AEFC's overall costs and profitability were appropriate, although profitability may be too low on an ongoing basis. The Board noted that the fees paid by the Fund should permit AEFC to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. Based on the foregoing, the Board concluded that the fees paid to AEFC under the Agreement were fair and reasonable and determined to approve renewal of the Agreement for the Interim Period. Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website americanexpress.com/funds; or by searching the website of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at http://www.sec.gov. -------------------------------------------------------------------------------- 51 -- AXP HIGH YIELD BOND FUND -- 2005 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 and Anne P. Jones, 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: 2005 - $13,000; 2004 - $12,841 (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: 2005 - $563; 2004 - $569 (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: 2005 - $2,639; 2004 - $2,495 (d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered for AXP High Yield Income Series, Inc. were as follows: 2005 - $755; 2004 - None (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 2005 and 2004 were pre-approved by the audit committee. (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: 2005 - None; 2004 - 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: 2005 - $75,900; 2004 - $71,000 (h) 100% of the services performed for item (g) above during 2005 and 2004 were pre-approved by the audit committee. * 2004 represents bills paid 6/1/03 - 5/31/04 2005 represents bills paid 6/1/04 - 5/31/05 Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) 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, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2005 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 3, 2005