-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kn2npF/e6Hz7cLsAP93w5mju+2mSqp2woWceVEDIYwrtsIkR92QQZwXM+oI5qIcs RNLsKRIYNralEO76q+QQ0w== 0000820027-03-000059.txt : 20030127 0000820027-03-000059.hdr.sgml : 20030127 20030127105918 ACCESSION NUMBER: 0000820027-03-000059 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021130 FILED AS OF DATE: 20030127 EFFECTIVENESS DATE: 20030127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP GOVERNMENT INCOME SERIES INC CENTRAL INDEX KEY: 0000764802 IRS NUMBER: 412021315 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04260 FILM NUMBER: 03525088 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 MAIL ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS FEDERAL INCOME FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AXP FEDERAL INCOME FUND INC /MN/ DATE OF NAME CHANGE: 20000829 N-30D 1 s6442t.txt AXP FEDERAL INCOME FUND AXP(R) Federal Income Fund 2002 SEMIANNUAL REPORT AXP Federal Income Fund seeks to provide shareholders with a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. American Express(R) Funds AMERICAN EXPRESS(R) Table of Contents From the Chairman 2 Economic and Market Update 4 Fund Snapshot 6 Questions & Answers with Portfolio Management 7 Investments in Securities 10 Financial Statements (Portfolio) 14 Notes to Financial Statements (Portfolio) 16 Financial Statements (Fund) 20 Notes to Financial Statements (Fund) 23 Results of Meeting of Shareholders 29 (photo of) Arne H. Carlson From the Chairman Arne H. Carlson Chairman of the board Dear Shareholders, As we begin a new year, the proposed Bush economic stimulus package and potential conflicts around the globe are capturing headlines. While we don't know exactly what the future will bring for investors, we do know the past three years have been extremely difficult. Negative investment returns persisted in 2002 and the investing public also had their confidence in the integrity of corporations shaken. While the scandals appear to be largely behind us, the recent past offers lessons on investing and on governance, which I would like to discuss with you. First, and importantly, we have learned that diversification is not just a concept but a key tactic investors can use to help preserve assets. Many investors have come to a new understanding of their own degree of risk tolerance after three years of down markets. We would encourage you to work closely with your financial advisor to build a diversified portfolio designed to match your current thoughts about risk and reward. - -------------------------------------------------------------------------------- 2 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT From the Chairman A second lesson of 2002 is that we must have enhanced oversight of corporations to ensure their financial statements are accurate, their officers act in the interest of shareholders and their directors are truly independent. The Sarbanes-Oxley Act passed by Congress in August, is already having an impact in these areas. We believe governance of the American Express(R) Funds is consistent with the standards imposed by Sarbanes-Oxley. The American Express Funds Board is an independent body comprised of 10 members who are nominated by the independent directors. American Express Financial Corporation is represented by three board members, however, they do not play a role on the nominating committee. I am proud of our board members who come from across the United States and bring strong, diverse skills to the assignment of looking out for the interest of the Funds' shareholders. In 2002, we saw solid evidence of progress in several areas including, importantly, investment performance. In addition, the Funds auditors, KPMG LLP, are independent of American Express Financial Corporation. KPMG serves the interest of shareholders by supporting the work of the Board and certifying unbiased financial reports. Further, the Board has confidence in Ted Truscott, American Express Financial Corporation's Chief Investment Officer, and shares his enthusiasm in the management changes he has effected to improve the investment performance of all American Express funds. The focus of the Board and American Express Financial Corporation is simple; we strive for consistent, competitive investment performance. All of the proposals in the proxy statement you received in September were approved at the shareholder meeting on Nov. 13, 2002, and most will be implemented in the coming weeks. On behalf of the Board, Arne H. Carlson - -------------------------------------------------------------------------------- 3 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Economic and Market Update FROM CIO WILLIAM F. "TED" TRUSCOTT (photo of) William F. "Ted" Truscott William F. "Ted" Truscott Chief Investment Officer American Express Financial Corporation Dear Shareholders, In spite of a mostly positive fourth quarter*, 2002 proved to be an extraordinarily challenging year for investors, with the benchmark stock indices - -- the Dow, the Nasdaq and the S&P 500 -- all registering percentage losses well into the double digits. While there were technical factors that put a damper on market performance last year, most notably, P/E ratios that are surprisingly high after three years of a bear market, it was corporate governance issues that fostered a general atmosphere of mistrust. The collapse of several large, high profile companies due to outright fraud and malfeasance has been -- and ought to be -- outrageous to the investing public. The magnitude of this wrongdoing is still shocking months after the fact. When many economic factors should have been giving investors reason for optimism, the steady drip of news about these companies sapped overall confidence. I believe there is ample evidence that conditions are not as bad as the markets seem to think. While corporate earnings have been weak, the economy grew at the respectable rate of about 3% last year, compared to 0.1% in 2001. A portion of the softness in earnings can be attributed to excess capacity added in the late `90s. KEY POINTS - -- Stocks are continuing to get less expensive. - -- Credit "crunch" for business sector persists. - -- Those saving for long-term goals should maintain a significant allocation to equities. - -------------------------------------------------------------------------------- 4 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Economic and Market Update Interest rates are another bright spot. They are the lowest they have been in 40 years, which has added to consumer and business purchasing power. There's no better illustration of this than the housing market, which has remained vigorous. Finally, the business productivity gains we've seen since the mid-`90s are remarkable, making products and services less expensive. The macroeconomic picture, while not ideal, is certainly positive. For these reasons, I'm cautiously optimistic about market prospects for 2003. Of course, there are still risks. Much of what happens this year will depend on external factors, such as whether or not more scandals arise and the implications of potential conflict in Iraq. In the short term, military action in Iraq would almost certainly produce an oil price spike; if that increase became severe enough for a significant period of time, it would create inflationary pressures that could endanger economic growth. In addition to stocks, some bond categories offer opportunity. Though we believe U.S. Treasuries are currently overvalued, select corporate, high-yield and municipal issues may provide competitive returns this year. Speak to your financial advisor to learn more about different asset classes. After three years of negative stock market returns, many individual investors are rebalancing portfolios with regard to risk and return. If you are repositioning, we would encourage moderate changes from stocks to bonds. The risk inherent in emotion-based repositioning is that you will go too far too fast. I encourage gradual movement across categories. Should interest rates move at all in 2003, it's likely that they'll go up, which will have a negative impact on most bonds. Continue to invest according to your individual timeframe and financial goals. As always, thank you for investing with American Express Financial Advisors. William F. Truscott * Please see portfolio manager Q&A for fiscal period economic coverage. - -------------------------------------------------------------------------------- 5 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Fund Snapshot AS OF NOV. 30, 2002 PORTFOLIO MANAGER Portfolio manager Scott Kirby Tenure/since 6/01 Years in industry 22 FUND OBJECTIVE For investors seeking a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. Inception dates A: 8/19/85 B: 3/20/95 C: 6/26/00 Y: 3/20/95 Ticker symbols A: IFINX B: ISHOX C: AXFCX Y: IDFYX Total net assets $3.299 billion Number of holdings approximately 140 STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW Shares of the Fund are not insured or guaranteed by the U.S. government. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 6 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Q: How did the AXP Federal Income Fund perform during the six-month period ended Nov. 30, 2002? A: For the period, the Fund's Class A shares returned 2.87% excluding sales charges. In comparison, the Lehman Brothers Aggregate Bond Index returned 4.98% and the Merrill Lynch 1-3 Year U.S. Government Index generated a return of 3.19%. The Lipper Short U.S. Government Funds Index returned 2.56% over the same timeframe. Q: What factors most significantly impacted performance? A: Against a backdrop of a declining stock market, corporate governance concerns and a sluggish economic recovery, investors avoided equities and the more risky areas of the bond market. The Fund's return was negatively affected by our decision to keep its duration shorter than the market as interest rates declined. Duration measures a bond's sensitivity to interest-rate changes. In a declining interest-rate environment, a longer duration benefits a fund because prices on longer-duration bonds have the potential to appreciate more than prices on shorter-duration bonds, which tend to be more stable. Throughout the period, U.S. government and government agency securities were relatively strong performers, as investors sought safety above everything else. The Fund also experienced a loss on futures, which detracted from performance. (bar graph) PERFORMANCE COMPARISON For the six-month period ended Nov. 30, 2002 6% 4% (bar 1) (bar 2) (bar 3) (bar 4) 2% +2.87% +4.98% +2.56% +3.19% 0% (bar 1) AXP Federal Income Fund Class A (excluding sales charge) (bar 2) Lehman Brothers Aggregate Bond Index(1) (unmanaged) (bar 3) Lipper Short U.S. Government Funds Index(2) (bar 4) Merrill Lynch 1-3 Year U.S. Government Index(3) (unmanaged) (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper Short U.S. Government Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. (3) Merrill Lynch 1-3 Year U.S. Government Index, an unmanaged index, is made up of a representative list of government bonds. The index is frequently used as a general measure of government bond performance. However, the securities used to create the index may not be representative of the bonds held in the Fund. Past performance is no guarantee of future results. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in sales charges and fees. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. - -------------------------------------------------------------------------------- 7 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Questions & Answers (begin callout quote) >...we have put more of a focus on strategies designed to offset the impact of rising interest rates. (end callout quote) Q: What changes did you make to the Fund's portfolio? A: We took a more conservative stance in positioning the portfolio. While we reduced the Fund's commitment to mortgage-backed securities early in the period, they remained the Fund's largest position. These securities provided an extra income boost for the Fund, as mortgage-backed securities typically offer a yield advantage over comparable Treasuries. Treasury issues represented about one-third of the Fund's assets, and they aided the Fund's results as yields declined and prices rose on short-term and intermediate-term Treasury securities. For diversification purposes, we allocated about 5% of the Fund's assets to debt issued by European and Asian banks. AVERAGE ANNUAL TOTAL RETURNS as of Nov. 30, 2002 Class A Class B Class C Class Y (Inception dates) (8/19/85) (3/20/95) (6/26/00) (3/20/95) NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5) 6 months* +2.87% -2.02% +2.48% -2.52% +2.48% +1.48% +2.94% +2.94% 1 year +4.56% -0.40% +3.78% -0.22% +3.78% +3.78% +4.72% +4.72% 5 years +5.29% +4.27% +4.50% +4.34% N/A N/A +5.43% +5.43% 10 years +5.78% +5.26% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +5.44% +5.44% +6.40% +6.40% +6.39% +6.39%
* Not annualized. (1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. The performance shown for each class of shares will vary due to differences in sales charges and fees. Short term performance may be higher or lower than the figures shown. Visit americanexpress.com for current information. - -------------------------------------------------------------------------------- 8 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Questions & Answers Q: What is your outlook for the months ahead? A: Recently, we've seen mixed economic news due to overhanging geo-political risks such as the possibility of war with Iraq. As we look ahead to 2003, we believe interest rates may rise modestly as the economy slowly begins to show signs of recovery. In a rising interest-rate environment, bond prices will decline. Over the past several weeks, we have seen an upturn in the equity market, as investors become more confident that the economic recovery will stay on track and that corporate profits will rebound in the months ahead. This renewed interest in equities may mean that some bond investors will switch some of their assets to equities, which will put further downward pressure on bond prices. In order to protect the Fund's principal value, we have put more of a focus on strategies designed to offset the impact of rising interest rates. We will maintain a neutral to slightly defensive position regarding the Fund's interest-rate sensitivity. In addition, we will look to achieve the highest dividend that is reasonable within the Fund's risk constraints, as yield will probably make up most or all of the Fund's return in the months ahead. - -------------------------------------------------------------------------------- 9 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Investments in Securities Government Income Portfolio Nov. 30, 2002 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (99.9%) Issuer Coupon Principal Value(a) rate amount Government obligations & agencies (42.8%) Federal Home Loan Bank 02-15-05 4.38% $46,000,000 $47,940,464 Student Loan Mtge Assn 07-15-04 3.38 100,000,000 102,097,700 U.S. Treasury 03-31-04 3.63 192,000,000 196,852,416 05-15-04 12.38 7,000,000(f) 8,060,661 06-30-04 2.88 240,400,000 244,200,724 09-30-04 1.88 262,700,000 262,125,212 11-15-04 7.88 185,600,000 206,160,954 05-15-05 6.75 142,150,000 157,153,506 08-15-05 10.75 85,590,000 104,192,473 11-15-09 10.38 48,000,000(f) 55,406,256 TIPS 07-15-12 3.00 25,500,000(i) 26,637,824 Total 1,410,828,190 Mortgage-backed securities (50.3%) Federal Home Loan Mtge Corp 09-01-09 6.50 1,723,121 1,812,816 10-01-10 7.00 4,013,755 4,261,268 01-01-12 5.50 27,046,839 28,059,701 03-01-12 7.50 15,185,942 16,130,384 01-01-13 6.00 5,457,681 5,704,228 07-01-14 6.50 8,535,197 8,967,869 06-01-15 7.50 24,893,172 26,440,502 04-01-17 6.50 59,657,774 62,567,495 07-01-17 6.00 36,114,712 37,499,647 07-01-17 6.50 41,037,291 43,039,691 11-01-23 8.00 3,903,938 4,227,419 05-01-24 7.50 1,731,174 1,843,674 07-01-24 8.00 491,574 529,850 07-01-24 8.00 1,791,896(f) 1,931,420 01-01-25 9.00 1,887,176 2,083,869 06-01-25 8.00 2,769,294 2,983,251 08-01-25 8.00 644,092 693,854 05-01-26 9.00 3,622,897 4,016,590 Collateralized Mtge Obligation 12-15-08 6.00 22,675,342 23,916,211 06-15-11 5.25 40,751,500 42,112,062 12-15-13 5.50 47,000,000 48,412,764 02-15-14 5.50 29,386,000 30,595,772 11-15-15 5.50 44,000,000 45,565,907 02-15-16 5.50 40,000,000 41,512,444 12-15-17 5.00 50,000,000 51,312,499 12-15-17 5.00 46,000,000 47,035,000 01-17-21 6.00 10,000,000 10,525,062 12-15-21 5.75 12,833,000 13,272,915 02-25-42 6.00 34,000,000 35,769,360 Interest Only 11-15-18 6.50 11,518,295(d) 49,437 01-01-20 10.00 47,521(d) 11,691 11-15-25 70.91 8,658,527(d) 607,864 Interest Only/Inverse Floater 03-15-32 6.57 20,949,381(d,h) 1,423,672 Principal Only 09-15-03 0.27 985,155(e) 983,941 05-15-08 2.50 1,827,775(e) 1,811,491 05-15-08 1.79 654,700(e) 650,757 Federal Natl Mtge Assn 09-01-07 8.50 638,681 679,341 01-01-09 5.59 39,196,877 41,443,478 10-01-09 7.11 4,384,161 4,867,689 11-01-10 7.11 5,000,000 5,570,764 09-01-12 6.74 4,709,462 5,274,347 12-01-12 5.00 40,000,000(b) 40,724,800 05-01-13 6.00 3,031,911 3,167,133 06-01-13 6.00 24,822,454 25,929,523 09-01-13 6.00 55,134 57,593 10-01-13 6.00 9,288,607 9,702,874 11-01-13 6.00 3,599,774 3,760,322 12-01-13 5.50 16,205,738 16,767,181 12-01-13 6.00 2,019,073 2,109,123 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 01-01-14 5.50% $29,929,263 $30,966,153 01-01-14 6.00 1,681,522 1,756,517 02-01-14 5.50 2,960,305 3,062,864 03-01-14 5.50 4,045,518 4,185,674 03-01-14 6.00 2,588,641 2,704,093 04-01-14 5.50 85,475,761 88,437,040 06-01-14 6.50 32,307,931 33,990,568 07-01-14 5.50 64,092,116 66,312,566 08-01-14 6.50 2,366,312 2,487,333 09-01-14 6.00 231,465 241,433 08-01-15 5.50 14,946,227 15,464,034 12-01-16 5.50 2,936,216 3,011,858 06-01-17 6.50 10,748,043 11,277,768 07-01-17 6.00 53,456,725 55,544,744 08-01-17 5.50 39,163,749 40,225,052 11-01-17 5.50 24,209,736 24,826,328 11-01-21 8.00 708,457 767,205 03-01-23 9.00 470,301 523,017 09-01-23 6.50 20,086,194 20,922,370 11-01-23 6.00 6,120,447 6,322,537 12-01-23 7.00 5,589,947 5,882,182 01-01-24 6.50 5,548,858 5,779,854 06-01-24 9.00 1,648,108 1,829,247 02-01-26 6.00 360,571 370,546 02-01-26 8.00 704,496 760,313 05-01-26 7.50 4,655,933 4,950,715 12-01-28 7.00 12,406,777 13,004,117 08-01-29 7.00 5,318,434 5,567,719 04-01-31 6.50 15,608,259 16,129,739 09-01-31 7.50 5,858,720 6,211,568 11-01-31 6.50 4,920,276 5,112,314 09-01-32 6.50 5,319,858(b) 5,497,682 Collateralized Mtge Obligation 11-25-08 5.50 629,441 638,890 01-25-09 5.50 49,612,000 51,290,920 06-25-09 5.50 36,170,000 37,281,652 09-25-10 5.00 16,419,000 16,917,192 01-25-12 5.50 29,020,000 30,129,777 01-25-19 5.00 23,799,500 24,734,456 07-25-21 5.50 12,205,000 12,742,636 04-25-31 6.00 43,733,486 45,213,865 10-01-32 5.00 34,000,000 35,093,328 11-25-32 5.00 32,346,818 32,904,280 03-25-42 5.50 31,500,000(b) 32,317,031 08-25-42 4.70 16,000,000 16,141,440 Interest Only 05-25-12 5.50 15,946,210(d) 1,424,432 08-01-18 9.50 23,237(d) 5,119 01-15-20 10.00 965,787(d) 251,484 02-25-22 9.50 141,609(d) 32,289 07-25-22 8.50 3,295,243(d) 673,935 Interest Only/Inverse Floater 02-25-32 6.42 40,614,984(d,h) 3,671,063 Inverse Floater 11-25-23 22.40 1,316,142(h) 1,472,113 03-25-24 21.59 89,276(h) 93,162 Principal Only 06-25-21 4.72 121,698(e) 109,513 Govt Natl Mtge Assn 09-15-14 6.00 23,597,521 24,793,195 08-20-19 11.00 59,043 68,072 Total 1,660,541,539 Banks and savings & loans (5.3%)(c) Asian Development Bank (U.S. Dollar) 03-09-04 6.13 40,000,000 41,959,160 European Investment Bank (U.S. Dollar) 03-15-05 4.00 51,000,000 52,544,280 Inter-American Development Bank (U.S. Dollar) 01-18-05 4.00 30,000,000 31,068,540 Intl Bank for Reconstruction & Development (U.S. Dollar) 11-04-05 5.00 45,000,000 47,831,670 Total 173,403,650 Financial services (1.5%) KFW Intl Finance 10-01-04 3.75 50,000,000 51,140,500 Total bonds (Cost: $3,243,169,977) $3,295,913,879 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Options purchased (--%) Issuer Notional Exercise Expiration Value(a) amount price date Puts Jan. U.S. Treasury Bonds $22,500,000 $107 Dec. 2002 $253,125 June Euro Dollar 212,500,000 98 June 2003 127,500 March U.S. Treasury Notes 170,000,000 109 March 2003 1,089,054 Total options purchased (Cost: $1,360,243) $1,469,679 Short-term securities (4.0%)(g) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies Federal Home Loan Mtge Corp Disc Nts 01-17-03 1.24% $5,000,000 $4,991,767 01-30-03 1.24 46,800,000 46,705,651 02-27-03 1.26 30,000,000 29,910,840 Federal Natl Mtge Assn Disc Nts 12-23-02 1.46 10,000,000 9,990,267 12-26-02 1.50 9,200,000 9,189,650 01-14-03 1.24 31,800,000 31,750,842 Total short-term securities (Cost: $132,532,134) $132,539,017 Total investments in securities (Cost: $3,377,062,354)(j) $3,429,922,575 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At Nov. 30, 2002, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $79,269,139. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Nov. 30, 2002, the value of foreign securities represented 5.3% of net assets. (d) Interest-only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest-only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing of future cash flows as of Nov. 30, 2002. (e) Principal-only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal-only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows as of Nov. 30, 2002. (f) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 4 to the financial statements): Type of security Notional amount --------------------------------------------------------------------------- Purchase contracts U.S. Treasury Bonds, March 2003, 20-year $ 68,600,000 U.S. Treasury Notes, March 2003, 2-year 270,800,000 U.S. Treasury Notes, March 2003, 10-year 150,700,000 Sale contracts Swap Futures, April 2003, 10-year 83,100,000 U.S. Treasury Notes, March 2003, 5-year 504,700,000 (g) At Nov. 30, 2002, cash or short-term securities were designated to cover open put options written as follows (see Note 6 to the financial statements): Issuer Notional Exercise Expiration Value(a) amount price date --------------------------------------------------------------------------- U.S. Treasury Bonds, 20-year $45,000,000 $105 Dec. 2002 $232,029 (h) Inverse floaters represent securities that pay interest at a rate that increases (decreases) in the same magnitude as, or in a multiple of, a decline (increase) in market short-term rates. Interest rate disclosed is the rate in effect on Nov. 30, 2002. (i) U.S. Treasury inflation-protection securities (TIPS) are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (j) At Nov. 30, 2002, the cost of securities for federal income tax purposes was approximately $3,377,062,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $60,565,000 Unrealized depreciation (7,704,000) ---------- Net unrealized appreciation $52,861,000 ----------- - -------------------------------------------------------------------------------- 13 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Financial Statements Statement of assets and liabilities Government Income Portfolio Nov. 30, 2002 (Unaudited) Assets Investments in securities, at value (Note 1)* (identified cost $3,377,062,354) $3,429,922,575 Cash in bank on demand deposit 1,243,958 Accrued interest receivable 20,384,126 Receivable for investment securities sold (257,571) U.S. government securities held as collateral (Note 5) 244,279,074 ----------- Total assets 3,695,572,162 ------------- Liabilities Payable for investment securities purchased 79,289,924 Payable upon return of securities loaned (Note 5) 315,766,575 Accrued investment management services fee 88,703 Other accrued expenses 58,426 Options contracts written, at value (premiums received $230,234) (Note 6) 232,029 ------- Total liabilities 395,435,657 ----------- Net assets $3,300,136,505 ============== *Including securities on loan, at value (Note 5) $ 311,121,100 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 14 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Statement of operations Government Income Portfolio Six months ended Nov. 30, 2002 (Unaudited) Investment income Income: Interest $ 62,415,736 ------------ Expenses (Note 2): Investment management services fee 7,408,052 Compensation of board members 11,338 Custodian fees 83,350 Audit fees 18,000 Other 28,363 ------ Total expenses 7,549,103 --------- Investment income (loss) -- net 54,866,633 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 25,936,335 Futures contracts (11,845,848) Options contracts written (Note 6) (2,746,559) - ---------- Net realized gain (loss) on investments 11,343,928 Net change in unrealized appreciation (depreciation) on investments 18,337,207 ---------- Net gain (loss) on investments 29,681,135 ---------- Net increase (decrease) in net assets resulting from operations $ 84,547,768 ============
Statements of changes in net assets Government Income Portfolio Nov. 30, 2002 May 31, 2002 Six months ended Year ended (Unaudited) Operations Investment income (loss) -- net $ 54,866,633 $ 105,493,519 Net realized gain (loss) on investments 11,343,928 26,857,517 Net change in unrealized appreciation (depreciation) on investments 18,337,207 7,407,629 ---------- --------- Net increase (decrease) in net assets resulting from operations 84,547,768 139,758,665 ---------- ----------- Proceeds from contributions 792,980,218 442,781,541 Fair value of withdrawals (84,953,935) (202,909,108) ----------- ------------ Net contributions (withdrawals) from partners 708,026,283 239,872,433 ----------- ----------- Total increase (decrease) in net assets 792,574,051 379,631,098 Net assets at beginning of period 2,507,562,454 2,127,931,356 ------------- ------------- Net assets at end of period $3,300,136,505 $2,507,562,454 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 15 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Notes to Financial Statements Government Income Portfolio (Unaudited as to Nov. 30, 2002) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Government Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio seeks to provide a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and sell put and call options and write put and call options. This may include purchasing mortgage-backed security (MBS) put spread options and writing covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. 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. The Portfolio also may write over-the-counter options where completing the obligation depends upon the credit standing of the other party. - -------------------------------------------------------------------------------- 16 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts. 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. Short sales The Portfolio may engage in short sales. In these transactions, the Portfolio sells a security that it does not own. The Portfolio is obligated to replace the security that was short by purchasing it at the market price at the time of replacement or entering into an offsetting transaction with the broker. The price at such time may be more or less than the price at which the Portfolio sold the security. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when-issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. As of Nov. 30, 2002, the Portfolio has entered into outstanding when-issued securities of $73,746,701 and other forward-commitments of $5,522,438. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll-over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. 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. - -------------------------------------------------------------------------------- 17 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Other Security transactions are accounted for on the date securities are purchased or sold. Interest income, including amortization of premium and discount using the effective interest method, is accrued daily. 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. The Portfolio also pays custodian fees to American Express Trust Company, an affiliate of AEFC. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $3,557,241,700 and $2,810,505,010, respectively, for the six months ended Nov. 30, 2002. For the same period, the portfolio turnover rate was 95%. Realized gains and losses are determined on an identified cost basis. 4. INTEREST RATE FUTURES CONTRACTS As of Nov. 30, 2002, investments in securities included securities valued at $9,113,778 that were pledged as collateral to cover initial margin deposits on 3,547 open purchase contracts and 5,878 open sale contracts. The notional market value of the open purchase contracts as of Nov. 30, 2002, was $529,550,461 with a net unrealized loss of $1,965,961. The notional market value of the open sale contracts as of Nov. 30, 2002, was $647,932,072 with a net unrealized gain of $743,753. See "Summary of significant accounting policies." 5. LENDING OF PORTFOLIO SECURITIES As of Nov. 30, 2002, securities valued at $311,121,100 were on loan to brokers. For collateral, the Portfolio received $71,487,501 in cash and U.S. government securities valued at $244,279,074. Income from securities lending amounted to $49,632 for the six months ended Nov. 30, 2002. 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. - -------------------------------------------------------------------------------- 18 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
6. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written are as follows: Six months ended Nov. 30, 2002 Puts Calls Contracts Premiums Contracts Premiums Balance May 31, 2001 -- $ -- 2,632 $ 1,119,785 Opened 622 401,546 7,619 6,860,145 Closed (172) (171,312) (8,535) (6,355,072) Exercised -- -- (1,544) (1,440,108) Expired -- -- (172) (184,750) -- -- ---- -------- Balance Nov. 30, 2002 450 $ 230,234 -- $ -- --- --------- -- -----------
See "Summary of significant accounting policies." - -------------------------------------------------------------------------------- 19 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Federal Income Fund Nov. 30, 2002 (Unaudited) Assets Investment in Portfolio (Note 1) $3,300,017,950 Capital shares receivable 2,173,020 --------- Total assets 3,302,190,970 ------------- Liabilities Dividends payable to shareholders 1,292,650 Capital shares payable 775,025 Accrued distribution fee 105,580 Accrued service fee 940 Accrued transfer agency fee 16,723 Accrued administrative services fee 7,971 Other accrued expenses 563,682 ------- Total liabilities 2,762,571 --------- Net assets applicable to outstanding capital stock $3,299,428,399 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 6,736,178 Additional paid-in capital 3,451,441,746 Excess of distributions over net investment income (7,994,916) Accumulated net realized gain (loss) (Note 5) (202,388,627) Unrealized appreciation (depreciation) on investments 51,634,018 ---------- Total -- representing net assets applicable to outstanding capital stock $3,299,428,399 ============== Net assets applicable to outstanding shares: Class A $1,600,810,051 Class B $1,480,320,439 Class C $ 46,356,805 Class Y $ 171,941,104 Net asset value per share of outstanding capital stock: Class A shares 326,851,106 $ 4.90 Class B shares 302,200,585 $ 4.90 Class C shares 9,464,689 $ 4.90 Class Y shares 35,101,455 $ 4.90 ---------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 20 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Statement of operations AXP Federal Income Fund Six months ended Nov. 30, 2002 (Unaudited) Investment income Income: Interest $ 62,421,743 ------------ Expenses (Note 2): Expenses allocated from Portfolio 7,548,810 Distribution fee Class A 1,799,601 Class B 6,655,211 Class C 190,356 Transfer agency fee 1,639,741 Incremental transfer agency fee Class A 72,022 Class B 100,985 Class C 3,696 Service fee -- Class Y 93,595 Administrative services fees and expenses 675,655 Compensation of board members 8,763 Printing and postage 408,918 Registration fees 264,463 Audit fees 6,000 Other 16,052 ------ Total expenses 19,483,868 Earnings credits on cash balances (Note 2) (28,267) ------- Total net expenses 19,455,601 ---------- Investment income (loss) -- net 42,966,142 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 25,935,713 Futures contracts (11,845,918) Options contracts written (2,746,559) ---------- Net realized gain (loss) on investments 11,343,236 Net change in unrealized appreciation (depreciation) on investments 18,336,552 ---------- Net gain (loss) on investments 29,679,788 ---------- Net increase (decrease) in net assets resulting from operations $ 72,645,930 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 21 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Statements of changes in net assets AXP Federal Income Fund Nov. 30, 2002 May 31, 2002 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss) -- net $ 42,966,142 $ 87,596,745 Net realized gain (loss) on investments 11,343,236 26,855,921 Net change in unrealized appreciation (depreciation) on investments 18,336,552 7,407,446 ---------- --------- Net increase (decrease) in net assets resulting from operations 72,645,930 121,860,112 ---------- ----------- Distributions to shareholders from: Net investment income Class A (26,083,115) (47,915,014) Class B (19,031,253) (34,663,888) Class C (541,171) (508,158) Class Y (3,541,035) (7,572,107) ---------- ---------- Total distributions (49,196,574) (90,659,167) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 708,334,051 657,601,521 Class B shares 631,737,589 705,152,428 Class C shares 23,580,284 31,377,389 Class Y shares 46,864,747 67,870,113 Reinvestment of distributions at net asset value Class A shares 23,271,581 41,925,856 Class B shares 17,851,296 32,558,359 Class C shares 484,626 466,925 Class Y shares 3,283,157 7,409,925 Payments for redemptions Class A shares (326,575,373) (576,657,354) Class B shares (Note 2) (283,897,777) (558,439,712) Class C shares (Note 2) (6,835,593) (10,096,220) Class Y shares (68,108,155) (50,063,214) ----------- ----------- Increase (decrease) in net assets from capital share transactions 769,990,433 349,106,016 ----------- ----------- Total increase (decrease) in net assets 793,439,789 380,306,961 Net assets at beginning of period 2,505,988,610 2,125,681,649 ------------- ------------- Net assets at end of period $3,299,428,399 $2,505,988,610 ============== ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 22 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Notes to Financial Statements AXP Federal Income Fund (Unaudited as to Nov. 30, 2002) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Government Income Series, Inc, (formerly AXP Federal Income Fund, Inc.) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Government Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Government Income Portfolio The Fund invests all of its assets in Government Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in U.S. government and government agency securities. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund as of Nov. 30, 2002 was 99.99%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities, and contingent assets and liabilities) that could differ from actual results. - -------------------------------------------------------------------------------- 23 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT 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 and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $19.50 o Class B $20.50 o Class C $20.00 o Class Y $17.50 The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. - -------------------------------------------------------------------------------- 24 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Sales charges received by the Distributor for distributing Fund shares were $4,149,972 for Class A, $877,912 for Class B and $14,249 for Class C for the six months ended Nov. 30, 2002. During the six months ended Nov. 30, 2002, the Fund's transfer agency fees were reduced by $28,267 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows: Six months ended Nov. 30, 2002 Class A Class B Class C Class Y Sold 144,482,277 128,825,184 4,807,801 9,555,058 Issued for reinvested distributions 4,743,725 3,638,983 98,787 669,388 Redeemed (66,616,907) (57,915,681) (1,392,876) (13,924,752) ----------- ----------- ---------- ----------- Net increase (decrease) 82,609,095 74,548,486 3,513,712 (3,700,306) ---------- ---------- --------- ---------- Year ended May 31, 2002 Class A Class B Class C Class Y Sold 135,903,504 145,765,262 6,484,859 14,030,804 Issued for reinvested distributions 8,677,586 6,738,998 96,601 1,533,797 Redeemed (119,296,103) (115,594,195) (2,088,331) (10,364,442) ------------ ------------ ---------- ----------- Net increase (decrease) 25,284,987 36,910,065 4,493,129 5,200,159 ---------- ---------- --------- ---------
4. BANK BORROWINGS The Fund has a revolving credit agreement with Deutsche Bank, whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The agreement went into effect Sept. 24, 2002. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50% or the Federal Funds Rate plus 0.25% and the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $200 million with U.S. Bank, N.A. The Fund had no borrowings outstanding during the six months ended Nov. 30, 2002. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $182,550,267 as of May 31, 2002, that will expire in 2008 through 2011 if not offset by capital gains. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. - -------------------------------------------------------------------------------- 25 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL 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, 2002(f) 2002 2001 2000 1999 Net asset value, beginning of period $4.85 $4.78 $4.59 $4.94 $5.08 Income from investment operations: Net investment income (loss) .08 .19 .27 .27 .27 Net gains (losses) (both realized and unrealized) .06 .08 .19 (.27) (.07) Total from investment operations .14 .27 .46 -- .20 Less distributions: Dividends from net investment income (.09) (.20) (.27) (.28) (.27) Distributions from realized gains -- -- -- (.07) (.07) Total distributions (.09) (.20) (.27) (.35) (.34) Net asset value, end of period $4.90 $4.85 $4.78 $4.59 $4.94 Ratios/supplemental data Net assets, end of period (in millions) $1,601 $1,185 $1,047 $1,139 $1,723 Ratio of expenses to average daily net assets(c) .97%(d) .95% .98% .92% .88% Ratio of net investment income (loss) to average daily net assets 3.21%(d) 4.01% 5.72% 5.71% 5.36% Portfolio turnover rate (excluding short-term securities) 95% 267% 366% 674% 278% Total return(e) 2.87%(g) 5.77% 10.19% (.01%) 4.07% Class B Per share income and capital changes(a) Fiscal period ended May 31, 2002(f) 2002 2001 2000 1999 Net asset value, beginning of period $4.85 $4.78 $4.59 $4.94 $5.08 Income from investment operations: Net investment income (loss) .06 .16 .24 .24 .23 Net gains (losses) (both realized and unrealized) .06 .08 .18 (.28) (.07) Total from investment operations .12 .24 .42 (.04) .16 Less distributions: Dividends from net investment income (.07) (.17) (.23) (.24) (.23) Distributions from realized gains -- -- -- (.07) (.07) Total distributions (.07) (.17) (.23) (.31) (.30) Net asset value, end of period $4.90 $4.85 $4.78 $4.59 $4.94 Ratios/supplemental data Net assets, end of period (in millions) $1,480 $1,104 $912 $981 $1,498 Ratio of expenses to average daily net assets(c) 1.72%(d) 1.71% 1.73% 1.68% 1.63% Ratio of net investment income (loss) to average daily net assets 2.44%(d) 3.25% 4.96% 4.95% 4.61% Portfolio turnover rate (excluding short-term securities) 95% 267% 366% 674% 278% Total return(e) 2.48%(g) 4.98% 9.36% (.77%) 3.31%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 26 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2002(f) 2002 2001(b) Net asset value, beginning of period $4.85 $4.78 $4.63 Income from investment operations: Net investment income (loss) .06 .16 .22 Net gains (losses) (both realized and unrealized) .06 .08 .14 Total from investment operations .12 .24 .36 Less distributions: Dividends from net investment income (.07) (.17) (.21) Net asset value, end of period $4.90 $4.85 $4.78 Ratios/supplemental data Net assets, end of period (in millions) $46 $29 $7 Ratio of expenses to average daily net assets(c) 1.73%(d) 1.72% 1.73%(d) Ratio of net investment income (loss) to average daily net assets 2.41%(d) 3.09% 4.93%(d) Portfolio turnover rate (excluding short-term securities) 95% 267% 366% Total return(e) 2.48%(g) 4.98% 8.08%(g)
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2002(f) 2002 2001 2000 1999 Net asset value, beginning of period $4.85 $4.78 $4.59 $4.94 $5.08 Income from investment operations: Net investment income (loss) .09 .20 .28 .28 .28 Net gains (losses) (both realized and unrealized) .05 .08 .19 (.28) (.07) Total from investment operations .14 .28 .47 -- .21 Less distributions: Dividends from net investment income (.09) (.21) (.28) (.28) (.28) Distributions from realized gains -- -- -- (.07) (.07) Total distributions (.09) (.21) (.28) (.35) (.35) Net asset value, end of period $4.90 $4.85 $4.78 $4.59 $4.94 Ratios/supplemental data Net assets, end of period (in millions) $172 $188 $161 $175 $191 Ratio of expenses to average daily net assets(c) .80%(d) .79% .82% .78% .80% Ratio of net investment income (loss) to average daily net assets 3.38%(d) 4.17% 5.89% 5.92% 5.44% Portfolio turnover rate (excluding short-term securities) 95% 267% 366% 674% 278% Total return(e) 2.94%(g) 5.93% 10.36% .15% 4.15%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 27 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Notes to financial highlights (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) Six months ended Nov. 30, 2002 (Unaudited). (g) Not annualized. - -------------------------------------------------------------------------------- 28 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT
Results of Meeting of Shareholders AXP FEDERAL INCOME FUND REGULAR MEETING OF SHAREHOLDERS HELD ON NOVEMBER 13, 2002 (UNAUDITED) A brief description of each proposal voted upon at the meeting and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each proposal is set forth below. Proposal 1 To elect the thirteen nominees specified below as Board members*. Shares Voted "For" Shares Withholding Authority to Vote Arne H. Carlson 488,839,211.156 18,339,032.045 Philip J. Carroll, Jr. 489,444,682.943 17,733,560.258 Livio D. DeSimone 489,311,342.916 17,866,900.285 Barbara H. Fraser 489,573,322.023 17,604,921.178 Ira D. Hall 489,664,617.603 17,513,625.598 Heinz F. Hutter 489,113,478.151 18,064,765.050 Anne P. Jones 489,064,701.887 18,113,541.314 Stephen R. Lewis, Jr. 490,515,392.934 16,662,850.267 Alan G. Quasha 490,015,388.746 17,162,854.455 Stephen W. Roszell 490,120,393.802 17,057,849.399 Alan K. Simpson 488,116,122.686 19,062,120.515 Alison Taunton-Rigby 489,767,870.570 17,410,372.631 William F. Truscott 490,015,475.979 17,162,767.222
- -------------------------------------------------------------------------------- 29 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT Proposal 2 To Amend the Articles of Incorporation/Declaration of Trust*: 2(a). To allow one vote/dollar instead of one vote/share. Shares Voted "For" Shares Voted "Against" Abstentions Broker Non-Votes 396,150,335.230 40,858,504.609 18,123,444.362 52,045,959.000 2(b). To change the name of the corporation. Shares Voted "For" Shares Voted "Against" Abstentions Broker Non-Votes 451,867,760.860 35,805,074.223 19,505,408.118 0.000 * Denotes Registrant-wide proposals and voting results. - -------------------------------------------------------------------------------- 30 -- AXP FEDERAL INCOME FUND -- 2002 SEMIANNUAL REPORT American Express(R) Funds Growth Funds AXP(R) Emerging Markets Fund AXP Equity Select Fund AXP Focused Growth Fund AXP Global Growth Fund AXP Growth Fund AXP Growth Dimensions Fund AXP New Dimensions Fund(R) AXP Partners International Aggressive Growth Fund AXP Partners Small Cap Growth Fund AXP Strategy Aggressive Fund Blend Funds AXP Blue Chip Advantage Fund AXP Discovery Fund* AXP European Equity Fund AXP Global Balanced Fund AXP International Fund AXP Large Cap Equity Fund AXP Managed Allocation Fund AXP Mid Cap Index Fund AXP Partners International Core Fund AXP Partners International Small Cap Fund AXP Partners Small Cap Core Fund AXP Research Opportunities Fund AXP S&P 500 Index Fund AXP Small Cap Advantage Fund AXP Small Company Index Fund AXP Stock Fund Value Funds AXP Diversified Equity Income Fund AXP Equity Value Fund AXP Large Cap Value Fund AXP Mid Cap Value Fund AXP Mutual AXP Partners Fundamental Value Fund AXP Partners International Select Value Fund AXP Partners Select Value Fund AXP Partners Small Cap Value Fund AXP Partners Value Fund AXP Progressive Fund* Income/Tax-Exempt Income Funds AXP Bond Fund AXP Cash Management Fund** AXP Extra Income Fund AXP Federal Income Fund AXP Global Bond Fund AXP High Yield Tax-Exempt Fund AXP Insured Tax-Exempt Fund AXP Intermediate Tax-Exempt Fund AXP Selective Fund AXP State Tax-Exempt Funds AXP Tax-Exempt Bond Fund AXP Tax-Free Money Fund** AXP U.S. Government Mortgage Fund Sector Funds AXP Global Technology Fund AXP Precious Metals Fund AXP Utilities Fund These funds are also listed in the categories above. AXP(R) Partners Funds AXP Partners Fundamental Value Fund AXP Partners International Aggressive Growth Fund AXP Partners International Core Fund AXP Partners International Select Value Fund AXP Partners International Small Cap Fund AXP Partners Select Value Fund AXP Partners Small Cap Core Fund AXP Partners Small Cap Growth Fund AXP Partners Small Cap Value Fund AXP Partners Value Fund International Funds AXP Emerging Markets Fund AXP European Equity Fund AXP Global Balanced Fund AXP Global Bond Fund AXP Global Growth Fund AXP International Fund AXP Partners International Aggressive Growth Fund AXP Partners International Core Fund AXP Partners International Select Value Fund AXP Partners International Small Cap Fund * Closed to new investors. ** An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. For more complete information about our funds, including fees and expenses, please call (800) 862-7919 for prospectuses. Read them carefully before you invest. (1/03) AXP Federal Income Fund 70100 AXP Financial Center Minneapolis, MN 55474 americanexpress.com American Express(R) Funds AMERICAN EXPRESS(R) This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. S-6442 T (1/03) -----END PRIVACY-ENHANCED MESSAGE-----