-----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, F3SUL+0JA2uTbYPPIafvMe3T4KKbj74NdzAsQcAWLg3BALjdSsNfPa1JTpjuvCOp YOGCu3Y6Kj6T2umu7Mo4fA== 0000820027-03-000739.txt : 20031028 0000820027-03-000739.hdr.sgml : 20031028 20031028120247 ACCESSION NUMBER: 0000820027-03-000739 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20031028 EFFECTIVENESS DATE: 20031030 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP VARIABLE PORTFOLIO INVESTMENT SERIES INC CENTRAL INDEX KEY: 0000353968 IRS NUMBER: 411409539 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-03218 FILM NUMBER: 03960106 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126718626 MAIL ADDRESS: STREET 1: IDS FINANCIAL SERVICES INC STREET 2: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE INVESTMENT SERIES INC DATE OF NAME CHANGE: 19981102 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE CAPITAL RESOURCE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE CAPITAL RESOURCE FUND II INC DATE OF NAME CHANGE: 19851104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP VARIABLE PORTFOLIO INVESTMENT SERIES INC CENTRAL INDEX KEY: 0000353968 IRS NUMBER: 411409539 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-73115 FILM NUMBER: 03960107 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126718626 MAIL ADDRESS: STREET 1: IDS FINANCIAL SERVICES INC STREET 2: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE INVESTMENT SERIES INC DATE OF NAME CHANGE: 19981102 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE CAPITAL RESOURCE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE CAPITAL RESOURCE FUND II INC DATE OF NAME CHANGE: 19851104 485BPOS 1 invest-partc.txt AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 50 (File No. 2-73115) [X] --- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 52 (File No. 811-3218) [X] --- AXP Variable Portfolio - Investment Series, Inc. 200 AXP Financial Center Minneapolis, Minnesota 55474 Leslie L. Ogg - 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268 (612) 330-9283 Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [X] on Oct. 30, 2003 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: [ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment. [AMERICAN EXPRESS(R) FUNDS LOGO] AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS PROSPECTUS/OCT. 30, 2003 AXP(R) Variable Portfolio - Blue Chip Advantage Fund AXP(R) Variable Portfolio - Capital Resource Fund AXP(R) Variable Portfolio - Cash Management Fund AXP(R) Variable Portfolio - Core Bond Fund AXP(R) Variable Portfolio - Diversified Bond Fund AXP(R) Variable Portfolio - Diversified Equity Income Fund AXP(R) Variable Portfolio - Emerging Markets Fund AXP(R) Variable Portfolio - Equity Select Fund AXP(R) Variable Portfolio - Global Bond Fund AXP(R) Variable Portfolio - Growth Fund AXP(R) Variable Portfolio - High Yield Bond Fund AXP(R) Variable Portfolio - International Fund AXP(R) Variable Portfolio - Large Cap Value Fund AXP(R) Variable Portfolio - Managed Fund AXP(R) Variable Portfolio - NEW DIMENSIONS FUND(R) AXP(R) Variable Portfolio - Partners Select Value Fund AXP(R) Variable Portfolio - Partners Small Cap Value Fund AXP(R) Variable Portfolio - S&P 500 Index Fund AXP(R) Variable Portfolio - Short Duration U.S. Government Fund AXP(R) Variable Portfolio - Small Cap Advantage Fund AXP(R) Variable Portfolio - Stock Fund AXP(R) Variable Portfolio - Strategy Aggressive Fund Please note that each Fund: - - is not a bank deposit - - is not federally insured - - is not endorsed by any bank or government agency - - is not guaranteed to achieve its goal Like all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. This prospectus may contain information on Funds not available under your variable annuity contract or life insurance policy. Please refer to your variable annuity contract or life insurance policy prospectus for information regarding the investment options available to you. THESE SECURITIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK OR AN AFFILIATE OF ANY BANK, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), OR ANY OTHER AGENCY OF THE UNITED STATES, OR ANY BANK OR AN AFFILIATE OF ANY BANK; AND ARE SUBJECT TO INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF VALUE. [AMERICAN EXPRESS(R) LOGO] MANAGED BY: AMERICAN EXPRESS FINANCIAL CORPORATION TABLE OF CONTENTS TAKE A CLOSER LOOK AT: THE FUNDS 4P AXP VARIABLE PORTFOLIO - BLUE CHIP ADVANTAGE FUND 4P Goal 4p Principal Investment Strategies 4p Principal Risks 5p Past Performance 5p Management 6p Other Securities and Investment Strategies 6p AXP VARIABLE PORTFOLIO - CAPITAL RESOURCE FUND 6P Goal 6p Principal Investment Strategies 6p Principal Risks 7p Past Performance 8p Management 8p Other Securities and Investment Strategies 9p AXP VARIABLE PORTFOLIO - CASH MANAGEMENT FUND 9P Goal 9p Principal Investment Strategies 9p Principal Risks 9p Past Performance 10p Management 11p AXP VARIABLE PORTFOLIO - CORE BOND FUND 11P Goal 11p Principal Investment Strategies 11p Principal Risks 12p Past Performance 12p Management 12p Other Securities and Investment Strategies 12p AXP VARIABLE PORTFOLIO - DIVERSIFIED BOND FUND 13P Goal 13p Principal Investment Strategies 13p Principal Risks 13p Past Performance 14p Management 15p Other Securities and Investment Strategies 15p AXP VARIABLE PORTFOLIO - DIVERSIFIED EQUITY INCOME FUND 15P Goal 15p Principal Investment Strategies 15p Principal Risks 16p Past Performance 16p Management 17p Other Securities and Investment Strategies 17p AXP VARIABLE PORTFOLIO - EMERGING MARKETS FUND 18P Goal 18p Principal Investment Strategies 18p Principal Risks 19p Past Performance 20p Management 20p Other Securities and Investment Strategies 21p AXP VARIABLE PORTFOLIO - EQUITY SELECT FUND 21P Goal 21p Principal Investment Strategies 21p Principal Risks 21p Past Performance 22p Management 23p Other Securities and Investment Strategies 23p AXP VARIABLE PORTFOLIO - GLOBAL BOND FUND 23P Goal 23p Principal Investment Strategies 23p Principal Risks 23p Past Performance 24p Management 25p Other Securities and Investment Strategies 25p AXP VARIABLE PORTFOLIO - GROWTH FUND 26P Goal 26p Principal Investment Strategies 26p Principal Risks 26p Past Performance 27p Management 28p Other Securities and Investment Strategies 28p AXP VARIABLE PORTFOLIO - HIGH YIELD BOND FUND 28P Goal 28p Principal Investment Strategies 28p Principal Risks 29p Past Performance 29p Management 30p Other Securities and Investment Strategies 30p AXP VARIABLE PORTFOLIO - INTERNATIONAL FUND 31P Goal 31p Principal Investment Strategies 31p Principal Risks 31p Past Performance 32p Management 33p Other Securities and Investment Strategies 33p AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 2p AXP VARIABLE PORTFOLIO - LARGE CAP VALUE FUND 34P Goal 34p Principal Investment Strategies 34p Principal Risks 34p Past Performance 35p Management 35p Other Securities and Investment Strategies 35p AXP VARIABLE PORTFOLIO - MANAGED FUND 35P Goal 35p Principal Investment Strategies 35p Principal Risks 36p Past Performance 37p Management 38p Other Securities and Investment Strategies 38p AXP VARIABLE PORTFOLIO - NEW DIMENSIONS FUND 38P Goal 38p Principal Investment Strategies 38p Principal Risks 39p Past Performance 40p Management 40p Other Securities and Investment Strategies 41p AXP VARIABLE PORTFOLIO - PARTNERS SELECT VALUE FUND 41P Goal 41p Principal Investment Strategies 41p Principal Risks 41p Past Performance 42p Management 42p Other Securities and Investment Strategies 42p AXP VARIABLE PORTFOLIO - PARTNERS SMALL CAP VALUE FUND 43P Goal 43p Principal Investment Strategies 43p Principal Risks 44p Past Performance 45p Management 46p Other Securities and Investment Strategies 47p AXP VARIABLE PORTFOLIO - S&P 500 INDEX FUND 48P Goal 48p Principal Investment Strategies 48p Principal Risks 48p Past Performance 49p Management 50p AXP VARIABLE PORTFOLIO - SHORT DURATION U.S. GOVERNMENT FUND 50P Goal 50p Principal Investment Strategies 50p Principal Risks 51p Past Performance 52p Management 53p Other Securities and Investment Strategies 53p AXP VARIABLE PORTFOLIO - SMALL CAP ADVANTAGE FUND 53P Goal 53p Principal Investment Strategies 53p Principal Risks 54p Past Performance 54p Management 55p Other Securities and Investment Strategies 55p AXP VARIABLE PORTFOLIO - STOCK FUND 56P Goal 56p Principal Investment Strategies 56p Principal Risks 56p Past Performance 57p Management 57p Other Securities and Investment Strategies 58p AXP VARIABLE PORTFOLIO - STRATEGY AGGRESSIVE FUND 58P Goal 58p Principal Investment Strategies 58p Principal Risks 59p Past Performance 59p Management 60p Other Securities and Investment Strategies 60p FEES AND EXPENSES 61P BUYING AND SELLING SHARES 63P Valuing Fund Shares 63p Purchasing Shares 63p Transferring/Selling Shares 63p DISTRIBUTIONS AND TAXES 63P OTHER INFORMATION 64P FINANCIAL HIGHLIGHTS 65P AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 3p THE FUNDS References to "Fund" throughout this prospectus refer to AXP Variable Portfolio - - Blue Chip Advantage Fund, AXP Variable Portfolio - Capital Resource Fund, AXP Variable Portfolio - Cash Management Fund, AXP Variable Portfolio - Core Bond Fund, AXP Variable Portfolio - Diversified Bond Fund, AXP Variable Portfolio - Diversified Equity Income Fund, AXP Variable Portfolio - Emerging Markets Fund, AXP Variable Portfolio - Equity Select Fund, AXP Variable Portfolio - Global Bond Fund, AXP Variable Portfolio - Growth Fund, AXP Variable Portfolio - High Yield Bond Fund, AXP Variable Portfolio - International Fund, AXP Variable Portfolio - Large Cap Value Fund, AXP Variable Portfolio - Managed Fund, AXP Variable Portfolio - New Dimensions Fund, AXP Variable Portfolio - Partners Select Value Fund, AXP Variable Portfolio - Partners Small Cap Value Fund, AXP Variable Portfolio - S&P 500 Index Fund, AXP Variable Portfolio - Short Duration U.S. Government Fund, AXP Variable Portfolio - Small Cap Advantage Fund, AXP Variable Portfolio - Stock Fund, and AXP Variable Portfolio - Strategy Aggressive Fund, singularly or collectively as the context requires. A Fund may have a name, portfolio manager, objectives, strategies and characteristics that are the same or substantially similar to those of a publicly-traded retail mutual fund. Each Fund will have its own unique portfolio holdings, fees, operating expenses and operating results. The results of each Fund may differ significantly from any publicly-traded retail mutual fund. PLEASE REMEMBER THAT YOU MAY NOT BUY (NOR WILL YOU OWN) SHARES OF THE FUND DIRECTLY. YOU INVEST BY BUYING A VARIABLE ANNUITY CONTRACT OR LIFE INSURANCE POLICY AND ALLOCATING YOUR PURCHASE PAYMENTS TO THE VARIABLE SUBACCOUNT OR VARIABLE ACCOUNT (THE SUBACCOUNTS) THAT INVESTS IN THE FUND. AXP VARIABLE PORTFOLIO - BLUE CHIP ADVANTAGE FUND GOAL The Fund seeks to provide shareholders with a long-term total return exceeding that of the U.S. stock market. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, at least 80% of the Fund's net assets are invested in blue chip stocks. Blue chip stocks are issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. A common measure of blue chip stocks is the S&P 500 Composite Stock Price Index (S&P 500 Index). The S&P 500 Index is an unmanaged market index used to measure the total return of the U.S. stock market (the Fund may change this market index from time to time). While the Fund invests in stocks included in the S&P 500 Index, it is not an index fund, it may own companies not included in the index, and its results will likely differ from the index. Selecting blue chip stocks is the primary decision in building the investment portfolio. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, American Express Financial Corporation (AEFC), the Fund's investment manager, makes investment selections by: - - Identifying companies with: - attractive valuations, - financial strength, - strong, sustainable earnings growth, and - improving growth dynamics. - - Buying a diversified portfolio of securities. - - Buying equity securities not included in the S&P 500 Index if those securities meet the standards described above. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - Political, economic, or other events could affect the company's performance. - - Potential losses can be minimized (i.e., in a market down-turn). - - A more attractive opportunity exists. - - The company or the security continues to meet the other standards described above. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 4p PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK ISSUER RISK STYLE RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. STYLE RISK The objective of the Fund is to provide shareholders with a long-term return exceeding that of the U.S. stock market. Currently, the S&P 500 Index is the market index used to measure total return of the U.S. stock market. However, unlike the unmanaged index, the Fund's performance is affected by factors such as the size of the Fund's portfolio, transaction costs, management fees and expenses, brokerage commissions and fees, the extent and timing of cash flows in and out of the Fund, stock selection, sector weightings, and other such factors. As a result, once these factors are accounted for, the Fund may under-perform the market index. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - BLUE CHIP ADVANTAGE FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 -10.48% 2001 -16.49% 2002 -22.66%
During the period shown in the bar chart, the highest return for a calendar quarter was +10.47% (quarter ending December 2001) and the lowest return for a calendar quarter was -17.49% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +13.65%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 5p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Blue Chip Advantage Fund -22.66 -12.00%(a) S&P 500 Index -22.10 -9.74%(b) Lipper Large-Cap Core Funds Index -21.23 -8.94%(b)
(a) Inception date was Sept. 15, 1999. (b) Measurement period started Oct. 1, 1999. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Large-Cap Core 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT James M. Johnson, Jr., Portfolio Manager - - Managed the Fund since 1999. - - Joined AEFC in 1994. - - Began investment career in 1990. - - MBA, University of Minnesota, Carlson School of Management. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - CAPITAL RESOURCE FUND GOAL The Fund seeks capital appreciation. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in U.S. common stocks of companies with market capitalization of at least $5 billion. Additionally, the Fund may invest up to 25% of its total assets in foreign investments. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Identifying securities that AEFC believes have good capital appreciation potential. - - Evaluating opportunities and risks by reviewing interest rates and economic forecasts. - - Buying a diversified portfolio of securities. AEFC may weight certain sectors more heavily based on its expectations for growth and market trends. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 6p In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The interest rate or economic outlook changes. - - The security is overvalued relative to other potential investments. - - The security has reached AEFC's price objective. - - AEFC wishes to lock-in profits. - - A more attractive opportunity has been identified. - - The issuer or the security continues to meet the other standards described above. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK STYLE RISK ISSUER RISK FOREIGN RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. STYLE RISK The Fund purchases stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline significantly and quickly. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. FOREIGN RISK The following are all components of foreign risk: COUNTRY RISK includes the political, economic and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing and financial reporting standards), the possibility of government-imposed restrictions and even the nationalization of assets. CURRENCY risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 7p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to a recognized index. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - CAPITAL RESOURCE FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 +3.42% 1994 +1.17% 1995 +27.86% 1996 +7.71% 1997 +24.14% 1998 +24.12% 1999 +23.75% 2000 -17.46% 2001 -18.11% 2002 -22.03%
During the period shown in the bar chart, the highest return for a calendar quarter was +26.20% (quarter ending December 1998) and the lowest return for a calendar quarter was -17.27% (quarter ending September 2001). The Fund's year to date return as of Sept. 30, 2003 was +16.19%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS 10 YEARS AXP VP - Capital Resource Fund -22.03% -4.14% +3.79% S&P 500 Index -22.10% -0.59% +9.34% Lipper Large-Cap Core Funds Index -21.23% -0.74% +8.04%
This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The S&P 500 Index companies may be generally larger than those in which the Fund invests. The Lipper Large-Cap Core 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. The securities included in the index may not be the same as those held by the Fund. MANAGEMENT Doug Chase, Portfolio Manger - - Managed the Fund since 2002. - - Joined AEFC in 2002. - - Prior to that, Analyst and Portfolio Manager at Fidelity Investments. - - Began investment career in 1992. - - MBA, University of Michigan. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 8p OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, convertible securities, and debt obligations of any rating. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - CASH MANAGEMENT FUND GOAL The Fund seeks to provide shareholders with maximum current income consistent with liquidity and stability of principal. Because any investment involves risk, the Fund cannot guarantee this goal. PRINCIPAL INVESTMENT STRATEGIES The Fund's assets primarily are invested in money market instruments, such as marketable debt obligations issued by the U.S. government or its agencies, bank certificates of deposit, bankers' acceptances, letters of credit, and commercial paper, including asset-backed commercial paper. The Fund may invest more than 25% of its total assets in U.S. banks, U.S. branches of foreign banks and U.S. government securities. Additionally, the Fund may invest up to 25% of its total assets in U.S. dollar-denominated foreign investments. Because the Fund seeks to maintain a constant net asset value of $1.00 per share, capital appreciation is not expected to play a role in the Fund's return. The Fund's yield will vary from day-to-day. The Fund restricts its investments to instruments that meet certain maturity and quality standards required by the Securities and Exchange Commission (SEC) for money market funds. For example, the Fund: - - Limits its average portfolio maturity to ninety days or less. - - Buys obligations with remaining maturities of 397 days or less. - - Buys only obligations that are denominated in U.S. dollars and present minimal credit risk. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Considering opportunities and risks given current interest rates and anticipated interest rates. - - Purchasing securities based on the timing of cash flows in and out of the Fund. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The issuer's credit rating declines or AEFC expects a decline (the Fund, in certain cases, may continue to own securities that are down-graded until AEFC believes it is advantageous to sell). - - Political, economic, or other events could affect the issuer's performance. - - AEFC identifies a more attractive opportunity. - - The issuer or the security continues to meet the other standards described above. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Although the Fund's share price has remained constant in the past, THE FUND CANNOT GUARANTEE THAT IT WILL ALWAYS BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Principal risks associated with an investment in the Fund include: REINVESTMENT RISK INFLATION RISK CREDIT RISK SECTOR/CONCENTRATION RISK REINVESTMENT RISK The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. INFLATION RISK Also known as purchasing power risk, inflation risk measures the effects of continually rising prices on investments. If an investment's yield is lower than the rate of inflation, your money will have less purchasing power as time goes on. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 9p CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). SECTOR/CONCENTRATION RISK Investments that are concentrated in a particular issuer, geographic region, or sector will be more susceptible to changes in price (the more you diversify, the more you spread risk). For example, if the Fund concentrates its investments in banks, the value of these investments may be adversely affected by economic or regulatory developments in the banking industry. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing how the Fund's performance varied for each full calendar year shown on the chart below. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - CASH MANAGEMENT BOND FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 +2.70% 1994 +3.80% 1995 +5.45% 1996 +4.23% 1997 +5.16% 1998 +5.14% 1999 +4.73% 2000 +5.83% 2001 +3.74% 2002 +1.14%
During the period shown in the bar chart, the highest return for a calendar quarter was +1.49% (quarter ending September 2000) and the lowest return for a calendar quarter was +0.25% (quarter ending December 2002). The Fund's year to date return as of Sept. 30, 2003 was +0.40%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS 10 YEARS AXP VP - Cash Management Fund +1.14% +4.10% +4.26%
This table shows total returns from hypothetical investments in shares of the Fund. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. YIELD INFORMATION For current 7-day yield information, call (800) 862-7919 option 3. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 10p MANAGEMENT The team that manages the Fund's portfolio is led by: Jerri I. Cohen, CFA, Portfolio Manager - - Managed the Fund since 2002. - - Leader of the cash investment sector team. - - Joined AEFC in 2002. - - Prior to that, Sector Leader/Portfolio Manager, Zurich Scudder Investments, from 2000 to 2002. Prior to that, Portfolio Manager, Zurich Scudder Investments, from 1992 to 2000. - - Began investment career in 1981. - - MBA, Northwestern University. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. AXP VARIABLE PORTFOLIO - CORE BOND FUND GOAL The Fund seeks to provide shareholders with a high total return through current income and capital appreciation. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in bonds and other debt securities. Although the Fund is not an index fund, it invests primarily in intermediate-term (5-12 years) investment grade securities that are included in the Lehman Brothers Aggregate Bond Index (the "Index"). The Index includes securities issued by the U.S. government, corporate securities and mortgage- and asset-backed securities. The Fund will not invest in securities rated below investment grade ("junk bonds"), although it may hold securities that have been downgraded. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Evaluating the portfolio's total exposure to the sectors, industries and securities relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price to select the most attractive securities within each sector. - - Targeting an average portfolio duration of 4 to 6 years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a 5 year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. The Fund's investment process employs significant risk controls that are designed to maintain risk levels to be comparable to the Index. These controls include review of effective duration and limitation on sector allocations, industry concentration and the size of individual positions. In evaluating whether to sell a security, AEFC considers, among other factors: - - The portfolio's total exposure to the sectors, industries and securities relative to the Index. - - Whether a security's rating change or vulnerability to a change. - - Whether a sector or industry is experiencing change. - - Changes in the interest rate or economic outlook. - - Whether AEFC identifies a more attractive opportunity. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in short-term obligations such as government securities and commercial paper. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, the Fund may trade its portfolio securities more frequently. Frequent trading could result in increased fees and expenses. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 11p PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK INTEREST RATE RISK CREDIT RISK CALL/PREPAYMENT RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. INTEREST RATE RISK The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the greater its sensitivity to changes in interest rates. CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to change in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. CALL/PREPAYMENT RISK The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk, which is the risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. PAST PERFORMANCE As of the date of this prospectus, the Fund has not commenced operations and therefore performance information is not available. The Fund intends to compare its performance to the Lehman Brothers Aggregate Bond Index, an unmanaged index, made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of the bonds held in the Fund. The Fund also intends to compare its performance to the Lipper Intermediate Investment Grade Funds Index, an index published by Lipper Inc., that 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. MANAGEMENT The team that manages the Fund's portfolio is led by: Tom Murphy, CFA, Portfolio Manager - - Managed the Fund since 2003. - - Leader of the investment grade corporate bond sector team. - - Joined AEFC in 2002. - - Prior to that, Managing Director and Portfolio Manager, BlackRock Financial Management, in 2002. Prior to that, various positions at Zurich Scudder from 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as convertible securities and preferred stocks. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 12p AXP VARIABLE PORTFOLIO - DIVERSIFIED BOND FUND GOAL The Fund seeks to provide shareholders with a high level of current income while attempting to conserve the value of the investment for the longest period of time. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, at least 80% of the Fund's net assets will be invested in bonds. Of that 80%, at least 50% will be invested in intermediate-term (5-12 years) investment grade securities that comprise the Lehman Brothers Aggregate Bond Index. The Index includes securities issued by the U.S. government, corporate bonds, and mortgage- and asset-backed securities. Although the Fund emphasizes high- and medium-quality debt securities, it will assume some credit risk to achieve higher yield and/or capital appreciation by buying lower-quality (junk) bonds. The Fund may invest up to 15% in foreign investments, which may include investments in emerging markets. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Evaluating the portfolio's total exposure to the sector, industry and security relative to the Index. - - Analyzing factors such as credit quality, interest rate outlook and price to select securities within each sector. - - Investing in lower-quality (junk) bonds and foreign investments as opportunities permit. - - Targeting an average portfolio duration of four-six years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a five year duration means a bond is expected to decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. In evaluating whether to sell a security, AEFC considers, among other factors: - - The portfolio's total exposure to the sector, industry and security relative to the Index. - - A security's rating has changed or is vulnerable to a change. - - A sector or industry is experiencing change. - - The interest rate or economic outlook changes. - - AEFC identifies a more attractive opportunity. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although the Fund primarily will invest in these securities to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: CREDIT RISK INTEREST RATE RISK CALL/PREPAYMENT RISK MARKET RISK CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. INTEREST RATE RISK The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the greater its sensitivity to changes in interest rates. CALL/PREPAYMENT RISK The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk, which is the risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 13p MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - DIVERSIFIED BOND FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 +15.85% 1994 -3.92% 1995 +22.30% 1996 +5.70% 1997 +8.83% 1998 +1.51% 1999 +1.70% 2000 +5.41% 2001 +7.67% 2002 +5.53%
During the period shown in the bar chart, the highest return for a calendar quarter was +8.65% (quarter ending June 1995) and the lowest return for a calendar quarter was -3.21% (quarter ending March 1994). The Fund's year to date return as of Sept. 30, 2003 was +4.10%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS 10 YEARS AXP VP - Diversified Bond Fund +5.53% +4.34% +6.83% Lehman Brothers Aggregate Bond Index +10.25% +7.55% +7.51% Lipper Intermediate Investment Grade Index +8.29% +6.72% +6.86%
This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. 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. The Lipper Intermediate Investment Grade 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. The securities included in the indexes may not be the same as those held by the Fund. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 14p MANAGEMENT The team that manages the Fund's portfolio is led by: Tom Murphy, Portfolio Manager - - Managed the Fund since 2002. - - Leader of the investment grade corporate bond sector team. - - Joined AEFC in 2002. - - Prior to that, Managing Director and Portfolio Manager, BlackRock Financial Management, in 2002. Prior to that, various positions at Zurich Scudder from 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, common stocks, preferred stocks and convertible securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - DIVERSIFIED EQUITY INCOME FUND GOAL The Fund seeks to provide shareholders with a high level of current income and, as a secondary goal, steady growth of capital. Because any investment involves risk, achieving these goals cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities. Under normal market conditions, the Fund will invest at least 80% of its net assets in dividend-paying common and preferred stocks. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses equity investments by: - - Identifying companies with moderate growth potential based on: - effective management (considering overall performance); and - financial strength. - - Identifying stocks that are selling at low prices in relation to: - current and projected earnings; - current and projected dividends; and - historic price levels. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The security has reached AEFC's price objective. - - The company has met AEFC's earnings and/or growth expectations. - - The company or the security continues to meet the other standards described above. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities or commercial paper. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 15p PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: ISSUER RISK MARKET RISK SECTOR/CONCENTRATION RISK STYLE RISK ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. SECTOR/CONCENTRATION RISK Investments that are concentrated in a particular issuer, geographic region, or sector will be more susceptible to changes in price (the more you diversify, the more you spread risk). STYLE RISK The Fund's management strategy will influence performance significantly. Securities in which the Fund invests could fall out of favor with the market, causing the Fund to underperform funds that invest primarily in other types of securities. If the manager's stock selection strategy does not perform as expected, the Fund could underperform its peers. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - DIVERSIFIED EQUITY INCOME FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 -0.78% 2001 +21.4% 2002 -19.03%
During the period shown in the bar chart, the highest return for a calendar quarter was +9.99% (quarter ending December 2001) and the lowest return for a calendar quarter was -21.04% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +20.06%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 16p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Diversified Equity Income Fund -19.03% -4.49%(a) Russell 1000(R) Value Index -15.52% -3.19%(b) Lipper Equity Income Funds Index -16.43% -3.66%(b)
(a) Inception date was Sept. 15, 1999. (b) Measurement period started Oct. 1, 1999. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Russell 1000(R) Value Index, an unmanaged index, measures the performance of those Russell 1000(R) companies with lower price-to-book ratios and lower forecasted growth values. The Lipper Equity Income 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Warren Spitz, Portfolio Manager - - Managed the Fund since 2000. - - Joined AEFC in 2000. - - Prior to that, Portfolio Manager, Prudential Global Asset Management, from 1987-2000. - - Began investment career in 1984. - - MBA, University of Pennsylvania, Wharton School. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as foreign securities, convertible securities, debt obligations including bonds and commercial paper of any rating, and money market securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 17p AXP VARIABLE PORTFOLIO - EMERGING MARKETS FUND GOAL The Fund seeks to provide shareholders with long-term capital growth. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities of companies in emerging market countries. Emerging markets are countries characterized as developing or emerging by either the World Bank or the United Nations. Under normal market conditions, at least 80% of the Fund's net assets will be invested in companies located in at least three different emerging market countries. Included within this 80% are the securities of companies that earn 50% or more of their total revenues from goods or services produced in emerging market countries or from sales made in emerging market countries. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Considering opportunities and risks within emerging market countries. - - Determining the percentage of assets to invest in a particular country based upon its economic outlook, political environment, and growth rate (the Fund may invest a significant portion of its assets in a particular country or region). - - Identifying companies with: - effective management, - financial strength, - prospects for growth and development, and - high demand for their products or services. - - Identifying securities with sufficient liquidity in trading volume (however, AEFC may invest up to 10% of the Fund's net assets in illiquid securities). - - Buying securities of those companies AEFC considers to be industry market leaders offering the best opportunity for long-term growth. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - The security is overvalued relative to alternative investments. - The company or the security continues to meet the standards described above. Because the economies of emerging markets can change much more rapidly than that of the U.S., AEFC will focus on the risks associated with potential currency devaluations or sharp changes in monetary policy. If AEFC believes economic or political developments may result in lower share prices, it will attempt to reduce the investments in that country. AEFC closely monitors the Fund's exposure to foreign currency fluctuations. From time to time, AEFC may purchase derivative instruments to hedge against currency fluctuations. Additionally, the Fund may utilize derivative instruments to produce incremental earnings and to increase flexibility. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 18p PRINCIPAL RISKS This Fund is designed for long-term investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK FOREIGN/EMERGING MARKETS RISK ISSUER RISK STYLE RISK SECTOR/CONCENTRATION RISK LIQUIDITY RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. FOREIGN/EMERGING MARKETS RISK The following are all components of foreign/emerging markets risk: COUNTRY RISK includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. CURRENCY RISK results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. EMERGING MARKETS RISK includes the dramatic pace of change (economic, social, and political) in these countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. SECTOR/CONCENTRATION RISK Investments that are concentrated in a particular issuer, geographic region, or sector will be more susceptible to changes in price (the more you diversify, the more you spread risk). LIQUIDITY RISK Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 19p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - EMERGING MARKETS FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 2001 -1.38% 2002 -5.44%
During the period shown in the bar chart, the highest return for a calendar quarter was +23.29% (quarter ending December 2001) and the lowest return for a calendar quarter was -18.48% (quarter ending September 2001). The Fund's year to date return as of Sept. 30, 2003 was +22.04%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Emerging Markets Fund -5.44% -13.22%(a) MSCI Emerging Markets Free Index -6.00% -13.14%(b) Lipper Emerging Markets Funds Index -4.63% -12.56%(b)
(a) Inception date was May 1, 2000. (b) Measurement period started May 1, 2000. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Morgan Stanley Capital International (MSCI) Emerging Markets Free Index, an unmanaged market capitalization-weighted index, is compiled from a composite of securities markets of 26 emerging markets countries. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Emerging Markets 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Julian A.S. Thompson, Portfolio Manager - - Managed the Fund since 1999. - - Joined AEFC in 1999. - - Prior to that, Investment Manager, Stewart Ivory, a Scottish investment company, from 1993 to 1999. - - Began investment career in 1993. - - Double first Classics and a Ph.D., Magdalene College, Cambridge. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 20p OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities and debt securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - EQUITY SELECT FUND GOAL The Fund seeks to provide shareholders with growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund will invest at least 80% of its net assets in equity securities. The Fund invests primarily in medium-sized companies. The Fund considers medium-sized companies to be those whose market capitalization falls within the range of companies in the Russell MidCap(R) Index. The market capitalization within the Index will vary, but as of June 30, 2003, the range was between $1.2 billion and $9.8 billion. The Fund may also invest in companies with higher and lower market capitalization. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses equity investments by: - - Identifying small, medium and large companies with: - effective management, - financial strength, - growth potential, and - competitive market position. - - Considering opportunities and risks by overall market conditions and industry outlook. - - Identifying sectors with growth potential and weighting purchases in those sectors more heavily. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The security has reached AEFC's price objective (what AEFC considers to be fair market value). - - The company has met AEFC's earnings and/or growth expectations. - - Political, economic, or other events could affect the company's performance. - - The company or the security continues to meet the other standards described above. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK STYLE RISK ISSUER RISK SMALL AND MEDIUM COMPANY RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 21p ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. SMALL AND MEDIUM COMPANY RISK Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. Additionally, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - EQUITY SELECT FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -13.76%
During the period shown in the bar chart, the highest return for a calendar quarter was +8.59% (quarter ending December 2002) and the lowest return for a calendar quarter was -13.46% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +10.83%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Equity Select Fund -13.76% -9.06%(a) Russell MidCap(R) Growth Index -27.41% -21.84%(b) Lipper Mid-Cap Growth Funds Index -28.47% -22.94%(b)
(a) Inception date was May 1, 2001. (b) Measurement period started May 1, 2001. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Russell MidCap(R) Growth Index, an unmanaged index, measures the performance of those Russell MidCap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000(R) Growth Index. The Lipper Mid-Cap Growth 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. The securities included in the indexes may not be the same as those held by the Fund. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 22p MANAGEMENT Duncan J. Evered, Portfolio Manager - - Managed the Fund since 2000. - - Joined AEFC in 1994. - - Began investment career in 1984. - - MBA, Stanford University. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, foreign securities, and debt obligations in the four highest ratings. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and the annual and semiannual reports. AXP VARIABLE PORTFOLIO - GLOBAL BOND FUND GOAL The Fund seeks to provide shareholders with high total return through income and growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund is a non-diversified mutual fund that invests primarily in debt obligations of U.S. and foreign issuers. Under normal market conditions, at least 80% of the Fund's net assets will be invested in investment-grade corporate or government debt obligations including money market instruments of issuers located in at least three different countries. Although the Fund emphasizes high- and medium-quality debt securities, it may assume some credit risk to achieve higher dividends and/or capital appreciation by buying below investment grade bonds (junk bonds). The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Considering opportunities and risks by credit rating and currency. - - Identifying investment-grade U.S. and foreign bonds. - - Identifying below investment-grade U.S. and foreign bonds. - - Identifying bonds that can take advantage of currency movements and interest rate differences among nations. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued. - - The security continues to meet the standards described above. AEFC closely monitors the Fund's exposure to foreign currency fluctuations. From time to time, AEFC may purchase derivative instruments such as futures, options and forward contracts to hedge against currency fluctuations. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. In addition, since the Fund is a non-diversified mutual fund, it may concentrate its investments in securities of fewer issuers than would a diversified fund. Accordingly, the Fund may have more risk than mutual funds that have broader diversification. Principal risks associated with an investment in the Fund include: INTEREST RATE RISK FOREIGN/EMERGING MARKETS RISK CREDIT RISK LIQUIDITY RISK CALL/PREPAYMENT RISK INTEREST RATE RISK The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a debt obligation, the greater its sensitivity to changes in interest rates. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 23p FOREIGN/EMERGING MARKETS RISK The following are all components of foreign/emerging markets risk: COUNTRY RISK includes the political, economic and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing and financial reporting standards), the possibility of government-imposed restrictions and even the nationalization of assets. CURRENCY RISK results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. EMERGING MARKETS RISK includes the dramatic pace of change (economic, social and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners and hostile relations with neighboring countries. CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. They have greater price fluctuations and are more likely to experience a default. LIQUIDITY RISK Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. CALL/PREPAYMENT RISK The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk, which is the risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - GLOBAL BOND FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 +3.83% 1998 +8.05% 1999 -4.40% 2000 +3.24% 2001 +1.34% 2002 +14.98%
During the period shown in the bar chart, the highest return for a calendar quarter was +7.71% (quarter ending June 2002) and the lowest return for a calendar quarter was -2.94% (quarter ending March 1997). The Fund's year to date return as of Sept. 30, 2003 was +8.61%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 24p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS SINCE INCEPTION AXP VP - Global Bond Fund +14.98% +4.44% +5.10%(a) Lehman Brothers Global Aggregate Index +16.53% +5.66% +5.88%(b) CitiGroup World Government Bond Index +19.49% +5.82% +5.29%(b) Lipper Global Income Funds Index +11.68% +4.28% +5.19%(b)
(a) Inception date was May 1, 1996. (b) Measurement period started May 1, 1996. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The Lehman Brothers Global Aggregate Index, an unmanaged market capitalization weighted benchmark, tracks the performance of investment grade fixed income securities denominated in 13 currencies. The index reflects the reinvestment of all income and changes in market prices, but exclude brokerage commissions or other fees. CitiGroup World Government Bond Index, an unmanaged market capitalization weighted benchmark, tracks the performance of the 17 government bond markets around the world. It is widely recognized by investors as a measurement index for portfolios of government bond securities. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Global Income 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. Recently, the Fund's investment manager recommended to the Fund that the Fund change its comparative index from the CitiGroup World Government Bond Index to the Lehman Brothers Global Aggregate Index. The investment manager made this recommendation because the new index more closely represents the Fund's holdings. We will include both indexes in this transition year. In the future, however, only the Lehman Brothers Global Aggregate Index will be included. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT The team that manages the Fund's portfolio is led by: Nicholas Pifer, CFA, Portfolio Manager - - Managed the Fund since 2000. - - Leader of the global sector team. - - Joined AEFC in 2000. - - Prior to that, Fixed Income Portfolio Manager, Investment Advisers, Inc., 1997 to 2000. - - Began investment career in 1990. - - MA, Johns Hopkins University School of Advanced International Studies. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as preferred stocks and convertible securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 25p AXP VARIABLE PORTFOLIO - GROWTH FUND GOAL The Fund seeks to provide shareholders with long-term capital growth. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in common stocks that appear to offer growth opportunities. These growth opportunities could result from new management, market developments, or technological superiority. The Fund may invest up to 25% of its total assets in foreign investments. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by identifying companies that AEFC believes have above-average long-term growth potential based on: - - Effective management. - - Financial strength. - - Competitive market or product position. - - Technological advantage relative to other companies. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to other potential investments. - - The security has reached AEFC's price objective. - - The company has met AEFC's earnings and/or growth expectations. - - Political, economic, or other events could affect the company's other security's performance. - - AEFC identifies a more attractive opportunity. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK ISSUER RISK STYLE RISK FOREIGN RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline significantly and quickly. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 26p FOREIGN RISK The following are all components of foreign risk: COUNTRY RISK includes the political, economic and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing and financial reporting standards), the possibility of government-imposed restrictions and even the nationalization of assets. CURRENCY RISK results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - GROWTH FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 -19.30% 2001 -30.95% 2002 -26.10%
During the period shown in the bar chart, the highest return for a calendar quarter was +18.16% (quarter ending December 2001) and the lowest return for a calendar quarter was -28.79% (quarter ending September 2001). The Fund's year to date return as of Sept. 30, 2003 was +13.63%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Growth Fund -26.10% -19.21%(a) Russell 1000(R) Growth Index -27.88% -16.47%(b) Lipper Large-Cap Growth Funds Index -28.11% -16.72%(b)
(a) Inception date was Sept. 15, 1999. (b) Measurement period started Oct. 1, 1999. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 27p The Russell 1000(R) Growth Index, an unmanaged index, measures the performance of the growth subset of the Russell 1000(R) Index, which is composed of the 1,000 largest companies in the U.S. These companies have higher price-to-book ratios and higher forecasted growth values. The Lipper Large-Cap Growth 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Nick Thakore, Portfolio Manager - - Managed the Portfolio since 2002. - - Joined AEFC in 2002. - - Prior to that, Analyst and Portfolio Manager at Fidelity Investments. - - Began investment career in 1993. - - MBA, Wharton School at University of Pennsylvania. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, preferred stocks, investment grade debt obligations, and convertible securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - HIGH YIELD BOND FUND GOAL The Fund seeks to provide shareholders with high current income as its primary goal and, as its secondary goal, capital growth. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, the Fund will invest at least 80% of its net assets in high-yielding, high risk corporate bonds (junk bonds). These bonds may be issued by U.S. and foreign companies and governments. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Reviewing interest rate and economic forecasts. - - Reviewing credit characteristics. - - Identifying securities and /or companies that: - have medium and low quality ratings, - have similar qualities to securities or companies with medium or low quality ratings, in AEFC's opinion, even though they are not rated or have been given a different rating by a rating agency, - have growth potential, - have the potential for capital appreciation through credit upgrades. - - Buying securities that are expected to outperform other securities. - - Aggressively managing the Fund to earn a high total return. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The interest rate or economic outlook changes. - - A sector or industry is experiencing change. - - A security's rating is changed. - - The security is overvalued. - - The company does not meet AEFC's performance expectations. - - AEFC wishes to lock in profits. - - AEFC identifies a more attractive opportunity. - - The issuer or the security continues to meet the other standards described above. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 28p UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS This Fund is designed for long-term investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: CREDIT RISK MARKET RISK INTEREST RATE RISK CALL/PREPAYMENT RISK CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment-grade bonds. MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. INTEREST RATE RISK The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a debt obligation, the greater its sensitivity to changes in interest rates. CALL/PREPAYMENT RISK The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk, which is the risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - HIGH YIELD BOND FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 +13.37% 1998 -4.41% 1999 +6.24% 2000 -9.31% 2001 +4.93% 2002 -6.58%
During the period shown in the bar chart, the highest return for a calendar quarter was +5.87% (quarter ending September 1997) and the lowest return for a calendar quarter was -9.38% (quarter ending September 1998). The Fund's year to date return as of Sept. 30, 2003 was +18.93%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 29p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS SINCE INCEPTION AXP VP - High Yield Bond Fund -6.58% -2.02% +1.19%(a) JP Morgan Global High Yield Index +2.17% +1.09% +4.07%(b) Lipper High Yield Funds Index -2.41% -1.80% +1.84%(b) Merrill Lynch High Yield Bond Index -1.14% +1.24% +4.17%(b)
(a) Inception date was May 1, 1996. (b) Measurement period started May 1, 1996. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. 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. The Lipper High Yield Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. Merrill Lynch High Yield Bond Index, an unmanaged index, provides a broad-based measure of performance of the non-investment grade U.S. domestic bond market. The index currently captures close to $200 billion of the outstanding debt of domestic market issuers rated below investment grade but not in default. The index is "rule-based," which means there is a defined list of criteria that a bond must meet in order to qualify for inclusion in the index. Recently, the Fund's investment manager recommended to the Fund that the Fund change its comparative index from the Merrill Lynch High Yield Bond Index to the JP Morgan Global High Yield Index. The investment manager made this recommendation because the new index more closely represents the Fund's holdings. We will include both indexes in this transition year. In the future, however, only the JP Morgan Global High Yield Index will be included. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Management of the Fund's portfolio is coordinated by: Scott Schroepfer, CFA, Portfolio Manager - - Managed the Fund since 1999. - - Member of the high yield sector team. - - Joined AEFC in 1990. - - Began investment career in 1986. - - MBA, University of Minnesota. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. Investment decisions for the Fund are made in consultation with the high yield sector team led by Jennifer Ponce de Leon. Jennifer, who holds an MBA from DePaul University, began her investment career in 1989 and joined AEFC in 1997. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, common stocks, preferred stocks and convertible securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 30p AXP VARIABLE PORTFOLIO - INTERNATIONAL FUND GOAL The Fund seeks to provide shareholders with capital appreciation. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in equity securities of foreign issuers that offer strong growth potential. The Fund may invest in developed and in emerging markets. The percentage of the Fund's total assets invested in particular regions or industries will change according to economic conditions, growth prospects and valuation. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Considering opportunities and risks within regions or countries. - - Identifying sectors or companies with strong growth potential. - - Selecting stocks of large companies that AEFC believes have the following fundamental strengths: - financial strength, - high demand for their products or services, and - effective management. - - Identifying securities with sufficient liquidity in trading volume. AEFC decides how much to invest in various countries and local currencies, and then buys securities that offer the best opportunity for long-term growth. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued. - - The security has reached AEFC's price objective. - - The company or the security continues to meet the standards described above. - - The region or country is undergoing political, economic, or other change. AEFC closely monitors the Fund's exposure to foreign currency fluctuations. From time to time, AEFC may purchase derivative instruments to hedge against currency fluctuations. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Investments in U.S. issuers generally will constitute less than 20% of the Fund's total assets. If, however, investments in foreign securities appear to be relatively unattractive in AEFC's judgment, as a temporary defensive strategy, the Fund may invest any portion of its assets in securities of U.S. issuers appearing to offer opportunities for superior growth. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS This Fund is designed for long-term investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK FOREIGN/EMERGING MARKETS RISK STYLE RISK ISSUER RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. FOREIGN/EMERGING MARKETS RISK The following are all components of foreign/emerging markets risk: COUNTRY RISK includes the political, economic and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 31p CURRENCY RISK results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. EMERGING MARKETS RISK includes the dramatic pace of change (economic, social and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners and hostile relations with neighboring countries. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - INTERNATIONAL FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 +32.79% 1994 -1.66% 1995 +11.33% 1996 +9.03% 1997 +2.73% 1998 +15.82% 1999 +45.63% 2000 -24.93% 2001 -28.69% 2002 -18.25%
During the period shown in the bar chart, the highest return for a calendar quarter was +31.82% (quarter ending December 1999) and the lowest return for a calendar quarter was -21.14% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +12.99%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 32p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS 10 YEARS AXP VP - International Fund -18.25% -5.89% +1.86% MSCI EAFE Index -15.66% -2.61% +4.30% Lipper International Funds Index -13.83% -1.64% +5.56%
This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Morgan Stanley Capital International EAFE Index (MSCI EAFE Index), an unmanaged index, is compiled from a composite of securities markets of Europe, Australia and the Far East. The index is widely recognized by investors in foreign markets as the measurement index for portfolios of non-North American securities. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper International 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Mark Burgess, Co-Portfolio Manager - - Chief Investment Officer of American Express Asset Management International, Inc. (AEAMI). - - Managed the Fund since 2002. - - Joined AEFC in 2001. - - Prior to that, Global Chief Investment Officer for Colonial First State, from 1998 to 2000, and Chief Investment Officer for Australia and Asia for the Colonial Group (Australia) from 1995 to 1998. - - Began investment career in 1985. - - Bachelors Degree of Commerce - Honors Degree, Melbourne University. Richard Falle, Co-Portfolio Manager - - Managed the Fund since 2002. - - Joined AEFC in 1997. - - Began investment career in 1993. - - BSc in economics - Bristol University. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, preferred stocks, convertible securities, and debt securities of any rating. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 33p AXP VARIABLE PORTFOLIO - LARGE CAP VALUE FUND GOAL The Fund seeks to provide shareholders with long-term growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, at least 80% of the Fund's net assets are invested in equity securities of companies with a market capitalization greater than $5 billion. The Fund may also invest in income-producing equity securities and preferred stocks. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, seeks to identify companies that appear to be undervalued by various measures or that may be temporarily out of favor, but have good prospects for capital appreciation. AEFC selects investments for the Fund by: - - Seeking out a variety of large, well-established companies whose underlying fundamentals are stable, or are anticipated to become stable, or whose fundamentals are improving. - - Identifying stocks that are undervalued: - because they have one or more ratios, such as price-to-earnings or price-to-cash flow, that are low relative to the general market, or have a yield that exceeds the market, - because one or more of their current ratios are low relative to historical levels for the stock, or - because one or more of their current ratios or other financial measures make that stock attractive relative to its peers. In deciding whether to sell a security, AEFC considers whether: - - The security has reached AEFC's price objective. - - The company has met AEFC's earnings and/or growth expectations. - - The security is overvalued relative to other potential investments. - - A more attractive opportunity has been identified. - - Political, economic, or other events could affect the company's or the security's performance. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing could prevent the Fund from achieving its investment objective. During these times, the Fund may trade its portfolio securities more frequently. Frequent trading could result in increased fees and expenses. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK ISSUER RISK STYLE RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortage, corporate restructurings, fraudulent disclosures or other factors. STYLE RISK The Fund's management strategy will influence performance significantly. Large capitalization stocks as a group could fall out of favor with the market, causing the Fund to underperform funds that invest primarily in small or medium capitalization stocks. The Fund purchases stocks it believes are undervalued, but have potential for long-term growth. These stocks may trade at a discount to the market. Growth cannot be guaranteed and the markets may not be willing to re-evaluate out-of-favor stocks. If the manager's stock selection strategy does not perform as expected, the Fund could underperform its peers. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 34p PAST PERFORMANCE The bar chart and past performance table are not presented because the Fund is new as of the date of this prospectus. When available, the Fund intends to compare its performance to the Russell 1000(R) Value Index, an unmanaged index that measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. The Fund also intends to compare its performance to the Lipper Large-Cap Value Funds Index, an 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. MANAGEMENT Robert Ewing, CFA, Portfolio Manager - - Joined AEFC in 2002. - - Prior to that, Analyst and Portfolio Manager at Fidelity Investments. - - Began investment career in 1988. - - BS, Boston College Carroll School of Management. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may utilize investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, debt securities, convertible securities, and foreign securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - MANAGED FUND GOAL The Fund seeks maximum total investment return through a combination of capital growth and current income. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in a combination of equity and debt securities. It will invest in a combination of common and preferred stocks, bonds and other debt securities. Under normal market conditions, at least 50% of the Fund's total assets are invested in common stocks. Although the Fund emphasizes high- and medium-quality securities for the debt portion of its portfolio, it will assume some credit risk to achieve higher dividends and/or capital appreciation by buying lower-quality (junk) bonds. The Fund may invest up to 25% of its total assets in foreign investments. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses equity investments by: - - Considering opportunities and risks by reviewing overall market conditions and industry outlook. - - Focusing on companies that are attractively valued relative to history, peers or the market overall (by using such measures as price-to-earnings, price-to-book, price-to-cash flow and price-to-sales). - - Selecting companies it believes are positioned to benefit from: - anticipated industry changes or current dynamics, - competitive market position, - improving financial performance, - anticipated earnings growth, or - future valuation increases. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The interest rate or economic outlook changes. - - The security is overvalued when compared to other potential investments. - - The issuer's credit quality declines or AEFC expects a decline (the Fund may continue to own securities that are down-graded until AEFC believes it is advantageous to sell). - - The security has reached AEFC's price objective. - - AEFC identifies a more attractive opportunity. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 35p UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS Please remember that with any investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK INTEREST RATE RISK CREDIT RISK FOREIGN RISK ISSUER RISK LIQUIDITY RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. INTEREST RATE RISK The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a debt obligation, the higher its yield and the greater its sensitivity to changes in interest rates. CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. They have greater price fluctuations and are more likely to experience a default. FOREIGN RISK The following are all components of foreign risk: COUNTRY RISK includes the political, economic and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing and financial reporting standards), the possibility of government-imposed restrictions and even the nationalization of assets. CURRENCY RISK results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. LIQUIDITY RISK Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments or forego an investment opportunity. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 36p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - MANAGED FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 +12.33% 1994 -4.52% 1995 +24.21% 1996 +16.20% 1997 +19.50% 1998 +15.80% 1999 +14.84% 2000 -2.31% 2001 -10.59% 2002 -12.92%
During the period shown in the bar chart, the highest return for a calendar quarter was +15.66% (quarter ending December 1998) and the lowest return for a calendar quarter was -12.37% (quarter ending September 2001). The Fund's year to date return as of Sept. 30, 2003 was +10.86%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS 10 YEARS AXP VP - Managed Fund -12.92% +0.23% +6.47% S&P 500 Index -22.10% -0.59% +9.34% Lehman Brothers Aggregate Bond Index +10.25% +7.55% +7.51% Lipper Balanced Funds Index -10.69% +2.10% +7.53%
This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The S&P 500 Index companies may be generally larger than those in which the Fund invests. 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. The Lipper Balanced 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. The securities included in the index may not be the same as those held by the Fund. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 37p MANAGEMENT Robert Ewing, CFA, Portfolio Manager - - Managed the Fund since 2002. - - Joined AEFC in 2002. - - Prior to that, Analyst and Portfolio Manager, Fidelity Investments. - - Began investment career in 1988. - - BS, Boston College Carroll School of Management - Honors Program. The team that manages the fixed income portion of the Fund's portfolio is led by: Tom Murphy, CFA, Portfolio Manager - - Managed the Fund since 2003. - - Leader of the investment grade corporate bond sector team. - - Joined AEFC in 2002. - - Prior to that, Managing Director and Portfolio Manager, BlackRock Financial Management, in 2002. Prior to that, various positions at Zurich Scudder from 1992 to 2002. - - Began investment career in 1986. - - MBA, University of Michigan. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as preferred stocks and convertible securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - NEW DIMENSIONS FUND GOAL The Fund seeks to provide shareholders with long-term growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in common stocks showing potential for significant growth. These companies often operate in areas where dynamic economic and technological changes are occurring. The Fund may invest up to 30% of its total assets in foreign investments. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Identifying companies that AEFC believes have above-average long-term growth potential based on: - effective management, - financial strength, and - competitive market position; as well as - - Considering opportunities and risks by reviewing interest rate and economic forecasts both domestically and abroad. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The company has met AEFC's earnings and/or growth expectations. - - Political, economic, or other events could affect the company's performance. - - AEFC wishes to minimize potential losses. - - AEFC identifies a more attractive opportunity. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 38p UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK ISSUER RISK STYLE RISK FOREIGN RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. FOREIGN RISK The following are all components of foreign risk: COUNTRY RISK includes the political, economic and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing and financial reporting standards), the possibility of government-imposed restrictions and even the nationalization of assets. CURRENCY RISK results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. CUSTODY RISK refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 39p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - NEW DIMENSIONS FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 +24.37% 1998 +28.64% 1999 +32.00% 2000 -9.08% 2001 -16.71% 2002 -21.89%
During the period shown in the bar chart, the highest return for a calendar quarter was +24.72% (quarter ending December 1998) and the lowest return for a calendar quarter was -16.64% (quarter ending March 2001). The Fund's year to date return as of Sept. 30, 2003 was +13.71%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS SINCE INCEPTION AXP VP - New Dimensions Fund -21.89% +0.09% +5.12%(a) S&P 500 Index -21.10% -0.59% +6.16%(b) Lipper Large-Cap Growth Funds Index -28.11% -4.16% +5.16%(b)
(a) Inception date was May 1, 1996. (b) Measurement period started May 1, 1996. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The S&P 500 Index companies may be generally larger than those in which the Fund invests. The Lipper Large-Cap Growth 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Gordon Fines, Vice President and Senior Portfolio Manager - - Managed the Fund since 1991. - - Leads the Growth Team. - - Joined AEFC in 1981. - - Began investment career in 1967. - - Undergraduate in History, Northwestern University. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 40p OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, preferred stocks, convertible securities, and debt securities of any rating. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - PARTNERS SELECT VALUE FUND GOAL The Fund seeks to provide shareholders with long-term growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund's assets are primarily invested in common stocks, preferred stocks and securities convertible into common stocks that are listed on a nationally recognized securities exchange or traded on the NASDAQ National Market System of the National Association of Securities Dealers. The Fund invests in mid cap companies as well as companies with larger and smaller market capitalizations. The Fund considers mid-cap companies to be either those with a market capitalization of up to $10 billion or those whose market capitalization falls within the range of the Russell 3000(R) Value Index. At June 30, 2003, the range of the Index was between $29 million and $239 billion. The market capitalization range and the composition of the Russell 3000 Index are subject to change. AEFC serves as the investment manager to the Fund and is responsible for the Fund's overall administration, distribution and oversight of the subadviser. AEFC has selected an independent asset manager, GAMCO Investors, Inc., which does business under the name Gabelli Asset Management Company (the Subadviser), to subadvise the Fund. In selecting investments for the Fund, the Subadviser looks for companies which appear underpriced relative to their private market value (PMV). PMV is the value the Subadviser believes informed investors would be willing to pay for a company in an arm's-length transaction, such as an acquisition, based on the company's cash flow, assets, and business prospects. The Subadviser will invest in companies that it believes are selling at a significant discount to their PMV in the public market. In choosing investments, the Subadviser considers factors such as: - - Price and earnings expectations. - - The Subadviser's assessment of the company's price-to-earnings ratio relative to the price-to-earnings ratios of other companies. - - Balance sheet characteristics. - - The Subadviser's assessment of the skills and experience of the company's management relative to other well-managed companies. - - Changes in economic and political outlooks as well as individual corporate developments. The Subadviser will generally sell investments when they lose their perceived value relative to other investments. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to hedge risk, this type of investment could prevent the Fund from achieving its investment objective. During these times, trading in the Fund's portfolio securities could be more frequent, which could result in increased fees and expenses. PRINCIPAL RISKS This Fund is designed for long-term investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK SMALL AND MEDIUM COMPANY RISK MANAGEMENT RISK STYLE RISK ISSUER RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 41p SMALL AND MEDIUM COMPANY RISK Investments in small and medium capitalization companies often involve greater risks than investments in larger, more established companies because small and medium capitalization companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small and medium capitalization companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. MANAGEMENT RISK The risk that a strategy or selection method utilized by the investment manager may fail to produce the intended result. When all other factors have been accounted for and the investment manager chooses an investment, there is always the possibility that the choice will be a poor one. STYLE RISK The Fund purchases stocks it believes are undervalued, but have potential for long-term growth. These stocks may trade at a discount to the market. Growth cannot be guaranteed and the markets may not be willing to reevaluate out-of-favor stocks. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. PAST PERFORMANCE As of the date of this prospectus, the Fund has not commenced operations and therefore performance information is not available. The Fund intends to compare its performance to the Russell 3000(R) Value Index, an unmanaged index, that measures the performance of those Russell 3000(R) Index companies with lower price-to-book ratios and lower forecasted growth values. The Fund also intends to compare its performance to the Lipper Multi-Cap Value Funds Index, an index published by Lipper Inc., that 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. MANAGEMENT AEFC selects, contracts with and compensates the Subadviser to manage the investment of the Fund's assets. AEFC monitors the compliance of the Subadviser with the investment objectives and related policies of the Fund, reviews the performance of the Subadviser, and reports periodically to the Board of Directors. The Subadviser manages the Fund's assets based upon its experience in managing a fund whose investment goals and strategies are substantially similar to those of the Fund. Mr. Mario Gabelli, CFA, is responsible for the day-to-day management of the Fund. Mr. Gabelli has been Chairman, Chief Executive Officer and Chief Investment Officer of Gabelli Asset Management Company and its predecessor company since its inception in 1977. Mr. Gabelli also serves as Chairman and Chief Executive Officer of Gabelli Asset Management Inc., a New York Stock Exchange-listed company that trades under the stock symbol GBL. GAMCO Investors, Inc., which does business under the name Gabelli Asset Management Company, is located at One Corporate Center, Rye, New York 10580. The Subadviser, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, investment grade debt securities, and foreign securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 42p AXP VARIABLE PORTFOLIO - PARTNERS SMALL CAP VALUE FUND GOAL The Fund seeks to provide shareholders with long-term capital appreciation. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund is a non-diversified mutual fund that invests primarily in equity securities. Under normal market conditions, at least 80% of the Fund's net assets are invested in companies with market capitalization of less than $2 billion, which also includes micro capitalization companies with market capitalization of less than $400 million, at the time of investment. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. AEFC, the Fund's investment manager, is responsible for the Fund's overall administration, distribution and oversight of the subadvisers. AEFC has selected three independent asset managers, Royce & Associates, LLC (Royce), Third Avenue Management LLC (Third Avenue), and Goldman Sachs Asset Management, L.P. (GSAM) (the Subadvisers), to subadvise the Fund. Each of the Subadvisers acts independently of the other and uses its own methodology for selecting investments. Each of the Subadvisers employs an active investment strategy that focuses on small companies in an attempt to take advantage of what are believed to be undervalued securities. In selecting investments for the Fund, each of the Subadvisers looks for well-capitalized small and micro capitalization companies that they believe are undervalued. Although this strategy seeks to identify companies with market capitalizations in the range of the Russell 2000(R) Value Index, the Fund may hold or buy stock in a company that is not included in the Russell 2000 Value Index if the stock remains attractive. ROYCE Royce uses a value methodology in managing its portion of the Fund. In selecting securities, Royce evaluates the quality of a company's balance sheet, the level of its cash flows and various measures of a company's profitability. Royce then uses these factors to assess the company's current worth, basing this assessment on either what it believes a knowledgeable buyer might pay to acquire the entire company or what it thinks the value of the company should be in the stock market. This analysis takes a number of factors into consideration, including the company's future growth prospects and current financial condition. Royce's investments focus on small- and micro-cap securities that it believes are trading significantly below its estimate of their current worth. In selecting securities for the Fund, Royce looks for companies in the upper end of the small-cap market that have: - - Excellent business strengths. - - High internal rates of return and low leverage. In the micro-cap sector, Royce selects from a universe of more than 6,200 micro-cap companies that it believes are trading significantly below its estimate of their current worth. THIRD AVENUE Third Avenue uses a value investment style through a disciplined bottom-up approach to identify securities of well-financed companies which are trading at a substantial discount. Focusing on a company's fundamentals rather than macro-economic trends, Third Avenue investigates publicly available information about a company to understand its dynamics and gathers information about its management, its customers, and its competitors. In selecting securities for the Fund, Third Avenue identifies attractive investments that exhibit the following four essential characteristics: - - High quality resources, measured by the presence of high quality assets, the absence of liabilities both on and off the balance sheet and strong cash flows. - - Competent management with a strong record as an owner and operator of the business, and shares a common interest with outside, passive minority shareholders. - - Understandable business, based on company's published financials, Securities and Exchange Commission (SEC) filings and other public documents. - - Selling at a discount to the value of business were it a private company or a takeover candidate. Third Avenue will generally sell a security when there has been a fundamental change in the business or capital structure of the company, which significantly affects the investment's inherent value, or when Third Avenue believes that the market value of an investment is over-priced relative to its intrinsic value. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 43p GSAM Business quality, attractive valuation and thoughtful portfolio construction are the key elements of GSAM's Value Equity approach. Through intensive, hands-on research the Value Equity team at Goldman Sachs seeks to identify well-positioned small-cap companies that have attractive returns on capital, strong or improving cash flow characteristics and run by shareholder-oriented managements. The team employs a disciplined valuation approach to invest in these companies when the market does not fully recognize their real economic value. GSAM will sell a position if (1) the risk/reward profile becomes less attractive due to price appreciation; (2) its investment thesis for a particular holding is invalidated based on subsequent information; and (3) its confidence in management's ability to execute is compromised. Furthermore, GSAM mitigates the liquidity and company-specific risks associated with small-cap value investing by limiting their sector bets and investing in a large number of holdings. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund's policies permit investment of more of its assets in money market securities. Although investing in these securities would serve primarily to hedge risk, this type of investment could prevent the Fund from achieving its investment objective. During these times, trading in the Fund's portfolio securities could be more frequent, which could result in increased fees, expenses, and taxes. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. In addition, since the Fund is a non-diversified mutual fund, it may invest more of its assets in fewer issuers than if it were a diversified fund. Accordingly, the Fund may have more risk than mutual funds that have broader diversification. This Fund is designed for investors with above-average risk tolerance. Principal risks associated with an investment in the Fund include: MARKET RISK SMALL COMPANY RISK STYLE RISK ISSUER RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. SMALL COMPANY RISK Investments in small companies often involve greater risks than investments in larger, more established companies because small companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading are substantially less and may be more volatile than is typical of larger companies. The prices of small- and micro-cap securities are generally more volatile and their markets are less liquid relative to larger-cap securities. Therefore, the Fund may involve considerably more risk of loss and its returns may differ significantly from funds investing in larger-cap companies or other asset classes. STYLE RISK The Fund purchases stocks it believes are undervalued, but have potential for long-term growth. These stocks may trade at a discount to the market. Growth cannot be guaranteed and the markets may not be willing to reevaluate out-of-favor stocks. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 44p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - PARTNERS SMALL CAP VALUE FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -12.13%
During the period shown in the bar chart, the highest return for a calendar quarter was 9.08% (quarter ending March 2002) and the lowest return for a calendar quarter was -21.23% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +21.00%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Partners Small Cap Value Fund -12.13% -4.34%(a) Russell 2000(R) Value Index -11.43% -6.08%(b) Lipper Small-Cap Value Funds Index -11.20% -5.83%(b) Russell 2000(R) Index -20.48% -12.79%(b)
(a) Inception date was Aug. 14, 2001. (b) Measurement period started Oct. 1, 2001. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The Russell 2000(R) Value Index, an unmanaged index, measures the performance of those Russell 2000(R) companies with lower price-to-book ratios and lower forecasted growth values. The Lipper Small-Cap Value 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. The Russell 2000(R) Index, an unmanaged index, measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which represents approximately 8% of the total market capitalization of the Russell 2000(R) Index. Recently, the Fund's investment manager recommended to the Fund that the Fund change its comparative index from the Russell 2000(R) Index to the Russell 2000(R) Value Index. The investment manager made this recommendation because the new index more closely represents the Fund's holdings. We will include both indexes in this transition year. In the future, however, only the Russell 2000(R) Value Index will be included. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 45p MANAGEMENT AEFC selects, contracts with and compensates the Subadvisers to manage the investment of the Fund's assets. AEFC monitors the compliance of the Subadvisers with the investment objectives and related policies of the Fund, reviews the performance of the Subadvisers, and reports periodically to the Board of Directors (the "Board"). The Subadvisers each manage a portion of the Fund's assets based upon their respective experience in managing a small capitalization value fund whose investment goals and strategies are substantially similar to those of the Fund. ROYCE Royce & Associates, LLC has been investing in small-cap securities with a value approach for more than 25 years. Charles M. Royce has been Royce's President and Chief Investment Officer since 1972. W. Whitney George, Managing Director, Vice President and Senior Portfolio Manager and Jay S. Kaplan, Portfolio Manager, co-manage the portion of the Fund's portfolio managed by Royce. Mr. George has been employed by Royce since 1991. Mr. Kaplan has been employed by Royce since 2000, having previously been a Managing Director and Portfolio Manager at Prudential Investments. THIRD AVENUE Curtis R. Jensen and Ian Lapey have primary responsibility for managing the portion of the Fund's portfolio managed by Third Avenue. Mr. Jensen, Co-Chief Investment Officer and Portfolio Manager of the Third Avenue Small-Cap Value Fund, oversees the management of those assets managed by Third Avenue, and Mr. Lapey, Portfolio Manager, handles the day-to-day management of those assets. Mr. Jensen has been employed by Third Avenue since 1995, having previously held various corporate finance positions with Manufacturers Hanover Trust Company and Enright and Company, a private investment banking firm. Mr. Jensen received a BA from Williams College and an MBA from the Yale School of Management, where he studied under Mr. Whitman. Mr. Lapey has been employed by Third Avenue since 2001, having previously been an Equity Research Analyst with Credit Suisse First Boston for three years. Mr. Lapey received a BA from Williams College, an MS from Northeastern University Graduate School of Professional Accounting, and an MBA from New York University Stern School of Business. Martin J. Whitman, CFA, is founder and Co-Chief Investment Officer of Third Avenue Management LLC. GSAM A team of seasoned small-cap value investors is responsible for managing GSAM's portion of the Fund. Portfolio managers are organized along industry lines and are responsible for conducting research in their particular area of expertise. While the team debates investment ideas and overall portfolio structure, the buy/sell decision resides with the portfolio manager responsible for the industry. Key professionals include: EILEEN ROMINGER, MANAGING DIRECTOR AND CHIEF INVESTMENT OFFICER Eileen is Chief Investment Officer and portfolio manager on the U.S. Value team where she oversees the portfolio construction and investment research for the firm's value accounts. Her prior experience spanned 18 years at Oppenheimer Capital, where she was a Managing Director and member of the Executive Committee. She was a senior portfolio manager for corporate pension fund and insurance company accounts, portfolio manager of Quest Value Fund since 1988, as well as a senior research analyst responsible for several industries. Eileen received an M.B.A. from Wharton School of Business and a B.A. from Fairfield University. CHIP OTNESS, CFA, MANAGING DIRECTOR AND PORTFOLIO MANAGER Chip is a portfolio manager on the U.S. Value team, where he oversees the portfolio construction and investment research for the firm's Small Cap Value accounts. Chip brings to Goldman Sachs 30 years of fundamental-driven research and investment management experience, 20 years of that managing small-cap funds. Chip started his career at JP Morgan where he spent 28 years. When he left JP Morgan he was Managing Director and ran the J.P. Morgan's Small Cap Institutional group and was responsible for growing and managing $3.6 billion in assets. Chip received a B.A. in Economics from Harvard University. LISA PARISI, CFA, VICE PRESIDENT AND PORTFOLIO MANAGER Lisa is a portfolio manager on the U.S. Value team, where she has broad research responsibilities across the value strategies. Previously, Lisa started a small-cap value strategy for John A Levin & Co. Lisa also developed a small-cap value product and co-managed a mid-cap value product at Valenzuela Capital, where she was a managing director. Lisa started her career working at Lazard Freres on the small-cap value team and has also worked at Royce Associates and Trust Company of the West. Lisa received a B.B.A. from Adelphi University and an M.B.A. in Finance from the Stern School of Business at New York University. J. KELLY FLYNN, VICE PRESIDENT AND PORTFOLIO MANAGER Kelly is a portfolio manager for the U.S. Value team, where he has broad research responsibilities across the value strategies. Prior to joining Goldman Sachs Kelly spent three years at Lazard Asset Management where he was a portfolio manager for Small Cap/SMID Cap Value products. Before Lazard, Kelly was a small-cap value portfolio manager at 1838 Investment Advisors. Kelly has also spent time working for Edgewater Private Equity Fund as a research analyst and at First Boston in the mergers and acquisitions department. Kelly received a B.A. from Harvard in 1990 and an M.B.A from Wharton School of Business. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 46p DOLORES BAMFORD, CFA, VICE PRESIDENT AND PORTFOLIO MANAGER Dolores is a portfolio manager for the U.S. Value team, where she has broad research responsibility across the value portfolios. Prior to her arrival at Goldman Sachs, Dolores was a Portfolio Manager at Putnam Investments for various products since 1992. While at Putnam she was portfolio manager for a variety of Funds including the Putnam Convertible Income-Growth Fund, the Global Resources Fund. Dolores received a B.A. from Wellesley College in 1988 and her M.S. from MIT Sloan School of Management. SCOTT CARROLL, CFA, VICE PRESIDENT AND PORTFOLIO MANAGER Scott is a portfolio manager on the U.S. Value team, where he has broad research responsibilities across the value portfolios. Before joining Goldman Sachs, Scott spent over five years at Van Kampen Funds where he had portfolio management and analyst responsibilities for a Growth and Income and Equity Income funds. Prior to Van Kampen, Scott spent three years at Lincoln Capital Management as an equity analyst. Scott also spent two years as a Senior Auditor at Pittway Corporation. Scott received a B.S. in Accounting from Northern Illinois University in 1988, and an MBA from the University of Chicago Graduate School of Business. Royce is located at 1414 Avenue of the Americas, New York, New York. Royce, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of a portion of the Fund's portfolio, as well as investment research and statistical information under a Subadvisory Agreement with AEFC. Royce is a direct wholly-owned subsidiary of Legg Mason, Inc. located at 100 Light Street, Baltimore, Maryland. Third Avenue is located at 622 Third Avenue 32nd Floor, New York, New York. Third Avenue, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of a portion of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. On August 8, 2002, Affiliated Managers Group, Inc. acquired an indirect majority equity interest in Third Avenue. The investment professionals and management team serving Third Avenue remain unchanged. GSAM is located at 32 Old Slip, 17th Floor, New York, New York. GSAM, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of a portion of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. GSAM is a division of The Goldman Sachs Group, Inc., a publicly traded financial services company, located at 85 Broad Street, New York, New York. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, investment grade debt securities, and foreign securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 47p AXP VARIABLE PORTFOLIO - S&P 500 INDEX FUND GOAL The Fund seeks to provide shareholders with long-term capital appreciation. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund seeks to provide investment results that correspond to the total return (the combination of appreciation and income) of large-capitalization stocks of U.S. companies. In pursuit of this objective, the Fund invests primarily in securities that are expected to provide investment results that correspond to the performance of the Standard & Poor's 500 Composite Stock Price Index* (S&P 500 Index). The S&P 500 Index is made up primarily of large-capitalization companies that represent a broad spectrum of the U.S. economy. The S&P 500 Index is an unmanaged group of securities whose overall performance is frequently used as a standard to measure investment performance. The Fund is not managed according to traditional methods of "active" investment management. Instead, it follows a passive or indexing investment approach in an attempt to mirror the performance of the S&P 500 Index. Keep in mind that an index fund has operating expenses and transaction costs, while an index does not. This means that, while an index fund may track its index closely, it is typically unable to match the performance of the index exactly. While there is no guarantee, the investment adviser expects the correlation between the Fund and its respective index to be at least .95. A correlation of 1.00 means the return of the Fund can be completely explained by the return of the index. The Fund normally will invest in all stocks in the S&P 500 Index in roughly the same proportions as their weightings in the index. For example, if 5% of the S&P 500 Index is made up of a stock of a particular company, the Fund normally will invest approximately 5% of its assets in that company. This strategy is known as "full replication." Although the Fund attempts to replicate the S&P 500 Index, there may be times when the Fund and the index do not match exactly. AEFC, the Fund's investment adviser, may purchase stocks not included in the S&P 500 Index when it believes it would be a cost efficient way of approximating the S&P 500 Index's performance to do so, for example, in anticipation of a stock being added to the index. AEFC may use various techniques, such as buying and selling options and futures contracts, to increase or decrease the Fund's exposure to changing security prices or other factors that affect security values. The Fund normally will invest at least 80% of its total assets in securities that are contained in the S&P 500 Index. AEFC will monitor the performance of the Fund against the index and will adjust the Fund's holdings, as necessary, to minimize tracking error. In the event a correlation of .95 or better is not achieved, the Fund's board will consider alternative arrangements. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. The Fund may change its target index for a different index if the current index is discontinued or if the Fund's board believes a different index would better enable the Fund to match the performance of the market segment represented by the current index. The substitute index will measure the same general segment of the market as the current index. The Fund may hold cash or its equivalent or invest in investment grade short-term fixed income securities. Although index funds, by their nature, tend to be tax-efficient investments, the Fund generally is managed without regard to tax efficiency. In evaluating whether to sell a security, AEFC, the Fund's investment adviser, considers, among other factors, whether: - - The security continues to be included in the S&P 500 Index. - - Corporate actions have affected the company's security (such as corporate reorganizations, mergers or acquisitions). - - A company's market weighting otherwise changes with respect to the S&P 500 Index. - - Timing of cash flows in and out of the Fund require AEFC to sell a security. * "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," and "Standard & Poor's 500" are trademarks of The McGraw-Hill Companies, Inc. These trademarks have been licensed for use by American Express Financial Corporation. The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's or any of its subsidiaries or affiliates (the "Licensors") and the Licensors make no representation regarding the advisability of investing in the Fund. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK TRACKING ERROR RISK SECTOR/CONCENTRATION RISK ISSUER RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 48p TRACKING ERROR RISK The Fund may not track the S&P 500 Index perfectly because differences between the S&P 500 Index and the Fund's portfolio can cause differences in performance. The investment adviser purchases securities and other instruments in an attempt to replicate the performance of the S&P 500 Index. However, the tools that the investment adviser uses to replicate the S&P 500 Index are not perfect and the Fund's performance is affected by factors such as the size of the Fund's portfolio, transaction costs, management fees and expenses, brokerage commissions and fees, the extent and timing of cash flows in and out of the Fund and changes in the S&P 500 Index. In addition, the returns from a specific type of security (for example, large-cap stocks) may trail returns from other asset classes or the overall market. Each type of security will go through cycles of doing better or worse than stocks or bonds in general. These periods may last for several years. SECTOR/CONCENTRATION RISK The Fund is non-diversified. A non-diversified fund may invest more of its assets in fewer companies than if it were a diversified fund. Because each investment has a greater effect on the Fund's performance, it may be more susceptible to a single economic, political or regulatory occurrence than a diversified fund. In addition, in tracking the S&P 500 Index, the Fund may have a considerable portion of its assets invested in one or more sectors of the market. This may lead to a greater market fluctuation than would occur with a fund invested in a wider spectrum of industries. The Fund will invest more than 25% of its total assets in a particular industry only if necessary to track the S&P 500 Index. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - S&P 500 INDEX FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 2001 -12.46% 2002 -22.42%
During the period shown in the bar chart, the highest return for a calendar quarter was +10.56% (quarter ending December 2001) and the lowest return for a calendar quarter was -17.26% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +14.25%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 49p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - S&P 500 Index Fund -22.42% -16.79%(a) S&P 500 Index -22.10% -15.97%(b) Lipper S&P 500 Funds Index -22.30% -16.20%(b)
(a) Inception date was May 1, 2000. (b) Measurement period started May 1, 2000. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper S&P 500 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT David Factor, CFA, Portfolio Manager - - Managed the Fund since 2001. - - Joined AEFC in 1994. - - Began investment career in 1996. - - BSB, University of Minnesota. AXP VARIABLE PORTFOLIO - SHORT DURATION U.S. GOVERNMENT FUND GOAL The Fund seeks to provide shareholders with a high level of current income and safety of principal consistent with an investment in U.S. government and government agency securities. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in debt obligations. Under normal market conditions, at least 80% of the Fund's net assets are invested in securities issued or guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities. Although the Fund may invest in any U.S. government securities, it is anticipated that U.S. government securities representing part ownership in pools of mortgage loans (mortgage-backed securities) will comprise a large percentage of the Fund's investments. These mortgage loans include, but are not limited to Government National Mortgage Association (GNMA or Ginnie Mae) mortgage-backed bonds, which are backed by the full faith and credit of the United States; and Federal National Mortgage Association (FNMA or Fannie Mae) and Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) mortgage-backed bonds, which are backed by the credit of federal agencies or government sponsored agencies or government sponsored entities. The Fund will utilize forward sale commitments for hedging purposes. Additionally, the Fund will utilize derivative instruments and when-issued securities to produce incremental earnings, to hedge existing positions, and to increase flexibility. The Fund's potential losses from the use of these instruments could extend beyond its initial investment. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses investments by: - - Reviewing credit characteristics and the interest rate outlook. - - Identifying and buying securities that: - are high quality or have similar qualities, in AEFC's opinion, even though they are not rated or have been given a lower rating by a rating agency; and - have short or intermediate-term maturities. - - Under normal market conditions, the Fund will maintain an average portfolio duration of one to three years. Duration measures the sensitivity of bond prices to changes in interest rates. The longer the duration of a bond, the longer it will take to repay the principal and interest obligations and the more sensitive it will be to changes in interest rates. For example, a three year duration means a bond is expected to decrease in value by 3% if interest rates rise 1% and increase in value by 3% if interest rates fall 1%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 50p In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The interest rate or economic outlook changes. - - The security is overvalued relative to alternative investments. - - AEFC wishes to lock-in profits. - - AEFC identifies a more attractive opportunity. - - The issuer or the security continues to meet the other standards described above. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. Additionally, the Fund's portfolio turnover may be affected by short-term investment strategies. High portfolio turnover could result in increases in transaction costs and may result in realized capital gains that would be taxable distributions to shareholders. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK CORRELATION RISK INTEREST RATE RISK CALL/PREPAYMENT RISK CREDIT RISK DERIVATIVES RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. CORRELATION RISK The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. INTEREST RATE RISK The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a debt obligation, the higher its yield and the greater its sensitivity to changes in interest rates. CALL/PREPAYMENT RISK The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk, which is the risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. CREDIT RISK The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). DERIVATIVES RISK Just as with securities in which the fund invests directly, derivatives are subject to a number of risks, including market, correlation, liquidity, interest rate, and credit risk. In addition, gains or losses involving derivatives may be substantial, because a relatively small price movement in the underlying security, currency or index may result in a substantial gain or loss for the fund. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 51p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - SHORT DURATION U.S. GOVERNMENT FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 +8.47% 2001 +6.29% 2002 +5.83%
During the period shown in the bar chart, the highest return for a calendar quarter was +3.25% (quarter ending December 2000) and the lowest return for a calendar quarter was +0.11% (quarter ending December 2001). The Fund's year to date return as of Sept. 30, 2003 was +1.26%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Short Duration U.S. Government Fund +5.83% +6.37%(a) Lehman Brothers 1-3 Year Government Index +6.01% +7.15%(b) Lehman Brothers Aggregate Bond Index +10.25% +9.25%(b) Lipper Short U.S. Government Funds Index +5.29% +6.43%(b)
(a) Inception date was Sept. 15, 1999. (b) Measurement period started Oct. 1, 1999. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Lehman Brothers 1-3 Year Government Index, an unmanaged index, is made up of all publicly issued, non-convertible domestic debt of the U.S. government, or agency thereof, or any quasi-federal corporation. The index also includes corporate debt guaranteed by the U.S. government. Only notes and bonds with a minimum maturity of one year up to a maximum maturity of 2.9 years are included. 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. 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. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 52p Recently, the Fund's investment manager recommended to the Fund that the Fund change its comparative index from the Lehman Brothers Aggregate Bond Index to the Lehman Brothers 1-3 Year Government Index. The investment manager made this recommendation because the new index more closely represents the Fund's objectives. We will include both indices in this transition year. In the future, however, only the Lehman Brothers 1-3 Year Government Index will be included. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT The team that manages the Fund's portfolio is led by: Scott Kirby, Portfolio Manager - - Managed the Fund since 2001. - - Leader of the structured assets team. - - Joined AEFC in 1979, left in 1985 and returned in 1987. - - Began investment career in 1983. - - MBA, University of Minnesota. AEFC's investment professionals who manage fixed income funds are organized into teams. Each team specializes in a particular sector of the fixed income market. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities and investment grade non-governmental debt obligations. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - SMALL CAP ADVANTAGE FUND GOAL The Fund seeks to provide shareholders with long-term capital growth. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund's assets primarily are invested in equity securities. Under normal market conditions, at least 80% of the Fund's net assets are invested in equity securities of companies with market capitalization of up to $2 billion at the time the Fund first invests in them. These companies will often be those included in the Russell 2000(R) Index. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. AEFC, the Fund's investment manager, is responsible for the Fund's overall administration, distribution and oversight of the subadviser. Kenwood Capital Management LLC (Kenwood) (the Subadviser), an indirect subsidiary of AEFC, subadvises the Fund. Kenwood manages the Fund to provide diversified exposure to the small cap segment of the U.S. stock market. Under normal market conditions, it is expected that the Fund will be fully invested in common stocks across a wide range of industries. Kenwood buys stocks based on an analysis of valuation and earnings. This selection discipline favors companies that exhibit: - - Attractive valuations, based on measures such as the ratio of stock price to company earnings or free cash flow. - - Improving earnings, based on an analysis of trends in earnings forecasts and prior period earnings that were better than expected, as well as a qualitative assessment of the company's competitive market position. Kenwood will normally sell a stock holding if: - - The stock's price moves above a reasonable valuation target. - - The company's financial performance fails to meet expectations. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although the Fund would invest in these securities primarily to reduce risk, this type of investment also could prevent the Fund from achieving its investment objective. During these times trading in the Fund's portfolio securities could be more frequent, which could result in increased fees, expenses, and taxes. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 53p PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK SMALL AND MEDIUM COMPANY RISK ISSUER RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. SMALL AND MEDIUM COMPANY RISK Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - SMALL CAP ADVANTAGE FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 +4.16% 2001 -6.53% 2002 -17.06%
During the period shown in the bar chart, the highest return for a calendar quarter was +17.52% (quarter ending December 2001) and the lowest return for a calendar quarter was -19.29% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +27.35%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 54p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Small Cap Advantage Fund -17.06% -2.65%(a) Russell 2000(R) Index -20.48% -2.01%(b) Lipper Small-Cap Core Funds Index -19.23% +2.99%(b)
(a) Inception date was Sept. 15, 1999. (b) Measurement period started Oct. 1, 1999. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Russell 2000(R) Index, an unmanaged index, measures the performance of the 2,000 smallest companies in the Russell 3000(R) Index, which represents approximately 8% of the total market capitalization of the Russell 3000(R) Index. The Lipper Small-Cap Core 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Jake Hurwitz, CFA, Co-Portfolio Manager - - Managed the Fund since 1999. - - Principal of Kenwood Capital Management LLC, since 1998. - - Prior to that, Senior Vice President and Senior Portfolio Manager, Travelers Investment Management Company (TIMCO), from 1991 to 1998. - - Began investment career in 1978. - - MA, University of California, MBA, New York University. Kent Kelley, CFA, Co-Portfolio Manager - - Managed the Fund since 1999. - - Principal of Kenwood Capital Management LLC, since 1998. - - Prior to that, Chief Executive Officer, TIMCO, from 1995 to 1998. - - Began investment career in 1978. - - MA, Yale University. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities and debt securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 55p AXP VARIABLE PORTFOLIO - STOCK FUND GOAL The Fund seeks to provide shareholders with current income and growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund's assets primarily are invested in common stocks and securities convertible into common stocks. Under normal circumstances, at least 80% of the Fund's net assets are invested in these securities. In pursuit of its income objective, the Fund will invest in income-producing equity securities (such as convertible securities and preferred stocks) and short-term debt instruments (such as commercial paper). The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses equity investments by: - - Considering opportunities and risks by reviewing overall market conditions and industry outlook. - - Identifying market trends that AEFC believes will lead to good long-term growth potential. - - Identifying companies with strong, sustainable earnings growth based on: - effective management (considering overall performance), - competitive market position, and - financial strength. - - Focusing on those companies that AEFC considers to be "blue chips." Blue chip stocks are issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. - - Identifying investments that contribute to portfolio diversification. - - Identifying income-producing securities. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to other potential investments. - - The security has reached AEFC's price objective. - - The company has met AEFC's earnings and/or growth expectations. - - Political, economic or other events could affect the company's performance. UNUSUAL MARKET CONDITIONS During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: ISSUER RISK MARKET RISK STYLE RISK ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 56p PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - STOCK FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -20.91%
During the period shown in the bar chart, the highest return for a calendar quarter was +1.81% (quarter ending December 2002) and the lowest return for a calendar quarter was -13.89% (quarter ending September 2002). The Fund's year to date return as of Sept. 30, 2003 was +12.33%. AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR SINCE INCEPTION AXP VP - Stock Fund -20.91% -17.48%(a) S&P 500 Index -22.10% -16.00%(b) Lipper Large-Cap Core Funds Index -21.23% -15.18%(b)
(a) Inception date was Aug. 13, 2001. (b) Measurement period started Sept. 1, 2001. This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Large-Cap Core 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Mike Kennedy, CFA, Portfolio Manager - - Managed the Fund since 2001. - - Joined AEFC in 1985. - - Began investment career in - - MBA, Loyola University of Chicago. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 57p OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, foreign securities, and debt obligations rated C or higher. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. These securities and investment strategies, and others, are discussed in the SAI and its annual and semiannual reports. AXP VARIABLE PORTFOLIO - STRATEGY AGGRESSIVE FUND GOAL The Fund seeks to provide shareholders with capital appreciation. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in securities of growth companies. Under normal market conditions, at least 65% of the Fund's total assets are invested in equity securities. In pursuit of the Fund's goal, AEFC, the Fund's investment manager, chooses equity investments by: - - Considering opportunities and risks within growing industries and new technologies. - - Selecting companies that AEFC believes have aggressive growth prospects. - - Identifying small and medium companies with: - effective management, - financial strength, and - competitive market position. The Fund focuses on medium-sized and small-sized companies whose market capitalization falls within the range of companies in the Russell MidCap(R) Index for medium-sized companies and the Russell 2000(R) Index for the small-sized companies. The market capitalization within Indexes will vary, but as of June 30, 2003, the range was between $1.2 billion and $9.8 billion in the Russell MidCap(R) Index, and between $116.6 million and $1.2 billion in the Russell 2000 Index. In evaluating whether to sell a security, AEFC considers, among other factors, whether: - - The security is overvalued relative to alternative investments. - - The security has reached AEFC's price objective. - - The company's characteristics change. - - The company has met AEFC's earnings and/or growth expectations. - - Political, economic, or other events could affect the company's performance. - - AEFC wishes to minimize potential losses (i.e., in a market down-turn). - - AEFC wishes to lock-in profits. - - AEFC identifies a more attractive opportunity. - - The company or the security continues to meet the other standards described above. UNUSUAL MARKET CONDITIONS During unusual market conditions or when growth opportunities are unavailable, the Fund may invest more of its assets in money market securities or debt obligations. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 58p PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: MARKET RISK STYLE RISK SMALL AND MEDIUM COMPANY RISK ISSUER RISK MARKET RISK The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. STYLE RISK The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. SMALL AND MEDIUM COMPANY RISK Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less and may be more volatile than is typical of larger companies. ISSUER RISK The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: - - how the Fund's performance varied for each full calendar year shown on the chart below, and - - how the Fund's average annual total returns compare to other recognized indexes. How the Fund performed in the past does not indicate how the Fund will perform in the future. [CHART] AXP VP - STRATEGY AGGRESSIVE FUND PERFORMANCE (BASED ON CALENDAR YEARS) 1993 +13.07% 1994 -6.32% 1995 +31.76% 1996 +15.98% 1997 +12.64% 1998 +2.62% 1999 +71.03% 2000 -19.04% 2001 -32.91% 2002 -31.95%
During the period shown in the bar chart, the highest return for a calendar quarter was +56.47% (quarter ending December 1999) and the lowest return for a calendar quarter was -28.63% (quarter ending March 2001). The Fund's year to date return as of Sept. 30, 2003 was +16.80%. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 59p AVERAGE ANNUAL TOTAL RETURNS (AS OF DEC. 31, 2002)
1 YEAR 5 YEARS 10 YEARS AXP VP - Strategy Aggressive Fund -31.95% -8.29% +1.69% Russell MidCap(R) Growth Index -27.41% -1.82% +6.71% Lipper Mid-Cap Growth Funds Index -28.47% -1.49% +6.41%
This table shows total returns from a hypothetical investment in the Fund. Comparison index returns are for the same periods. The results do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. For purposes of this calculation, information about the Fund assumes the deduction of applicable fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. Russell MidCap(R) Growth Index measures the performance of those Russell MidCap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000(R) Growth Index. The Lipper Mid-Cap Growth 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. The securities included in the indexes may not be the same as those held by the Fund. MANAGEMENT Paul Rokosz, CFA, Portfolio Manager - - Managed the Fund since 2002. - - Joined AEFC in 1998. - - Prior to that, Senior Analyst, Putnam Investments, from 1994 to 1998. - - Began investment career in 1986. - - MBA, University of Chicago Graduate School of Business. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as foreign securities, money market securities, debt obligations rated B or higher, and convertible securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's SAI and its annual and semiannual reports. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 60p FEES AND EXPENSES Because the Fund is the underlying investment vehicle for an annuity contract or life insurance policy, there is no sales charge for the purchase or sale of Fund shares. However, there may be charges associated with your annuity contract or life insurance policy, including those that may be associated with surrender or withdrawal. Any charges that apply to the subaccount and your contract or policy are described in the annuity contract or life insurance policy prospectus. The summary below describes the Fund fees and expenses that you would pay if you buy a variable annuity or life insurance policy and allocate your purchase payments to subaccounts or premiums that invest in the Fund. This summary does not reflect any fee or sales charges imposed by your annuity contract or life insurance policy. ANNUAL FUND OPERATING EXPENSES AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS
MANAGEMENT DISTRIBUTION OTHER FEE WAIVER/EXPENSE NET FUND FEES(a) (12b-1) FEES(b) EXPENSES(c) TOTAL REIMBURSEMENT EXPENSES AXP VP - Blue Chip Advantage Fund 0.53%(g) 0.13% 0.14% 0.80% 0.00% 0.80% AXP VP - Capital Resource Fund 0.64%(h) 0.13% 0.08% 0.85% 0.00% 0.85% AXP VP - Cash Management Fund 0.51% 0.13% 0.06% 0.70% 0.00% 0.70% AXP VP - Core Bond Fund 0.63% 0.13% 0.45% 1.21% 0.26% 0.95% AXP VP - Diversified Bond Fund 0.60% 0.13% 0.08% 0.81% 0.00% 0.81% AXP VP - Diversified Equity Income Fund 0.53%(g) 0.13% 0.10% 0.76% 0.00% 0.76% AXP VP - Emerging Markets Fund(d) 1.13%(g) 0.13% 0.78% 2.04% 0.29% 1.75% AXP VP - Equity Select Fund 0.68%(h) 0.13% 0.25% 1.06% 0.00% 1.06% AXP VP - Global Bond Fund 0.84% 0.13% 0.12% 1.09% 0.00% 1.09% AXP VP - Growth Fund 0.65%(h) 0.13% 0.21% 0.99% 0.00% 0.99% AXP VP - High Yield Bond Fund 0.62% 0.13% 0.08% 0.83% 0.00% 0.83% AXP VP - International Fund(d) 0.84%(g) 0.13% 0.09% 1.06% 0.00% 1.06% AXP VP - Large Cap Value Fund 0.63% 0.13% 0.43% 1.19% 0.14% 1.05% AXP VP - Managed Fund 0.61%(h) 0.13% 0.06% 0.80% 0.00% 0.80% AXP VP - New Dimensions Fund 0.62%(g) 0.13% 0.07% 0.82% 0.00% 0.82% AXP VP - Partners Select Value Fund 0.81% 0.13% 0.46% 1.40% 0.25% 1.15% AXP VP - Partners Small Cap Value Fund(e) 0.99%(g) 0.13% 0.43% 1.55% 0.00% 1.55% AXP VP - S&P 500 Index Fund 0.29% 0.13% 0.22% 0.64% 0.14% 0.50% AXP VP - Short Duration U.S. Government Fund 0.61% 0.13% 0.08% 0.82% 0.00% 0.82% AXP VP - Small Cap Advantage Fund(f) 0.81%(h) 0.13% 0.25% 1.19% 0.00% 1.19% AXP VP - Stock Fund 0.55%(g) 0.13% 1.13% 1.81% 0.71% 1.10% AXP VP - Strategy Aggressive Fund 0.61%(g) 0.13% 0.09% 0.83% 0.00% 0.83%
(a) The Fund pays AEFC a fee for managing its assets. (b) The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940. The Fund pays IDS Life Insurance Company an annual fee of up to 0.125% of average daily net assets as payment for distributing its shares and providing shareholder services. Because this fee is paid out of the Fund's assets on an on-going basis, over time this fee will increase the cost of your investment and may cost you more than paying other types of sales charges. (c) The Fund pays taxes, brokerage commissions and other nonadvisory expenses including administrative and accounting services. (d) AEFC pays American Express Asset Management International Inc. (AEAMI) a fee for sub-investment advisory services. AEAMI (50192 AXP Financial Center, Minneapolis, MN 55474) is a wholly-owned subsidiary of AEFC. (e) AEFC pays Royce & Associates, LLC, Third Avenue Management LLC and Goldman Sachs Asset Management, L.P., a fee for sub-investment advisory services. (f) AEFC pays Kenwood Capital Management LLC (KCM LLC) a fee for sub-investment advisory services. KCM LLC (Metropolitan Center, Suite 2300, 333 South Seventh Street, Minneapolis, MN 55402) is an indirect subsidiary of AEFC. (g) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.03% for AXP VP - Blue Chip Advantage Fund, 0.03% for AXP VP - Diversified Equity Income Fund, 0.04% for AXP VP - Emerging Markets Fund, 0.02% for AXP VP - International Fund, 0.002% for AXP VP - New Dimensions Fund, 0.03% for AXP VP - Partners Small Cap Value Fund, 0.01% for AXP VP - Stock Fund and 0.02% for AXP VP - Strategy Aggressive Fund. (h) Includes the impact of a performance incentive adjustment that increased the management fee by 0.02% for AXP VP - Capital Resource Fund, 0.03% for AXP VP - Equity Select Fund, 0.02% for AXP VP - Growth Fund, 0.003% for AXP VP - Managed Fund and 0.02% for AXP VP - Small Cap Advantage Fund. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 61p EXAMPLE This example is intended to show you the expenses you would pay if you invest $10,000 to a subaccount that invests in the Fund which earns a 5% annual return. The operating expenses remain the same each year. If you hold your accumulation units until the end of the years shown, your costs would be:
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS AXP VP - Blue Chip Advantage Fund $ 82 $ 256 $ 445 $ 994 AXP VP - Capital Resource Fund 87 271 472 1,053 AXP VP - Cash Management Fund 72 224 390 874 AXP VP - Core Bond Fund 97 359 N/A N/A AXP VP - Diversified Bond Fund 83 259 450 1,006 AXP VP - Diversified Equity Income Fund 78 243 423 946 AXP VP - Emerging Markets Fund 188 622 1,082 2,359 AXP VP - Equity Select Fund 108 337 586 1,299 AXP VP - Global Bond Fund 111 347 602 1,333 AXP VP - Growth Fund 101 316 548 1,218 AXP VP - High Yield Bond Fund 85 265 461 1,029 AXP VP - International Fund 108 337 586 1,299 AXP VP - Large Cap Value Fund 107 364 N/A N/A AXP VP - Managed Fund 82 256 445 994 AXP VP - New Dimensions Fund 84 262 456 1,018 AXP VP - Partners Select Value Fund 117 419 N/A N/A AXP VP - Partners Small Cap Value Fund 158 490 846 1,851 AXP VP - S&P 500 Index Fund 56 196 349 793 AXP VP - Short Duration U.S. Government Fund 84 262 456 1,018 AXP VP - Small Cap Advantage Fund 121 378 655 1,448 AXP VP - Stock Fund 136 524 937 2,093 AXP VP - Strategy Aggressive Fund 85 265 461 1,029
THIS EXAMPLE DOES NOT REPRESENT ACTUAL EXPENSES, PAST OR FUTURE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. THIS EXAMPLE DOES NOT REFLECT THE EXPENSES THAT APPLY TO THE SUBACCOUNTS OR THE CONTRACTS. INCLUSION OF THESE CHARGES WOULD INCREASE EXPENSES FOR ALL PERIODS SHOWN. EXPENSE LIMITATIONS Through April 30, 2004, AEFC has agreed to waive certain fees and reimburse expenses to the extent that total expenses exceed the following percentage of Fund average daily net assets: AXP VP - Emerging Markets Fund 1.75% AXP VP - Equity Select Fund 1.10% AXP VP - S&P 500 Index Fund 0.495% AXP VP - Stock Fund 1.10%
Through Aug. 31, 2004, AEFC has agreed to waive certain fees and reimburse expenses to the extent that total expenses exceed the following percentage of Fund average daily net assets: AXP VP - Core Bond Fund 0.95% AXP VP - Large Cap Value Fund 1.05% AXP VP - Partners Select Value Fund 1.15%
The expense table above has been adjusted to incorporate the expense limitations for a theoretical investment occurring on Sept. 1, 2003. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 62p BUYING AND SELLING SHARES VALUING FUND SHARES The net asset value (NAV) is the value of a single Fund share. The NAV usually changes daily, and is calculated at the close of business of the New York Stock Exchange, normally 4 p.m. Eastern time, on each day the New York Stock Exchange (NYSE) is open. AXP Variable Portfolio - Cash Management Fund's securities are valued at amortized cost. In valuing assets of all other Funds, the Fund's assets are valued primarily on the basis of market quotations. Foreign investments are valued in U.S. dollars. AEFC will price a security at fair value in accordance with procedures adopted by the Fund's Board of Directors if a reliable market quotation is not readily available. AEFC also may use fair value if a security's value has been materially affected by events after the close of the primary exchanges or markets on which the security is traded and before the NAV is calculated. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. PURCHASING SHARES You may not buy (nor will you own) shares of the Fund directly. You invest by buying an annuity contract or life insurance policy and allocating your purchase payments to the subaccount that invests in the Fund. Your purchase price will be the next NAV calculated after your request is received by the Fund or an authorized insurance company. For further information concerning minimum and maximum payments and submission and acceptance of your application, see your annuity contract or life insurance policy prospectus. TRANSFERRING/SELLING SHARES There is no sales charge for the sale of Fund shares, but there may be charges associated with the surrender or withdrawal of your annuity contract or life insurance policy. Any charges that apply to the subaccount and your contract are described in your annuity contract or life insurance policy prospectus. You may transfer all or part of your value in a subaccount investing in shares of the Fund to one or more of the other subaccounts investing in shares of other funds with different investment objectives. You may provide instructions to sell any shares you have allocated to the subaccounts. AEFC or an authorized agent will mail your payment within seven days after accepting your surrender or withdrawal request. The amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received by the Fund or an authorized insurance company. Please refer to your annuity contract or life insurance policy prospectus for more information about transfers among subaccounts as well as surrenders and withdrawals. DISTRIBUTIONS AND TAXES The Fund distributes to shareholders (subaccounts) dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to the shareholders (subaccounts) as DIVIDENDS. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is either long-term or short-term depending on the length of time the Fund held the security. Realized capital gains or losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as CAPITAL GAIN DISTRIBUTIONS. REINVESTMENT Since the distributions are automatically reinvested in additional Fund shares, the total value of your holdings will not change. The reinvestment price is the next calculated NAV after the distribution is paid. TAXES The Fund intends to comply with the regulations relating to the diversification requirements under section 817(h) of the Internal Revenue Code. IMPORTANT: This information is a brief and selective summary of some of the tax rules that apply to the Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. FEDERAL INCOME TAXATION OF SUBACCOUNTS, LIFE INSURANCE COMPANIES AND ANNUITY CONTRACTS OR LIFE INSURANCE POLICIES IS DISCUSSED IN YOUR ANNUITY CONTRACT OR LIFE INSURANCE POLICY PROSPECTUS. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 63p OTHER INFORMATION The Fund operates under an order from the Securities and Exchange Commission to permit AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. INVESTMENT MANAGER AEFC, the Fund's investment manager, located at 200 AXP Financial Center, Minneapolis, MN 55474, is the wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, NY 10285. The AEFC family of companies offers not only insurance and annuities, but also mutual funds, investment certificates and a broad range of financial management services. AEFC has been a provider of financial services since 1894 and as of the end of the most recent fiscal year owned and managed more than $209 billion in assets. The Fund operates under an order from the Securities and Exchange Commission that permits AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. AXP VP - Cash Management Fund, AXP VP - Diversified Bond Fund, AXP VP - Global Bond Fund, AXP VP - High Yield Bond Fund and AXP VP - Short Duration U.S. Government Fund received an order from the Securities and Exchange Commission that permits AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the funds without first obtaining shareholder approval. Before the funds may rely on the order, a majority of the fund's outstanding voting securities will need to approve operating the funds in this manner. If shareholder approval is received, the funds may add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. There is no assurance shareholder approval will be received, and no changes will be made without shareholder approval until that time. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 64p Financial Highlights The financial highlights tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). The returns do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. This information has been audited by KPMG LLP, whose report, along with the Fund's financial statements, is included in the annual report which, if not included with this prospectus, is available upon request. We have not provided this information for AXP VP - Core Bond Fund, AXP VP - Large Cap Value Fund and AXP VP - Partners Select Value Fund because they are new and do not have any history. AXP VP - BLUE CHIP ADVANTAGE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 6.57 $ 8.14 $ 11.62 $ 9.78 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .06 .05 .07 .02 Net gains (losses) (both realized and unrealized) .57 (1.57) (3.47) 1.85 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .63 (1.52) (3.40) 1.87 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.06) (.05) (.08) (.03) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 7.14 $ 6.57 $ 8.14 $ 11.62 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 66 $ 63 $ 81 $ 71 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .80% .79% .78% .95%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .96% .68% .81% .34%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 87% 143% 124% 226% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 9.60% (18.67%) (29.40%) 19.13%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses would have been 0.96% for the period ended Aug. 31, 2000. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 65p AXP VP - CAPITAL RESOURCE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 16.48 $ 20.87 $ 37.21 $ 34.62 $ 26.80 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .10 .05 .01 .06 Net gains (losses) (both realized and unrealized) 1.56 (2.83) (12.96) 6.20 10.28 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.66 (2.73) (12.91) 6.21 10.34 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.09) (.04) (.01) (.06) Distributions from realized gains -- (1.57) (3.39) (3.61) (2.46) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.10) (1.66) (3.43) (3.62) (2.52) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 18.04 $ 16.48 $ 20.87 $ 37.21 $ 34.62 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 1,982 $ 2,227 $ 3,270 $ 5,920 $ 5,621 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .85% .80% .78% .77% .66% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .62% .52% .13% (.02%) .17% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 115% 146% 62% 52% 56% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 10.16% (14.08%) (36.48%) 19.26% 40.12% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - CASH MANAGEMENT FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .01 .02 .05 .05 .05 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.01) (.02) (.05) (.05) (.05) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 868 $ 1,123 $ 1,063 $ 783 $ 690 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .70% .69% .68% .68% .56% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .72% 1.61% 4.76% 5.38% 4.60% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) .72% 1.59% 4.94% 5.52% 4.72% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 66p AXP VP - DIVERSIFIED BOND FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 10.38 $ 10.61 $ 10.29 $ 10.56 $ 11.08 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .44 .56 .70 .75 .79 Net gains (losses) (both realized and unrealized) .02 (.23) .30 (.27) (.52) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .46 .33 1.00 .48 .27 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.44) (.56) (.68) (.75) (.77) Distributions from realized gains -- -- -- -- (.02) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.44) (.56) (.68) (.75) (.79) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.40 $ 10.38 $ 10.61 $ 10.29 $ 10.56 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 1,765 $ 1,814 $ 1,626 $ 1,468 $ 1,750 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .81% .80% .80% .79% .68% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.23% 5.41% 6.72% 7.30% 7.22% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 251% 167% 122% 70% 68% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 4.50% 3.20% 10.07% 4.69% 2.40% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - DIVERSIFIED EQUITY INCOME FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.41 $ 10.20 $ 10.05 $ 9.76 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .13 .11 .10 Net gains (losses) (both realized and unrealized) 1.24 (1.75) .15 .30 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.41 (1.62) .26 .40 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.13) (.11) (.11) Distributions from realized gains -- (.04) -- -- - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.17) (.17) (.11) (.11) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 9.65 $ 8.41 $ 10.20 $ 10.05 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 370 $ 267 $ 106 $ 23 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .76% .87% .91%(d) .95%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.13% 1.59% 1.49% 1.42%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 39% 35% 68% 53% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 17.00% (16.16%) 2.56% 4.21%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.17% and 1.49% for the periods ended Aug. 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 67p AXP VP - EMERGING MARKETS FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 7.04 $ 6.68 $ 9.61 $ 10.23 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .04 .02 .01 (.01) Net gains (losses) (both realized and unrealized) 1.38 .34 (2.94) (.60) - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.42 .36 (2.93) (.61) - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.02) -- -- -- Tax return of capital -- -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.02) -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 8.44 $ 7.04 $ 6.68 $ 9.61 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 16 $ 10 $ 6 $ 6 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.75% 1.68% 1.75% 1.69%(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .67% .31% .20% (.36%)(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 191% 215% 203% 37% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 20.25% 5.45% (30.49%) (6.03%)(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 1, 2000 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 2.04%, 2.36%, 3.49% and 2.42% for the periods ended Aug. 31, 2003, 2002, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AXP VP - EQUITY SELECT FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.54 $ 9.57 $ 10.27 - ------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.05) (.04) (.01) Net gains (losses) (both realized and unrealized) 1.60 (.99) (.69) - ------------------------------------------------------------------------------------------------------ Total from investment operations 1.55 (1.03) (.70) - ------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 10.09 $ 8.54 $ 9.57 - ------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 170 $ 72 $ 14 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) 1.06% 1.10%(d) 1.10%(d),(f) - ------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets (.71%) (.76%) (.45%)(f) - ------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 19% 20% 19% - ------------------------------------------------------------------------------------------------------ Total return(e) 18.20% (10.77%) (6.82%)(g) - ------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 1, 2001 (date the Fund became available) to Aug. 31, 2001. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.39% and 2.99% for the periods ended Aug. 31, 2002 and 2001, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 68p AXP VP - GLOBAL BOND FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 10.02 $ 9.76 $ 9.34 $ 9.84 $ 10.09 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .34 .38 .43 .32 .55 Net gains (losses) (both realized and unrealized) .61 .36 .23 (.51) (.29) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .95 .74 .66 (.19) .26 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.57) (.48) (.24) (.31) (.51) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.40 $ 10.02 $ 9.76 $ 9.34 $ 9.84 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 312 $ 233 $ 191 $ 177 $ 197 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.09% 1.08% 1.07% 1.07% .96% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.08% 3.92% 4.54% 4.81% 5.36% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 102% 46% 34% 50% 56% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 9.56% 7.83% 7.14% (1.90%) 2.50% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - GROWTH FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 5.00 $ 6.48 $ 13.46 $ 9.72 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .01 -- (.01) -- Net gains (losses) (both realized and unrealized) .45 (1.48) (6.97) 3.75 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .46 (1.48) (6.98) 3.75 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.01) -- -- -- Tax return of capital -- -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.01) -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 5.45 $ 5.00 $ 6.48 $ 13.46 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 223 $ 144 $ 177 $ 195 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .99% .81% .90%(d) .95%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .20% --% (.19%) (.09%)(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 199% 272% 41% 17% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 9.29% (22.80%) (51.87%) 38.59%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 0.91% and 0.97% for the periods ended Aug 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 69p AXP VP - HIGH YIELD BOND FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 5.66 $ 6.83 $ 7.76 $ 8.75 $ 9.54 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .48 .56 .79 .85 .92 Net gains (losses) (both realized and unrealized) .54 (1.17) (.95) (.99) (.69) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.02 (.61) (.16) (.14) .23 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.46) (.56) (.77) (.85) (.92) Distributions from realized gains -- -- -- -- (.10) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.46) (.56) (.77) (.85) (1.02) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 6.22 $ 5.66 $ 6.83 $ 7.76 $ 8.75 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 843 $ 577 $ 609 $ 595 $ 638 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .83% .83% .82% .82% .70% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 8.31% 8.91% 11.04% 10.35% 10.17% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 141% 135% 86% 63% 50% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 18.81% (9.33%) (1.89%) (1.59%) 2.61% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - INTERNATIONAL FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 7.00 $ 8.39 $ 16.98 $ 17.26 $ 14.25 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .07 .03 .06 .12 Net gains (losses) (both realized and unrealized) .16 (1.35) (5.57) 2.50 3.04 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .24 (1.28) (5.54) 2.56 3.16 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.05) (.07) (.03) (.01) (.07) Distributions from realized gains -- (.01) (2.97) (2.83) (.08) Excess distributions from net investment income -- (.03) (.05) -- -- - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.05) (.11) (3.05) (2.84) (.15) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 7.19 $ 7.00 $ 8.39 $ 16.98 $ 17.26 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 738 $ 873 $ 1,310 $ 2,389 $ 2,221 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.06% 1.07% 1.04% 1.02% .94% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.19% .83% .31% .27% .70% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 102% 140% 278% 118% 102% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 3.48% (15.38%) (36.90%) 14.74% 22.18% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 70p AXP VP - MANAGED FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 12.32 $ 15.30 $ 20.81 $ 18.84 $ 17.25 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .31 .33 .44 .47 .50 Net gains (losses) (both realized and unrealized) .82 (1.88) (4.32) 2.85 3.29 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.13 (1.55) (3.88) 3.32 3.79 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.31) (.34) (.39) (.48) (.49) Distributions from realized gains (.14) (1.09) (1.24) (.87) (1.71) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.45) (1.43) (1.63) (1.35) (2.20) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 13.00 $ 12.32 $ 15.30 $ 20.81 $ 18.84 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 2,416 $ 2,709 $ 3,759 $ 5,223 $ 5,046 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .80% .77% .76% .75% .63% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.48% 2.31% 2.46% 2.37% 2.62% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 119% 103% 63% 49% 44% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 9.40% (10.91%) (19.37%) 18.42% 22.98% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - NEW DIMENSIONS FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 13.06 $ 15.49 $ 25.03 $ 18.87 $ 13.29 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .07 .02 .03 .06 Net gains (losses) (both realized and unrealized) 1.23 (2.42) (8.01) 6.34 5.60 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.31 (2.35) (7.99) 6.37 5.66 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.07) (.02) (.04) (.06) Distributions from realized gains -- (.01) (1.53) (.17) (.02) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.08) (.08) (1.55) (.21) (.08) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 14.29 $ 13.06 $ 15.49 $ 25.03 $ 18.87 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 3,115 $ 3,045 $ 3,892 $ 5,564 $ 3,538 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .82% .79% .79% .78% .68% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .64% .47% .12% .15% .34% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 23% 27% 27% 28% 27% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 10.11% (15.17%) (33.05%) 34.01% 42.61% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 credit on cash balances. (c) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 71p AXP VP - PARTNERS SMALL CAP VALUE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 9.52 $ 9.84 $ 10.01 - ------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.03) (.03) (.01) Net gains (losses) (both realized and unrealized) 1.95 (.29) (.16) - ------------------------------------------------------------------------------------------------------ Total from investment operations 1.92 (.32) (.17) - ------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.01) -- -- Distributions from realized gains (.04) -- -- - ------------------------------------------------------------------------------------------------------ Total distributions (.05) -- -- - ------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 11.39 $ 9.52 $ 9.84 - ------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 134 $ 63 $ 5 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) 1.55% 1.48% 1.50%(d),(f) - ------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets (.43%) (.67%) (1.15%)(f) - ------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 87% 12% --% - ------------------------------------------------------------------------------------------------------ Total return(e) 20.24% (3.19%) (1.77%)(g) - ------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Aug. 14, 2001 (date the Fund became available) to Aug. 31, 2001. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses would have been 6.86% for the period ended Aug. 31, 2001. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 72p AXP VP - S&P 500 INDEX FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 6.24 $ 7.71 $ 10.38 $ 10.06 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .07 .06 .02 Net gains (losses) (both realized and unrealized) .64 (1.47) (2.65) .33 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .72 (1.40) (2.59) .35 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.07) (.06) (.03) Distributions from realized gains -- -- (.02) -- - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.08) (.07) (.08) (.03) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 6.88 $ 6.24 $ 7.71 $ 10.38 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 171 $ 99 $ 56 $ 21 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .50% .50% .49% .48%(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.31% 1.01% .85% .72%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 5% 72% 137% 44% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 11.51% (18.29%) (24.96%) 3.49%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 1, 2000 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 0.64%, 0.82%, 1.31% and 1.57% for the periods ended Aug. 31, 2003, 2002, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 73p AXP VP - SHORT DURATION U.S. GOVERNMENT FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 10.55 $ 10.34 $ 9.95 $ 10.02 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .27 .34 .52 .51 Net gains (losses) (both realized and unrealized) (.05) .23 .39 (.06) - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .22 .57 .91 .45 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.27) (.34) (.52) (.52) Distributions from realized gains (.04) (.02) -- -- - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.31) (.36) (.52) (.52) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.46 $ 10.55 $ 10.34 $ 9.95 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 479 $ 276 $ 106 $ 37 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .82% .83% .84%(d) .87%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.47% 3.24% 4.94% 5.49%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 179% 292% 95% 67% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 2.06% 5.42% 9.29% 4.64%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 0.87% and 0.89% for the periods ended Aug. 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AXP VP - SMALL CAP ADVANTAGE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.79 $ 10.13 $ 12.58 $ 9.90 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.02) (.02) (.01) (.02) Net gains (losses) (both realized and unrealized) 2.48 (1.32) (2.09) 2.78 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.46 (1.34) (2.10) 2.76 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Distributions from realized gains -- -- (.35) (.08) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.25 $ 8.79 $ 10.13 $ 12.58 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 102 $ 59 $ 49 $ 31 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) 1.19% 1.11% 1.16%(d) 1.19%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets (.20%) (.21%) (.08%) (.24%)(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 124% 156% 152% 169% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 27.96% (13.28%) (16.68%) 28.19%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.26% and 1.43% for the periods ended Aug. 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 74p AXP VP - STOCK FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.00 $ 9.52 $ 9.82 - ------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .05 .05 .01 Net gains (losses) (both realized and unrealized) .48 (1.52) (.30) - ------------------------------------------------------------------------------------------------------------- Total from investment operations .53 (1.47) (.29) - ------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.05) (.05) (.01) - ------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 8.48 $ 8.00 $ 9.52 - ------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 12 $ 5 $ 2 - ------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.10% 1.10% 1.10%(f) - ------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .62% .56% .90%(f) - ------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 76% 93% 4% - ------------------------------------------------------------------------------------------------------------- Total return(e) 6.65% (15.53%) (2.97%)(g) - -------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Aug. 13, 2001 (date the Fund became available) to Aug. 31, 2001. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.81%, 2.44% and 11.36% for the periods ended Aug. 31, 2003, 2002 and 2001, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AXP VP - STRATEGY AGGRESSIVE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 5.72 $ 8.29 $ 27.82 $ 16.46 $ 13.10 - ------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.03) (.04) .01 .01 .05 Net gains (losses) (both realized and unrealized) 1.30 (2.53) (13.01) 13.17 4.36 - ------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.27 (2.57) (13.00) 13.18 4.41 - ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income -- -- (.02) -- (.05) Distributions from realized gains -- -- (6.51) (1.82) (1.00) - ------------------------------------------------------------------------------------------------------------------- Total distributions -- -- (6.53) (1.82) (1.05) - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 6.99 $ 5.72 $ 8.29 $ 27.82 $ 16.46 - ------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 969 $ 991 $ 1,815 $ 4,197 $ 2,327 - ------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .83% .81% .78% .77% .67% - ------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets (.54%) (.50%) .10% .04% .31% - ------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 27% 180% 166% 143% 207% - ------------------------------------------------------------------------------------------------------------------- Total return(c) 22.16% (30.97%) (53.61%) 84.97% 35.27% - -------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- PROSPECTUS 75p Additional information about the Fund and its investments is available in the Fund's SAI, annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund during the last fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report or the semiannual report, or to make inquiries about the Fund, contact American Express Variable Portfolio Funds. American Express Variable Portfolio Funds 70100 AXP Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #s: AXP Variable Portfolio - Blue Chip Advantage Fund 811-3218 AXP Variable Portfolio - Capital Resource Fund 811-3218 AXP Variable Portfolio - Cash Management Fund 811-3190 AXP Variable Portfolio - Core Bond Fund 811-3219 AXP Variable Portfolio - Diversified Bond Fund 811-3219 AXP Variable Portfolio - Diversified Equity Income Fund 811-4252 AXP Variable Portfolio - Emerging Markets Fund 811-3218 AXP Variable Portfolio - Equity Select Fund 811-3218 AXP Variable Portfolio - Global Bond Fund 811-3219 AXP Variable Portfolio - Growth Fund 811-3218 AXP Variable Portfolio - High Yield Bond Fund 811-3219 AXP Variable Portfolio - International Fund 811-3218 AXP Variable Portfolio - Large Cap Value Fund 811-3218 AXP Variable Portfolio - Managed Fund 811-4252 AXP Variable Portfolio - New Dimensions Fund 811-3218 AXP Variable Portfolio - Partners Select Value Fund 811-10383 AXP Variable Portfolio - Partners Small Cap Value Fund 811-10383 AXP Variable Portfolio - S&P 500 Index Fund 811-3218 AXP Variable Portfolio - Short Duration U.S. Government Fund 811-3219 AXP Variable Portfolio - Small Cap Advantage Fund 811-3218 AXP Variable Portfolio - Stock Fund 811-3218 AXP Variable Portfolio - Strategy Aggressive Fund 811-3218 - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS - -------------------------------------------------------------------------------- American Express Variable Portfolio Funds 70100 AXP Financial Center Minneapolis, MN 55474 STATEMENT OF ADDITIONAL INFORMATION FOR AXP(R) Variable Portfolio - Income Series, Inc. AXP(R) Variable Portfolio - Core Bond Fund AXP(R) Variable Portfolio - Diversified Bond Fund AXP(R) Variable Portfolio - Global Bond Fund AXP(R) Variable Portfolio - High Yield Bond Fund AXP(R) Variable Portfolio - Short Duration U.S. Government Fund AXP(R) Variable Portfolio - Investment Series, Inc. AXP(R) Variable Portfolio - Blue Chip Advantage Fund AXP(R) Variable Portfolio - Capital Resource Fund AXP(R) Variable Portfolio - Emerging Markets Fund AXP(R) Variable Portfolio - Equity Select Fund AXP(R) Variable Portfolio - Growth Fund AXP(R) Variable Portfolio - International Fund AXP(R) Variable Portfolio - Large Cap Value Fund AXP(R) Variable Portfolio - New Dimensions Fund(R) AXP(R) Variable Portfolio - S&P 500 Index Fund AXP(R) Variable Portfolio - Small Cap Advantage Fund AXP(R) Variable Portfolio - Stock Fund AXP(R) Variable Portfolio - Strategy Aggressive Fund AXP(R) Variable Portfolio - Managed Series, Inc. AXP(R) Variable Portfolio - Diversified Equity Income Fund AXP(R) Variable Portfolio - Managed Fund AXP(R) Variable Portfolio - Money Market Series, Inc. AXP(R) Variable Portfolio - Cash Management Fund AXP(R) Variable Portfolio - Partners Series, Inc. AXP(R) Variable Portfolio - Partners Select Value Fund AXP(R) Variable Portfolio - Partners Small Cap Value Fund (singularly and collectively, where the context requires, referred to as the Fund) Oct. 30, 2003 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the Financial Statements contained in the most recent Annual Report to shareholders (Annual Report) that may be obtained from your financial advisor or by writing to American Express(R) Variable Portfolio Funds, 70100 AXP Financial Center, Minneapolis, MN 55474 or by calling (800) 862-7919. The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report are incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. The prospectus for the Fund, dated the same date as this SAI, also is incorporated in this SAI by reference. Table of Contents Fundamental Investment Policies p. 3 Investment Strategies and Types of Investments p. 15 Information Regarding Risks and Investment Strategies p. 26 Security Transactions p. 43 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation p. 48 Performance Information p. 49 Valuing Fund Shares p. 52 Proxy Voting p. 54 Selling Shares p. 54 Capital Loss Carryover p. 55 Taxes p. 55 Agreements p. 55 Organizational Information p. 69 Board Members and Officers p. 71 Independent Auditors p. 79 Appendix A: Description of Money Market Securities p. 80 Appendix B: Description of Ratings p. 83 Appendix C: Additional Information About the Index p. 88 - -------------------------------------------------------------------------------- 2 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Fundamental Investment Policies Throughout this SAI, the funds are referred to as follows: AXP Variable Portfolio - Blue Chip Advantage Fund (Blue Chip Advantage) AXP Variable Portfolio - Capital Resource Fund (Capital Resource) AXP Variable Portfolio - Cash Management Fund (Cash Management) AXP Variable Portfolio - Core Bond Fund (Core Bond) AXP Variable Portfolio - Diversified Bond Fund (Diversified Bond) AXP Variable Portfolio - Diversified Equity Income Fund (Diversified Equity Income) AXP Variable Portfolio - Emerging Markets Fund (Emerging Markets) AXP Variable Portfolio - Equity Select Fund (Equity Select) AXP Variable Portfolio - Global Bond Fund (Global Bond) AXP Variable Portfolio - Growth Fund (Growth) AXP Variable Portfolio - High Yield Bond Fund (High Yield Bond) AXP Variable Portfolio - International Fund (International) AXP Variable Portfolio - Large Cap Value Fund (Large Cap Value) AXP Variable Portfolio - Managed Fund (Managed) AXP Variable Portfolio - New Dimensions Fund (New Dimensions) AXP Variable Portfolio - Partners Select Value Fund (Partners Select Value) AXP Variable Portfolio - Partners Small Cap Value Fund (Partners Small Cap Value) AXP Variable Portfolio - S&P 500 Index Fund (S&P 500 Index) AXP Variable Portfolio - Short Duration U.S. Government Fund (Short Duration U.S. Government) AXP Variable Portfolio - Small Cap Advantage Fund (Small Cap Advantage) AXP Variable Portfolio - Stock Fund (Stock) AXP Variable Portfolio - Strategy Aggressive Fund (Strategy Aggressive) Fundamental investment policies adopted by the Fund cannot be changed without the approval of a majority of the outstanding voting securities of the Fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. The policies below are fundamental policies that apply to the Fund and may be changed only with shareholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund will not: Blue Chip Advantage o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Issue senior securities, except as permitted under the 1940 Act. - -------------------------------------------------------------------------------- 3 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS o Lend Fund securities in excess of 30% of its net assets. o Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. Capital Resource o Invest more than 5% of its total assets, at market value, in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities. Up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of the Fund's total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Fund will not purchase additional securities at any time borrowing for temporary purposes exceeds 5%. o Lend Fund securities in excess of 30% of its net assets. o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sell restricted securities. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of a Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. Cash Management o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sell restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Fund will not purchase additional securities at any time borrowing for temporary purposes exceeds 5%. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities. o Buy on margin or sell short. o Make cash loans. However, the Fund does make short-term investments which it may have an agreement with the seller to reacquire. o Buy or sell real estate, commodities or commodity contracts. For purposes of this policy, real estate includes real estate limited partnerships. o Lend Fund securities in excess of 30% of its net assets, at market value. o Purchase common stocks, preferred stocks, warrants, other equity securities, corporate bonds or debentures, state bonds, municipal bonds, or industrial revenue bonds. o Intentionally invest more than 25% of the Fund's assets taken at market value in any particular industry, except with respect to investing in U.S. government or agency securities and bank obligations. Investments are varied according to what is judged advantageous under different economic conditions. o Issue senior securities, except as permitted under the 1940 Act. - -------------------------------------------------------------------------------- 4 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Core Bond o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Issue senior securities, except as permitted under the 1940 Act. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. Diversified Bond o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Fund will not purchase additional securities at any time borrowing for temporary purposes exceeds 5%. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. - -------------------------------------------------------------------------------- 5 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Diversified Equity Income o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Issue senior securities, except as permitted under the 1940 Act. o Lend Fund securities in excess of 30% of its net assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. Emerging Markets o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. - -------------------------------------------------------------------------------- 6 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Equity Select o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. Global Bond o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. - -------------------------------------------------------------------------------- 7 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Growth o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Issue senior securities, except as permitted under the 1940 Act o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. High Yield Bond o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. - -------------------------------------------------------------------------------- 8 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS International o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Fund will not purchase additional securities at any time borrowing for temporary purposes exceeds 5%. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. Large Cap Value o Act as an underwriter (sell securities for others) except to the extent that, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer, except up to 25% of the Fund's total assets may be invested without regard to this 10% limitation. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, or other registered investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options, futures contracts, and foreign currency, or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Issue senior securities, except as permitted under the 1940 Act. o Lend Fund securities in excess of 30% of its net assets. - -------------------------------------------------------------------------------- 9 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Managed o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Fund has not borrowed in the past and has no present intention to borrow. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. New Dimensions o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. - -------------------------------------------------------------------------------- 10 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Partners Select Value o Act as an underwriter (sell securities for others) except to the extent that, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Purchase more than 10% of the outstanding voting securities of an issuer, except up to 25% of the Fund's total assets may be invested without regard to this 10% limitation. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, or other registered investment companies, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Borrow money in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options, futures contracts and foreign currency or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. o Issue senior securities, except as permitted under the 1940 Act. o Lend Fund securities in excess of 30% of its net assets. Partners Small Cap Value o Act as an underwriter (sell securities for others) except to the extent that, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options, futures contracts and foreign currency or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Issue senior securities, except as permitted under the 1940 Act. o Lend Fund securities in excess of 30% of its net assets. - -------------------------------------------------------------------------------- 11 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS S&P 500 Index o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. Short Duration U.S. Government o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. - -------------------------------------------------------------------------------- 12 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Small Cap Advantage o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Issue senior securities, except as permitted under the 1940 Act. o Lend Fund securities in excess of 30% of its net assets. Stock o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. - -------------------------------------------------------------------------------- 13 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Strategy Aggressive o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. It may be considered an underwriter under securities laws when it sells restricted securities. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. The Fund will not purchase additional securities at any time borrowing for temporary purposes exceeds 5%. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to AEFC, to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Concentrate in any one industry. According to the present interpretation by the SEC, this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. Except for the fundamental investment policies listed above, the other investment policies described in the prospectus and in this SAI are not fundamental and may be changed by the board at any time. - -------------------------------------------------------------------------------- 14 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Investment Strategies and Types Of Investments This table shows various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager may make on behalf of the Fund. For a description of principal risks, please see the prospectus. Notwithstanding the Fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to hedge against certain types of risk, these practices are left to the investment manager's sole discretion.
Investment strategies and types of investments Allowable for the Fund? Diversified Blue Chip Capital Cash Core Diversified Equity Advantage Resource Management Bond Bond Income Agency and Government Securities yes yes yes yes yes yes Borrowing yes yes yes yes yes yes Cash/Money Market Instruments yes yes yes yes yes yes Collateralized Bond Obligations yes yes no yes yes yes Commercial Paper yes yes yes yes yes yes Common Stock yes yes no yes yes yes Convertible Securities yes yes no yes yes yes Corporate Bonds yes yes no yes yes yes Debt Obligations yes yes yes yes yes yes Depositary Receipts yes yes no yes yes yes Derivative Instruments (including Options and Futures) yes yes no yes yes yes Foreign Currency Transactions yes yes no yes yes yes Foreign Securities yes yes yes yes yes yes Funding Agreements no no yes no no no High-Yield (High-Risk) Securities (Junk Bonds) no* yes no* yes yes yes Illiquid and Restricted Securities yes yes no yes yes yes Indexed Securities yes yes no yes yes yes Inverse Floaters no yes no yes yes no Investment Companies yes yes yes yes yes yes Lending of Portfolio Securities yes yes yes yes yes yes Loan Participations yes yes no yes yes yes Mortgage- and Asset-Backed Securities no yes yes yes yes yes Mortgage Dollar Rolls no yes no yes yes no Municipal Obligations yes yes no yes yes yes Preferred Stock yes yes no yes yes yes Real Estate Investment Trusts yes yes no yes yes yes Repurchase Agreements yes yes yes yes yes yes Reverse Repurchase Agreements yes yes yes yes yes yes Short Sales no no no no no no Sovereign Debt yes yes yes yes yes yes Structured Products yes yes no yes yes yes Swap Agreements no no no no no no Variable- or Floating-Rate Securities yes yes yes yes yes yes Warrants yes yes no yes yes yes When-Issued Securities and Forward Commitments yes yes no yes yes yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes yes no yes yes yes
* The Fund may hold bonds that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase. - -------------------------------------------------------------------------------- 15 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS
Investment strategies and types of investments Allowable for the Fund? Emerging Equity Global High Yield Markets Select Bond Growth Bond Agency and Government Securities yes yes yes yes yes Borrowing yes yes yes yes yes Cash/Money Market Instruments yes yes yes yes yes Collateralized Bond Obligations yes yes yes yes yes Commercial Paper yes yes yes yes yes Common Stock yes yes yes yes yes Convertible Securities yes yes yes yes yes Corporate Bonds yes yes yes yes yes Debt Obligations yes yes yes yes yes Depositary Receipts yes yes yes yes yes Derivative Instruments (including Options and Futures) yes yes yes yes yes Foreign Currency Transactions yes yes yes yes yes Foreign Securities yes yes yes yes yes Funding Agreements no no no no no High-Yield (High-Risk) Securities (Junk Bonds) yes no* yes no* yes Illiquid and Restricted Securities yes yes yes yes yes Indexed Securities yes yes yes yes yes Inverse Floaters no no yes no yes Investment Companies yes yes yes yes yes Lending of Portfolio Securities yes yes yes yes yes Loan Participations yes yes yes yes yes Mortgage- and Asset-Backed Securities yes yes yes yes yes Mortgage Dollar Rolls no no yes no yes Municipal Obligations yes yes yes yes yes Preferred Stock yes yes yes yes yes Real Estate Investment Trusts yes yes yes yes yes Repurchase Agreements yes yes yes yes yes Reverse Repurchase Agreements yes yes yes yes yes Short Sales no no no no no Sovereign Debt yes yes yes yes yes Structured Products yes yes yes yes yes Swap Agreements no no no no no Variable- or Floating-Rate Securities yes yes yes yes yes Warrants yes yes yes yes yes When-Issued Securities and Forward Commitments yes yes yes yes yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes yes yes yes yes
* The Fund may hold bonds that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase. - -------------------------------------------------------------------------------- 16 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS
Investment strategies and types of investments Allowable for the Fund? Partners Partners Large Cap New Select Small International Value Managed Dimensions Value Cap Value Agency and Government Securities yes yes yes yes yes yes Borrowing yes yes yes yes yes yes Cash/Money Market Instruments yes yes yes yes yes yes Collateralized Bond Obligations yes yes yes yes no no Commercial Paper yes yes yes yes yes yes Common Stock yes yes yes yes yes yes Convertible Securities yes yes yes yes yes yes Corporate Bonds yes yes yes yes yes yes Debt Obligations yes yes yes yes yes yes Depositary Receipts yes yes yes yes yes yes Derivative Instruments (including Options and Futures) yes yes yes yes yes yes Foreign Currency Transactions yes yes yes yes yes yes Foreign Securities yes yes yes yes yes yes Funding Agreements no no no no no no High-Yield (High-Risk) Securities (Junk Bonds) no* yes yes yes yes yes Illiquid and Restricted Securities yes yes yes yes yes yes Indexed Securities yes yes yes yes yes yes Inverse Floaters no no yes no no no Investment Companies yes yes yes yes yes yes Lending of Portfolio Securities yes yes yes yes yes yes Loan Participations yes yes yes yes yes no Mortgage- and Asset-Backed Securities yes yes yes yes no yes Mortgage Dollar Rolls no no yes no yes no Municipal Obligations yes yes yes yes yes yes Preferred Stock yes yes yes yes yes yes Real Estate Investment Trusts yes yes yes yes yes yes Repurchase Agreements yes yes yes yes yes yes Reverse Repurchase Agreements yes yes yes yes yes yes Short Sales no no no no no no Sovereign Debt yes yes yes yes no no Structured Products yes yes yes yes yes yes Swap Agreements no no no no no no Variable- or Floating-Rate Securities yes yes yes yes yes yes Warrants yes yes yes yes yes yes When-Issued Securities and Forward Commitments yes yes yes yes yes yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes yes yes yes yes yes
* The Fund may hold bonds that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase. - -------------------------------------------------------------------------------- 17 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS
Investment strategies and types of investments Allowable for the Fund? S&P 500 Short Duration Small Cap Strategy Index U.S. Government Advantage Stock Aggressive Agency and Government Securities yes yes yes yes yes Borrowing yes yes yes yes yes Cash/Money Market Instruments yes yes yes yes yes Collateralized Bond Obligations yes yes no yes yes Commercial Paper yes yes yes yes yes Common Stock yes no yes yes yes Convertible Securities yes no yes yes yes Corporate Bonds yes yes yes yes yes Debt Obligations yes yes yes yes yes Depositary Receipts yes no yes yes yes Derivative Instruments (including Options and Futures) yes yes yes yes yes Foreign Currency Transactions yes no yes yes yes Foreign Securities yes yes yes yes yes Funding Agreements no no no no no High-Yield (High-Risk) Securities (Junk Bonds) no* no* no* yes yes Illiquid and Restricted Securities yes yes yes yes yes Indexed Securities yes yes yes yes yes Inverse Floaters no yes no no no Investment Companies yes yes yes yes yes Lending of Portfolio Securities yes yes yes yes yes Loan Participations yes yes no yes yes Mortgage- and Asset-Backed Securities no yes no yes yes Mortgage Dollar Rolls no yes no no no Municipal Obligations yes yes yes yes yes Preferred Stock yes no yes yes yes Real Estate Investment Trusts yes yes yes yes yes Repurchase Agreements yes yes yes yes yes Reverse Repurchase Agreements yes yes yes yes yes Short Sales yes yes no no no Sovereign Debt yes yes no yes yes Structured Products yes yes yes yes yes Swap Agreements no no no no no Variable- or Floating-Rate Securities yes yes yes yes yes Warrants yes yes yes yes yes When-Issued Securities and Forward Commitments yes yes yes yes yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes yes yes yes yes
* The Fund may hold bonds that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase. - -------------------------------------------------------------------------------- 18 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS The following are guidelines that may be changed by the board at any time: Blue Chip Advantage o The Fund may invest up to 20% of its total assets in foreign investments included in the market index. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest in a company to control or manage it. o The Fund will not invest more than 10% of its total assets in securities of investment companies. Capital Resource o The Fund may invest up to 25% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may enter into stock index futures contracts. o The Fund will not invest in a company to control or manage it. o The Fund will not invest more than 10% of its total assets in securities of investment companies. Cash Management o The Fund will not invest more than 10% of its net assets in securities that are illiquid whether or not registration or the filing of a notification under the Securities Act of 1933 or the taking of similar action under other securities laws relating to the sale of securities is required. A risk of any such investment is that it might not be able to be easily liquidated. For the purpose of this policy, repurchase agreements with maturities greater than seven days and non-negotiable fixed time deposits will be treated as illiquid securities. o The Fund may invest up to 25% of its total assets in foreign investments. o The Fund may invest in commercial paper rated in the highest rating category by at least two nationally recognized statistical rating organizations (or by one, if only one rating is assigned) and in unrated paper determined by the board of directors to be of comparable quality. The Fund also may invest up to 5% of its assets in commercial paper receiving the second highest rating or in unrated paper determined to be of comparable quality. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. - -------------------------------------------------------------------------------- 19 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Core Bond o The Fund may invest up to 15% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not invest more than 10% of its net assets in securities of investment companies unless a higher amount is permitted under an SEC exemptive order. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest in a company to control or manage it. Diversified Bond o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may enter into interest rate futures contracts. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. Diversified Equity Income o No more than 20% of the Fund's net assets may be invested in bonds below investment grade unless the bonds are convertible securities. o The Fund may invest up to 25% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in futures contracts. o The Fund will not invest in a company to control or manage it. o The Fund will not invest more than 10% of its total assets in securities of investment companies. - -------------------------------------------------------------------------------- 20 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Emerging Markets o The Fund may invest up to 20% of its net assets in bonds. o The Fund may invest up to 10% of its net assets in bonds rated below investment grade, including Brady bonds. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. Equity Select o The Fund only invests in bonds given the four highest ratings by Moody's Investors Service, Inc. or by Standard & Poor's Corporation or in bonds of comparable quality in the judgment of the investment manager. o The Fund may invest up to 15% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. Global Bond o The Fund may not purchase debt securities rated lower than B by Moody's Investors Service Inc. or the equivalent. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, but the Fund may make margin payments in connection with transactions in futures contracts. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. - -------------------------------------------------------------------------------- 21 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Growth o The Fund will not invest in bonds rated below investment grade. o The Fund may invest up to 25% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. High Yield Bond o The Fund may invest up to 10% of its total assets in common stocks, preferred stocks that do not pay dividends and warrants to purchase common stocks. o The Fund may invest up to 25% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. o The Fund will not buy on margin or sell short, except the Fund may enter into interest rate futures contracts. International o Normally, investments in U.S. issuers generally will constitute less than 20% of the Fund's total assets. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest in a company to control or manage it. o The Fund will not invest more than 10% of its assets in securities of investment companies except by purchase in the open market where the dealer's or sponsor's profit is the regular commission. - -------------------------------------------------------------------------------- 22 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Large Cap Value o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o The Fund will not invest more than 10% of its net assets in rated securities which are rated below investment grade. o The Fund will not invest more than 20% of its net assets in foreign securities. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. Managed o Under normal market conditions, the Fund invests at least 50% of its total assets in common stocks. o The Fund may invest up to 25% of its total assets in foreign investment. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except it may enter into stock index futures and interest rate futures contracts. o The Fund will not invest in a company to control or manage it. o The Fund will not invest more than 10% of its total assets in securities of investment companies. New Dimensions o The Fund may invest up to 30% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, but the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest more than 10% of its assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. - -------------------------------------------------------------------------------- 23 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Partners Select Value o The Fund will normally purchase only investment grade convertible debt securities with a rating of, or equivalent to, at least "BBB" by Standard &Poor's (S&P) or, in the case of unrated securities, judged by the Subadviser to be of comparable quality. The Fund may invest in more speculative convertible debt securities, provided that such securities have a rating of, or equivalent to, at least an S&P rating of "B" and provided also that the total investment in such securities remains below 15% of the Fund's assets. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies, unless a higher amount is permitted under an SEC exemptive order. o The Fund will not invest more than 20% of its net assets in foreign securities. o The Fund will not make additional investments while any borrowing remains outstanding. Partners Small Cap Value o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not make additional investments while any bank borrowing remains outstanding. S&P 500 Index o Under normal market conditions, at least 80% of the Fund's net assets are invested in securities that are contained in the S&P 500 Index. The Fund will provide shareholders with at least 60 days notice of any change in the 80% policy. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o The Fund will not buy on margin, except the Fund may make margin payments in connection with transactions in futures contracts. For additional information about the Index, see Appendix C. Short Duration U.S. Government o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin, but it may make margin payments in connection with interest rate futures contracts. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. - -------------------------------------------------------------------------------- 24 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Small Cap Advantage o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in derivative instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. Stock o The Fund will not invest more than 5% of its net assets in bonds below investment grade. o The Fund will not purchase securities rated below C by Moody's Investors Service, Inc. or Standard & Poor's Corporation or the equivalent. o The Fund may invest up to 15% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for god faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not invest more than 10% of its net assets in securities of investment companies. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest in a company to control or manage it. Strategy Aggressive o Under normal market conditions, at least 65% of the fund's total assets are invested in equity securities. o The Fund may invest up to 25% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell securities short, except the Fund may enter into stock index futures contracts. o The Fund will not invest more than 10% of its total assets in the securities of investment companies. o The Fund will not invest in a company to control or manage it. - -------------------------------------------------------------------------------- 25 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Information Regarding Risks and Investment Strategies RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). Please remember that a mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with the Fund at any time (for a description of principal risks, please see the prospectus): Call/Prepayment Risk The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk. Correlation Risk The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. Credit Risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. Event Risk Occasionally, the value of a security may be seriously and unexpectedly changed by a natural or industrial accident or occurrence. Foreign/Emerging Markets Risk The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. - -------------------------------------------------------------------------------- 26 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Inflation Risk Also known as purchasing power risk, inflation risk measures the effects of continually rising prices on investments. If an investment's yield is lower than the rate of inflation, your money will have less purchasing power as time goes on. Interest Rate Risk The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the greater its sensitivity to changes in interest rates. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Legal/Legislative Risk Congress and other governmental units have the power to change existing laws affecting securities. A change in law might affect an investment adversely. Leverage Risk Some derivative investments (such as options, futures, or options on futures) require little or no initial payment and base their price on a security, a currency, or an index. A small change in the value of the underlying security, currency, or index may cause a sizable gain or loss in the price of the instrument. Liquidity Risk Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. Management Risk The risk that a strategy or selection method utilized by the investment manager may fail to produce the intended result. When all other factors have been accounted for and the investment manager chooses an investment, there is always the possibility that the choice will be a poor one. Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Reinvestment Risk The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. Sector/Concentration Risk Investments that are concentrated in a particular issuer, geographic region, or industry will be more susceptible to changes in price (the more you diversify, the more you spread risk). Small and Medium Company Risk Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. - -------------------------------------------------------------------------------- 27 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS INVESTMENT STRATEGIES The following information supplements the discussion of the Fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes many strategies that many mutual funds use and types of securities that they purchase. Please refer to the section titled Investment Strategies and Types of Investments to see which are applicable to the Fund. Agency and Government Securities The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities, including mortgage pass through certificates of the Government National Mortgage Association (GNMA), are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Associaton (FNMA), Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and Reinvestment Risk. Borrowing The Fund may borrow money for temporary or emergency purposes and make other investments or engage in other transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce the Fund's total return. Except as qualified above, however, the Fund will not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Inflation Risk and Management Risk. Cash/Money Market Instruments The Fund may maintain a portion of its assets in cash and cash-equivalent investments. Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. The Fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject the Fund to certain costs and expenses. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk, Inflation Risk, and Management Risk. Collateralized Bond Obligations Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments -- money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, earns them investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield (High-Risk) Securities (Junk Bonds).) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 28 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Commercial Paper Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk, Liquidity Risk, and Management Risk. Common Stock Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Event Risk, Issuer Risk, Legal/Legislative Risk, Management Risk, Market Risk, and Small and Medium Company Risk. Convertible Securities Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Call/Prepayment Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and Reinvestment Risk. Corporate Bonds Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield (High-Risk) Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. - -------------------------------------------------------------------------------- 29 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Debt Obligations Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a specified rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield (High-Risk) Securities (Junk Bonds).) All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating organization or their rating systems, the Fund will attempt to use comparable ratings as standards for selecting investments. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Depositary Receipts Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, Management Risk, and Market Risk. Derivative Instruments Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. - -------------------------------------------------------------------------------- 30 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If the Fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indices (such as the S&P 500 Index), foreign currencies and other financial instruments and indices. The Fund will engage in futures and related options transactions to produce incremental earnings, to hedge existing positions, and to increase flexibility. The Fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission (CFTC), under which a mutual fund is exempt from the definition of a "commodity pool operator." The Fund, therefore, is not subject to registration or regulation as a pool operator, meaning that the Fund may invest in futures contracts without registering with the CFTC. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. - -------------------------------------------------------------------------------- 31 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax and Accounting Treatment. As permitted under federal income tax laws and to the extent the Fund is allowed to invest in futures contracts, the Fund intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If the Fund is using short futures contracts for hedging purposes, the Fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, the Fund will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. - -------------------------------------------------------------------------------- 32 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (See also Foreign Currency Transactions.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Leverage Risk, Liquidity Risk, and Management Risk. Foreign Currency Transactions Investments in foreign countries usually involve currencies of foreign countries. In addition, the Fund may hold cash and cash-equivalent investments in foreign currencies. As a result, the value of the Fund's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, the Fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing the Fund's NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Spot Rates and Derivative Instruments. The Fund conducts its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts) as a hedge against fluctuations in future foreign exchange rates. (See also Derivative Instruments). These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, the Fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. The Fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. The Fund also may enter into forward contracts when management of the Fund believes the currency of a particular foreign country may change in relationship to another currency. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. The Fund will not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's securities or other assets denominated in that currency. The Fund will designate cash or securities in an amount equal to the value of the Fund's total assets committed to consummating forward contracts entered into under the second circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the Fund's commitments on such contracts. At maturity of a forward contract, the Fund may either sell the security and make delivery of the foreign currency or retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to buy, on the same maturity date, the same amount of foreign currency. If the Fund retains the security and engages in an offsetting transaction, the Fund will incur a gain or loss (as described below) to the extent there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline between the date the Fund enters into a forward contract for selling foreign currency and the date it enters into an offsetting contract for purchasing the foreign currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell. - -------------------------------------------------------------------------------- 33 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS It is impossible to forecast what the market value of securities will be at the expiration of a contract. Accordingly, it may be necessary for the Fund to buy additional foreign currency on the spot market (and bear the expense of that purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received on the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. The Fund's dealing in forward contracts will be limited to the transactions described above. This method of protecting the value of the Fund's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. Although the Fund values its assets each business day in terms of U.S. dollars, it does not intend to convert its foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. Options on Foreign Currencies. The Fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, the Fund may buy put options on the foreign currency. If the value of the currency does decline, the Fund will have the right to sell the currency for a fixed amount in dollars and will offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities the Fund plans to buy, the Fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates. As in the case of other types of options, however, the benefit to the Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates. The Fund may write options on foreign currencies for the same types of hedging purposes. For example, when the Fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of securities will be fully or partially offset by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency. If rates move in the manner projected, the put option will expire unexercised and allow the Fund to hedge increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if the Fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. - -------------------------------------------------------------------------------- 34 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. The Fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. The Fund may use currency futures for the same purposes as currency forward contracts, subject to Commodity Futures Trading Commission (CFTC) limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the Fund's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect the Fund against price decline if the issuer's creditworthiness deteriorates. Because the value of the Fund's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of the Fund's investments denominated in that currency over time. The Fund will hold securities or other options or futures positions whose values are expected to offset its obligations. The Fund will not enter into an option or futures position that exposes the Fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Correlation Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk. Foreign Securities Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of - -------------------------------------------------------------------------------- 35 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. The introduction of a single currency, the euro, on January 1, 1999 for participating European nations in the Economic and Monetary Union ("EU") presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other EU countries such as the United Kingdom and Denmark into the euro and the admission of other non-EU countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk, Issuer Risk, and Management Risk. Funding Agreements The Fund may invest in funding agreements issued by domestic insurance companies. Funding agreements are short-term, privately placed, debt obligations of insurance companies that offer a fixed- or floating-rate of interest. These investments are not readily marketable and therefore are considered to be illiquid securities. (See also Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with funding agreements include: Credit Risk and Liquidity Risk. High-Yield (High-Risk) Securities (Junk Bonds) High yield (high-risk) securities are sometimes referred to as junk bonds. They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. - -------------------------------------------------------------------------------- 36 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield (high-risk) securities include: Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and Management Risk. Illiquid and Restricted Securities The Fund may invest in illiquid securities (i.e., securities that are not readily marketable). These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent the Fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for such securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for the Fund to sell such an investment promptly and at an acceptable price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk and Management Risk. Indexed Securities The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk, Management Risk, and Market Risk. Inflation Protected Securities Inflation is a general rise in prices of goods and services. Inflation erodes the purchasing power of an investor's assets. For example, if an investment provides a total return of 7% in a given year and inflation is 3% during that period, the inflation-adjusted, or real, return is 4%. Inflation protected securities are debt securities whose principal and/or interest payments are adjusted for inflation, unlike debt securities that make fixed principal and interest payments. One type of inflation-protected debt security is issued by the U.S. Treasury. The principal of these securities is adjusted for inflation as indicated by the Consumer Price Index for Urban Consumers (CPI) and interest is paid on the adjusted amount. The CPI is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. If the CPI falls, the principal value of inflation-protected securities will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Conversely, if the CPI rises, the principal value of inflation-protected securities will be adjusted upward, and consequently the interest payable on these securities will be increased. Repayment of the original bond principal upon maturity is guaranteed in the case of U.S. Treasury inflation-protected securities, even during a period of deflation. However, the current market value of the inflation-protected securities is not guaranteed and will fluctuate. Other inflation-indexed securities include inflation-related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Other issuers of inflation-protected debt securities include other U.S. government agencies or instrumentalities, corporations and foreign governments. There can be no assurance that the CPI or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure. Any increase in principal for an inflation-protected security resulting from inflation adjustments is considered by IRS regulations to be taxable income in the year it occurs. For direct holders of an inflation-protected security, this means that taxes must be paid on principal adjustments even though these amounts are not received until the bond matures. By contrast, a fund holding these securities distributes both interest income and the income attributable to principal adjustments in the form of cash or reinvested shares, which are taxable to shareholders. Although one or more of the other risks described in this SAI may apply, the largest risks associated with inflation-protected securities include: Interest Rate Risk and Market Risk. - -------------------------------------------------------------------------------- 37 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Inverse Floaters Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with inverse floaters include: Interest Rate Risk and Management Risk. Investment Companies Investing in securities issued by registered and unregistered investment companies may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Management Risk and Market Risk. Lending of Portfolio Securities The Fund may lend certain of its portfolio securities to broker-dealers. The current policy of the Fund's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Fund receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Fund will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Fund receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk and Management Risk. Loan Participations Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk and Management Risk. Mortgage- and Asset-Backed Securities Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. - -------------------------------------------------------------------------------- 38 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage- and asset-backed securities include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and Management Risk. Mortgage Dollar Rolls Mortgage dollar rolls are investments whereby an investor would sell mortgage-backed securities for delivery in the current month and simultaneously contract to purchase substantially similar securities on a specified future date. While an investor would forego principal and interest paid on the mortgage-backed securities during the roll period, the investor would be compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk, Interest Rate Risk, and Management Risk. Municipal Obligations Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. - -------------------------------------------------------------------------------- 39 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Event Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market Risk. Preferred Stock Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk, Management Risk, and Market Risk. Real Estate Investment Trusts Real estate investment trusts (REITs) are entities that manage a portfolio of real estate to earn profits for their shareholders. REITs can make investments in real estate such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Additionally, the failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Issuer Risk, Management Risk, and Market Risk. Repurchase Agreements The Fund may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement, the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk and Management Risk. Reverse Repurchase Agreements In a reverse repurchase agreement, the investor would sell a security and enter into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 40 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Short Sales With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to utilize short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to the Fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Management Risk and Market Risk. Sovereign Debt A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk, Foreign/Emerging Markets Risk, and Management Risk. Structured Products Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option, or a forward contract embedded in a note or any of a wide variety of debt, equity, and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market, and defaults by other parties. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured products include: Credit Risk, Liquidity Risk, and Management Risk. Swap Agreements Swap agreements obligate one party to make payments to the other party based on the change in the market value of an index or other asset. In return, the other party agrees to make payments to the first party based on the return of another index or asset. Swap agreements entail the risk that a party will default on its payment obligations. Interest Rate Swaps. Interest rate swap agreements are used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. Swaps also may protect against changes in the price of securities that an investor anticipates buying or selling at a later date. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard interest rate swap transaction, two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined notional amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. Swap agreements are usually entered into at a zero net market value of the swap agreement commitments. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty to the other. - -------------------------------------------------------------------------------- 41 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Swap agreements may include embedded interest rate caps, floor and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts. Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. The Fund will enter into interest rate swap agreements only if the claims-paying ability of the other party or its guarantor is considered to be investment grade by the Advisor. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one NRSRO at the time of entering into the transaction. If there is a default by the other party to such a transaction, the Fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, the Fund may seek to minimize counterparty risk by requiring the counterparty to post collateral. Currency Swaps. Currency swaps are similar to interest rate swaps, except that they involve currencies instead of interest rates. Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Liquidity Risk, Credit Risk and Correlation Risk. Variable- or Floating-Rate Securities The Fund may invest in securities that offer a variable- or floating-rate of interest. Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (e.g., daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the Fund to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the Fund as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk and Management Risk. Warrants Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Management Risk and Market Risk. When-Issued Securities and Forward Commitments When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, the Fund may lose the opportunity to obtain a price and yield considered to be advantageous. - -------------------------------------------------------------------------------- 42 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk and Management Risk. Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk, Interest Rate Risk, and Management Risk. The Fund cannot issue senior securities but this does not prohibit certain investment activities for which assets of the Fund are set aside, or margin, collateral or escrow arrangements are established, to cover the related obligations. Examples of those activities include borrowing money, delayed-delivery and when-issued securities transactions, and contracts to buy or sell options, derivatives, and hedging instruments. Security Transactions Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's investment goal and policies, which securities will be purchased, held, or sold. The description of policies and procedures in this section also applies to any Fund subadviser. In determining where the buy and sell orders are to be placed, AEFC has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the board. In selecting broker-dealers to execute transactions, AEFC may consider the price of the security, including commission or mark-up, the size and difficulty of the order, the reliability, integrity, financial soundness, and general operation and execution capabilities of the broker, the broker's expertise in particular markets, and research services provided by the broker. The Fund, AEFC and any subadviser each have a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the Fund. The Fund's securities may be traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The board has adopted a policy authorizing AEFC to do so to the extent authorized by law, if AEFC determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or AEFC's overall responsibilities with respect to the Fund and other funds for which it acts as investment manager. Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business, and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software, or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management, and trading functions and other services to the extent permitted under an interpretation by the SEC. When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Fund to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Fund that it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this - -------------------------------------------------------------------------------- 43 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS arrangement, some portfolio transactions may not be effected at the lowest commission, but AEFC believes it may obtain better overall execution. AEFC has represented that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. All other transactions will be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by AEFC in providing advice to all American Express mutual funds even though it is not possible to relate the benefits to any particular fund. Each investment decision made for the Fund is made independently from any decision made for another portfolio, fund, or other account advised by AEFC or any of its subsidiaries. When the Fund buys or sells the same security as another portfolio, fund, or account, AEFC carries out the purchase or sale in a way the Fund agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Fund, the Fund hopes to gain an overall advantage in execution. On occasion, the Fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency, and research services. For fiscal periods noted below, each Fund paid the following total brokerage commissions. Substantially all firms through whom transactions were executed provide research services. Aug. 31, 2003 Aug. 31, 2002 Aug. 31, 2001 Blue Chip Advantage(a) $ 67,156 $ 158,806 $ 178,230 Capital Resource 8,716,167 13,343,582 5,590,232 Cash Management 0 0 0 Diversified Bond 160,924 61,521 52,128 Diversified Equity Income 404,266 381,450 111,989 Emerging Markets 140,367 107,623 56,106 Equity Select(a) 87,081 46,825 6,092 Global Bond 10,757 3,702 100 Growth 1,602,857 1,163,758 132,591 High Yield Bond 0 12,860 4,625 International 3,486,330 6,517,960 17,900,237 Managed 4,515,096 7,825,511 3,759,560 New Dimensions 2,120,523 2,566,663 2,590,090 Partners Small Cap Value(b) 473,123 176,588 0 S&P 500 Index 24,385 34,961 28,807 Short Duration U.S. Government 64,310 23,568 1,580 Small Cap Advantage 569,268 345,489 140,344 Stock(c) 10,415 5,225 1,179 Strategy Aggressive 1,046,957 6,317,283 5,402,114 (a) For the period from May 1, 2001 (date the Fund became available) to Aug. 31, 2001. (b) For the period from Aug. 14, 2001 (date the Fund became available) to Aug. 31, 2001. (c) For the period from Aug. 13, 2001 (date the Fund became available) to Aug. 31, 2001. - -------------------------------------------------------------------------------- 44 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS In fiscal period 2003, the following transactions and commissions were specifically directed to firms in exchange for research services: Transactions of shares Commissions Blue Chip Advantage $ -- $ -- Capital Resource 128,245,931 204,639 Cash Management -- -- Diversified Bond -- -- Diversified Equity Income 1,424,345 6,000 Emerging Markets -- -- Equity Select -- -- Global Bond -- -- Growth 9,291,539 19,831 High Yield Bond -- -- International -- -- Managed 53,778,929 114,022 New Dimensions -- -- Partners Small Cap Value 51,078,364 50,288 S&P 500 Index -- -- Short Duration U.S. Government -- -- Small Cap Advantage 3,051,574 11,396 Stock -- -- Strategy Aggressive -- -- As of the end of the most recent fiscal year, Emerging Markets, Growth, International and Strategy Aggressive held no securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities. As of the end of the most recent fiscal year, each Fund held securities of its regular brokers or dealers of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below:
Value of securities Fund Name of Issuer owned at end of fiscal period Blue Chip Advantage Bear Stearns Companies $ 171,451 Citigroup 1,653,803 E*TRADE Group 91,377 FleetBoston Financial 359,519 J.P. Morgan Chase 845,234 Lehman Brothers Holdings 170,898 Morgan Stanley 358,607 Capital Resource Citigroup 76,729,500 FleetBoston Financial 6,858,962 Fleet Funding 7,870,905 J.P. Morgan Chase 9,502,894 Merrill Lynch 7,486,176 Morgan Stanley 12,597,578 Cash Management Credit Suisse First Boston NY Yankee 23,000,000 Fleet Funding 24,060,355 Goldman Sachs Group 20,248,272 Lehman Brothers Holdings 7,500,000 Merrill Lynch 5,000,000
- -------------------------------------------------------------------------------- 45 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS
Value of securities Fund Name of Issuer owned at end of fiscal period Diversified Bond Fund Bear Stearns Commercial Mtge Securities $ 4,244,470 Chase Manhattan Bank - First Union Natl 8,102,993 Citigroup 30,871,195 Credit Suisse First Boston USA 3,033,629 Fleet Funding 14,934,274 Goldman Sachs Group 5,793,659 LaBranche 817,500 Lehman Brothers Holdings 4,683,506 Merrill Lynch 3,147,792 Morgan Stanley 13,069,559 Morgan Stanley Capital 1 11,676,391 Morgan Stanley, Dean Witter Capital 1 5,529,653 Diversified Equity Income Citigroup 8,863,384 Credit Suisse First Boston 1,797,191 FleetBoston Financial 2,742,194 Lehman Brothers Holdings 1,868,244 J.P. Morgan Chase 1,807,500 Merrill Lynch 4,366,936 Morgan Stanley 4,506,635 Equity Select Legg Mason 3,734,083 Global Bond Bear Stearns Commercial Mtge Securities 385,861 Citigroup 13,998,289 Goldman Sachs Group 561,658 J.P. Morgan Chase 332,158 LaBranche 190,750 Lehman Brothers Holdings 290,901 Morgan Stanley, Dean Witter 1,264,685 High Yield Bond LaBranche 5,319,200 Managed Bear Stearns Commercial Mtge Securities 3,168,883 Chase Manhattan Bank - First Union Natl 1,997,217 Citigroup 91,300,199 Citigroup Global Markets Holdings 18,690,905 Credit Suisse First Boston USA 1,355,451 FleetBoston Financial 14,007,906 Goldman Sachs Group 2,673,739 J.P. Morgan Chase 24,706,840 LaBranche 163,500 Lehman Brothers Holdings 2,230,241 Merrill Lynch 20,387,863 Morgan Stanley 19,759,950 Morgan Stanley Capital 1 5,206,513 Morgan Stanley, Dean Witter Capital 1 1,093,568 PNC Financial Services Group 11,090,800 New Dimensions Citigroup 98,661,696 Credit Suisse First Boston 8,586,579 Morgan Stanley 22,159,442
- -------------------------------------------------------------------------------- 46 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS
Value of securities Fund Name of Issuer owned at end of fiscal period Partners Small Cap Value Affiliated Managers Group $ 285,031 Citigroup 6,699,181 E*TRADE Group 382,122 Instinet Group 747,225 Morgan Stanley 4,099,499 Westwood Holdings Group 422,497 S&P 500 Index American Express 1,057,954 Bear Stearns Companies 125,404 Citigroup 4,039,830 FleetBoston Financial 563,394 Franklin Resources 198,026 Goldman Sachs Group 752,607 Lehman Brothers Holdings 288,489 J.P. Morgan Chase 1,258,166 Merrill Lynch 906,032 Morgan Stanley 960,529 PNC Financial Services Group 243,902 Schwab (Charles) 265,484 Short Duration U.S. Government Fleet Funding 499,491 Small Cap Advantage Affiliated Managers Group 372,900 Jefferies Group 261,360 Stock Citigroup 288,105
The Fund's portfolio turnover rate indicates changes in its portfolio of securities and will vary from year to year. The Fund may experience relatively higher portfolio turnover than normal during a period of rapid asset growth if smaller positions acquired in connection with portfolio diversification requirements are replaced by larger positions. Relatively greater portfolio turnover often occurs in the early years of a fund's operation since it is more difficult for new funds to establish meaningful portfolio positions as quickly and efficiently as a more seasoned fund. The portfolio turnover rates for the two most recent fiscal years were as follows: Aug. 31, 2003 Aug. 31, 2002 Blue Chip Advantage 87% 143% Capital Resource 115 146 Diversified Bond 251 167 Diversified Equity Income 39 35 Emerging Markets 191 215 Equity Select 19 20 Global Bond 102 46 Growth 199 272 High Yield Bond 141 135 International 102 140 Managed 119 103 New Dimensions 23 27 Partners Small Cap Value 87 12 S&P 500 Index 5 72 Short Duration U.S. Government 179 292 Small Cap Advantage 124 156 Stock 76 93 Strategy Aggressive 27 180 - -------------------------------------------------------------------------------- 47 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation Affiliates of American Express Company (of which AEFC is a wholly-owned indirect subsidiary) may engage in brokerage and other securities transactions on behalf of the Fund according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. AEFC will use an American Express affiliate only if (i) AEFC determines that the Fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Fund and (ii) the affiliate charges the Fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. Information about brokerage commissions paid by the Fund for the last three fiscal periods to brokers affiliated with the Advisor is contained in the following table:
As of the end of fiscal period 2003 2002 2001 Percent of aggregate dollar amount of Aggregate dollar Percent of transactions Aggregate dollar Aggregate dollar amount of aggregate involving amount of amount of Nature of commissions brokerage payment of commissions commissions Fund Broker affiliation paid to broker commissions commissions paid to broker paid to broker Blue Chip Advantage (a) (b) $ 1,274(c) 1.90% 2.39% $ 0 $ 0 Capital Resource (a) (b) 23,751(c) 0.27 0.56 517,419 603,162 Diversified Equity Income (a) (b) 9,635(c) 2.38 2.60 9,892 0 Growth (a) (b) 31,108(c) 1.94 3.74 19,139 441 Managed (a) (b) 172,596(c) 3.82 5.87 296,208 186,633 New Dimensions (a) (b) 32,412(c) 1.53 2.98 62,631 29,262 Partners M.S. Whitman Affiliate of 74,790(c) 15.81 10.42 12,636 0 Small Cap Value the subadviser Small Cap Advantage (a) (b) 57(c) 0.01 0.02 380 0 Strategy Aggressive (a) (b) 18,428(c) 1.76 3.41 45,360 146,170
(a) American Enterprise Investment Services Inc. (b) Wholly-owned subsidiary of the adviser. (c) Represents brokerage clearing fees. - -------------------------------------------------------------------------------- 48 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Performance Information The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations, if applicable, used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the methods used by the Fund to compute performance follows below. The Fund's average annual total returns for the one-, five-, and ten-year periods, or since inception, as applicable, ended Aug. 31, 2003, are set forth below:
Fund 1 year 5 years 10 years Since inception AXP VP - Blue Chip Advantage Fund +9.60% N/A N/A -6.99%(a) AXP VP - Capital Resource Fund +10.16% +0.09% +5.44% N/A AXP VP - Cash Management Fund +0.72% +3.48% +4.12% N/A AXP VP - Diversified Bond Fund +4.50% +4.94% +5.59% N/A AXP VP - Diversified Equity Income Fund +17.00% N/A N/A +1.20%(a) AXP VP - Emerging Markets Fund +20.25% N/A N/A -5.53%(b) AXP VP - Equity Select Fund +18.20% N/A N/A -0.74%(c) AXP VP - Global Bond Fund +9.56% +4.93% N/A +5.08%(d) AXP VP - Growth Fund +9.29% N/A N/A -13.52%(a) AXP VP - High Yield Bond Fund +18.81% +1.31% N/A +3.11%(d) AXP VP - International Fund +3.48% -4.98% +0.87% N/A AXP VP - Managed Fund +9.40% +2.74% +6.48% N/A AXP VP - New Dimensions Fund +10.11% +3.63% N/A +6.76%(d) AXP VP - Partners Small Cap Value Fund +20.24% N/A N/A +6.77%(e) AXP VP - S&P 500 Index Fund +11.51% N/A N/A -9.86%(b) AXP VP - Short Duration U.S. Government Fund +2.06% N/A N/A +5.39%(a) AXP VP - Small Cap Advantage Fund +27.96% N/A N/A +4.38%(a) AXP VP - Stock Fund +6.65% N/A N/A -6.35%(f) AXP VP - Strategy Aggressive Fund +22.16% -0.43% +3.10% N/A
(a) Inception date was Sept. 15, 1999. (b) Inception date was May 1, 2000. (c) Inception date was May 1, 2001. (d) Inception date was May 1, 1996. (e) Inception date was Aug. 14, 2001. (f) Inception date was Aug. 13, 2001. For purposes of this calculation, information about each Fund assumes the deduction of applicable Fund expenses and makes no adjustments for taxes that may have been paid on the reinvested income and capital gains. The returns do not reflect the expenses that apply to the subaccounts or the contracts. Inclusion of these charges would reduce total return for all periods shown. We have not provided this information for AXP VP - Core Bond Fund, AXP VP - Large Cap Value Fund and AXP VP - Partners Select Value Fund because they are new and do not have history. AVERAGE ANNUAL TOTAL RETURN The Fund may calculate average annual total return for certain periods by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)(to the power of n) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) - -------------------------------------------------------------------------------- 49 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS AGGREGATE TOTAL RETURN The Fund may calculate aggregate total return for certain periods representing the cumulative change in the value of an investment in a fund over a specified period of time according to the following formula: ERV - P ------------- P where: P = a hypothetical initial payment of $1,000 ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) The total return of the S&P 500 Index is calculated by several sources. Blue Chip Advantage will use the total return as calculated by Standard & Poor's Corporation (S&P) to measure the U.S. stock market. The total return is calculated by adding dividend income to price appreciation. Total return on the S&P 500 Index is determined by reinvesting cash dividends paid on stocks on the ex-dividend date -- that is, the date on or after which a sale of stock does not carry with it the right to a dividend already declared. S&P also makes adjustments for special dividends, such as stock dividends. The percentage changes for the indexes other than the S&P 500 Index reflect reinvestment of all distributions on a quarterly basis and changes in market prices. The percentage changes for all the indexes exclude brokerage commissions or other fees. By comparison, the Fund will incur such fees and other expenses. ANNUALIZED YIELD Diversified Bond, Diversified Equity Income, Global Bond, High Yield Bond and Short Duration U.S. Government may calculate an annualized yield by dividing the net investment income per share deemed earned during a 30-day period by the net asset value per share on the last day of the period and annualizing the results. Yield is calculated according to the following formula: Yield = 2[(a - b + 1)(to the power of 6) - 1] ----- cd where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period Diversified Bond's annualized yield was 3.45%, Diversified Equity Income's was 4.86%, Global Bond's was 2.35%, High Yield Bond's was 8.00% and Short Duration U.S. Government's was 1.85% for the 30-day period ended Aug. 30, 2003. The Fund's yield, calculated as described above according to the formula prescribed by the SEC, is a hypothetical return based on market value yield to maturity for the Fund's securities. It is not necessarily indicative of the amount which was or may be paid to the Fund's shareholders. Actual amounts paid to Fund's shareholders are reflected in the distribution yield. DISTRIBUTION YIELD Distribution yield is calculated according to the following formula: D x F = DY --- --- NAV 30 where: D = sum of dividends for 30 day period NAV = beginning of period net asset value F = annualizing factor DY = distribution yield Diversified Bond's distribution yield was 3.48%, Diversified Equity Income's was 4.96%, Global Bond's was 2.35%, High Yield Bond's was 8.05% and Short Duration U.S. Government's was 1.87% for the 30-day period ended Aug. 30, 2003. Cash Management calculates annualized simple and compound yields based on a seven-day period. The simple yield is calculated by determining the net change in the value of a hypothetical account having a balance of one share at the beginning of the seven-day period, dividing the net change in account value by the value of the account at the beginning of the period to obtain the return for the period, and multiplying that return by 365/7 to obtain an annualized figure. The value of the hypothetical account includes the amount of any declared dividends, the value of any shares purchased with any dividend paid during the period and any dividends declared for such shares. The Fund's yield does not include any realized or unrealized gains or losses. - -------------------------------------------------------------------------------- 50 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS The Fund calculates its compound yield according to the following formula: Compound Yield = [(return for seven day period + 1)(to the power of 365/7)] - 1 Cash Management's simple annualized yield was 0.16% and its compound yield was 0.16% for the seven days ended Aug 30, 2003, the last business day of the Fund's fiscal year. Yield, or rate of return, on Cash Management shares may fluctuate daily and does not provide a basis for determining future yields. However, it may be used as one element in assessing how the Fund is meeting its goal. When comparing an investment in the Fund with savings accounts and similar investment alternatives, you must consider that such alternatives often provide an agreed to or guaranteed fixed yield for a stated period of time, whereas the Fund's yield fluctuates. In comparing the yield of one money market fund to another, you should consider the Fund's investment policies, including the types of investments permitted. In its sales material and other communications, the Fund may quote, compare or refer to rankings, yields, or returns as published by independent statistical services or publishers and publications such as The Bank Rate Monitor National Index, Barron's, Business Week, CDA Technologies, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, iMoneyNet Money Market Fund Report, Institutional Investor, Investor's Business Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger Investment Companies Service. The Fund also may compare its performance to a wide variety of indexes or averages. There are similarities and differences between the investments that the Fund may purchase and the investments measured by the indexes or averages and the composition of the indexes or averages will differ from that of the Fund. Ibbotson Associates provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the CPI) and combinations of various capital markets. The performance of these capital markets is based on the returns of different indexes. The Fund may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. The Fund may quote various measures of volatility in advertising. Measures of volatility seek to compare a fund's historical share price fluctuations or returns to those of a benchmark. The Distributor may provide information designed to help individuals understand their investment goals and explore various financial strategies. Materials may include discussions of asset allocation, retirement investing, brokerage products and services, model portfolios, saving for college or other goals, and charitable giving. - -------------------------------------------------------------------------------- 51 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Valuing Fund Shares As of the end of the most recent fiscal year, the computation looked like this:
Fund Net assets Shares outstanding Net asset value of one share Blue Chip Advantage $ 65,939,419 divided by 9,238,072 equals $ 7.14 Capital Resource 1,981,504,252 109,831,455 18.04 Cash Management 868,014,549 868,326,214 1.00 Diversified Bond 1,764,884,748 169,697,198 10.40 Diversified Equity Income 370,119,515 38,372,962 9.65 Emerging Markets 16,271,602 1,928,808 8.44 Equity Select 170,349,301 16,878,982 10.09 Global Bond 312,392,472 30,047,216 10.40 Growth 223,154,450 40,958,790 5.45 High Yield Bond 842,702,702 135,475,929 6.22 International 738,303,698 102,743,484 7.19 Managed 2,416,455,248 185,819,642 13.00 New Dimensions 3,114,809,827 217,925,584 14.29 Partners Small Cap Value 133,827,798 11,748,041 11.39 S&P 500 Index 171,304,239 24,909,775 6.88 Short Duration U.S. Government 478,929,159 45,779,285 10.46 Small Cap Advantage 101,575,981 9,032,273 11.25 Stock 11,525,299 1,358,620 8.48 Strategy Aggressive 968,682,381 138,589,728 6.99
- -------------------------------------------------------------------------------- 52 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS In determining net assets before shareholder transactions, the Fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): o Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. o Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. o Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. o Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. o Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. o Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. o Occasionally, events affecting the value of securities occur between the time the primary market on which the securities are traded closes and the close of the Exchange. If events materially affect the value of securities, the securities will be valued at their fair value according to procedures decided upon in good faith by the board. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. o Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. o Securities without a readily available market price and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Fund. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. In accordance with Rule 2a-7 of the 1940 Act, all of the securities in Cash Management's portfolio are valued at amortized cost. The amortized cost method of valuation is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. It does not take into consideration unrealized capital gains or losses. The board has established procedures designed to stabilize the fund's price per share for purposes of sales and redemptions at $1, to the extent that it is reasonably possible to do so. These procedures include review of Cash Management's securities by the board, at intervals deemed appropriate by it, to determine whether Cash Management's net asset value per share computed by using available market quotations deviates from a share value of $1 as computed using the amortized cost method. The board must consider any deviation that appears and if it exceeds 0.5% it must determine what action, if any, needs to be taken. If the board determines a deviation exists that may result in a material dilution of the holdings of current shareholders or investors, or in other unfair consequences for such persons, it must undertake remedial action that it deems necessary and appropriate. Such action may include withholding dividends, calculating net asset value per share for purposes of sales and redemptions using available market quotations, making redemptions in kind, and selling securities before maturity in order to realize capital gains or losses or to shorten average portfolio maturity. While the amortized cost method provides certainty and consistency in portfolio valuation, it may result in valuations of securities that are either somewhat higher or lower than the prices at which the securities could be sold. This means that during times of declining interest rates the yield on Cash Management's shares may be higher than if valuations of securities were made based on actual market prices and estimates of market prices. Accordingly, if using the amortized cost method were to result in a lower portfolio value, a prospective investor in Cash Management would be able to obtain a somewhat higher yield than he would get if portfolio valuation were based on actual market values. Existing shareholders, on the other hand, would receive a somewhat lower yield than they would otherwise receive. The opposite would happen during a period of rising interest rates. - -------------------------------------------------------------------------------- 53 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Proxy Voting GENERAL GUIDELINES The Fund upholds a long tradition of sound and principled corporate governance. For approximately 30 years, the Board of Directors, which consists of a majority of independent directors, has voted proxies. General guidelines are: o Corporate governance matters -- The board supports proxy proposals that require changes or encourage decisions that have been shown to add shareholder value over time and votes against proxy proposals that entrench management. o Changes in capital structure -- The board votes for amendments to corporate documents that strengthen the financial condition of a business. o Stock option plans and other management compensation issues -- The board expects thoughtful consideration to be given by a company's management to developing a balanced compensation structure providing competitive current income with long-term employee incentives directly tied to the interest of shareholders and votes against proxy proposals that dilute shareholder value excessively. o Social and corporate policy issues -- The board believes that proxy proposals should address the business interests of the corporation. Each proposal is viewed in light of the circumstances of the company submitting the proposal. POLICY AND PROCEDURES The policy of the board is to vote all proxies of the companies in which the Fund holds investments, ensuring there are no conflicts between interests of Fund shareholders and those of the Fund's investment manager, AEFC. The recommendation of the management of a company as set out in the company's proxy statement is considered. In each instance in which the Fund votes against the recommendation, the board sends a letter to senior management of the company explaining the basis for its vote. This has permitted both the company's management and the Fund's board to gain better insight into issues presented by proxy proposals. In the case of foreign corporations, proxies of companies located in some countries may not be voted due to requirements of locking up the voting shares and when time constraints prohibit the processing of proxies. From time to time a proxy proposal is presented that has not been previously considered by the board or that AEFC recommends be voted different from the votes cast for similar proposals. In making recommendations to the board about voting on a proposal, AEFC relies on its own investment personnel and information obtained from outside resources, including Institutional Shareholder Services (ISS). AEFC makes the recommendation in writing. The process established by the board to vote proxies requires that either board members or officers who are independent from AEFC consider the recommendation and decide how to vote the proxy proposal. PROXY VOTING RECORD The proxy voting record will be made available on a quarterly basis after the end of the quarter for all companies whose shareholders meetings were completed during the quarter. The information is on a website maintained by ISS and can be accessed through the American Express Company's web page, www.americanexpress.com beginning Jan. 1, 2004. For anyone seeking information on how the Fund voted all proxies during a year, the information can be obtained after Aug. 1, 2004 without cost: o On the ISS website www.americanexpress.com/funds o On a web site maintained by the Securities and Exchange Commission, www.sec.gov o By calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. Selling Shares The Fund will sell any shares presented by the shareholders (variable accounts or subaccounts) for sale. The policies on when or whether to buy or sell shares are described in your annuity or life insurance prospectus. During an emergency the board can suspend the computation of net asset value, stop accepting payments for purchase of shares, or suspend the duty of the Fund to sell shares for more than seven days. Such emergency situations would occur if: o The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or o Disposal of the Fund's securities is not reasonably practicable or it is not reasonably practicable for the Fund to determine the fair value of its net assets, or o The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all contract owners. - -------------------------------------------------------------------------------- 54 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS REJECTION OF BUSINESS The Fund reserves the right to reject any business, in its sole discretion. Capital Loss Carryover For federal income tax purposes, Blue Chip Advantage, Capital Resource, Cash Management, Diversified Bond, Diversified Equity Income, Emerging Markets, Equity Select, Global Bond, Growth, High Yield Bond, International, Managed, New Dimensions, Partners Small Cap Value, S&P 500 Index, Small Cap Advantage, Stock and Strategy Aggressive had total capital loss carryovers of $33,756,009, $571,842,581, $3,091, $139,636,838, $21,848,621, $1,685,173, $929,452, $5,792,969, $164,893,812, $300,351,153, $794,731,098, $149,722,831, $512,441,380, $231,273, $2,590,558, $9,684,863, $764,578 and $1,346,618,303, respectively, at the end of the most recent fiscal year, that if not offset by subsequent capital gains will expire as follows:
Fund 2007 2008 2009 2010 2011 2012 Blue Chip Advantage $ 0 $ 21,038 $ 2,524,274 $ 15,873,670 $ 12,004,786 $ 3,332,241 Capital Resource 0 0 0 139,602,999 360,984,907 71,254,675 Cash Management 0 3,091 0 0 0 0 Diversified Bond 14,566,694 52,158,845 47,894,894 9,863,475 15,152,930 0 Diversified Equity Income 0 0 0 1,220,814 17,487,401 3,140,406 Emerging Markets 0 0 290,779 1,370,563 0 23,831 Equity Select 0 0 0 0 929,452 0 Global Bond 0 2,754,088 1,192,501 1,846,380 0 0 Growth 0 5,782 7,126,550 73,511,853 79,742,473 4,507,154 High Yield Bond 6,538,287 30,163,085 40,154,779 100,694,093 106,316,240 16,484,669 International 0 0 0 619,510,271 90,583,080 84,637,747 Managed 0 0 0 0 66,384,445 83,338,386 New Dimensions 0 0 0 336,061,643 150,380,547 25,999,190 Partners Small Cap Value 0 0 0 0 0 231,273 S&P 500 Index 0 0 220,844 330,144 2,039,570 0 Small Cap Advantage 0 0 1,113,514 2,086,216 5,889,322 595,811 Stock 0 0 6,881 88,472 372,897 296,328 Strategy Aggressive 0 0 124,275,882 869,472,336 310,534,170 42,335,915
It is unlikely that the board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. Taxes The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Income earned by the Fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. Agreements INVESTMENT MANAGEMENT SERVICES AGREEMENT AEFC, a wholly-owned subsidiary of American Express Company, is the investment manager for the Fund. Under the Investment Management Services Agreement, AEFC, subject to the policies set by the board, provides investment management services. For its services, AEFC is paid a fee monthly based on the following schedule. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. - -------------------------------------------------------------------------------- 55 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Blue Chip Advantage Assets (billions) Annual rate at each asset level First $0.50 0.560% Next 0.50 0.545 Next 1.00 0.530 Next 1.00 0.515 Next 3.00 0.500 Over 6.00 0.470 Capital Resource Assets (billions) Annual rate at each asset level First $1.00 0.630% Next 1.00 0.615 Next 1.00 0.600 Next 3.00 0.585 Over 6.00 0.570 Cash Management Assets (billions) Annual rate at each asset level First $1.00 0.510% Next 0.50 0.493 Next 0.50 0.475 Next 0.50 0.458 Over 2.50 0.440 Core Bond Assets (billions) Annual rate at each asset level First $1.00 0.630% Next 1.00 0.615 Next 1.00 0.600 Next 3.00 0.585 Next 3.00 0.570 Over 9.00 0.555 Diversified Bond Assets (billions) Annual rate at each asset level First $1.00 0.610% Next 1.00 0.595 Next 1.00 0.580 Next 3.00 0.565 Next 3.00 0.550 Over 9.00 0.535 Diversified Equity Income Assets (billions) Annual rate at each asset level First $0.50 0.560% Next 0.50 0.545 Next 1.00 0.530 Next 1.00 0.515 Next 3.00 0.500 Over 6.00 0.470 - -------------------------------------------------------------------------------- 56 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Emerging Markets Assets (billions) Annual rate at each asset level First $0.25 1.170% Next 0.25 1.155 Next 0.25 1.140 Next 0.25 1.125 Next 1.00 1.110 Over 2.00 1.095 Equity Select Assets (billions) Annual rate at each asset level First $0.25 0.650% Next 0.25 0.635 Next 0.25 0.620 Next 0.25 0.605 Next 1.00 0.590 Next 1.00 0.575 Over 3.00 0.560 Global Bond Assets (billions) Annual rate at each asset level First $0.25 0.840% Next 0.25 0.825 Next 0.25 0.810 Next 0.25 0.795 Over 1.00 0.780 Growth Assets (billions) Annual rate at each asset level First $1.00 0.630% Next 1.00 0.615 Next 1.00 0.600 Next 3.00 0.585 Over 6.00 0.570 High Yield Bond Assets (billions) Annual rate at each asset level First $1.00 0.620% Next 1.00 0.605 Next 1.00 0.590 Next 3.00 0.575 Next 3.00 0.560 Over 9.00 0.545 International Assets (billions) Annual rate at each asset level First $0.25 0.870% Next 0.25 0.855 Next 0.25 0.840 Next 0.25 0.825 Next 1.00 0.810 Over 2.00 0.795 - -------------------------------------------------------------------------------- 57 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Large Cap Value Assets (billions) Annual rate at each asset level First $1.00 0.630% Next 1.00 0.615 Next 1.00 0.600 Next 3.00 0.585 Over 6.00 0.570 Managed Assets (billions) Annual rate at each asset level First $0.50 0.630% Next 0.50 0.615 Next 1.00 0.600 Next 1.00 0.585 Next 3.00 0.570 Over 6.00 0.550 New Dimensions Assets (billions) Annual rate at each asset level First $1.00 0.630% Next 1.00 0.615 Next 1.00 0.600 Next 3.00 0.585 Over 6.00 0.570 Partners Select Value Assets (billions) Annual rate at each asset level First $0.50 0.810% Next 0.50 0.795 Next 1.00 0.780 Next 1.00 0.765 Next 3.00 0.750 Over 6.00 0.720 Partners Small Cap Value Assets (billions) Annual rate at each asset level First $0.25 1.020% Next 0.25 1.000 Next 0.25 0.980 Next 0.25 0.960 Next 1.00 0.940 Over 2.00 0.920 - -------------------------------------------------------------------------------- 58 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS S&P 500 Index Assets (billions) Annual rate at each asset level First $1.00 0.290% Next 1.00 0.280 Next 3.00 0.270 Over 5.00 0.260 Short Duration U.S. Government Assets (billions) Annual rate at each asset level First $1.00 0.610% Next 1.00 0.595 Next 1.00 0.580 Next 3.00 0.565 Next 3.00 0.550 Over 9.00 0.535 Small Cap Advantage Assets (billions) Annual rate at each asset level First $0.25 0.790% Next 0.25 0.770 Next 0.25 0.750 Next 0.25 0.730 Next 1.00 0.710 Over 2.00 0.650 Stock Assets (billions) Annual rate at each asset level First $0.50 0.560% Next 0.50 0.545 Next 1.00 0.530 Next 1.00 0.515 Next 3.00 0.500 Over 6.00 0.470 Strategy Aggressive Assets (billions) Annual rate at each asset level First $0.25 0.650% Next 0.25 0.635 Next 0.25 0.620 Next 0.25 0.605 Next 1.00 0.590 Over 2.00 0.575 On the last day of the most recent fiscal period, the daily rate applied to the Fund's assets (on an annual basis) was 0.560% for Blue Chip Advantage, 0.623% for Capital Resource, 0.510% for Cash Management, 0.603% for Diversified Bond, 0.560% for Diversified Equity Income, 1.170% for Emerging Markets, 0.650% for Equity Select, 0.839% for Global Bond, 0.630% for Growth, 0.620% for High Yield Bond, 0.855% for International, 0.607% for Managed, 0.614% for New Dimensions, 1.020% for Partners Small Cap Value, 0.290% for S&P 500 Index, 0.610% for Short Duration U.S. Government, 0.790% for Small Cap Advantage, 0.560% for Stock, 0.628% for Strategy Aggressive. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. - -------------------------------------------------------------------------------- 59 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS For Blue Chip Advantage, Capital Resource, Diversified Equity Income, Emerging Markets, Equity Select, Growth, International, Large Cap Value, Managed, New Dimensions, Partners Select Value, Partners Small Cap Value, Small Cap Advantage, Stock and Strategy Aggressive, before the fee based on the asset charge is paid, it is adjusted for investment performance. The adjustment, determined monthly, will be determined by measuring the percentage difference over a rolling 12-month period between the change in the net asset value of one share of the Fund and the change in the (i) Lipper Large-Cap Core Funds Index for Blue Chip Advantage, (ii) Lipper Large Cap Core Funds Index for Capital Resource, (iii) Lipper Equity Income Funds Index for Diversified Equity Income, (iv) Lipper Emerging Markets Funds Index for Emerging Markets, (v) Lipper Mid-Cap Growth Funds Index for Equity Select, (vi) Lipper Large-Cap Growth Funds Index for Growth, (vii) Lipper International Funds Index for International, (viii) Lipper Large-Cap Value Funds Index for Large Cap Value, (ix) Lipper Balanced Funds Index for Managed, (x) Lipper Large-Cap Growth Funds Index for New Dimensions, (xi) Lipper Multi-Cap Value Funds Index for Partners Select Value, (xii) Lipper Small-Cap Value Funds Index for Partners Small Cap Value, (xiii) Lipper Small-Cap Core Funds Index for Small Cap Advantage, (xiv) Lipper Large-Cap Core Funds Index for Stock and (xv) Lipper Mid-Cap Growth Funds Index for Strategy Aggressive. The performance difference is then used to determine the adjustment rate. The adjustment rate for Blue Chip Advantage, Capital Resource, Diversified Equity Income, Emerging Markets, Equity Select, Growth, International, Large Cap Value, New Dimensions, Partners Small Cap Value, Small Cap Advantage, Stock and Strategy Aggressive, computed to five decimal places, is determined in accordance with the following table: Performance Difference Adjustment Rate 0.00%-0.50% 0 0.50%-1.00% 6 basis points times the performance difference over 0.50% (maximum of 3 basis points if a 1% performance difference) 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference over 1.00% (maximum 6 basis points if a 2% performance difference) 2.00%-4.00% 6 basis points, plus 2 basis points times the performance difference over 2.00% (maximum 10 basis points if a 4% performance difference) 4.00%-6.00% 10 basis points, plus 1 basis point times the performance difference over 4.00% (maximum 12 basis points if a 6% performance difference) 6.00% or more 12 basis points For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the Fund is 0.0012 per year. Where the Fund's share performance exceeds that of the Index, the fee paid to AEFC will increase. Where the performance of the Index exceeds the performance of the Fund's shares, the fee paid to AEFC will decrease. The adjustment rate for Managed, computed to five decimal places, is determined in accordance with the following table: Performance Difference Adjustment Rate 0.00%-0.50% 0 0.50%-1.00% 6 basis points times the Performance Difference over 0.50% (maximum of 3 basis points if a 1% Performance Difference) 1.00%-2.00% 3 basis points, plus 3 basis points times the Performance Difference over 1.00% (maximum 6 basis points if a 2% Performance Difference) 2.00%-3.00% 6 basis points, plus 2 basis points times the Performance Difference over 2.00% (maximum of 8 basis points if a 3% Performance Difference) 3.00% or more 8 basis points For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the Fund is 0.00080 per year. Where the Fund's Class A performance exceeds that of the Index, the fee paid to AEFC will increase. Where the performance of the Index exceeds the performance of the Fund's Class A shares, the fee paid to AEFC will decrease. The first adjustment for Partners Select Value will be made in April, 2004, and will cover the six-month period beginning Oct. 1, 2003. The first adjustment for Large Cap Value will be made in May, 2004, and will cover the six-month period beginning Oct. 31, 2003. The comparison period will increase by one month until it reaches 12 months. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. - -------------------------------------------------------------------------------- 60 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS The management fee is paid monthly. Under the agreement, advisory expenses paid for the following fiscal periods were as follows:
Fund 2003 2002 2001 Blue Chip Advantage $ 321,077 $ 413,926 $ 432,774 Capital Resource 12,597,101 17,665,201 26,165,265 Cash Management 5,189,115 5,593,953 4,588,071 Diversified Bond 11,121,622 10,368,107 9,066,435 Diversified Equity Income 1,495,598 1,150,977 226,096 Emerging Markets 134,837 90,859 63,655 Equity Select 758,579 283,080 14,536 Global Bond 2,370,419 1,676,418 1,528,297 Growth 1,068,315 940,814 1,231,521 High Yield Bond 4,158,089 3,745,531 3,654,071 International 6,108,448 9,291,252 14,728,134 Managed 14,961,945 20,015,266 26,202,635 New Dimensions 17,629,745 22,425,282 27,613,749 Partners Small Cap Value 876,649 335,667 2,014 S&P 500 Index 361,397 241,143 109,395 Short Duration U.S. Government 2,508,938 1,033,892 380,941 Small Cap Advantage 560,022 424,132 289,538 Stock 41,942 19,019 540 Strategy Aggressive 5,526,254 9,118,165 16,018,758
Under the current Agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses which include custodian fees and expenses, audit expenses, cost of items sent to contract owners, postage, fees and expenses paid to board members who are not officers or employees of AEFC, fees and expenses of attorneys, costs of fidelity and surety bonds, SEC registration fees, expenses of preparing prospectuses and of printing and distributing prospectuses to existing contract owners, losses due to theft or other wrong doing or due to liabilities not covered by bond or agreement, expenses incurred in connection with lending securities and expenses properly payable by the Fund, approved by the board. All other expenses are borne by AEFC. Under the agreement, nonadvisory expenses, net of earnings credits and waivers, paid for the following fiscal years were as follows: Fund 2003 2002 2001 Blue Chip Advantage $ 58,889 $ 67,922 $ 52,288 Capital Resource 545,654 513,931 461,991 Cash Management 296,307 276,411 152,537 Diversified Bond 596,353 389,558 246,598 Diversified Equity Income 192,223 290,798 73,464 Emerging Markets 44,996 17,588 13,227 Equity Select 204,710 86,146 4,059 Global Bond 188,858 97,679 78,806 Growth 268,161 124,140 205,675 High Yield Bond 250,031 190,460 150,755 International 353,295 509,535 578,011 Managed 755,600 602,097 594,865 New Dimensions 902,794 515,400 624,270 Partners Small Cap Value 318,514 80,544 579 S&P 500 Index (4,001) (7,670) (15,811) Short Duration U.S. Government 155,494 77,818 30,061 Small Cap Advantage 131,572 110,950 88,763 Stock 27,513 8,965 405 Strategy Aggressive 285,548 331,683 450,640 - -------------------------------------------------------------------------------- 61 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Basis for board approving the investment advisory contract Based on its work throughout the year and detailed analysis by the Contracts Committee of reports provided by AEFC, the independent board members determined to renew the Investment Management Services Agreement and Subadvisory Agreements (where applicable) based on: o tangible steps AEFC has taken to improve the competitive ranking and consistency of the investment performance of the Fund, including changes in leadership, portfolio managers, compensation structures, and the implementation of management practices, o continued commitment to expand the range of investment options that it offers investors, through repositioning existing funds and creating new funds, o consistent effort to provide a management structure that imposes disciplines that ensure adherence to stated management style and expected risk characteristics, o additional time needed to evaluate the efficacy of the new AEFC management structure that has produced improved performance results in the short term, o benefit of economy of scale that results from the graduated fee structure and the reasonableness of fees in light of the fees paid by similar funds in the industry, o competitive total expenses that are either at or only slightly above the median expenses of a group of comparable funds based on a report prepared by Lipper Inc., and o reasonable level of AEFC's profitability from its mutual fund operations. Subadvisory Agreement The assets of the Fund are managed by a Subadviser that has been selected by AEFC, subject to the review and approval of the board. AEFC has recommended the Subadviser for the Fund to the board based upon its assessment of the skills of the Subadviser in managing other assets with goals and investment strategies substantially similar to those of the Fund. Short-term investment performance is not the only factor in selecting or terminating a Subadviser, and AEFC does not expect to make frequent changes of Subadvisers. The Subadviser has discretion, subject to oversight by the board and AEFC, to purchase and sell portfolio assets, consistent with the Fund's investment objectives, policies, and restrictions. Generally, the services that the Subadviser provides to the Fund are limited to asset management and related recordkeeping services. AEFC has entered into an advisory agreement with each Subadviser known as a Subadvisory Agreement. A Subadviser may also serve as a discretionary or non-discretionary investment adviser to management or advisory accounts that are unrelated in any manner to AEFC or its affiliates. Subadvisers: American Express Asset Management International Inc. (AEAMI), a wholly-owned subsidiary of AEFC, 50192 AXP Financial Center, Minneapolis, MN 55474 subadvises the assets in the Emerging Markets and International Fund. AEAMI, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. Under the agreement, AEAMI receives an annual fee of 0.35% of average daily net assets. Under the agreement, the total amount paid for International was $2,564,968 for fiscal year 2003, $3,854,049 for fiscal year 2002, and $6,248,732 for fiscal year 2001. Under the agreement, the total amount paid for Emerging Markets was $41,689 for fiscal year 2003, $19,325 for fiscal year 2002, and $11,564 for fiscal period 2001. Kenwood Capital Management LLC (KCM LLC) an indirect subsidiary of AEFC located at Metropolitan Center, Suite 2300, 333 South 7th Street, Minneapolis, MN 55402, subadvises the assets of Small Cap Advantage Fund. KCM LLC, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. Under the Subadvisory Agreement, the KCM LLC receives an annual fee of 0.35% of average daily net assets from AEFC. Under the agreement, the total amount paid for Small Cap Advantage was $242,909 for fiscal year 2003, $144,931 for fiscal year 2002, and $100,003 for fiscal year 2001. - -------------------------------------------------------------------------------- 62 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS The assets of Partners Small Cap Value are managed by three Subadvisers that have been selected by AEFC, subject to the review and approval of the board. AEFC has recommended the Subadvisers for Partners Small Cap Value based upon its assessment of the skills of the Subadvisers in managing other assets with goals and investment strategies substantially similar to those of Partners Small Cap Value. Short-term investment performance is not the only factor in selecting or terminating a Subadviser, and AEFC does not expect to make frequent changes of Subadvisers. AEFC allocates the assets of Partners Small Cap Value among the Subadvisers. Each Subadviser has discretion, subject to oversight by the board and AEFC, to purchase and sell portfolio assets, consistent with Partners Small Cap Value's investment objectives, policies, and restriction. Generally, the services that the Subadviser provides to Partners Small Cap Value are limited to asset management and related recordkeeping services. AEFC has entered into an advisory agreement with each subadviser known as a Subadvisory Agreement. A Subadviser may also serve as a discretionary or non-discretionary investment advisor to management or advisory accounts that are unrelated in any manner to AEFC or its affiliates. Royce: Royce & Associates, LLC (Royce), located at 1414 Avenue of the Americas, New York, New York, subadvises the Fund's assets. Royce, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of a portion of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. Royce is a direct wholly-owned subsidiary of Legg Mason, Inc. located at 100 Light Street, Baltimore, Maryland. Under the Subadvisory Agreement, the fee is equal to .80% on the first $50 million, reducing to .50% as assets increase. The total amount paid was $324,032 for fiscal year 2003, $160,776 for fiscal year 2002 and $1,390 for fiscal period 2001. Third Avenue: Third Avenue Management LLC (Third Avenue), located at 622 Third Avenue 32nd Floor, New York, New York, subadvises the Fund's assets. Third Avenue, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of a portion of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. Third Avenue is an indirect subsidiary of Affiliated Managers Group, Inc. located at 600 Hale Street, Prides Crossings, Massachusetts 01965. Under the Subadvisory Agreement, the fee is equal to .50% on the first $100 million, reducing to .40% as assets increase. The total amount paid was $125,228 for fiscal year 2003, $62,726 for fiscal year 2002 and $854 for fiscal period 2001. GSAM: Goldman Sachs Asset Management, L.P. (GSAM), located at 32 Old Slip, 17th Floor, New York, New York, subadvises the Fund's assets. GSAM, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of a portion of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. GSAM is a division of Goldman Sachs Group, Inc., a publicly traded financial services company, located at 85 Broad Street, New York, New York. Under the Subadvisory Agreement, the fee is equal to 0.60% on the first $100 million, reducing to 0.55% as assets increase. On Aug. 11, 2003 GSAM replaced National City Investment Manager (National City). The total amount paid to GSAM was $10,731 for the fiscal period 2003 (from Aug. 11, 2003 to Aug. 31, 2003). The total amount paid to National City was $78,050 for fiscal period 2003 (from Oct. 1, 2002 to Aug. 10, 2003) and $1,168 for fiscal period 2002 (from Aug. 1, 2002 to Aug. 31, 2002). The assets of Partners Select Value are managed by a Subadviser that has been selected by AEFC, subject to the review and approval of the board. AEFC has recommended the Subadviser for Partners Select Value to the board based upon its assessment of the skills of the Subadviser in managing other assets with goals and investment strategies substantially similar to those of Partners Select Value. Short-term investment performance is not the only factor in selecting or terminating a Subadviser, and AEFC does not expect to make frequent changes of a Subadviser. The Subadviser has discretion, subject to oversight by the board and AEFC, to purchase and sell portfolio assets, consistent with Partners Select Value's investment objectives, policies, and restrictions. Generally, the services that the Subadviser provides to Partners Select Value are limited to asset management and related recordkeeping services. AEFC has entered into an advisory agreement with the Subadviser known as a Subadvisory Agreement. The Subadviser may also serve as a discretionary or non-discretionary investment adviser to management or advisory accounts that are unrelated in any manner to AEFC or its affiliates. Gabelli: GAMCO Investors, Inc., which does business under the name Gabelli Asset Management Company, located at One Corporate Center, Rye, NY 10580, subadvises the Fund's assets. The Subadviser, subject to the supervision and approval of AEFC, provides investment advisory assistance and day-to-day management of the Fund's portfolio, as well as investment research and statistical information, under a Subadvisory Agreement with AEFC. Under the Subadvisory Agreement, the fee is equal to 0.40% of average daily net assets that are subject to the Subadviser's investment discretion on the first $500 million, reducing to 0.30% as assets increase. - -------------------------------------------------------------------------------- 63 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS ADMINISTRATIVE SERVICES AGREEMENT The Funds have an Administrative Services Agreement with AEFC. Under this agreement, the Funds pay AEFC for providing administration and accounting services. The fees are calculated as follows: Blue Chip Advantage Assets (billions) Annual rate at each asset level First $0.25 0.040% Next 0.25 0.035 Next 0.25 0.030 Next 0.25 0.025 Over 1.00 0.020 Capital Resource Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Over 6.00 0.030 Cash Management Assets (billions) Annual rate at each asset level First $1.00 0.030% Next 0.50 0.027 Next 0.50 0.025 Next 0.50 0.022 Over 2.50 0.020 Core Bond Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Next 3.00 0.030 Over 9.00 0.025 Diversified Bond Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Next 3.00 0.030 Over 9.00 0.025 - -------------------------------------------------------------------------------- 64 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Diversified Equity Income Assets (billions) Annual rate at each asset level First $0.50 0.040% Next 0.50 0.035 Next 1.00 0.030 Next 1.00 0.025 Next 3.00 0.020 Over 6.00 0.020 Emerging Markets Assets (billions) Annual rate at each asset level First $0.25 0.100% Next 0.25 0.090 Next 0.25 0.080 Next 0.25 0.070 Next 1.00 0.060 Over 2.00 0.050 Equity Select Assets (billions) Annual rate at each asset level First $0.25 0.060% Next 0.25 0.055 Next 0.25 0.050 Next 0.25 0.045 Next 1.00 0.040 Next 1.00 0.035 Over 3.00 0.030 Global Bond Assets (billions) Annual rate at each asset level First $0.25 0.060% Next 0.25 0.055 Next 0.25 0.050 Next 0.25 0.045 Over 1.00 0.040 Growth Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Over 6.00 0.030 High Yield Bond Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Next 3.00 0.030 Over 9.00 0.025 - -------------------------------------------------------------------------------- 65 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS International Assets (billions) Annual rate at each asset level First $0.25 0.060% Next 0.25 0.055 Next 0.25 0.050 Next 0.25 0.045 Next 1.00 0.040 Over 2.00 0.035 Large Cap Value Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Over 6.00 0.030 Managed Assets (billions) Annual rate at each asset level First $0.50 0.040% Next 0.50 0.035 Next 1.00 0.030 Next 1.00 0.025 Next 3.00 0.020 Over 6.00 0.020 New Dimensions Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Over 6.00 0.030 Partners Select Value Assets (billions) Annual rate at each asset level First $0.50 0.060% Next 0.50 0.055 Next 1.00 0.050 Next 1.00 0.045 Next 3.00 0.040 Over 6.00 0.035 Partners Small Cap Value Assets (billions) Annual rate at each asset level First $0.25 0.080% Next 0.25 0.075 Next 0.25 0.070 Next 0.25 0.065 Next 1.00 0.060 Over 2.00 0.055 - -------------------------------------------------------------------------------- 66 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS S&P 500 Index Assets (billions) Annual rate at each asset level First $1.00 0.080% Next 1.00 0.075 Next 3.00 0.070 Over 5.00 0.065 Short Duration U.S. Government Assets (billions) Annual rate at each asset level First $1.00 0.050% Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Next 3.00 0.030 Over 9.00 0.025 Small Cap Advantage Assets (billions) Annual rate at each asset level First $0.25 0.060% Next 0.25 0.055 Next 0.25 0.050 Next 0.25 0.045 Next 1.00 0.040 Over 2.00 0.035 Stock Assets (billions) Annual rate at each asset level First $0.50 0.040% Next 0.50 0.035 Next 1.00 0.030 Next 1.00 0.025 Next 3.00 0.020 Over 6.00 0.020 Strategy Aggressive Assets (billions) Annual rate at each asset level First $0.25 0.060% Next 0.25 0.055 Next 0.25 0.050 Next 0.25 0.045 Next 1.00 0.040 Over 2.00 0.035 - -------------------------------------------------------------------------------- 67 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS On the last day of the most recent fiscal period, the daily rates applied to the Funds' net assets on an annual basis were: Fees paid during Fund Daily rates prior fiscal year Blue Chip Advantage 0.040% $ 24,614 Capital Resource 0.048 968,533 Cash Management 0.030 324,844 Diversified Bond 0.048 913,878 Diversified Equity Income 0.040 116,748 Emerging Markets 0.100 11,910 Equity Select 0.060 67,462 Global Bond 0.059 172,574 Growth 0.050 84,387 High Yield Bond 0.050 341,823 International 0.055 414,456 Managed 0.032 836,945 New Dimensions 0.045 1,354,201 Partners Small Cap Value 0.080 72,474 S&P 500 Index 0.080 101,514 Short Duration U.S. Government 0.050 212,068 Small Cap Advantage 0.060 42,618 Stock 0.040 3,064 Strategy Aggressive 0.053 498,086 The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. Third parties with which AEFC contracts to provide services for the Fund or its shareholders may pay a fee to AEFC to help defray the cost of providing administrative and accounting services. The amount of any such fee is negotiated separately with each service provider and does not constitute compensation for investment advisory, distribution, or other services. Payment of any such fee neither increases nor reduces fees or expenses paid by shareholders of the Fund. PLAN AND AGREEMENT OF DISTRIBUTION To help defray the cost of distribution and servicing, the Fund and IDS Life Insurance Company (IDS Life) entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, of the type known as a reimbursement plan, IDS Life is paid a fee up to actual expenses incurred at an annual rate of up to 0.125% of the Fund's average daily net assets. Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of shares; and overhead appropriately allocated to the sale of shares. These expenses also include costs of providing personal service to contract owners. A substantial portion of the costs are not specifically identified to any one of the American Express Variable Portfolio Funds. The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the Fund or by IDS Life. The Plan (or any agreement related to it) will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the board members, including a majority of the board members who are not interested persons of the Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement. - -------------------------------------------------------------------------------- 68 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Fees paid for the following fiscal periods were as follows: Fees paid during Fund prior fiscal year Blue Chip Advantage $ 75,470 Capital Resource 2,446,359 Cash Management 1,274,132 Diversified Bond 2,305,049 Diversified Equity Income 354,586 Emerging Markets 14,889 Equity Select 138,731 Global Bond 353,522 Growth 204,477 High Yield Bond 838,324 International 916,060 Managed 3,068,716 New Dimensions 3,592,015 Partners Small Cap Value 111,147 S&P 500 Index 155,774 Short Duration U.S. Government 514,127 Small Cap Advantage 86,753 Stock 9,574 Strategy Aggressive 1,126,018 The fee is not allocated to any one service (such as advertising, payments to underwriters or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. CUSTODIAN AGREEMENT The Fund's securities and cash are held by American Express Trust Company, 200 AXP Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. The custodian may enter into a sub-custodian agreement with the Bank of New York, 90 Washington Street, New York, NY 10286. As part of this arrangement, securities purchased outside the United Stated are maintained in the custody of various foreign branches of Bank of New York or in other financial institutions as permitted by law and by the Fund's sub-custodian agreement. Organizational Information The Fund is an open-end management investment company. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The Fund is owned by the subaccounts, its shareholders. The shares of the Fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of the Fund would have the same rights to dividends and assets as every other share of that Fund. VOTING RIGHTS For a discussion of the rights of contract owners concerning the voting of shares held by the subaccounts, please see your annuity or life insurance policy prospectus. All shares have voting rights over the Fund's management and fundamental policies. Each share is entitled to vote based on your total dollar interest in the Fund. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of board members. This means that shareholders have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. - -------------------------------------------------------------------------------- 69 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS DIVIDEND RIGHTS Dividends paid by the Fund, if any, with respect to each class of shares, if applicable, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures.
FUND HISTORY TABLE FOR FUNDS MANAGED BY AEFC Date of Form of State of Fiscal organization organization organization year end Diversified IDS Life Series Fund, Inc. 5/8/85 Corporation MN 4/30 Equity Portfolio Yes Equity Income Portfolio Yes Government Securities Portfolio Yes Income Portfolio Yes International Equity Portfolio Yes Managed Portfolio Yes Money Market Portfolio Yes AXP Variable Portfolio - Income Series, Inc. 4/27/81, 6/13/86* Corporation NV/MN 8/31 AXP Variable Portfolio - Core Bond Fund Yes AXP Variable Portfolio - Diversified Bond Fund** Yes AXP Variable Portfolio - Global Bond Fund No AXP Variable Portfolio - High Yield Bond Fund** Yes AXP Variable Portfolio - Short Duration U.S. Government Fund** Yes AXP Variable Portfolio - Investment Series, Inc. 4/27/81, 6/13/86* Corporation NV/MN 8/31 AXP Variable Portfolio - Blue Chip Advantage Fund Yes AXP Variable Portfolio - Capital Resource Fund Yes AXP Variable Portfolio - Emerging Markets Fund Yes AXP Variable Portfolio - Equity Select Fund Yes AXP Variable Portfolio - Growth Fund Yes AXP Variable Portfolio - S&P 500 Index Fund No AXP Variable Portfolio - International Fund Yes AXP Variable Portfolio - Large Cap Value Fund Yes AXP Variable Portfolio - New Dimensions Fund Yes AXP Variable Portfolio - Small Cap Advantage Fund Yes AXP Variable Portfolio - Stock Fund Yes AXP Variable Portfolio - Strategy Aggressive Fund Yes AXP Variable Portfolio - Managed Series, Inc. 3/5/85 Corporation MN 8/31 AXP Variable Portfolio - Diversified Equity Income Fund Yes AXP Variable Portfolio - Managed Fund Yes AXP Variable Portfolio - Money Market Series, Inc. 4/27/81, 6/13/86* Corporation NV/MN 8/31 AXP Variable Portfolio - Cash Management Fund Yes AXP Variable Portfolio - Partners Series, Inc. 5/9/01 Corporation MN 8/31 AXP Variable Portfolio - Partners Select Value Fund Yes AXP Variable Portfolio - Partners Small Cap Value Fund No
* Date merged into a Minnesota corporation. ** Effective June 27, 2003, AXP(R) VP - Bond Fund changed its name to AXP(R) VP - Diversified Bond Fund, AXP(R) VP - Extra Income Fund changed its name to AXP(R) VP - High Yield Bond Fund and AXP(R) VP - Federal Income Fund changed its name to AXP(R) VP - Short Duration U.S. Government Fund. - -------------------------------------------------------------------------------- 70 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 86 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held with Fund Principal occupation Other directorships Committee memberships and length of service during past five years - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Arne H. Carlson Board member since 1999 Chair, Board Services Joint Audit, 901 S. Marquette Ave. Corporation (provides Contracts, Executive, Minneapolis, MN 55402 administrative Investment Review, Age 69 services to boards). Board Effectiveness Former Governor of Minnesota - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Philip J. Carroll, Jr. Board member since 2002 Retired Chairman and Scottish Power PLC, 901 S. Marquette Ave. CEO, Fluor Corporation Vulcan Materials Minneapolis, MN 55402 (engineering and Company, Inc. Age 65 construction) since (construction 1998 materials/chemicals) - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Livio D. DeSimone Board member since 2001 Retired Chair of the Cargill, Incorporated Joint Audit, 30 Seventh Street East Board and Chief (commodity merchants Contracts, Executive Suite 3050 Executive Officer, and processors), St. Paul, MN 55101-4901 Minnesota Mining and General Mills, Inc. Age 69 Manufacturing (3M) (consumer foods), Vulcan Materials Company (construction materials/chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Heinz F. Hutter* Board member since 1994 Retired President and Board Effectiveness, 901 S. Marquette Ave. Chief Operating Executive, Investment Minneapolis, MN 55402 Officer, Cargill, Review Age 74 Incorporated (commodity merchants and processors) - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Anne P. Jones Board member since 1985 Attorney and Consultant Joint Audit, Board 901 S. Marquette Ave. Effectiveness, Minneapolis, MN 55402 Executive Age 68 - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Stephen R. Lewis, Jr.** Board member since 2002 Retired President and Valmont Industries, Contracts, Investment 901 S. Marquette Ave. Professor of Inc. (manufactures Review, Executive Minneapolis, MN 55402 Economics, Carleton irrigation systems) Age 64 College - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Alan G. Quasha Board member since 2002 President, Quadrant Compagnie Financiere Joint Audit, 901 S. Marquette Ave. Management, Inc. Richemont AG (luxury Investment Review Minneapolis, MN 55402 (management of private goods), Harken Energy Age 53 equities) Corporation (oil and gas exploration) and SIRIT Inc. (radio frequency identification technology) - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Alan K. Simpson Board member since 1997 Former three-term Biogen, Inc. Investment Review, 1201 Sunshine Ave. United States Senator (biopharmaceuticals) Board Effectiveness Cody, WY 82414 for Wyoming Age 71 - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Alison Taunton-Rigby Board member since 2002 President, Forester Investment Review, 901 S. Marquette Ave. Biotech since 2000. Contracts Minneapolis, MN 55402 Former President and Age 59 CEO, Aquila Biopharmaceuticals, Inc. - -------------------------------- ------------------------- ------------------------ ------------------------ -----------------------
* Interested person of AXP Partners International Aggressive Growth Fund and AXP Partners Aggressive Growth Fund by reason of being a security holder of J P Morgan Chase & Co., which has a 45% interest in American Century Companies, Inc., the parent company of the subadviser of two of the AXP Partners Funds, American Century Investment Management, Inc. ** Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Liberty Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 71 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS
Board Members Affiliated with AEFC*** Name, address, age Position held with Fund Principal occupation Other directorships Committee memberships and length of service during past five years - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Barbara H. Fraser Board member since 2002 Executive Vice 1546 AXP Financial Center President - AEFA Minneapolis, MN 55474 Products and Corporate Age 53 Marketing of AEFC since 2002. President - Travelers Check Group, American Express Company, 2001-2002. Management Consultant, Reuters, 2000-2001. Managing Director - International Investments, Citibank Global, 1999-2000. Chairman and CEO, Citicorp Investment Services and Citigroup Insurance Group, U.S., 1998-1999 - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Stephen W. Roszell Board member since Senior Vice President 50238 AXP Financial Center 2002, Vice President - Institutional Group Minneapolis, MN 55474 since 2002 of AEFC Age 54 - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- William F. Truscott Board member since Senior Vice President 53600 AXP Financial Center 2001, Vice President - Chief Investment Minneapolis, MN 55474 since 2002 Officer of AEFC since Age 42 2001. Former Chief Investment Officer and Managing Director, Zurich Scudder Investments - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- *** Interested person by reason of being an officer, director and/or employee of AEFC. 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. Roszell, who is vice president, and Mr. Truscott, who is vice president, the Fund's other officers are: Other Officers Name, address, age Position held with Fund Principal occupation Other directorships Committee memberships and length of service during past five years - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Jeffrey P. Fox Treasurer since 2002 Vice President - 50005 AXP Financial Center Investment Accounting, Minneapolis, MN 55474 AEFC, since 2002; Vice Age 48 President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Paula R. Meyer President since 2002 Senior Vice President 596 AXP Financial Center and General Manager - Minneapolis, MN 55474 Mutual Funds, AEFC, Age 49 since 2002; Vice President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - -------------------------------- ------------------------- ------------------------ ------------------------ ----------------------- Leslie L. Ogg Vice President, General President of Board 901 S. Marquette Ave. Counsel, and Secretary Services Corporation Minneapolis, MN 55402 since 1978 Age 65 - -------------------------------- ------------------------- ------------------------ ------------------------ -----------------------
- -------------------------------------------------------------------------------- 72 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Responsibilities of board with respect to Fund's management The board initially approves an Investment Management Services Agreement and other contracts with American Express Financial Corporation (AEFC), one of AEFC's subsidiaries, and other service providers. Once the contracts are approved, the board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts of interest. Annually, the board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and AEFC's profitability in order to determine whether to continue existing contracts or negotiate new contracts. Several committees facilitate its work Executive Committee -- Acts for the board between meetings of the board. The committee held one meeting during the last fiscal year. Joint Audit Committee -- Meets with the independent public accountant, internal auditors and corporate officers to review financial statements, reports, and compliance matters. Reports significant issues to the board and makes recommendations to the independent directors regarding the selection of the independent public accountant. The committee held four meetings during the last fiscal year. Investment Review Committee -- Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the board. The committee held four meetings during the last fiscal year. Board Effectiveness Committee -- Recommends to the board the size, structure and composition for the board; the compensation to be paid to members of the board; and a process for evaluating the board's performance. The committee also reviews candidates for board membership including candidates recommended by shareholders. To be considered, recommendations must include a curriculum vita and be mailed to the Chairman of the Board, American Express Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The committee held four meetings during the last fiscal year. Contracts Committee -- Receives and analyzes reports covering the level and quality of services provided under contracts with the Fund and advises the board regarding actions taken on these contracts during the annual review process. The committee held four meetings during the last fiscal year. COMPENSATION FOR BOARD MEMBERS During the most recent fiscal year, the independent members of the Fund board, for attending up to 27 meetings, received the following compensation: Compensation Table for AXP VP - Blue Chip Advantage Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,056 137,958 Heinz F. Hutter 1,056 137,908 Anne P. Jones 1,106 142,358 Stephen R. Lewis, Jr. 1,006 133,658 Alan G. Quasha 900 124,308 Alan K. Simpson 850 119,658 Alison Taunton-Rigby 833 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. - -------------------------------------------------------------------------------- 73 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Compensation Table for AXP VP - Capital Resource Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 850 $ 44,183 Livio D. DeSimone 2,356 137,958 Heinz F. Hutter 2,356 137,908 Anne P. Jones 2,406 142,358 Stephen R. Lewis, Jr. 2,306 133,658 Alan G. Quasha 2,200 124,308 Alan K. Simpson 2,150 119,658 Alison Taunton-Rigby 1,892 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Cash Management Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 542 $ 44,183 Livio D. DeSimone 1,648 137,958 Heinz F. Hutter 1,648 137,908 Anne P. Jones 1,698 142,358 Stephen R. Lewis, Jr. 1,598 133,658 Alan G. Quasha 1,492 124,308 Alan K. Simpson 1,442 119,658 Alison Taunton-Rigby 1,333 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Diversified Bond Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 733 $ 44,183 Livio D. DeSimone 2,156 137,958 Heinz F. Hutter 2,156 137,908 Anne P. Jones 2,206 142,358 Stephen R. Lewis, Jr. 2,106 133,658 Alan G. Quasha 2,000 124,308 Alan K. Simpson 1,950 119,658 Alison Taunton-Rigby 1,775 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. - -------------------------------------------------------------------------------- 74 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Compensation Table for AXP VP - Diversified Equity Income Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,098 137,958 Heinz F. Hutter 1,098 137,908 Anne P. Jones 1,148 142,358 Stephen R. Lewis, Jr. 1,048 133,658 Alan G. Quasha 942 124,308 Alan K. Simpson 892 119,658 Alison Taunton-Rigby 875 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Equity Select Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,056 137,958 Heinz F. Hutter 1,056 137,908 Anne P. Jones 1,106 142,358 Stephen R. Lewis, Jr. 1,006 133,658 Alan G. Quasha 900 124,308 Alan K. Simpson 850 119,658 Alison Taunton-Rigby 833 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Global Bond Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,098 137,958 Heinz F. Hutter 1,098 137,908 Anne P. Jones 1,148 142,358 Stephen R. Lewis, Jr. 1,048 133,658 Alan G. Quasha 942 124,308 Alan K. Simpson 892 119,658 Alison Taunton-Rigby 875 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. - -------------------------------------------------------------------------------- 75 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Compensation Table for AXP VP - Growth Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,056 137,958 Heinz F. Hutter 1,056 137,908 Anne P. Jones 1,106 142,358 Stephen R. Lewis, Jr. 1,006 133,658 Alan G. Quasha 900 124,308 Alan K. Simpson 850 119,658 Alison Taunton-Rigby 833 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - High Yield Bond Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 400 $ 44,183 Livio D. DeSimone 1,340 137,958 Heinz F. Hutter 1,340 137,908 Anne P. Jones 1,390 142,358 Stephen R. Lewis, Jr. 1,290 133,658 Alan G. Quasha 1,183 124,308 Alan K. Simpson 1,133 119,658 Alison Taunton-Rigby 1,083 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - International Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 475 $ 44,183 Livio D. DeSimone 1,490 137,958 Heinz F. Hutter 1,490 137,908 Anne P. Jones 1,540 142,358 Stephen R. Lewis, Jr. 1,440 133,658 Alan G. Quasha 1,333 124,308 Alan K. Simpson 1,283 119,658 Alison Taunton-Rigby 1,183 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. - -------------------------------------------------------------------------------- 76 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Compensation Table for AXP VP - Managed Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 975 $ 44,183 Livio D. DeSimone 2,681 137,958 Heinz F. Hutter 2,681 137,908 Anne P. Jones 2,731 142,358 Stephen R. Lewis, Jr. 2,631 133,658 Alan G. Quasha 2,525 124,308 Alan K. Simpson 2,475 119,658 Alison Taunton-Rigby 2,167 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - New Dimensions Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $1,058 $ 44,183 Livio D. DeSimone 2,898 137,958 Heinz F. Hutter 2,898 137,908 Anne P. Jones 2,948 142,358 Stephen R. Lewis, Jr. 2,848 133,658 Alan G. Quasha 2,742 124,308 Alan K. Simpson 2,692 119,658 Alison Taunton-Rigby 2,350 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Partners Small Cap Value Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,056 137,958 Heinz F. Hutter 1,056 137,908 Anne P. Jones 1,106 142,358 Stephen R. Lewis, Jr. 1,006 133,658 Alan G. Quasha 900 124,308 Alan K. Simpson 850 119,658 Alison Taunton-Rigby 833 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. - -------------------------------------------------------------------------------- 77 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Compensation Table for AXP VP - S&P 500 Index Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,056 137,958 Heinz F. Hutter 1,056 137,908 Anne P. Jones 1,106 142,358 Stephen R. Lewis, Jr. 1,006 133,658 Alan G. Quasha 900 124,308 Alan K. Simpson 850 119,658 Alison Taunton-Rigby 833 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Short Duration U.S. Government Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 317 $ 44,183 Livio D. DeSimone 1,165 137,958 Heinz F. Hutter 1,165 137,908 Anne P. Jones 1,215 142,358 Stephen R. Lewis, Jr. 1,115 133,658 Alan G. Quasha 1,008 124,308 Alan K. Simpson 958 119,658 Alison Taunton-Rigby 942 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. Compensation Table for AXP VP - Small Cap Advantage Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 44,183 Livio D. DeSimone 1,056 137,958 Heinz F. Hutter 1,056 137,908 Anne P. Jones 1,106 142,358 Stephen R. Lewis, Jr. 1,006 133,658 Alan G. Quasha 900 124,308 Alan K. Simpson 850 119,658 Alison Taunton-Rigby 833 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. - -------------------------------------------------------------------------------- 78 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Compensation Table for AXP VP - Strategy Aggressive Total cash compensation from the Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 517 $ 44,183 Livio D. DeSimone 1,606 137,958 Heinz F. Hutter 1,606 137,908 Anne P. Jones 1,656 142,358 Stephen R. Lewis, Jr. 1,556 133,658 Alan G. Quasha 1,450 124,308 Alan K. Simpson 1,400 119,658 Alison Taunton-Rigby 1,267 110,892 * Arne H. Carlson, Chair of the Board, is compensated by Board Service Corporation. As of 30 days prior to the date of this SAI, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. Core Bond, Emerging Markets, Large Cap Value, Partners Select Value and Stock pay no fees or expenses to board members until the assets of the Fund reach $20 million. Independent Auditors The financial statements contained in the Annual Report were audited by independent auditors, KPMG LLP, 4200 Wells Fargo Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also provide other accounting and tax-related services as requested by the Fund. - -------------------------------------------------------------------------------- 79 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Appendix A DESCRIPTION OF MONEY MARKET SECURITIES The types of instruments that form the major part of the Fund's investments are described below. Certificates of Deposit -- A certificate of deposit is a negotiable receipt issued by a bank or savings and loan association in exchange for the deposit of funds. The issuer agrees to pay the amount deposited, plus interest, on the date specified on the certificate. Time Deposit -- A time deposit is a non-negotiable deposit in a bank for a fixed period of time. Bankers' Acceptances -- A bankers' acceptance arises from a short-term credit arrangement designed to enable businesses to obtain funds to finance commercial transactions. It is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. Commercial Paper -- Commercial paper is generally defined as unsecured short-term notes issued in bearer form by large well-known corporations and finance companies. Maturities on commercial paper range from one day to nine months. Letters of Credit -- A letter of credit is a short-term note issued in bearer form with a bank letter of credit which provides that the bank pay to the bearer the amount of the note upon presentation. U.S. Treasury Bills -- Treasury bills are issued with maturities of any period up to one year. Three-month and six-month bills are currently offered by the Treasury on 13-week and 26-week cycles respectively and are auctioned each week by the Treasury. Treasury bills are issued in book entry form and are sold only on a discount basis, i.e., the difference between the purchase price and the maturity value constitutes interest income for the investor. If they are sold before maturity, a portion of the income received may be a short-term capital gain. U.S. Government Agency Securities -- Federal agency securities are debt obligations which principally result from lending programs of the U.S. government. Housing and agriculture have traditionally been the principal beneficiaries of Federal credit programs, and agencies involved in providing credit to agriculture and housing account for the bulk of the outstanding agency securities. Repurchase Agreements -- A repurchase agreement involves the acquisition of securities by the Fund, with the concurrent agreement by a bank (or securities dealer if permitted by law or regulation), to reacquire the securities at the Fund's cost, plus interest, within a specified time. The Fund thereby receives a fixed rate of return on this investment, one that is insulated from market and rate fluctuations during the holding period. In these transactions, the securities acquired by the Fund have a total value equal to or in excess of the value of the repurchase agreement and are held by the Fund's custodian until required. Floating rate instruments -- These instruments pay interest at a rate tied to an external interest rate. The rate changes whenever there is a change in the external interest rate. If AEFC becomes aware that a security owned by the Fund is downgraded below the second highest rating, AEFC will either sell the security or recommend to the Fund's board why it should not be sold. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. - -------------------------------------------------------------------------------- 80 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Standard & Poor's Note Ratings An S&P note rating reflects the liquidity factors and market-access risks unique to notes. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Moody's Commercial Paper Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. - -------------------------------------------------------------------------------- 81 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Fitch's Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D: Default. Issues assigned this rating are in actual or imminent payment default. - -------------------------------------------------------------------------------- 82 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Appendix B DESCRIPTION OF RATINGS Standard & Poor's Long-Term Debt Ratings A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: o Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. o Nature of and provisions of the obligation. o Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Investment Grade Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. Speculative Grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. - -------------------------------------------------------------------------------- 83 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Moody's Long-Term Debt Ratings Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A -- Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa -- Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds that are rated Ba are judged to have speculative elements -- their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Fitch's Long-Term Debt Ratings Fitch's bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature of taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. - -------------------------------------------------------------------------------- 84 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Investment Grade AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Speculative Grade BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. DDD, DD and D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest potential for recovery. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. - -------------------------------------------------------------------------------- 85 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Standard & Poor's Muni Bond and Note Ratings An S&P municipal bond or note rating reflects the liquidity factors and market-access risks unique to these instruments. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Municipal bond rating symbols and definitions are as follows: Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. Moody's Short-Term Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are rated by Moody's. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. - -------------------------------------------------------------------------------- 86 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Fitch's Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D: Default. Issues assigned this rating are in actual or imminent payment default. - -------------------------------------------------------------------------------- 87 -- AMERICAN EXPRESS(R) VARIABLE PORTFOLIO FUNDS Appendix C ADDITIONAL INFORMATION ABOUT THE INDEX AXP Variable Portfolio - S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the shareholders of AXP Variable Portfolio - S&P 500 Index Fund or any member of the public regarding the advisability of investing in securities generally or in AXP Variable Portfolio - S&P 500 Index Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to AXP Variable Portfolio - S&P 500 Index Fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index, which are determined, composed and calculated by S&P without regard to AXP Variable Portfolio - S&P 500 Index Fund. S&P has no obligation to take the needs of AXP Variable Portfolio - S&P 500 Index Fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of AXP Variable Portfolio - S&P 500 Index Fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund's shares are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of AXP Variable Portfolio - S&P 500 Index Fund shares. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, ITS SHAREHOLDERS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. S-6466-20 W (10/03) INDEPENDENT AUDITORS' REPORT THE BOARD AND SHAREHOLDERS AXP(R) VARIABLE PORTFOLIO - INCOME SERIES, INC. AXP(R) VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. AXP(R) VARIABLE PORTFOLIO - MANAGED SERIES, INC. AXP(R) VARIABLE PORTFOLIO - MONEY MARKET SERIES, INC. AXP(R) VARIABLE PORTFOLIO - PARTNERS SERIES, INC. We have audited the accompanying statements of assets and liabilities, including the schedules of investments in securities, of AXP VP - Diversified Bond Fund (formerly AXP VP - Bond Fund), AXP VP - Global Bond Fund, AXP VP - High Yield Bond Fund (formerly AXP VP - Extra Income Fund) and AXP VP - Short Duration U.S. Government Fund (formerly AXP VP - Federal Income Fund) (funds within AXP Variable Portfolio - Income Series, Inc.), AXP VP - Blue Chip Advantage Fund, AXP VP - Capital Resource Fund, AXP VP - Emerging Markets Fund, AXP VP - Equity Select Fund, AXP VP - Growth Fund, AXP VP - International Fund, AXP VP - New Dimensions Fund, AXP VP - S&P 500 Index Fund, AXP VP - Small Cap Advantage Fund, AXP VP - Stock Fund and AXP VP - Strategy Aggressive Fund (funds within AXP Variable Portfolio - Investment Series, Inc.), AXP VP - Diversified Equity Income Fund and AXP VP - Managed Fund (funds within AXP Variable Portfolio - Managed Series, Inc.), AXP VP - Cash Management Fund, (fund within AXP Variable Portfolio - Money Market Series, Inc.), and AXP VP - Partners Small Cap Value Fund (fund within AXP Variable Portfolio - Partners Series, Inc.) as of August 31, 2003, and the related statements of operations, statements of changes in net assets and the financial highlights for the periods presented. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2003, 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 AXP VP - - Diversified Bond Fund, AXP VP - Global Bond Fund, AXP VP - High Yield Bond Fund, AXP VP - Short Duration U.S. Government Fund, AXP VP - Blue Chip Advantage Fund, AXP VP - Capital Resource Fund, AXP VP - Emerging Markets Fund, AXP VP - Equity Select Fund, AXP VP - Growth Fund, AXP VP - International Fund, AXP VP - New Dimensions Fund, AXP VP - S&P 500 Index Fund, AXP VP - Small Cap Advantage Fund, AXP VP - Stock Fund, AXP VP - Strategy Aggressive Fund, AXP VP - Diversified Equity Income Fund, AXP VP - Managed Fund, AXP VP - Cash Management Fund and AXP VP - Partners Small Cap Value Fund as of August 31, 2003 and the results of their operations, the changes in their net assets, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota October 10, 2003 AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 52 FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - AXP VP - BLUE CHIP CAPITAL CASH ADVANTAGE RESOURCE MANAGEMENT AUG. 31, 2003 FUND FUND FUND ASSETS Investments in securities, at value (Note 1) (identified cost $65,161,267, $1,879,780,195 and $875,577,858) $ 65,752,333 $ 1,986,352,055 $ 875,577,858 Cash in bank on demand deposit 268,716 65,464 110,683 Receivable for investment securities sold 15,275 14,853,613 -- Dividends and accrued interest receivable 93,969 2,873,500 599,081 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 66,130,293 2,004,144,632 876,287,622 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders (Note 1) 131,521 2,650,999 196,568 Payable for investment securities purchased -- 18,582,508 7,500,000 Accrued investment management services fee 28,835 976,402 361,974 Accrued distribution fee 6,436 196,034 88,719 Accrued administrative services fee 2,060 74,545 21,293 Other accrued expenses 22,022 159,892 104,519 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 190,874 22,640,380 8,273,073 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 65,939,419 $ 1,981,504,252 $ 868,014,549 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 92,381 $ 1,098,315 $ 8,683,262 Additional paid-in capital 100,018,803 2,456,299,464 859,334,378 Undistributed (excess of distributions over) net investment income (1,958) 14,169 -- Accumulated net realized gain (loss) (Note 9) (34,801,860) (582,479,556) (3,091) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 7) 632,053 106,571,860 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 65,939,419 $ 1,981,504,252 $ 868,014,549 ================================================================================================================================== Shares outstanding 9,238,072 109,831,455 868,326,214 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 7.14 $ 18.04 $ 1.00 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 53 STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - AXP VP - DIVERSIFIED DIVERSIFIED EMERGING BOND EQUITY INCOME MARKETS AUG. 31, 2003 FUND FUND FUND ASSETS Investments in securities, at value (Note 1)* (identified cost $2,065,340,495, $350,235,794 and $13,935,478) $ 2,032,144,048 $ 375,303,546 $ 16,110,158 Cash in bank on demand deposit 95,094 75,501 218,920 Foreign currency holdings for AXP VP - Emerging Markets Fund (identified cost $110,700) (Note 1) -- -- 111,018 Receivable for investment securities sold 96,814,838 -- 628,313 Dividends and accrued interest receivable 14,481,009 774,354 32,853 Unrealized appreciation on foreign currency contracts held, at value (Note 5) -- -- 140 U.S. government securities held as collateral (Note 6) 3,116,537 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 2,146,651,526 376,153,401 17,101,402 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders (Note 1) 4,742,558 1,483,179 12,868 Payable for investment securities purchased 95,578,015 1,429,622 770,797 Payable for securities puchased on a forward-commitment basis (Note 1) 207,512,889 -- -- Accrued investment management services fee 856,039 156,515 14,277 Accrued distribution fee 177,336 34,936 1,525 Unrealized depreciation on foreign currency contracts held, at value (Note 5) -- -- 2,043 Accrued administrative services fee 67,814 11,180 1,220 Payable upon return of securities loaned (Note 6) 71,864,263 2,858,000 -- Other accrued expenses 179,866 60,454 27,070 Options contracts written, at value (premiums received, $558,645 for AXP VP - Diversified Bond Fund (Note 8) 787,998 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 381,766,778 6,033,886 829,800 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 1,764,884,748 $ 370,119,515 $ 16,271,602 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 1,696,972 $ 383,730 $ 19,288 Additional paid-in capital 1,936,011,438 371,492,705 15,828,865 Undistributed (excess of distributions over) net investment income (603,136) (41,304) 6,142 Accumulated net realized gain (loss) (Note 9) (139,761,242) (26,783,368) (1,756,434) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Notes 5 and 7) (32,459,284) 25,067,752 2,173,741 - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 1,764,884,748 $ 370,119,515 $ 16,271,602 ================================================================================================================================== Shares outstanding 169,697,198 38,372,962 1,928,808 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 10.40 $ 9.65 $ 8.44 - ---------------------------------------------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 6) $ 70,628,180 $ 2,837,600 $ -- - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 54 STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - EQUITY GLOBAL AXP VP - SELECT BOND GROWTH AUG. 31, 2003 FUND FUND FUND ASSETS Investments in securities, at value (Note 1)* (identified cost $154,819,332, $331,468,168 and $209,601,244) $ 170,871,311 $ 339,274,469 $ 226,607,479 Cash in bank on demand deposit 249,701 84,701 65,444 Foreign currency holdings for AXP VP - Global Bond Fund (identified cost $1,405,427) (Note 1) -- 1,371,049 -- Receivable for investment securities sold -- 2,716,204 2,508,934 Dividends and accrued interest receivable 55,851 4,372,241 176,976 Unrealized appreciation on foreign currency contracts held, at value (Note 5) -- 201,527 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 171,176,863 348,020,191 229,358,833 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders (Note 1) -- 585,825 -- Payable for investment securities purchased 665,100 8,833,234 5,996,789 Payable for securities puchased on a forward-commitment basis (Note 1) -- 20,736,065 -- Accrued investment management services fee 82,445 209,205 106,818 Accrued distribution fee 15,855 31,246 21,194 Accrued administrative services fee 7,610 14,742 8,478 Payable upon return of securities loaned (Note 6) -- 5,037,500 -- Other accrued expenses 56,552 47,902 71,104 Options contracts written, at value (premiums received, $93,580 for AXP VP - Global Bond Fund (Note 8) -- 132,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 827,562 35,627,719 6,204,383 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 170,349,301 $ 312,392,472 $ 223,154,450 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 168,790 $ 300,472 $ 409,588 Additional paid-in capital 155,891,842 310,234,244 374,639,358 Undistributed (excess of distributions over) net investment income -- 486,617 (364) Accumulated net realized gain (loss) (Note 9) (1,763,310) (6,119,701) (168,900,551) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Notes 5 and 7) 16,051,979 7,490,840 17,006,419 - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 170,349,301 $ 312,392,472 $ 223,154,450 ================================================================================================================================== Shares outstanding 16,878,982 30,047,216 40,958,790 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 10.09 $ 10.40 $ 5.45 - ---------------------------------------------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 6) $ -- $ 4,916,400 $ -- - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 55 STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - HIGH YIELD AXP VP - AXP VP - BOND INTERNATIONAL MANAGED AUG. 31, 2003 FUND FUND FUND ASSETS Investments in securities, at value (Note 1)* (identified cost $836,453,639, $696,709,938 and $2,487,789,953) $ 844,581,064 $ 733,712,481 $ 2,556,266,332 Cash in bank on demand deposit 216,831 167,026 97,173 Foreign currency holdings for AXP VP - International Fund (identified cost $2,859,275) (Note 1) -- 2,875,646 -- Receivable for investment securities sold 4,351,602 6,304,803 47,034,965 Dividends and accrued interest receivable 15,549,118 2,552,505 9,867,198 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 864,698,615 745,612,461 2,613,265,668 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders (Note 1) 5,307,613 2,626,622 12,982,485 Payable for investment securities purchased 13,983,361 3,966,589 80,136,672 Payable for securities purchased on a forward-commitment basis (Note 1) 2,105,625 -- 76,764,966 Accrued investment management services fee 403,725 495,462 1,166,102 Accrued distribution fee 81,396 72,399 240,254 Accrued administrative services fee 32,559 31,939 61,955 Payable upon return of securities loaned (Note 6) -- -- 24,896,500 Other accrued expenses 81,634 115,752 205,487 Options contracts written at value (premium received, $252,383 for AXP VP - Managed Fund) (Note 8) -- -- 355,999 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 21,995,913 7,308,763 196,810,420 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 842,702,702 $ 738,303,698 $ 2,416,455,248 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value ($.001 for AXP VP - Managed Fund) (Note 1) $ 1,354,759 $ 1,027,435 $ 185,820 Additional paid-in capital 1,132,870,395 1,504,647,352 2,524,692,313 Undistributed net investment income 2,320,156 510 19,627 Accumulated net realized gain (loss) (Note 9) (301,970,033) (804,384,719) (176,763,009) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 7) 8,127,425 37,013,120 68,320,497 - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 842,702,702 $ 738,303,698 $ 2,416,455,248 ================================================================================================================================== Shares outstanding 135,475,929 102,743,484 185,819,642 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 6.22 $ 7.19 $ 13.00 - ---------------------------------------------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 6) $ -- $ -- $ 24,397,031 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 56 STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - PARTNERS AXP VP - NEW SMALL CAP S&P 500 DIMENSIONS VALUE INDEX AUG. 31, 2003 FUND FUND FUND ASSETS Investments in securities, at value (Note 1)* (identified cost $2,970,552,415, $121,138,738 and $183,893,842) $ 3,158,617,309 $ 134,460,013 $ 171,173,216 Cash in bank on demand deposit 77,222 151,143 422,622 Foreign currency holdings for AXP VP - New Dimensions Fund (identified cost $1,577) (Note 1) 1,595 -- -- Receivable for investment securities sold 17,984,584 175,566 39,667 Dividends and accrued interest receivable 4,420,937 80,662 258,094 U.S. government securities held as collateral (Note 6) 3,319,751 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 3,184,421,398 134,867,384 171,893,599 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders (Note 1) 4,936,028 -- 496,664 Payable for investment securities purchased 19,516,610 843,599 11,888 Accrued investment management services fee 1,496,836 102,291 38,085 Accrued distribution fee 304,558 12,536 16,416 Accrued administrative services fee 109,111 8,023 10,506 Payable upon return of securities loaned (Note 6) 43,018,151 -- -- Other accrued expenses 230,277 73,137 15,801 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 69,611,571 1,039,586 589,360 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 3,114,809,827 $ 133,827,798 $ 171,304,239 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 2,179,256 $ 117,480 $ 249,098 Additional paid-in capital 3,440,553,699 119,310,994 186,653,625 Excess of distributions over net investment income -- (114,349) (10,731) Accumulated net realized gain (loss) (Note 9) (515,988,040) 1,192,258 (2,910,969) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 7) 188,064,912 13,321,415 (12,676,784) - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 3,114,809,827 $ 133,827,798 $ 171,304,239 ================================================================================================================================== Shares outstanding 217,925,584 11,748,041 24,909,775 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 14.29 $ 11.39 $ 6.88 - ---------------------------------------------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 6) $ 42,274,460 $ -- $ -- - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 57 STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - SHORT DURATION SMALL CAP AXP VP - U.S. GOVERNMENT ADVANTAGE STOCK AUG. 31, 2003 FUND FUND FUND ASSETS Investments in securities, at value (Note 1) (identified cost $490,836,377, $84,123,290 and $10,365,546) $ 490,472,500 $ 102,023,539 $ 11,198,662 Cash in bank on demand deposit 107,541 197,718 383,468 Expense reimbursement receivable from AEFC -- -- 692 Receivable for investment securities sold 10,049,537 2,013,271 -- Dividends and accrued interest receivable 3,374,259 46,549 17,099 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 504,003,837 104,281,077 11,599,921 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Dividends payable to shareholders (Note 1) 741,004 -- 12,566 Payable for investment securities purchased 10,079,039 2,596,888 39,638 Payable for securities purchased on a forward-commitment basis (Note 1) 13,580,449 -- -- Accrued investment management services fee 233,561 59,247 4,953 Accrued distribution fee 47,861 9,375 1,106 Accrued administrative services fee 19,144 4,500 354 Other accrued expenses 49,245 35,086 16,005 Options contracts written at value (premium received, $107,060 for AXP VP - Short Duration U.S. Government Fund) (Note 8) 324,375 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 25,074,678 2,705,096 74,622 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 478,929,159 $ 101,575,981 $ 11,525,299 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 457,793 $ 90,323 $ 13,586 Additional paid-in capital 476,950,694 93,894,819 11,497,877 Undistributed net investment income -- 17,697 691 Accumulated net realized gain (loss) (Note 9) 2,358,344 (10,327,107) (819,971) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 7) (837,672) 17,900,249 833,116 - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 478,929,159 $ 101,575,981 $ 11,525,299 ================================================================================================================================== Shares outstanding 45,779,285 9,032,273 1,358,620 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 10.46 $ 11.25 $ 8.48 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 58 STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - STRATEGY AGGRESSIVE AUG. 31, 2003 FUND ASSETS Investments in securities, at value (Note 1) Investments in securities of unaffiliated issuers* (identified cost $920,277,161) $ 975,399,896 Investments in securities of affiliated issuers (identified cost $3,300,002) 144 - ---------------------------------------------------------------------------------------------------------------------------------- Total investments in securities (identified cost $923,577,163) 975,400,040 Cash in bank on demand deposit 732,843 Receivable for investment securities sold 528,933 Dividends and accrued interest receivable 182,269 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets 976,844,085 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Accrued investment management services fee 464,148 Accrued distribution fee 92,205 Accrued administrative services fee 39,153 Payable upon return of securities loaned (Note 6) 7,475,000 Other accrued expenses 91,198 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 8,161,704 - ---------------------------------------------------------------------------------------------------------------------------------- Net assets applicable to outstanding capital stock $ 968,682,381 ================================================================================================================================== REPRESENTED BY Capital stock -- $.01 par value (Note 1) $ 1,385,897 Additional paid-in capital 2,262,105,288 Undistributed net investment income 555,302 Accumulated net realized gain (loss) (Note 9) (1,347,186,983) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 51,822,877 - ---------------------------------------------------------------------------------------------------------------------------------- Total -- representing net assets applicable to outstanding capital stock $ 968,682,381 ================================================================================================================================== Shares outstanding 138,589,728 - ---------------------------------------------------------------------------------------------------------------------------------- Net asset value per share of outstanding capital stock $ 6.99 - ---------------------------------------------------------------------------------------------------------------------------------- * Including securities on loan, at value (Note 6) $ 7,171,125 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 59 STATEMENTS OF OPERATIONS AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - AXP VP - BLUE CHIP CAPITAL CASH ADVANTAGE RESOURCE MANAGEMENT YEAR ENDED AUG. 31, 2003 FUND FUND FUND INVESTMENT INCOME Income: Dividends $ 1,020,923 $ 27,037,159 $ -- Interest 36,939 1,734,801 14,433,946 Fee income from securities lending (Note 6) -- 6,837 -- Less foreign taxes withheld -- (30,097) -- - ---------------------------------------------------------------------------------------------------------------------------------- Total income 1,057,862 28,748,700 14,433,946 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 321,077 12,597,101 5,189,115 Distribution fee 75,470 2,446,359 1,274,132 Administrative services fees and expenses 24,614 968,533 324,844 Custodian fees 22,228 103,700 96,836 Compensation of board members 8,099 18,950 12,958 Printing and postage 12,224 389,871 164,751 Audit fees 17,000 24,000 18,500 Other 101 9,849 3,544 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 480,813 16,558,363 7,084,680 Earnings credits on cash balances (Note 2) (763) (716) (282) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 480,050 16,557,647 7,084,398 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 577,812 12,191,053 7,349,548 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (7,487,066) (188,314,276) 30 Futures contracts 482,417 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (7,004,649) (188,314,276) 30 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 11,900,526 346,211,686 -- - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 4,895,877 157,897,410 30 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 5,473,689 $ 170,088,463 $ 7,349,578 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 60 STATEMENTS OF OPERATIONS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - AXP VP - DIVERSIFIED DIVERSIFIED EMERGING BOND EQUITY INCOME MARKETS YEAR ENDED AUG. 31, 2003 FUND FUND FUND INVESTMENT INCOME Income: Dividends $ -- $ 8,122,817 $ 312,835 Interest 92,741,980 130,968 8,935 Fee income from securities lending (Note 6) 255,949 27,611 -- Less foreign taxes withheld -- (80,943) (35,119) - ---------------------------------------------------------------------------------------------------------------------------------- Total income 92,997,929 8,200,453 286,651 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 11,121,622 1,495,598 134,837 Distribution fee 2,305,049 354,586 14,889 Administrative services fees and expenses 913,878 116,748 11,910 Custodian fees 170,513 114,651 63,613 Compensation of board members 17,049 8,392 -- Printing and postage 374,672 51,748 946 Audit fees 25,000 18,000 17,000 Other 10,273 238 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 14,938,056 2,159,961 243,195 Expenses waived/reimbursed by AEFC (Note 2) -- -- (34,648) - ---------------------------------------------------------------------------------------------------------------------------------- 14,938,056 2,159,961 208,547 Earnings credits on cash balances (Note 2) (1,154) (806) (1,915) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 14,936,902 2,159,155 206,632 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 78,061,027 6,041,298 80,019 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) 43,235,998 (16,484,766) 79,663 Foreign currency transactions (5,077,680) (202) (38,973) Futures contracts 471,572 -- -- Options contracts written (Note 8) 1,076,689 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments 39,706,579 (16,484,968) 40,690 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (36,198,070) 62,393,427 2,605,051 - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 3,508,509 45,908,459 2,645,741 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 81,569,536 $ 51,949,757 $ 2,725,760 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 61 STATEMENTS OF OPERATIONS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - EQUITY GLOBAL AXP VP - SELECT BOND GROWTH YEAR ENDED AUG. 31, 2003 FUND FUND FUND INVESTMENT INCOME Income: Dividends $ 312,590 $ -- $ 1,771,265 Interest 63,423 11,796,628 193,131 Fee income from securities lending (Note 6) -- 3,756 7,501 Less foreign taxes withheld -- (3,490) (17,019) - ---------------------------------------------------------------------------------------------------------------------------------- Total income 376,013 11,796,894 1,954,878 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 758,579 2,370,419 1,068,315 Distribution fee 138,731 353,522 204,477 Administrative services fees and expenses 67,462 172,574 84,387 Custodian fees 161,884 102,608 205,884 Compensation of board members 8,100 8,392 8,099 Printing and postage 19,906 57,894 36,949 Audit fees 17,000 20,000 18,000 Other 14 364 349 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 1,171,676 3,085,773 1,626,460 Earnings credits on cash balances (Note 2) (2,194) (400) (1,120) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 1,169,482 3,085,373 1,625,340 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net (793,469) 8,711,521 329,538 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (138,674) 13,510,402 (9,111,551) Foreign currency transactions -- (2,156,463) 615 Futures contracts -- 300,524 -- Options contracts written (Note 8) -- 104,759 -- - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (138,674) 11,759,222 (9,110,936) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 24,185,577 2,830,114 24,976,105 - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 24,046,903 14,589,336 15,865,169 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 23,253,434 $ 23,300,857 $ 16,194,707 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 62 STATEMENTS OF OPERATIONS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - HIGH YIELD AXP VP - AXP VP - BOND INTERNATIONAL MANAGED YEAR ENDED AUG. 31, 2003 FUND FUND FUND INVESTMENT INCOME Income: Dividends $ 1,399,103 $ 18,286,629 $ 35,164,585 Interest 59,952,745 413,005 45,323,860 Fee income from securities lending (Note 6) -- 364,960 135,467 Less foreign taxes withheld -- (2,520,533) (13,835) - ---------------------------------------------------------------------------------------------------------------------------------- Total income 61,351,848 16,544,061 80,610,077 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 4,158,089 6,108,448 14,961,945 Distribution fee 838,324 916,060 3,068,716 Administrative services fees and expenses 341,823 414,456 836,945 Custodian fees 80,531 155,372 182,051 Compensation of board members 10,366 11,743 21,600 Printing and postage 133,988 159,722 514,831 Audit fees 24,000 23,000 24,500 Other 1,952 3,933 13,644 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 5,589,073 7,792,734 19,624,232 Earnings credits on cash balances (Note 2) (806) (475) (1,026) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 5,588,267 7,792,259 19,623,206 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 55,763,581 8,751,802 60,986,871 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (22,640,290) (113,150,831) (136,848,539) Foreign currency transactions -- (247,148) (1,383,162) Futures contracts -- -- (762,629) Options contracts written (Note 8) -- -- 493,517 - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (22,640,290) (113,397,979) (138,500,813) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 85,244,865 120,445,926 284,044,624 - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 62,604,575 7,047,947 145,543,811 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 118,368,156 $ 15,799,749 $ 206,530,682 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 63 STATEMENTS OF OPERATIONS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - PARTNERS AXP VP - NEW SMALL CAP S&P 500 DIMENSIONS VALUE INDEX YEAR ENDED AUG. 31, 2003 FUND FUND FUND INVESTMENT INCOME Income: Dividends $ 41,276,845 $ 887,058 $ 2,200,671 Interest 621,068 135,300 52,221 Fee income from securities lending (Note 6) 31,473 -- -- Less foreign taxes withheld (29,917) (22,389) -- - ---------------------------------------------------------------------------------------------------------------------------------- Total income 41,899,469 999,969 2,252,892 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 17,629,745 876,649 361,397 Distribution fee 3,592,015 111,147 155,774 Administrative services fees and expenses 1,354,201 72,474 101,514 Custodian fees 159,005 273,097 111,123 Compensation of board members 23,366 8,100 8,099 Printing and postage 690,860 16,783 20,130 Licensing fees -- -- 14,495 Audit fees 24,500 17,500 18,500 Other 6,286 3,034 2,241 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 23,479,978 1,378,784 793,273 Expenses waived/reimbursed by AEFC (Note 2) -- -- (176,230) - ---------------------------------------------------------------------------------------------------------------------------------- 23,479,978 1,378,784 617,043 Earnings credits on cash balances (Note 2) (1,223) -- (2,359) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 23,478,755 1,378,784 614,684 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 18,420,714 (378,815) 1,638,208 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (111,274,392) 1,617,768 (564,520) Foreign currency transactions (279,783) (6,330) -- Futures contracts -- -- 883,964 Options contracts written (Note 8) 180,000 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (111,374,175) 1,611,438 319,444 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 364,453,383 20,844,781 14,980,671 - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 253,079,208 22,456,219 15,300,115 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 271,499,922 $ 22,077,404 $ 16,938,323 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 64 STATEMENTS OF OPERATIONS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - AXP VP - SHORT DURATION SMALL CAP AXP VP - U.S. GOVERNMENT ADVANTAGE STOCK YEAR ENDED AUG. 31, 2003 FUND FUND FUND INVESTMENT INCOME Income: Dividends $ -- $ 646,718 $ 122,158 Interest 13,568,850 21,897 8,614 Fee income from securities lending (Note 6) -- 13,595 -- Less foreign taxes withheld -- (781) (809) - ---------------------------------------------------------------------------------------------------------------------------------- Total income 13,568,850 681,429 129,963 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 2,508,938 560,022 41,942 Distribution fee 514,127 86,753 9,574 Administrative services fees and expenses 212,068 42,618 3,064 Custodian fees 52,914 97,000 61,763 Compensation of board members 8,892 8,099 -- Printing and postage 74,569 12,308 2,409 Audit fees 19,500 17,000 17,000 Other -- 109 3,058 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 3,391,008 823,909 138,810 Expenses waived/reimbursed by AEFC (Note 2) -- -- (54,735) - ---------------------------------------------------------------------------------------------------------------------------------- 3,391,008 823,909 84,075 Earnings credits on cash balances (Note 2) (381) (2,944) (1,982) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 3,390,627 820,965 82,093 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net 10,178,223 (139,536) 47,870 - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) 2,617,374 (3,472,109) (401,084) Futures contracts (346,810) -- -- Options contracts written (Note 8) 369,173 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments 2,639,737 (3,472,109) (401,084) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (5,589,855) 24,120,853 1,206,533 - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies (2,950,118) 20,648,744 805,449 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 7,228,105 $ 20,509,208 $ 853,319 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 65 STATEMENTS OF OPERATIONS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - STRATEGY AGGRESSIVE YEAR ENDED AUG. 31, 2003 FUND INVESTMENT INCOME Income: Dividends $ 2,023,894 Interest 469,728 Fee income from securities lending (Note 6) 56,618 Less foreign taxes withheld (9,887) - ---------------------------------------------------------------------------------------------------------------------------------- Total income 2,540,353 - ---------------------------------------------------------------------------------------------------------------------------------- Expenses (Note 2): Investment management services fee 5,526,254 Distribution fee 1,126,018 Administrative services fees and expenses 498,086 Custodian fees 67,765 Compensation of board members 12,733 Printing and postage 177,695 Audit fees 22,500 Other 5,186 - ---------------------------------------------------------------------------------------------------------------------------------- Total expenses 7,436,237 Earnings credits on cash balances (Note 2) (331) - ---------------------------------------------------------------------------------------------------------------------------------- Total net expenses 7,435,906 - ---------------------------------------------------------------------------------------------------------------------------------- Investment income (loss) -- net (4,895,553) - ---------------------------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) -- NET Net realized gain (loss) on: Security transactions (Note 3) (63,101,780) Options contracts written (Note 8) 144,370 - ---------------------------------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments (62,957,410) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 245,325,134 - ---------------------------------------------------------------------------------------------------------------------------------- Net gain (loss) on investments and foreign currencies 182,367,724 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 177,472,171 ==================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 66 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - BLUE CHIP ADVANTAGE FUND AXP VP - CAPITAL RESOURCE FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 577,812 $ 526,692 $ 12,191,053 $ 14,929,976 Net realized gain (loss) on investments (7,004,649) (13,509,279) (188,314,276) (392,662,025) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 11,900,526 (2,735,760) 346,211,686 (31,370,552) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 5,473,689 (15,718,347) 170,088,463 (409,102,601) - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (575,688) (526,692) (12,159,512) (13,618,196) Net realized gain -- -- -- (226,597,742) - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (575,688) (526,692) (12,159,512) (240,215,938) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 6,618,598 12,387,550 39,257,748 26,311,282 Reinvestment of distributions at net asset value 575,675 510,024 12,843,852 240,885,427 Payments for redemptions (9,355,725) (14,395,624) (455,331,887) (661,353,102) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (2,161,452) (1,498,050) (403,230,287) (394,156,393) - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 2,736,549 (17,743,089) (245,301,336) (1,043,474,932) Net assets at beginning of year 63,202,870 80,945,959 2,226,805,588 3,270,280,520 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 65,939,419 $ 63,202,870 $ 1,981,504,252 $ 2,226,805,588 ================================================================================================================================ Undistributed (excess of distributions over) net investment income $ (1,958) $ (1,523) $ 14,169 $ (31,541) - --------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - CASH MANAGEMENT FUND AXP VP - DIVERSIFIED BOND FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 7,349,548 $ 17,771,251 $ 78,061,027 $ 92,978,259 Net realized gain (loss) on investments 30 -- 39,706,579 (63,284,059) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies -- -- (36,198,070) 25,649,907 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 7,349,578 17,771,251 81,569,536 55,344,107 - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (7,349,548) (17,809,621) (78,124,877) (92,738,533) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 1,034,080,685 1,058,210,653 236,544,839 338,056,662 Reinvestment of distributions at net asset value 8,160,797 19,553,193 81,298,134 92,561,111 Payments for redemptions (1,297,109,007) (1,018,223,186) (369,949,868) (205,796,427) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (254,867,525) 59,540,660 (52,106,895) 224,821,346 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (254,867,495) 59,502,290 (48,662,236) 187,426,920 Net assets at beginning of year 1,122,882,044 1,063,379,754 1,813,546,984 1,626,120,064 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 868,014,549 $ 1,122,882,044 $ 1,764,884,748 $ 1,813,546,984 ================================================================================================================================ Undistributed (excess of distributions over) net investment income $ -- $ -- $ (603,136) $ 1,087,188 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 67 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - DIVERSIFIED EQUITY INCOME FUND AXP VP - EMERGING MARKETS FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 6,041,298 $ 3,237,686 $ 80,019 $ 24,112 Net realized gain (loss) on investments (16,484,968) (10,495,341) 40,690 (1,400) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 62,393,427 (36,589,843) 2,605,051 (161,344) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 51,949,757 (43,847,498) 2,725,760 (138,632) - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (5,837,997) (3,207,115) (41,003) (1,018) Net realized gain -- (723,310) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (5,837,997) (3,930,425) (41,003) (1,018) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 127,536,983 285,364,171 10,689,540 5,268,091 Reinvestment of distributions at net asset value 5,418,241 3,199,218 28,135 1,018 Payments for redemptions (76,420,263) (78,822,962) (6,978,719) (985,879) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 56,534,961 209,740,427 3,738,956 4,283,230 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 102,646,721 161,962,504 6,423,713 4,143,580 Net assets at beginning of year 267,472,794 105,510,290 9,847,889 5,704,309 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 370,119,515 $ 267,472,794 $ 16,271,602 $ 9,847,889 ================================================================================================================================ Undistributed (excess of distributions over) net investment income $ (41,304) $ (58,180) $ 6,142 $ -- - --------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - EQUITY SELECT FUND AXP VP - GLOBAL BOND FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ (793,469) $ (309,292) $ 8,711,521 $ 7,830,823 Net realized gain (loss) on investments (138,674) (1,472,649) 11,759,222 (2,573,044) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 24,185,577 (7,657,601) 2,830,114 10,510,906 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 23,253,434 (9,439,542) 23,300,857 15,768,685 - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income -- -- (15,508,799) (9,972,691) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 78,499,807 82,057,178 92,043,308 58,834,310 Reinvestment of distributions at net asset value -- -- 16,984,403 8,611,585 Payments for redemptions (3,361,177) (14,281,109) (37,269,180) (31,869,821) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 75,138,630 67,776,069 71,758,531 35,576,074 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 98,392,064 58,336,527 79,550,589 41,372,068 Net assets at beginning of year 71,957,237 13,620,710 232,841,883 191,469,815 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 170,349,301 $ 71,957,237 $ 312,392,472 $ 232,841,883 ================================================================================================================================ Undistributed net investment income $ -- $ -- $ 486,617 $ 182,188 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 68 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - GROWTH FUND AXP VP - HIGH YIELD BOND FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 329,538 $ 1,028 $ 55,763,581 $ 53,834,235 Net realized gain (loss) on investments (9,110,936) (107,229,835) (22,640,290) (121,077,732) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 24,976,105 63,547,901 85,244,865 6,038,329 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 16,194,707 (43,680,906) 118,368,156 (61,205,168) - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (354,762) -- (53,023,212) (54,044,758) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 82,559,548 35,827,335 425,037,720 186,575,990 Reinvestment of distributions at net asset value 354,762 -- 51,864,894 54,870,752 Payments for redemptions (20,054,062) (24,596,876) (276,410,382) (158,253,604) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 62,860,248 11,230,459 200,492,232 83,193,138 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 78,700,193 (32,450,447) 265,837,176 (32,056,788) Net assets at beginning of year 144,454,257 176,904,704 576,865,526 608,922,314 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 223,154,450 $ 144,454,257 $ 842,702,702 $ 576,865,526 ================================================================================================================================ Undistributed (excess of distributions over) net investment income $ (364) $ 340 $ 2,320,156 $ 32,074 - --------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - INTERNATIONAL FUND AXP VP - MANAGED FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 8,751,802 $ 9,090,362 $ 60,986,871 $ 77,138,997 Net realized gain (loss) on investments (113,397,979) (167,464,926) (138,500,813) 24,828,211 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 120,445,926 (17,833,601) 284,044,624 (476,482,350) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 15,799,749 (176,208,165) 206,530,682 (374,515,142) - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (5,547,305) (8,908,956) (60,600,462) (77,891,964) Net realized gain -- (2,224,868) (29,213,177) (250,253,587) Excess distributions from net investment income (Note 1) -- (4,199,167) -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (5,547,305) (15,332,991) (89,813,639) (328,145,551) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 404,942,637 274,361,181 49,597,930 35,053,958 Reinvestment of distributions at net asset value 7,254,815 16,483,561 98,478,730 327,385,104 Payments for redemptions (557,645,677) (535,716,623) (557,377,522) (709,804,776) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (145,448,225) (244,871,881) (409,300,862) (347,365,714) - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (135,195,781) (436,413,037) (292,583,819) (1,050,026,407) Net assets at beginning of year 873,499,479 1,309,912,516 2,709,039,067 3,759,065,474 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 738,303,698 $ 873,499,479 $ 2,416,455,248 $ 2,709,039,067 ================================================================================================================================ Undistributed (excess of distributions over) net investment income $ 510 $ (2,956,839) $ 19,627 $ 230,750 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 69 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - PARTNERS SMALL CAP AXP VP - NEW DIMENSIONS FUND VALUE FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 18,420,714 $ 17,171,597 $ (378,815) $ (218,680) Net realized gain (loss) on investments (111,374,175) (140,044,412) 1,611,438 469,554 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 364,453,383 (466,854,646) 20,844,781 (7,442,391) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 271,499,922 (589,727,461) 22,077,404 (7,191,517) - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (18,140,932) (17,226,808) (89,612) -- Net realized gain -- (3,533,136) (317,725) -- - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (18,140,932) (20,759,944) (407,337) -- - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 200,067,483 239,607,332 52,429,258 66,069,165 Reinvestment of distributions at net asset value 18,319,384 17,343,868 407,337 -- Payments for redemptions (402,428,794) (493,298,991) (3,387,646) (953,809) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (184,041,927) (236,347,791) 49,448,949 65,115,356 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 69,317,063 (846,835,196) 71,119,016 57,923,839 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at beginning of year 3,045,492,764 3,892,327,960 62,708,782 4,784,943 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 3,114,809,827 $ 3,045,492,764 $ 133,827,798 $ 62,708,782 ================================================================================================================================ Undistributed (excess of distributions over) net investment income $ -- $ -- $ (114,349) $ 1,479 - --------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - SHORT DURATION AXP VP - S&P 500 INDEX FUND U.S. GOVERNMENT FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ 1,638,208 $ 837,688 $ 10,178,223 $ 5,496,739 Net realized gain (loss) on investments 319,444 (2,639,565) 2,639,737 1,251,741 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 14,980,671 (17,951,524) (5,589,855) 2,718,665 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 16,938,323 (19,753,401) 7,228,105 9,467,145 - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income (1,634,273) (842,615) (10,178,223) (5,496,739) Net realized gain -- -- (1,387,607) (264,298) - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (1,634,273) (842,615) (11,565,830) (5,761,037) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 67,724,355 69,263,218 273,291,893 182,106,477 Reinvestment of distributions at net asset value 1,425,617 670,952 11,535,473 5,416,056 Payments for redemptions (11,723,973) (6,666,038) (77,268,814) (21,995,473) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 57,425,999 63,268,132 207,558,552 165,527,060 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 72,730,049 42,672,116 203,220,827 169,233,168 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at beginning of year 98,574,190 55,902,074 275,708,332 106,475,164 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 171,304,239 $ 98,574,190 $ 478,929,159 $ 275,708,332 ================================================================================================================================
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 70 STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - SMALL CAP ADVANTAGE FUND AXP VP - STOCK FUND YEAR ENDED AUG. 31, 2003 2002 2003 2002 OPERATIONS AND DISTRIBUTIONS Investment income (loss) -- net $ (139,536) $ (120,145) $ 47,870 $ 18,895 Net realized gain (loss) on investments (3,472,109) (4,087,349) (401,084) (412,004) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 24,120,853 (4,682,108) 1,206,533 (283,648) - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 20,509,208 (8,889,602) 853,319 (676,757) - -------------------------------------------------------------------------------------------------------------------------------- Distributions to shareholders from: Net investment income -- -- (48,267) (18,391) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 25,694,819 23,713,018 6,299,134 3,812,517 Reinvestment of distributions at net asset value -- -- 42,016 14,213 Payments for redemptions (3,903,840) (4,777,768) (494,002) (242,563) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions 21,790,979 18,935,250 5,847,148 3,584,167 - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 42,300,187 10,045,648 6,652,200 2,889,019 Net assets at beginning of year 59,275,794 49,230,146 4,873,099 1,984,080 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 101,575,981 $ 59,275,794 $ 11,525,299 $ 4,873,099 ================================================================================================================================ Undistributed net investment income $ 17,697 $ 10,342 $ 691 $ 1,088 - --------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED) AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS
AXP VP - STRATEGY AGGRESSIVE FUND YEAR ENDED AUG. 31, 2003 2002 OPERATIONS Investment income (loss) -- net $ (4,895,553) $ (7,402,355) Net realized gain (loss) on investments (62,957,410) (551,796,489) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 245,325,134 55,661,883 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 177,472,171 (503,536,961) - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (NOTE 4) Proceeds from sales 42,357,867 77,928,737 Reinvestment of distributions at net asset value -- 2,827,564 Payments for redemptions (241,907,633) (400,968,776) - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net assets from capital share transactions (199,549,766) (320,212,475) - -------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (22,077,595) (823,749,436) Net assets at beginning of year 990,759,976 1,814,509,412 - -------------------------------------------------------------------------------------------------------------------------------- Net assets at end of year $ 968,682,381 $ 990,759,976 ================================================================================================================================ Undistributed net investment income $ 555,302 $ 319,691 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 71 NOTES TO FINANCIAL STATEMENTS AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Each Fund is registered under the Investment Company Act of 1940 (as amended) (the 1940 Act) as a diversified, (non-diversified for AXP VP - Global Bond Fund, AXP VP - Partners Small Cap Value Fund and AXP VP - S&P 500 Index Fund) open-end management investment company. Each Fund has 10 billion authorized shares of capital stock. The primary investments of each Fund are as follows: AXP VP - Blue Chip Advantage Fund invests primarily in common stocks of companies that are included in the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). AXP VP - Capital Resource Fund invests primarily in U.S. common stocks. AXP VP - Cash Management Fund invests primarily in money market instruments, such as marketable debt obligations issued by the U.S. government or its agencies, bank certificates of deposit, bankers' acceptances, letters of credit and commercial paper. AXP VP - Diversified Bond Fund (formerly AXP VP - Bond Fund) invests primarily in bonds and other debt obligations including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. AXP VP - Diversified Equity Income Fund invests primarily in dividend-paying common and preferred stocks. AXP VP - Emerging Markets Fund invests primarily in equity securities of companies in emerging market countries. AXP VP - Equity Select Fund invests primarily in growth stocks of medium-sized companies. AXP VP - Global Bond Fund invests primarily in debt securities of U.S. and foreign issuers. AXP VP - Growth Fund invests primarily in common stocks that appear to offer growth opportunities. AXP VP - High Yield Bond Fund (formerly AXP VP - Extra Income Fund) invests primarily in high-yielding, high risk corporate bonds (junk bonds) issued by U.S. and foreign companies and governments. AXP VP - International Fund invests primarily in equity securities of foreign issuers that offer strong growth potential. AXP VP - Managed Fund invests primarily in a combination of common and preferred stocks, bonds and other debt securities. AXP VP - New Dimensions Fund invests primarily in common stocks showing potential for significant growth. AXP VP - Partners Small Cap Value Fund invests primarily in equity securities of small capitalization companies. AXP VP - S&P 500 Index Fund invests primarily in securities that are expected to provide investment results that correspond to the performance of the S&P 500 Index. AXP VP - Short Duration U.S. Government Fund (formerly AXP VP - Federal Income Fund) invests primarily in debt obligations guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities. Although the Fund may invest in any U.S. government securities, it is anticipated that U.S. government securities representing part ownership in pools of mortgage loans (mortgage-backed securities) will comprise a large percentage of the Fund's investments. AXP VP - Small Cap Advantage Fund invests primarily in equity securities of small companies. AXP VP - Stock Fund invests primarily in common stocks and securities convertible into common stocks. AXP VP - Strategy Aggressive Fund invests primarily in securities of growth companies. You may not buy (nor will you own) shares of each Fund directly. You invest by buying a variable annuity contract or life insurance policy and allocating your purchase payments to the variable subaccount or variable account (the subaccounts) that invests in each Fund. Each Fund's significant accounting policies are summarized as follows: 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. Foreign securities are valued based on quotations from the principal market in which such securities are normally traded. If trading or events occurring in other markets after the close of the principal market in which foreign securities are traded, and before the close of business of the Fund, are expected to materially affect the value of those securities, then they are valued at their fair value taking this trading or these events into account. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 72 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 in all Funds, except AXP VP - Cash Management Fund, maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on the current interest rates; those maturing in 60 days or less are valued at amortized cost. Pursuant to Rule 2a-7 of the 1940 Act, all securities in AXP VP - Cash Management Fund are valued at amortized cost which approximates market value in order to maintain a constant net asset value of $1 per share. OPTION TRANSACTIONS To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Funds, except AXP VP - Cash Management Fund, 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 Funds 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 Funds give up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Funds 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 Funds pay a premium whether or not the option is exercised. The Funds also have 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 Funds will realize a gain or loss when the option transaction expires or closes. When an option is 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 Funds, except AXP VP - Cash Management Fund, may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Funds also may buy or 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 Funds are 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 Funds each day. The variation margin payments are equal to the daily changes in the contract value and recorded as unrealized gains and losses. The Funds recognize 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. 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. As of Aug. 31, 2003 foreign currency holdings for AXP VP - Global Bond Fund, AXP - VP Emerging Markets Fund and AXP VP - International Fund consisted of multiple denominations and foreign currency holdings for AXP VP - New Dimensions Fund were entirely comprised of Taiwan Dollars. The Funds, except AXP VP - Cash Management Fund and AXP VP - Short Duration U.S. Government Fund, 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 Funds and the resulting unrealized appreciation and/or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Funds are subject to the credit risk that the other party will not complete its contract obligations. ILLIQUID SECURITIES As of Aug. 31, 2003, investments in securities for AXP VP - Capital Resource Fund, AXP VP - Diversified Bond Fund, AXP VP - High Yield Bond Fund and AXP VP - Strategy Aggressive Fund, included issues that are illiquid which the Funds currently limit to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities as of Aug. 31, 2003, was $10,437,182, $2,790,233, $20,805,972 and $17,527,489, representing 0.53%, 0.16%, 2.47% and 1.81% of net assets for AXP VP - Capital Resource Fund, AXP VP - Diversified Bond Fund, AXP VP - High Yield Bond Fund and AXP VP - Strategy Aggressive Fund, respectively. 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. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 73 SECURITIES PURCHASED ON A FORWARD-COMMITMENT BASIS Delivery and payment for securities that have been purchased by the Funds on a forward-commitment basis, including when-issued securities, other forward-commitments and future capital commitments for limited partnership interests, can take place one month or more after the transaction date. During this period, when-issued securities and other forward-commitments are subject to market fluctuations, and they may affect each Fund's net assets the same as owned securities. The Funds designate cash or liquid securities at least equal to the amount of its forward-commitments. As of Aug. 31, 2003, the outstanding forward-commitments for the Funds are as follows:
WHEN-ISSUED OTHER FUTURE FUND SECURITIES FORWARD-COMMITMENTS CAPITAL COMMITMENTS - ------------------------------------------------------------------------------------------------------------------------ AXP VP - Diversified Bond Fund $ 178,867,172 $ 28,645,717 $ -- AXP VP - Global Bond Fund 17,757,818 2,978,247 -- AXP VP - High Yield Bond Fund -- 2,105,625 -- AXP VP - Managed Fund 60,098,087 16,666,879 -- AXP VP - Short Duration U.S. Government Fund 12,606,504 973,945 -- AXP VP - Strategy Aggressive Fund -- -- 4,275,000 - ------------------------------------------------------------------------------------------------------------------------
Certain Funds may also enter into transactions to sell purchase commitments to third parties at current market values and concurrently acquire other purchase commitments for similar securities at later dates. As an inducement for these Funds to "roll over" their purchase commitments, these Funds receive negotiated amounts in the form of reductions of the purchase price of the commitment. FEDERAL TAXES Each 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 subaccounts. No provision for income or excise taxes is thus required. Each Fund is treated as a separate entity for federal income tax purposes. 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, the timing and amount of market discount recognized as ordinary income, foreign tax credits 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. The effect on dividend distributions of certain book-to-tax differences is presented as "excess distributions" in the statement of changes in net assets. 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) are recorded by the Funds. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, accumulated net realized gain (loss) and undistributed net investment income have been increased (decreased), resulting in net reclassification adjustments to additional paid-in capital by the following:
AXP VP - AXP VP - AXP VP - AXP VP - AXP VP - AXP VP - BLUE CHIP CAPITAL CASH DIVERSIFIED DIVERSIFIED EMERGING ADVANTAGE RESOURCE MANAGEMENT BOND EQUITY INCOME MARKETS FUND FUND FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) $ 2,559 $ (14,169) $ -- $ 1,626,474 $ 186,425 $ 32,245 Undistributed net investment income (2,559) 14,169 -- (1,626,474) (186,425) (32,874) - ----------------------------------------------------------------------------------------------------------------------------- Additional paid-in capital reduction (increase) $ -- $ -- $ -- $ -- $ -- $ (629) - -----------------------------------------------------------------------------------------------------------------------------
AXP VP - AXP VP - AXP VP - AXP VP - AXP VP - AXP VP - EQUITY SELECT GLOBAL BOND GROWTH HIGH YIELD BOND INTERNATIONAL MANAGED FUND FUND FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) $ -- $ (7,101,707) $ 466 $ 452,287 $ 247,148 $ 597,532 Undistributed net investment income 793,469 7,101,707 24,520 (452,287) (247,148) (597,532) - ----------------------------------------------------------------------------------------------------------------------------- Additional paid-in capital reduction (increase) $ 793,469 $ -- $ 24,986 $ -- $ -- $ -- - -----------------------------------------------------------------------------------------------------------------------------
AXP VP - AXP VP - AXP VP - AXP VP - AXP VP - AXP VP - NEW PARTNERS S&P 500 SHORT DURATION SMALL CAP AXP VP - STRATEGY DIMENSIONS SMALL CAP INDEX U.S. GOVERNMENT ADVANTAGE STOCK AGGRESSIVE FUND VALUE FUND FUND FUND FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated net realized gain (loss) $ 279,782 $ (355,091) $ 11,854 $ -- $ 40,517 $ -- $ -- Undistributed net investment income (279,782) 352,599 (11,854) -- 146,891 -- 5,131,164 - ----------------------------------------------------------------------------------------------------------------------------------- Additional paid-in capital reduction (increase) $ -- $ (2,492) $ -- $ -- $ 187,408 $ -- $ 5,131,164 - -----------------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 74 The tax character of distributions paid for the years indicated is as follows:
YEAR ENDED AUG. 31, 2003 2002 - ---------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund Distributions paid from: Ordinary income $ 575,688 $ 526,692 Long-term capital gain -- -- AXP VP - Capital Resource Fund Distributions paid from: Ordinary income 12,159,512 13,618,196 Long-term capital gain -- 226,597,742 AXP VP - Cash Management Fund Distributions paid from: Ordinary income 7,349,548 17,809,621 Long-term capital gain -- -- AXP VP - Diversified Bond Fund Distributions paid from: Ordinary income 78,124,877 92,738,533 Long-term capital gain -- -- AXP VP - Diversified Equity Income Fund Distributions paid from: Ordinary income 5,837,997 3,836,273 Long-term capital gain -- 94,152 AXP VP - Emerging Markets Fund Distributions paid from: Ordinary income 41,003 1,018 Long-term capital gain -- -- AXP VP - Equity Select Fund Distributions paid from: Ordinary income -- -- Long-term capital gain -- -- AXP VP - Global Bond Fund Distributions paid from: Ordinary income 15,508,799 9,972,691 Long-term capital gain -- -- AXP VP - Growth Fund Distributions paid from: Ordinary income 354,762 -- Long-term capital gain -- -- AXP VP - High Yield Bond Fund Distributions paid from: Ordinary income 53,023,212 54,044,758 Long-term capital gain -- -- AXP VP - International Fund Distributions paid from: Ordinary income 5,547,305 13,108,123 Long-term capital gain -- 2,224,868 AXP VP - Managed Fund Distributions paid from: Ordinary income 60,600,462 77,891,964 Long-term capital gain 29,213,177 250,253,587
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 75
YEAR ENDED AUG. 31, 2003 2002 - ---------------------------------------------------------------------------------- AXP VP - New Dimensions Fund Distributions paid from: Ordinary income $ 18,140,932 $ 17,226,808 Long-term capital gain -- 3,533,136 AXP VP - Partners Small Cap Value Fund Distributions paid from: Ordinary income 407,236 -- Long-term capital gain 101 -- AXP VP - S&P 500 Index Fund Distributions paid from: Ordinary income 1,634,273 842,615 Long-term capital gain -- -- AXP VP - Short Duration U.S. Government Fund Distributions paid from: Ordinary income 11,091,527 5,713,659 Long-term capital gain 474,303 47,378 AXP VP - Small Cap Advantage Fund Distributions paid from: Ordinary income -- -- Long-term capital gain -- -- AXP VP - Stock Fund Distributions paid from: Ordinary income 48,267 18,391 Long-term capital gain -- -- AXP VP - Strategy Aggressive Fund Distributions paid from: Ordinary income -- -- Long-term capital gain -- --
As of Aug. 31, 2003, the components of distributable earnings on a tax basis for each Fund are as follows:
ACCUMULATED UNREALIZED UNDISTRIBUTED LONG-TERM APPRECIATION FUND ORDINARY INCOME GAIN (LOSS) (DEPRECIATION) - --------------------------------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund $ 128,967 $ (33,756,009) $ (413,202) AXP VP - Capital Resource Fund 2,665,168 (571,842,581) 95,934,885 AXP VP - Cash Management Fund 196,568 (3,091) -- AXP VP - Diversified Bond Fund 3,860,901 (139,636,838) (32,305,167) AXP VP - Diversified Equity Income Fund 807,977 (21,848,621) 20,766,903 AXP VP - Emerging Markets Fund 132,119 (1,685,173) 1,989,371 AXP VP - Equity Select Fund -- (929,452) 15,218,121 AXP VP - Global Bond Fund 1,561,440 (5,792,969) 6,675,110 AXP VP - Growth Fund -- (164,893,812) 12,999,316 AXP VP - High Yield Bond Fund 3,473,465 (300,351,153) 10,662,849 AXP VP - International Fund 3,765,642 (794,731,098) 26,220,989 AXP VP - Managed Fund 12,885,808 (149,722,831) 41,396,623 AXP VP - New Dimensions Fund 4,936,029 (512,441,380) 184,518,251 AXP VP - Partners Small Cap Value Fund 1,803,430 (231,273) 12,827,167 AXP VP - S&P 500 Index Fund 481,834 (2,590,558) (12,993,096) AXP VP - Short Duration U.S. Government Fund 2,618,148 411,876 (768,348) AXP VP - Small Cap Advantage Fund -- (9,684,863) 17,275,702 AXP VP - Stock Fund 13,257 (764,578) 777,723 AXP VP - Strategy Aggressive Fund -- (1,346,618,303) 51,809,499
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 76 DIVIDENDS As of Aug. 31, 2003, dividends declared for each Fund payable Sept. 2, 2003 are as follows:
FUND AMOUNT PER SHARE - ------------------------------------------------------------------------------------------ AXP VP - Blue Chip Advantage Fund $ 0.0142 AXP VP - Capital Resource Fund 0.0241 AXP VP - Cash Management Fund 0.0002 AXP VP - Diversified Bond Fund 0.0276 AXP VP - Diversified Equity Income Fund 0.0387 AXP VP - Emerging Markets 0.0067 AXP VP - Global Bond Fund 0.0195 AXP VP - High Yield Bond Fund 0.0396 AXP VP - International Fund 0.0256 AXP VP - Managed Fund 0.0699 AXP VP - New Dimensions Fund 0.0227 AXP VP - S&P 500 Index Fund 0.0199 AXP VP - Short Duration U.S. Government Fund 0.0161 AXP VP - Stock Fund 0.0092
Distributions to the subaccounts are recorded as of the close of business on the record date and are payable on the first business day following the record date. Dividends from net investment income are declared daily and distributed monthly, when available, for AXP VP - Cash Management Fund, AXP VP - Diversified Bond Fund, AXP VP - Global Bond, AXP VP - High Yield Bond Fund and AXP VP - Short Duration U.S. Government Fund and declared and distributed quarterly, when available, for AXP VP - Blue Chip Advantage Fund, AXP VP - Capital Resource Fund, AXP VP - Diversified Equity Income Fund, AXP VP - Emerging Markets Fund, AXP VP - Equity Select Fund, AXP VP - Growth Fund, AXP VP - International Fund, AXP VP - Managed Fund, AXP VP - New Dimensions Fund, AXP VP - Partners Small Cap Value Fund, AXP VP - S&P 500 Index Fund, AXP VP - Small Cap Advantage Fund, AXP VP - Stock Fund and AXP VP - Strategy Aggressive Fund. Capital gain distributions, when available, will be made annually. However, an additional capital gain distribution may be made during the fiscal year in order to comply with the Internal Revenue Code, as applicable to regulated investment companies. OTHER Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the security received. Interest income, including amortization of premium and discount using the effective interest method, is accrued daily. 2. EXPENSES The Funds have an Investment Management Services Agreement with IDS Life Insurance Company (IDS Life) for managing investments, record keeping and other services that are based solely on the assets of each Fund. Under an investment advisory agreement, IDS Life pays American Express Financial Corporation (AEFC) a fee for investment advice. Shareholders have approved a change to the Investment Management Services Agreement to combine all investment roles within AEFC. The Funds plan to implement this change of investment manager to AEFC in the near future. The management fee is a percentage of each Fund's average daily net assets in reducing percentages annually as follows: FUND PERCENTAGE RANGE - ------------------------------------------------------------------------------------------ AXP VP - Blue Chip Advantage Fund 0.560% to 0.470% AXP VP - Capital Resource Fund 0.630% to 0.570% AXP VP - Cash Management Fund 0.510% to 0.440% AXP VP - Diversified Bond Fund 0.610% to 0.535% AXP VP - Diversified Equity Income Fund 0.560% to 0.470% AXP VP - Emerging Markets Fund 1.170% to 1.095% AXP VP - Equity Select Fund 0.650% to 0.560% AXP VP - Global Bond Fund 0.840% to 0.780% AXP VP - Growth Fund 0.630% to 0.570% AXP VP - High Yield Bond Fund 0.620% to 0.545% AXP VP - International Fund 0.870% to 0.795% AXP VP - Managed Fund 0.630% to 0.550% AXP VP - New Dimensions Fund 0.630% to 0.570% AXP VP - Partners Small Cap Value Fund 1.020% to 0.920% AXP VP - S&P 500 Index Fund 0.290% to 0.260% AXP VP - Short Duration U.S. Government Fund 0.610% to 0.535% AXP VP - Small Cap Advantage Fund 0.790% to 0.650% AXP VP - Stock Fund 0.560% to 0.470% AXP VP - Strategy Aggressive Fund 0.650% to 0.575%
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 77 For the following Funds the fee may be adjusted upward or downward by a performance incentive adjustment. The adjustment is based on a comparison of the performance of each Fund to the stated index up to a maximum percentage of each Fund's average daily net assets after deducting 1% from the performance difference. If the performance difference is less than 1%, the adjustment will be zero. On Nov. 13, 2002, shareholders approved modification of the performance incentive adjustment calculation by adjusting the performance difference intervals, changing the maximum adjustment for some of the Funds and reducing the amount of the performance difference for which no adjustment is made to 0.50%. In addition, a performance incentive adjustment was added to five of the Funds for which the first adjustment was made on June 1, 2003 and covered the six-month period beginning Dec. 1, 2002. The index name, maximum percentage adjustment and the amount the fee was increased (decreased) for each Fund for the year ended Aug. 31, 2003 are as follows:
MAXIMUM MAXIMUM ADJUSTMENT ADJUSTMENT INDEX INCREASE FUND (PRIOR TO DEC. 1, 2002) (AFTER DEC. 1, 2002) NAME (DECREASE) - ----------------------------------------------------------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund 0.08% 0.12% Lipper Large-Cap Core Funds Index $ (17,027) AXP VP - Capital Resource Fund N/A 0.12% Lipper Large-Cap Core Funds Index 415,078 AXP VP - Diversified Equity Income Fund 0.08% 0.12% Lipper Equity Income Funds Index (92,950) AXP VP - Emerging Markets Fund 0.12% 0.12% Lipper Emerging Markets Funds Index (4,524) AXP VP - Equity Select Fund 0.12% 0.12% Lipper Mid-Cap Growth Funds Index 37,180 AXP VP - Growth Fund 0.12% 0.12% Lipper Large-Cap Growth Funds Index 37,751 AXP VP - International Fund N/A 0.12% Lipper International Funds Index (157,857) AXP VP - Managed Fund N/A 0.08% Lipper Balanced Funds Index 76,793 AXP VP - New Dimensions Fund N/A 0.12% Lipper Large-Cap Growth Funds Index (58,606) AXP VP - Partners Small Cap Value Fund 0.12% 0.12% Lipper Small-Cap Value Funds Index (30,309) AXP VP - Small Cap Advantage Fund 0.12% 0.12% Lipper Small-Cap Core Funds Index 11,741 AXP VP - Stock Fund 0.08% 0.12% Lipper Large-Cap Core Funds Index (951) AXP VP - Strategy Aggressive Fund N/A 0.12% Lipper Mid-Cap Growth Funds Index (148,057) - -----------------------------------------------------------------------------------------------------------------------------------
IDS Life, in turn, pays to American Express Financial Corporation (AEFC) a fee based on a percentage of each Fund's average daily net assets for the year. This fee is equal to 0.35% for AXP VP - Emerging Markets Fund and AXP VP - International Fund and 0.25% for each remaining Fund. AEFC has Subadvisory Agreements with American Express Asset Management International Inc., a wholly-owned subsidiary of AEFC to subadvise the assets of AXP VP - Emerging Markets Fund and AXP VP - International Fund and Kenwood Capital Management LLC, an indirect subsidiary of AEFC to subadvise the assets of AXP VP - Small Cap Advantage Fund. AEFC has Subadvisory Agreements with Royce & Associates, LLC (Royce), a wholly-owned subsidiary of Legg Mason, Third Avenue Management LLC (Third Avenue) and Goldman Sachs Asset Management, L.P. (GSAM) for AXP VP - Partners Small Cap Value Fund. Prior to Aug. 11, 2003, National City was allocated 50% of new investments in the Fund, net of any redemptions, while Royce and Third Avenue were each allocated 25%. Currently, AEFC anticipates allocating new assets so that over time each subadviser manages approximately one-third of AXP VP - Partners Small Cap Value Fund. Each subadviser's proportionate share of investments in AXP VP - Partners Small Cap Value Fund will vary due to market fluctuations. In addition to paying its own management fee, brokerage commissions, taxes and costs of certain legal services, each Fund will reimburse IDS Life an amount equal to the cost of certain expenses incurred and paid by IDS Life in connection with each Fund's operations. The Funds also pay custodian fees to American Express Trust Company, an affiliate of IDS Life. The reimbursement paid by AXP VP - Cash Management Fund will be limited to 0.25% of the Fund's average daily net assets. The Funds have an agreement with IDS Life for distribution services. Under a Plan and Agreement of Distribution, each Fund pays a fee at an annual rate up to 0.125% of each Fund's average daily net assets. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 78 The Funds have an Administrative Services Agreement with AEFC. Under this agreement, each Fund pays AEFC a fee for administration and accounting services at a percentage of each Fund's average daily net assets in reducing percentages annually as follows:
FUND PERCENTAGE RANGE - -------------------------------------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund 0.040% to 0.020% AXP VP - Capital Resource Fund 0.050% to 0.030% AXP VP - Cash Management Fund 0.030% to 0.020% AXP VP - Diversified Bond Fund 0.050% to 0.025% AXP VP - Diversified Equity Income Fund 0.040% to 0.020% AXP VP - Emerging Markets Fund 0.100% to 0.050% AXP VP - Equity Select Fund 0.060% to 0.030% AXP VP - Global Bond Fund 0.060% to 0.040% AXP VP - Growth Fund 0.050% to 0.030% AXP VP - High Yield Bond Fund 0.050% to 0.025% AXP VP - International Fund 0.060% to 0.035% AXP VP - Managed Fund 0.040% to 0.020% AXP VP - New Dimensions Fund 0.050% to 0.030% AXP VP - Partners Small Cap Value Fund 0.080% to 0.055% AXP VP - S&P 500 Index Fund 0.080% to 0.065% AXP VP - Short Duration U.S. Government Fund 0.050% to 0.025% AXP VP - Small Cap Advantage Fund 0.060% to 0.035% AXP VP - Stock Fund 0.040% to 0.020% AXP VP - Strategy Aggressive Fund 0.060% to 0.035%
A minor portion of additional administrative service expenses paid by the Funds are consultants' fees and fund office expenses. Under this agreement, the Funds also pay 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 Funds and approved by the board. For the year ended Aug. 31, 2003, AEFC waived certain fees and expenses to 1.75% for AXP VP - Emerging Markets Fund, 0.50% for AXP VP - S&P 500 Index Fund, and 1.10% for AXP VP - Stock Fund. In addition, IDS Life and AEFC have agreed to waive certain fees and expenses until April 30, 2004. Under this agreement, total expenses will not exceed the following percentage of the Fund's average daily net assets:
FUND PERCENTAGE - ------------------------------------------------------------------------------------------------------------ AXP VP - Emerging Markets Fund 1.750% AXP VP - Equity Select Fund 1.100% AXP VP - S&P 500 Index Fund 0.495% AXP VP - Stock Fund 1.100%
During the year ended Aug. 31, 2003, the Fund's custodian fees were reduced as a result of earnings credits from overnight cash balances as follows:
FUND REDUCTION - ------------------------------------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund $ 763 AXP VP - Capital Resource Fund 716 AXP VP - Cash Management Fund 282 AXP VP - Diversified Bond Fund 1,154 AXP VP - Diversified Equity Income Fund 806 AXP VP - Emerging Markets Fund 1,915 AXP VP - Equity Select Fund 2,194 AXP VP - Global Bond Fund 400 AXP VP - Growth Fund 1,120 AXP VP - High Yield Bond Fund 806 AXP VP - International Fund 475 AXP VP - Managed Fund 1,026 AXP VP - New Dimensions Fund 1,223 AXP VP - S&P 500 Index Fund 2,359 AXP VP - Short Duration U.S. Government Fund 381 AXP VP - Small Cap Advantage Fund 2,944 AXP VP - Stock Fund 1,982 AXP VP - Strategy Aggressive Fund 331
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 79 3. SECURITIES TRANSACTIONS For the year ended Aug. 31, 2003, cost of purchases and proceeds from sales of securities aggregated $5,797,015,537 and $6,045,692,491, respectively, for AXP VP - Cash Management Fund. Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated for each Fund are as follows:
FUND PURCHASES PROCEEDS - ------------------------------------------------------------------------------------------------------ AXP VP - Blue Chip Advantage Fund $ 50,214,915 $ 54,331,767 AXP VP - Capital Resource Fund 2,114,277,877 2,415,103,269 AXP VP - Diversified Bond Fund 4,415,259,393 4,396,786,112 AXP VP - Diversified Equity Income Fund 164,297,867 107,596,522 AXP VP - Emerging Markets Fund 24,822,981 21,152,765 AXP VP - Equity Select Fund 90,813,985 20,544,200 AXP VP - Global Bond Fund 327,526,881 270,710,960 AXP VP - Growth Fund 326,745,656 293,311,814 AXP VP - High Yield Bond Fund 1,105,778,030 905,873,451 AXP VP - International Fund 724,572,262 851,100,081 AXP VP - Managed Fund 2,792,536,323 3,269,351,210 AXP VP - New Dimensions Fund 660,619,120 916,910,222 AXP VP - Partners Small Cap Value Fund 107,493,520 69,332,848 AXP VP - S&P 500 Index Fund 61,917,771 6,672,193 AXP VP - Short Duration U.S. Government Fund 933,062,381 721,848,961 AXP VP - Small Cap Advantage Fund 107,203,992 85,241,265 AXP VP - Stock Fund 10,501,556 5,256,252 AXP VP - Strategy Aggressive Fund 239,701,093 411,580,608
Net realized gains and losses on investment sales are determined on an identified cost basis. Brokerage clearing fees paid to brokers affiliated with IDS Life for the year ended Aug. 31, 2003 are as follows:
FUND AMOUNT PAID - ------------------------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund $ 1,274 AXP VP - Capital Resource Fund 23,751 AXP VP - Diversified Equity Income Fund 9,635 AXP VP - Growth Fund 31,108 AXP VP - Managed Fund 172,596 AXP VP - New Dimensions Fund 32,412 AXP VP - Small Cap Advantage Fund 57 AXP VP - Strategy Aggressive Fund 18,428
Brokerage commissions paid to brokers affiliated with the subadvisers for AXP VP - - Partners Small Cap Value Fund were $74,790 for the year ended Aug. 31, 2003. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
YEAR ENDED AUG. 31, 2003 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - AXP VP - BLUE CHIP CAPITAL CASH ADVANTAGE RESOURCE MANAGEMENT FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 1,008,616 2,362,134 1,034,451,999 Issued for reinvested distributions 88,889 800,832 8,163,727 Redeemed (1,473,639) (28,451,446) (1,297,574,772) - ------------------------------------------------------------------------------------------------ Net increase (decrease) (376,134) (25,288,480) (254,959,046) - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - AXP VP - BLUE CHIP CAPITAL CASH ADVANTAGE RESOURCE MANAGEMENT FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 1,590,826 1,436,087 1,058,582,063 Issued for reinvested distributions 64,140 12,638,213 19,559,976 Redeemed (1,986,639) (35,665,988) (1,018,583,282) - ------------------------------------------------------------------------------------------------ Net increase (decrease) (331,673) (21,591,688) 59,558,757 - ------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 80
YEAR ENDED AUG. 31, 2003 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - AXP VP - DIVERSIFIED DIVERSIFIED EMERGING BOND EQUITY INCOME MARKETS FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 22,489,701 15,141,340 1,532,314 Issued for reinvested distributions 7,739,126 656,338 3,929 Redeemed (35,224,619) (9,246,293) (1,005,938) - ------------------------------------------------------------------------------------------------ Net increase (decrease) (4,995,792) 6,551,385 530,305 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 ----------------------------------------------------------------------------------------------- AXP VP - AXP VP - AXP VP - DIVERSIFIED DIVERSIFIED EMERGING BOND EQUITY INCOME MARKETS FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 32,427,670 29,435,932 675,358 Issued for reinvested distributions 8,842,954 319,622 147 Redeemed (19,778,881) (8,277,637) (131,141) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 21,491,743 21,477,917 544,364 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2003 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - EQUITY GLOBAL AXP VP - SELECT BOND GROWTH FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 8,836,598 8,750,558 15,981,122 Issued for reinvested distributions -- 1,621,030 70,858 Redeemed (384,943) (3,568,486) (3,986,581) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 8,451,655 6,803,102 12,065,399 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - EQUITY GLOBAL AXP VP - SELECT BOND GROWTH FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 8,511,084 6,018,539 5,979,237 Issued for reinvested distributions -- 893,799 -- Redeemed (1,507,262) (3,291,689) (4,397,794) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 7,003,822 3,620,649 1,581,443 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2003 - ------------------------------------------------------------------------------------------------ AXP VP - HIGH YIELD AXP VP - AXP VP - BOND INTERNATIONAL MANAGED FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 71,858,946 61,563,364 4,062,031 Issued for reinvested distributions 8,853,755 1,051,833 7,990,651 Redeemed (47,133,508) (84,683,630) (46,100,074) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 33,579,193 (22,068,433) (34,047,392) - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 - ------------------------------------------------------------------------------------------------ AXP VP - HIGH YIELD AXP VP - AXP VP - BOND INTERNATIONAL MANAGED FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 29,589,447 35,702,230 2,568,221 Issued for reinvested distributions 8,675,279 2,028,378 23,669,165 Redeemed (25,495,937) (68,997,946) (52,085,480) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 12,768,789 (31,267,338) (25,848,094) - ------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 81
YEAR ENDED AUG. 31, 2003 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - PARTNERS AXP VP - NEW SMALL CAP S&P 500 DIMENSIONS VALUE INDEX FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 15,280,603 5,477,129 10,815,463 Issued for reinvested distributions 1,422,655 41,935 229,997 Redeemed (31,925,693) (356,206) (1,925,880) - ------------------------------------------------------------------------------------------------ Net increase (decrease) (15,222,435) 5,162,858 9,119,580 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - PARTNERS AXP VP - NEW SMALL CAP S&P 500 DIMENSIONS VALUE INDEX FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 15,837,795 6,189,596 9,458,245 Issued for reinvested distributions 1,127,450 -- 88,952 Redeemed (35,154,263) (90,834) (1,004,336) - ------------------------------------------------------------------------------------------------ Net increase (decrease) (18,189,018) 6,098,762 8,542,861 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2003 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - SHORT DURATION SMALL CAP AXP VP - U.S. GOVERNMENT ADVANTAGE STOCK FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 25,859,995 2,733,191 806,564 Issued for reinvested distributions 1,092,715 -- 5,373 Redeemed (7,318,788) (445,359) (62,280) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 19,633,922 2,287,832 749,657 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 - ------------------------------------------------------------------------------------------------ AXP VP - AXP VP - SHORT DURATION SMALL CAP AXP VP - U.S. GOVERNMENT ADVANTAGE STOCK FUND FUND FUND - ------------------------------------------------------------------------------------------------ Sold 17,445,761 2,371,220 426,883 Issued for reinvested distributions 520,613 -- 1,527 Redeemed (2,116,788) (484,255) (27,812) - ------------------------------------------------------------------------------------------------ Net increase (decrease) 15,849,586 1,886,965 400,598 - ------------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2003 - --------------------------------------------------------------------------------------------- AXP VP - STRATEGY AGGRESSIVE FUND - --------------------------------------------------------------------------------------------- Sold 6,880,685 Issued for reinvested distributions -- Redeemed (41,451,528) - --------------------------------------------------------------------------------------------- Net increase (decrease) (34,570,843) - ---------------------------------------------------------------------------------------------
YEAR ENDED AUG. 31, 2002 - --------------------------------------------------------------------------------------------- AXP VP - STRATEGY AGGRESSIVE FUND - --------------------------------------------------------------------------------------------- Sold 10,311,970 Issued for reinvested distributions 341,129 Redeemed (56,399,156) - --------------------------------------------------------------------------------------------- Net increase (decrease) (45,746,057) - ---------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 82 5. FORWARD FOREIGN CURRENCY CONTRACTS As of Aug. 31, 2003, AXP VP - Emerging Markets Fund and AXP VP - Global Bond Fund have entered into forward foreign currency exchange contracts that obligate the Funds to deliver currencies at specified future dates. The unrealized appreciation and/or depreciation on these contracts is included in the accompanying financial statements. See "Summary of significant accounting policies." The terms of the open contracts are as follows: AXP VP - EMERGING MARKETS FUND
CURRENCY TO CURRENCY TO UNREALIZED UNREALIZED EXCHANGE DATE BE DELIVERED BE RECEIVED APPRECIATION DEPRECIATION - ---------------------------------------------------------------------------------------------------------------------------- Sept. 2, 2003 197,338 310,096 $ -- $ 2,043 British Pound U.S. Dollar Sept. 4, 2003 68,612 503,850 107 -- U.S. Dollar South African Rand Sept. 5, 2003 40,366 296,126 33 -- U.S. Dollar South African Rand - ---------------------------------------------------------------------------------------------------------------------------- $ 140 $ 2,043 - ----------------------------------------------------------------------------------------------------------------------------
AXP VP - GLOBAL BOND FUND
CURRENCY TO CURRENCY TO UNREALIZED UNREALIZED EXCHANGE DATE BE DELIVERED BE RECEIVED APPRECIATION DEPRECIATION - ---------------------------------------------------------------------------------------------------------------------------- Sept. 2, 2003 621,638 394,917 $ 3,021 $ -- U.S. Dollar British Pound Sept. 2, 2003 622,813 872,997 6,533 -- U.S. Dollar Canadian Dollar Sept. 2, 2003 4,228,016 3,879,982 31,815 -- U.S. Dollar European Monetary Unit Sept. 2, 2003 601,986 142,110,780 2,895 -- U.S. Dollar Hungarian Forint Sept. 24, 2003 5,862,647 700,000,000 140,714 -- U.S. Dollar Japanese Yen Oct. 2, 2003 1,532,304 2,400,000 16,549 -- U.S. Dollar Australian Dollar - ---------------------------------------------------------------------------------------------------------------------------- $ 201,527 $ -- - ----------------------------------------------------------------------------------------------------------------------------
6. LENDING OF PORTFOLIO SECURITIES Presented below is information regarding securities on loan as of Aug. 31, 2003.
AXP VP - AXP VP - AXP VP - AXP VP - DIVERSIFIED BOND DIVERSIFIED EQUITY GLOBAL BOND MANAGED FUND INCOME FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------------- Value of securities on loan to brokers $ 70,628,180 $ 2,837,600 $ 4,916,400 $ 24,397,031 - ------------------------------------------------------------------------------------------------------------------------------- Collateral received for securities loaned: Cash $ 68,747,726 $ 2,858,000 $ 5,037,500 $ 24,896,500 U.S. government securities, at value 3,116,537 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total collateral received for securities loaned $ 71,864,263 $ 2,858,000 $ 5,037,500 $ 24,896,500 - -------------------------------------------------------------------------------------------------------------------------------
AXP VP - AXP VP - NEW STRATEGY DIMENSIONS AGGRESSIVE FUND FUND - ------------------------------------------------------------------------------------------------------------------------------- Value of securities on loan to brokers $ 42,274,460 $ 7,171,125 - ------------------------------------------------------------------------------------------------------------------------------- Collateral received for securities loaned: Cash $ 39,698,400 $ 7,475,000 U.S. government securities, at value 3,319,751 -- - ------------------------------------------------------------------------------------------------------------------------------- Total collateral received for securities loaned $ 43,018,151 $ 7,475,000 - -------------------------------------------------------------------------------------------------------------------------------
Income from securities lending amounted to $6,837, $255,949, $27,611, $3,756, $7,501, $364,960, $135,467, $31,473, $13,595 and $56,618 for AXP VP - Capital Resource Fund, AXP VP - Diversified Bond Fund, AXP VP - Diversified Equity Income Fund, AXP VP - Global Bond Fund, AXP VP - Growth Fund, AXP VP - International Fund, AXP VP - Managed Fund, AXP VP - New Dimensions Fund, AXP VP - - Small Cap Advantage Fund and AXP VP - Strategy Aggressive Fund, respectively, for the year ended Aug. 31, 2003. The risks to each Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 83 7. FUTURES CONTRACTS As of Aug. 31, 2003, AXP VP - Blue Chip Advantage Fund's investments in securities included securities valued at $333,562 that were pledged as collateral to cover initial margin deposits on 47 open purchase stock index futures contracts. The notional market value of the open purchase stock index futures contracts as of Aug. 31, 2003 was $2,368,095 with a net unrealized gain of $40,987. See "Summary of significant accounting policies." As of Aug. 31, 2003, AXP VP - Diversified Bond Fund's investments in securities included securities valued at $4,076,171 that were pledged as collateral to cover initial margin deposits on 743 open purchase interest rate futures contracts and 1,621 open sale interest rate futures contracts. The notional market value of the open purchase interest rate futures contracts as of Aug. 31, 2003 was $179,523,813 with a net unrealized loss of $1,398,297. The notional market value of the open sale interest rate futures contracts as of Aug. 31, 2003 was $178,611,251 with a net unrealized gain of $2,364,814. See "Summary of significant accounting policies." As of Aug. 31, 2003, AXP VP - Global Bond Fund's investments in securities included securities valued at $458,265 that were pledged as collateral to cover initial margin deposits on 28 open purchase interest rate futures contracts denominated in Euros and 125 open purchase interest rate futures contracts. The notional market value of the open purchase interest rate futures contracts denominated in Euros as of Aug. 31, 2003 was $3,513,103 with a net unrealized loss of $110,615. The notional market value of the open purchase interest rate futures contracts as of Aug. 31, 2003 was $30,203,219 with a net unrealized loss of $235,031. See "Summary of significant accounting policies." As of Aug. 31, 2003, AXP VP - Managed Fund's investments in securities included securities valued at $1,032,402 that were pledged as collateral to cover initial margin deposits on 544 open purchase interest rate futures contracts and 460 open sale interest rate futures contracts. The notional market value of the open purchase interest rate futures contracts as of Aug. 31, 2003 was $103,637,925 with a net unrealized loss of $642,418. The notional market value of the open sale interest rate futures contracts as of Aug. 31, 2003 was $50,667,626 with a net unrealized gain of $590,152. See "Summary of significant accounting policies." As of Aug. 31, 2003, AXP VP - S&P 500 Index Fund's investments in securities included securities valued at $727,460 that were pledged as collateral to cover initial margin deposits on 63 open purchase stock index futures contracts. The notional market value of the open purchase stock index futures contracts as of Aug. 31, 2003 was $3,174,255 with a net unrealized gain of $43,842. See "Summary of significant accounting policies." As of Aug. 31, 2003, AXP VP - Short Duration U.S. Government Fund's investments in securities included securities valued at $1,366,369 that were pledged as collateral to cover initial margin deposits on 367 open purchase interest rate futures contracts and 864 open sale interest rate futures contracts. The notional market value of the open purchase interest rate futures contracts as of Aug. 31, 2003 was $84,154,513 with a net unrealized loss of $247,093. The notional market value of the open sale interest rate futures contracts as of Aug. 31, 2003 was $94,977,175 with a net unrealized loss of $9,388. See "Summary of significant accounting policies." 8. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written by AXP VP - Diversified Bond Fund during the year ended Aug. 31, 2003 are as follows:
CALLS PUTS - ------------------------------------------------------------------------------------------------------------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2002 -- $ -- -- $ -- Opened 4,684 3,469,760 3,835 1,581,732 Closed (3,987) (3,054,872) (3,038) (1,314,089) Exercised -- -- -- -- Expired (500) (37,065) (600) (86,821) - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2003 197 $ 377,823 197 $ 180,822 - -------------------------------------------------------------------------------------------------------------------------
See "Summary of significant accounting policies." Contracts and premiums associated with options contracts written by AXP VP - Global Bond Fund during the year ended Aug. 31, 2003 are as follows:
CALLS PUTS - ------------------------------------------------------------------------------------------------------------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2002 -- $ -- -- $ -- Opened 547 501,500 225 148,960 Closed (514) (438,210) (192) (118,670) - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2003 33 $ 63,290 33 $ 30,290 - -------------------------------------------------------------------------------------------------------------------------
See "Summary of significant accounting policies." AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 84 Contracts and premiums associated with options on futures contracts written by AXP VP - Managed Fund during the year ended Aug. 31, 2003 are as follows:
CALLS PUTS - ------------------------------------------------------------------------------------------------------------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2002 -- $ -- -- $ -- Opened 2,110 1,573,815 1,788 729,800 Closed (1,808) (1,387,334) (1,444) (611,222) Exercised -- -- -- -- Expired (213) (15,789) (255) (36,887) - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2003 89 $ 170,692 89 $ 81,691 - -------------------------------------------------------------------------------------------------------------------------
See "Summary of significant accounting policies." Contracts and premiums associated with options contracts written by AXP VP - New Dimensions Fund during the year ended Aug. 31, 2003 are as follows:
CALLS - ------------------------------------------------------------------------------------------------------------------------- CONTRACTS PREMIUMS - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2002 -- $ -- Opened 1,800 180,000 Closed -- -- Exercised -- -- Expired (1,800) (180,000) - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2003 -- $ -- - -------------------------------------------------------------------------------------------------------------------------
See "Summary of significant accounting policies." Contracts and premiums associated with options contracts written by AXP VP - Short Duration U.S. Government Fund during the year ended Aug. 31, 2003 are as follows:
CALLS PUTS - ------------------------------------------------------------------------------------------------------------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2002 89 $ 99,503 -- $ -- Opened 989 683,483 698 278,960 Closed (939) (627,276) (469) (194,423) Exercised (75) (87,747) (25) (8,884) Expired (14) (15,038) (144) (21,518) - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2003 50 $ 52,925 60 $ 54,135 - -------------------------------------------------------------------------------------------------------------------------
See "Summary of significant accounting policies." Contracts and premiums associated with options contracts written by AXP VP - Strategy Aggressive Fund during the year ended Aug. 31, 2003 are as follows:
PUTS - ------------------------------------------------------------------------------------------------------------------------- CONTRACTS PREMIUMS - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2002 1,050 $ 170,095 Opened -- -- Closed (1,050) (170,095) Exercised -- -- Expired -- -- - ------------------------------------------------------------------------------------------------------------------------- Balance Aug. 31, 2003 -- $ -- - -------------------------------------------------------------------------------------------------------------------------
See "Summary of significant accounting policies." AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 85 9. CAPITAL LOSS CARRY-OVER For federal income tax purposes, capital loss carry-overs as of Aug. 31, 2003 are as follows:
FUND CARRY-OVER EXPIRATION DATE - ---------------------------------------------------------------------------------------------------- AXP VP - Blue Chip Advantage Fund $ 33,756,009 2008-2012 AXP VP - Capital Resource Fund 571,842,581 2010-2012 AXP VP - Cash Management Fund 3,091 2008 AXP VP - Diversified Bond Fund 139,636,838 2007-2011 AXP VP - Diversified Equity Income Fund 21,848,621 2010-2012 AXP VP - Emerging Markets Fund 1,685,173 2009-2012 AXP VP - Equity Select Fund 929,452 2011 AXP VP - Global Bond Fund 5,792,969 2008-2010 AXP VP - Growth Fund 164,893,812 2008-2012 AXP VP - High Yield Bond Fund 300,351,153 2007-2012 AXP VP - International Fund 794,731,098 2010-2012 AXP VP - Managed Fund 149,722,831 2011-2012 AXP VP - New Dimensions Fund 512,441,380 2010-2012 AXP VP - Partners Small Cap Value Fund 231,273 2012 AXP VP - S&P 500 Index Fund 2,590,558 2009-2011 AXP VP - Small Cap Advantage Fund 9,684,863 2009-2012 AXP VP - Stock Fund 764,578 2009-2012 AXP VP - Strategy Aggressive Fund 1,346,618,303 2009-2012
It is unlikely the board will authorize a distribution of any net realized capital gains for a Fund until its capital loss carry-over has been offset or expires. 10. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating each Fund's results. AXP VP - BLUE CHIP ADVANTAGE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 6.57 $ 8.14 $ 11.62 $ 9.78 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .06 .05 .07 .02 Net gains (losses) (both realized and unrealized) .57 (1.57) (3.47) 1.85 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .63 (1.52) (3.40) 1.87 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.06) (.05) (.08) (.03) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 7.14 $ 6.57 $ 8.14 $ 11.62 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 66 $ 63 $ 81 $ 71 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .80% .79% .78% .95%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .96% .68% .81% .34%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 87% 143% 124% 226% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 9.60% (18.67%) (29.40%) 19.13%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses would have been 0.96% for the period ended Aug. 31, 2000. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 86 AXP VP - CAPITAL RESOURCE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 16.48 $ 20.87 $ 37.21 $ 34.62 $ 26.80 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .10 .10 .05 .01 .06 Net gains (losses) (both realized and unrealized) 1.56 (2.83) (12.96) 6.20 10.28 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.66 (2.73) (12.91) 6.21 10.34 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.10) (.09) (.04) (.01) (.06) Distributions from realized gains -- (1.57) (3.39) (3.61) (2.46) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.10) (1.66) (3.43) (3.62) (2.52) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 18.04 $ 16.48 $ 20.87 $ 37.21 $ 34.62 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 1,982 $ 2,227 $ 3,270 $ 5,920 $ 5,621 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .85% .80% .78% .77% .66% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .62% .52% .13% (.02%) .17% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 115% 146% 62% 52% 56% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 10.16% (14.08%) (36.48%) 19.26% 40.12% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - CASH MANAGEMENT FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .01 .02 .05 .05 .05 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.01) (.02) (.05) (.05) (.05) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 868 $ 1,123 $ 1,063 $ 783 $ 690 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .70% .69% .68% .68% .56% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .72% 1.61% 4.76% 5.38% 4.60% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) .72% 1.59% 4.94% 5.52% 4.72% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 87 AXP VP - DIVERSIFIED BOND FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 10.38 $ 10.61 $ 10.29 $ 10.56 $ 11.08 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .44 .56 .70 .75 .79 Net gains (losses) (both realized and unrealized) .02 (.23) .30 (.27) (.52) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .46 .33 1.00 .48 .27 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.44) (.56) (.68) (.75) (.77) Distributions from realized gains -- -- -- -- (.02) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.44) (.56) (.68) (.75) (.79) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.40 $ 10.38 $ 10.61 $ 10.29 $ 10.56 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 1,765 $ 1,814 $ 1,626 $ 1,468 $ 1,750 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .81% .80% .80% .79% .68% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 4.23% 5.41% 6.72% 7.30% 7.22% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 251% 167% 122% 70% 68% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 4.50% 3.20% 10.07% 4.69% 2.40% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - DIVERSIFIED EQUITY INCOME FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.41 $ 10.20 $ 10.05 $ 9.76 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .17 .13 .11 .10 Net gains (losses) (both realized and unrealized) 1.24 (1.75) .15 .30 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.41 (1.62) .26 .40 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.17) (.13) (.11) (.11) Distributions from realized gains -- (.04) -- -- - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.17) (.17) (.11) (.11) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 9.65 $ 8.41 $ 10.20 $ 10.05 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 370 $ 267 $ 106 $ 23 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .76% .87% .91%(d) .95%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.13% 1.59% 1.49% 1.42%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 39% 35% 68% 53% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 17.00% (16.16%) 2.56% 4.21%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.17% and 1.49% for the periods ended Aug. 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 88 AXP VP - EMERGING MARKETS FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 7.04 $ 6.68 $ 9.61 $ 10.23 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .04 .02 .01 (.01) Net gains (losses) (both realized and unrealized) 1.38 .34 (2.94) (.60) - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.42 .36 (2.93) (.61) - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.02) -- -- -- Tax return of capital -- -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.02) -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 8.44 $ 7.04 $ 6.68 $ 9.61 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 16 $ 10 $ 6 $ 6 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.75% 1.68% 1.75% 1.69%(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .67% .31% .20% (.36%)(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 191% 215% 203% 37% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 20.25% 5.45% (30.49%) (6.03%)(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 1, 2000 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 2.04%, 2.36%, 3.49% and 2.42% for the periods ended Aug. 31, 2003, 2002, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AXP VP - EQUITY SELECT FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.54 $ 9.57 $ 10.27 - ------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.05) (.04) (.01) Net gains (losses) (both realized and unrealized) 1.60 (.99) (.69) - ------------------------------------------------------------------------------------------------------ Total from investment operations 1.55 (1.03) (.70) - ------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 10.09 $ 8.54 $ 9.57 - ------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 170 $ 72 $ 14 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) 1.06% 1.10%(d) 1.10%(d),(f) - ------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets (.71%) (.76%) (.45%)(f) - ------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 19% 20% 19% - ------------------------------------------------------------------------------------------------------ Total return(e) 18.20% (10.77%) (6.82%)(g) - ------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 1, 2001 (date the Fund became available) to Aug. 31, 2001. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.39% and 2.99% for the periods ended Aug. 31, 2002 and 2001, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 89 AXP VP - GLOBAL BOND FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 10.02 $ 9.76 $ 9.34 $ 9.84 $ 10.09 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .34 .38 .43 .32 .55 Net gains (losses) (both realized and unrealized) .61 .36 .23 (.51) (.29) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .95 .74 .66 (.19) .26 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.57) (.48) (.24) (.31) (.51) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.40 $ 10.02 $ 9.76 $ 9.34 $ 9.84 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 312 $ 233 $ 191 $ 177 $ 197 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.09% 1.08% 1.07% 1.07% .96% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 3.08% 3.92% 4.54% 4.81% 5.36% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 102% 46% 34% 50% 56% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 9.56% 7.83% 7.14% (1.90%) 2.50% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - GROWTH FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 5.00 $ 6.48 $ 13.46 $ 9.72 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .01 -- (.01) -- Net gains (losses) (both realized and unrealized) .45 (1.48) (6.97) 3.75 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .46 (1.48) (6.98) 3.75 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.01) -- -- -- Tax return of capital -- -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.01) -- -- (.01) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 5.45 $ 5.00 $ 6.48 $ 13.46 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 223 $ 144 $ 177 $ 195 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .99% .81% .90%(d) .95%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .20% --% (.19%) (.09%)(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 199% 272% 41% 17% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 9.29% (22.80%) (51.87%) 38.59%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 0.91% and 0.97% for the periods ended Aug 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 90 AXP VP - HIGH YIELD BOND FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 5.66 $ 6.83 $ 7.76 $ 8.75 $ 9.54 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .48 .56 .79 .85 .92 Net gains (losses) (both realized and unrealized) .54 (1.17) (.95) (.99) (.69) - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.02 (.61) (.16) (.14) .23 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.46) (.56) (.77) (.85) (.92) Distributions from realized gains -- -- -- -- (.10) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.46) (.56) (.77) (.85) (1.02) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 6.22 $ 5.66 $ 6.83 $ 7.76 $ 8.75 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 843 $ 577 $ 609 $ 595 $ 638 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .83% .83% .82% .82% .70% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 8.31% 8.91% 11.04% 10.35% 10.17% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 141% 135% 86% 63% 50% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 18.81% (9.33%) (1.89%) (1.59%) 2.61% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - INTERNATIONAL FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 7.00 $ 8.39 $ 16.98 $ 17.26 $ 14.25 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .07 .03 .06 .12 Net gains (losses) (both realized and unrealized) .16 (1.35) (5.57) 2.50 3.04 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations .24 (1.28) (5.54) 2.56 3.16 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.05) (.07) (.03) (.01) (.07) Distributions from realized gains -- (.01) (2.97) (2.83) (.08) Excess distributions from net investment income -- (.03) (.05) -- -- - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.05) (.11) (3.05) (2.84) (.15) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 7.19 $ 7.00 $ 8.39 $ 16.98 $ 17.26 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 738 $ 873 $ 1,310 $ 2,389 $ 2,221 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) 1.06% 1.07% 1.04% 1.02% .94% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.19% .83% .31% .27% .70% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 102% 140% 278% 118% 102% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 3.48% (15.38%) (36.90%) 14.74% 22.18% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 91 AXP VP - MANAGED FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 12.32 $ 15.30 $ 20.81 $ 18.84 $ 17.25 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .31 .33 .44 .47 .50 Net gains (losses) (both realized and unrealized) .82 (1.88) (4.32) 2.85 3.29 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.13 (1.55) (3.88) 3.32 3.79 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.31) (.34) (.39) (.48) (.49) Distributions from realized gains (.14) (1.09) (1.24) (.87) (1.71) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.45) (1.43) (1.63) (1.35) (2.20) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 13.00 $ 12.32 $ 15.30 $ 20.81 $ 18.84 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 2,416 $ 2,709 $ 3,759 $ 5,223 $ 5,046 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .80% .77% .76% .75% .63% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.48% 2.31% 2.46% 2.37% 2.62% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 119% 103% 63% 49% 44% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 9.40% (10.91%) (19.37%) 18.42% 22.98% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AXP VP - NEW DIMENSIONS FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 13.06 $ 15.49 $ 25.03 $ 18.87 $ 13.29 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .07 .02 .03 .06 Net gains (losses) (both realized and unrealized) 1.23 (2.42) (8.01) 6.34 5.60 - --------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.31 (2.35) (7.99) 6.37 5.66 - --------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.07) (.02) (.04) (.06) Distributions from realized gains -- (.01) (1.53) (.17) (.02) - --------------------------------------------------------------------------------------------------------------------------- Total distributions (.08) (.08) (1.55) (.21) (.08) - --------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 14.29 $ 13.06 $ 15.49 $ 25.03 $ 18.87 - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 3,115 $ 3,045 $ 3,892 $ 5,564 $ 3,538 - --------------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .82% .79% .79% .78% .68% - --------------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .64% .47% .12% .15% .34% - --------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 23% 27% 27% 28% 27% - --------------------------------------------------------------------------------------------------------------------------- Total return(c) 10.11% (15.17%) (33.05%) 34.01% 42.61% - ---------------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 credit on cash balances. (c) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 92 AXP VP - PARTNERS SMALL CAP VALUE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 9.52 $ 9.84 $ 10.01 - ------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.03) (.03) (.01) Net gains (losses) (both realized and unrealized) 1.95 (.29) (.16) - ------------------------------------------------------------------------------------------------------ Total from investment operations 1.92 (.32) (.17) - ------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS: Dividends from net investment income (.01) -- -- Distributions from realized gains (.04) -- -- - ------------------------------------------------------------------------------------------------------ Total distributions (.05) -- -- - ------------------------------------------------------------------------------------------------------ Net asset value, end of period $ 11.39 $ 9.52 $ 9.84 - ------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 134 $ 63 $ 5 - ------------------------------------------------------------------------------------------------------ Ratio of expenses to average daily net assets(c) 1.55% 1.48% 1.50%(d),(f) - ------------------------------------------------------------------------------------------------------ Ratio of net investment income (loss) to average daily net assets (.43%) (.67%) (1.15%)(f) - ------------------------------------------------------------------------------------------------------ Portfolio turnover rate (excluding short-term securities) 87% 12% --% - ------------------------------------------------------------------------------------------------------ Total return(e) 20.24% (3.19%) (1.77%)(g) - ------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Aug. 14, 2001 (date the Fund became available) to Aug. 31, 2001. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses would have been 6.86% for the period ended Aug. 31, 2001. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 93 AXP VP - S&P 500 INDEX FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 6.24 $ 7.71 $ 10.38 $ 10.06 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .08 .07 .06 .02 Net gains (losses) (both realized and unrealized) .64 (1.47) (2.65) .33 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .72 (1.40) (2.59) .35 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.08) (.07) (.06) (.03) Distributions from realized gains -- -- (.02) -- - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.08) (.07) (.08) (.03) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 6.88 $ 6.24 $ 7.71 $ 10.38 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 171 $ 99 $ 56 $ 21 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) .50% .50% .49% .48%(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 1.31% 1.01% .85% .72%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 5% 72% 137% 44% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 11.51% (18.29%) (24.96%) 3.49%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from May 1, 2000 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 0.64%, 0.82%, 1.31% and 1.57% for the periods ended Aug. 31, 2003, 2002, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 94 AXP VP - SHORT DURATION U.S. GOVERNMENT FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 10.55 $ 10.34 $ 9.95 $ 10.02 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .27 .34 .52 .51 Net gains (losses) (both realized and unrealized) (.05) .23 .39 (.06) - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations .22 .57 .91 .45 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.27) (.34) (.52) (.52) Distributions from realized gains (.04) (.02) -- -- - ---------------------------------------------------------------------------------------------------------------------- Total distributions (.31) (.36) (.52) (.52) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.46 $ 10.55 $ 10.34 $ 9.95 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 479 $ 276 $ 106 $ 37 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) .82% .83% .84%(d) .87%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets 2.47% 3.24% 4.94% 5.49%(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 179% 292% 95% 67% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 2.06% 5.42% 9.29% 4.64%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 0.87% and 0.89% for the periods ended Aug. 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AXP VP - SMALL CAP ADVANTAGE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.79 $ 10.13 $ 12.58 $ 9.90 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.02) (.02) (.01) (.02) Net gains (losses) (both realized and unrealized) 2.48 (1.32) (2.09) 2.78 - ---------------------------------------------------------------------------------------------------------------------- Total from investment operations 2.46 (1.34) (2.10) 2.76 - ---------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Distributions from realized gains -- -- (.35) (.08) - ---------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.25 $ 8.79 $ 10.13 $ 12.58 - ---------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 102 $ 59 $ 49 $ 31 - ---------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c) 1.19% 1.11% 1.16%(d) 1.19%(d),(f) - ---------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets (.20%) (.21%) (.08%) (.24%)(f) - ---------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 124% 156% 152% 169% - ---------------------------------------------------------------------------------------------------------------------- Total return(e) 27.96% (13.28%) (16.68%) 28.19%(g) - ----------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Sept. 15, 1999 (date the Fund became available) to Aug. 31, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.26% and 1.43% for the periods ended Aug. 31, 2001 and 2000, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 95 AXP VP - STOCK FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001(b) PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 8.00 $ 9.52 $ 9.82 - ------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) .05 .05 .01 Net gains (losses) (both realized and unrealized) .48 (1.52) (.30) - ------------------------------------------------------------------------------------------------------------- Total from investment operations .53 (1.47) (.29) - ------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income (.05) (.05) (.01) - ------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 8.48 $ 8.00 $ 9.52 - ------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 12 $ 5 $ 2 - ------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(c),(d) 1.10% 1.10% 1.10%(f) - ------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets .62% .56% .90%(f) - ------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 76% 93% 4% - ------------------------------------------------------------------------------------------------------------- Total return(e) 6.65% (15.53%) (2.97%)(g) - -------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from Aug. 13, 2001 (date the Fund became available) to Aug. 31, 2001. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses would have been 1.81%, 2.44% and 11.36% for the periods ended Aug. 31, 2003, 2002 and 2001, respectively. (e) Total return does not reflect payment of the expenses that apply to the variable accounts or any annuity charges. (f) Adjusted to an annual basis. (g) Not annualized. AXP VP - STRATEGY AGGRESSIVE FUND
FISCAL PERIOD ENDED AUG. 31, 2003 2002 2001 2000 1999 PER SHARE INCOME AND CAPITAL CHANGES(a) Net asset value, beginning of period $ 5.72 $ 8.29 $ 27.82 $ 16.46 $ 13.10 - ------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (.03) (.04) .01 .01 .05 Net gains (losses) (both realized and unrealized) 1.30 (2.53) (13.01) 13.17 4.36 - ------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.27 (2.57) (13.00) 13.18 4.41 - ------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from net investment income -- -- (.02) -- (.05) Distributions from realized gains -- -- (6.51) (1.82) (1.00) - ------------------------------------------------------------------------------------------------------------------- Total distributions -- -- (6.53) (1.82) (1.05) - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 6.99 $ 5.72 $ 8.29 $ 27.82 $ 16.46 - ------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in millions) $ 969 $ 991 $ 1,815 $ 4,197 $ 2,327 - ------------------------------------------------------------------------------------------------------------------- Ratio of expenses to average daily net assets(b) .83% .81% .78% .77% .67% - ------------------------------------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average daily net assets (.54%) (.50%) .10% .04% .31% - ------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate (excluding short-term securities) 27% 180% 166% 143% 207% - ------------------------------------------------------------------------------------------------------------------- Total return(c) 22.16% (30.97%) (53.61%) 84.97% 35.27% - -------------------------------------------------------------------------------------------------------------------
NOTES TO FINANCIAL HIGHLIGHTS (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 the expenses that apply to the variable accounts or any annuity charges. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 96 INVESTMENTS IN SECURITIES AXP VP - BLUE CHIP ADVANTAGE FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (95.6%) AEROSPACE & DEFENSE (1.8%) General Dynamics 1,350 $ 116,249 Lockheed Martin 1,500 76,845 Northrop Grumman 1,250 119,350 Raytheon 7,800 250,068 Rockwell Automation 7,200 195,984 Rockwell Collins 3,600 97,380 United Defense Inds 3,850(b) 108,955 United Technologies 3,150 252,787 ------------------ Total 1,217,618 - ----------------------------------------------------------------------------------------------------------------- AIRLINES (0.1%) Southwest Airlines 5,250 89,723 - ----------------------------------------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (1.7%) Autoliv 2,900(c) 87,609 Delphi 24,100 218,346 Eaton 2,300 215,372 Ford Motor 25,850 298,826 PACCAR 1,550 132,060 Snap-On 4,700 138,650 ------------------ Total 1,090,863 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (7.9%) AmSouth Bancorporation 5,350 115,239 Bank of America 14,050 1,113,462 Charter One Financial 6,500 201,500 FleetBoston Financial 12,150 359,519 Golden West Financial 2,500 215,675 GreenPoint Financial 11,025(d) 373,527 KeyCorp 4,500 122,310 Natl City 13,600 430,848 Regions Financial 3,250 114,595 U.S. Bancorp 18,050 431,395 Wachovia 16,150 680,722 Washington Mutual 15,650 610,037 Wells Fargo 8,550 428,697 ------------------ Total 5,197,526 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (2.4%) Altria Group 13,650 562,653 Coca-Cola 15,950 694,144 Fortune Brands 1,000 56,400 PepsiCo 5,700 253,878 ------------------ Total 1,567,075 - ----------------------------------------------------------------------------------------------------------------- BROKER DEALERS (2.5%) Bear Stearns Companies 2,450 171,451 E*TRADE Group 9,900(b) 91,377 J.P. Morgan Chase 24,700 845,234 Lehman Brothers Holdings 2,600 170,898 Morgan Stanley 7,350 358,607 ------------------ Total 1,637,567 - ----------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.2%) Sherwin-Williams 4,450 133,856 - ----------------------------------------------------------------------------------------------------------------- CABLE (0.7%) Comcast Cl A 15,200(b) $ 452,200 - ----------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.4%) AT&T Wireless Services 18,300(b) 157,746 Nextel Communications Cl A 6,950(b) 133,996 ------------------ Total 291,742 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (0.6%) Dow Chemical 6,200 214,086 Rohm & Haas 3,250 118,073 Sigma-Aldrich 1,600 87,600 ------------------ Total 419,759 - ----------------------------------------------------------------------------------------------------------------- COMPUTER HARDWARE (4.6%) Cisco Systems 31,800(b) 608,970 Dell 20,450(b) 667,283 EMC 28,350(b) 361,463 Hewlett-Packard 20,600 410,352 Lexmark Intl Cl A 3,500(b) 234,640 NVIDIA 13,050(b) 236,988 SanDisk 2,950(b) 178,357 Storage Technology 9,500(b) 243,295 Sun Microsystems 21,800(b) 84,148 ------------------ Total 3,025,496 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (10.5%) BMC Software 10,650(b) 156,342 Citrix Systems 18,450(b) 379,886 Computer Associates Intl 10,900 279,367 Computer Sciences 2,900(b) 123,453 Comverse Technology 12,700(b) 209,423 Convergys 8,600(b) 154,800 Electronic Arts 4,550(b) 408,363 Fair, Isaac & Co 2,450 143,570 First Data 5,850 224,640 Intl Business Machines 13,650 1,119,436 Macromedia 7,200(b) 171,648 Microsoft 77,250 2,048,669 Oracle 60,750(b) 776,385 Siebel Systems 9,900(b) 99,792 SunGard Data Systems 4,250(b) 119,850 Symantec 6,500(b) 373,295 VERITAS Software 5,950(b) 205,156 ------------------ Total 6,994,075 - ----------------------------------------------------------------------------------------------------------------- ELECTRONICS (3.0%) Altera 15,300(b) 343,332 Avnet 5,800(b) 104,690 Intel 47,900 1,370,898 Xerox 16,800(b) 181,104 ------------------ Total 2,000,024 - ----------------------------------------------------------------------------------------------------------------- ENERGY (5.4%) Anadarko Petroleum 5,400 $ 234,900 Burlington Resources 2,700 130,734 ChevronTexaco 8,200 597,534 ConocoPhillips 4,800 268,032 Exxon Mobil 45,050 1,698,385 Kerr-McGee 2,800 123,060 Occidental Petroleum 7,500 257,475 Pogo Producing 3,250 149,370 Unocal 3,700 113,294 ------------------ Total 3,572,784 - ----------------------------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (0.2%) Transocean 5,000(b) 105,600 - ----------------------------------------------------------------------------------------------------------------- FINANCE COMPANIES (2.5%) Citigroup 38,150 1,653,803 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (2.0%) Countrywide Financial 6,300 427,455 Fannie Mae 2,900 187,891 Freddie Mac 7,700 409,255 MBNA 12,500 291,750 ------------------ Total 1,316,351 - ----------------------------------------------------------------------------------------------------------------- FOOD (1.2%) ConAgra Foods 17,850 392,700 Heinz (HJ) 3,950 127,822 Sara Lee 13,900 263,822 ------------------ Total 784,344 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (10.3%) Amgen 9,400(b) 619,460 Bard (CR) 1,250 83,750 Bausch & Lomb 2,600 109,616 Beckman Coulter 7,100 314,885 Becton, Dickinson & Co 4,150 151,641 Biogen 1,000(b) 39,460 Boston Scientific 3,750(b) 225,375 Chiron 1,250(b) 63,525 Genzyme 1,450(b) 68,368 Guidant 8,550 429,210 Johnson & Johnson 15,800 783,363 Lilly (Eli) 3,150 209,570 Medco Health Solutions 1(b) 21 Medicis Pharmaceutical Cl A 2,100 128,268 MedImmune 1,700(b) 59,279 Medtronic 4,150 205,757 Merck & Co 17,950 903,243 Mylan Laboratories 4,400 160,160 Pfizer 53,300 1,594,735 St. Jude Medical 5,600(b) 291,592 Wyeth 7,750 332,088 ------------------ Total 6,773,366 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 97 AXP VP - BLUE CHIP ADVANTAGE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) HEALTH CARE SERVICES (3.7%) Aetna 7,050 $ 401,850 Anthem 5,500(b) 402,600 Coventry Health Care 4,200(b) 197,148 DaVita 2,950(b) 89,680 Fisher Scientific Intl 7,650(b) 300,033 Humana 7,500(b) 131,925 UnitedHealth Group 11,200 553,616 WellPoint Health Networks 5,050(b) 393,900 ------------------ Total 2,470,752 - ----------------------------------------------------------------------------------------------------------------- HOME BUILDING (0.7%) KB HOME 1,900 108,718 NVR 800(b) 346,800 ------------------ Total 455,518 - ----------------------------------------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (2.6%) Energizer Holdings 11,300(b) 415,614 Gillette 16,450 533,966 Kimberly-Clark 5,950 304,105 Procter & Gamble 5,650 493,189 ------------------ Total 1,746,874 - ----------------------------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.9%) Burlington Northern Santa Fe 13,850 392,648 United Parcel Service Cl B 3,200 200,832 ------------------ Total 593,480 - ----------------------------------------------------------------------------------------------------------------- INSURANCE (5.9%) ACE 11,100(c) 357,420 Allstate 15,050 538,037 American Intl Group 13,200 786,323 Berkley (WR) 2,925 96,759 Fidelity Natl Financial 11,687 337,754 John Hancock Financial Services 4,500 137,385 Lincoln Natl 11,500 407,330 Marsh & McLennan 3,600 180,000 MetLife 4,550 129,311 Principal Financial Group 2,400 75,504 Prudential Financial 6,450 234,845 St. Paul Companies 8,100 281,556 Travelers Property Casualty Cl B 7,800 120,822 UnumProvident 14,400 203,040 ------------------ Total 3,886,086 - ----------------------------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (1.9%) AOL Time Warner 17,300(b) 283,028 Hasbro 4,950 91,575 Mattel 22,050 426,006 Viacom Cl B 9,450 425,250 ------------------ Total 1,225,859 - ----------------------------------------------------------------------------------------------------------------- LODGING & GAMING (0.3%) GTECH Holdings 4,550 192,829 - ----------------------------------------------------------------------------------------------------------------- MACHINERY (0.3%) Caterpillar 1,550 111,337 Ingersoll-Rand Cl A 1,150(c) 68,448 ------------------ Total 179,785 - ----------------------------------------------------------------------------------------------------------------- MEDIA (1.8%) Cendant 19,000(b) $ 341,620 InterActiveCorp 4,500(b) 166,545 Interpublic Group of Companies 12,900 195,435 McGraw-Hill Companies 7,600 463,600 ------------------ Total 1,167,200 - ----------------------------------------------------------------------------------------------------------------- METALS (0.5%) Alcoa 8,000 228,480 United States Steel 4,800 88,368 ------------------ Total 316,848 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (4.2%) 3M 1,050 149,594 Carlisle Companies 1,800 81,882 Cooper Inds Cl A 4,050 206,105 Emerson Electric 2,850 158,916 General Electric 57,650 1,704,710 Pentair 3,850 164,780 Tyco Intl 13,500(c) 277,830 ------------------ Total 2,743,817 - ----------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (0.4%) Pactiv 4,150(b) 83,332 Sealed Air 3,800(b) 184,908 ------------------ Total 268,240 - ----------------------------------------------------------------------------------------------------------------- PRECIOUS METALS (0.2%) Newmont Mining 2,700 106,002 - ----------------------------------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (0.3%) Equity Office Properties Trust 2,700 75,114 Equity Residential 1,850 53,798 Simon Property Group 1,300 55,523 ------------------ Total 184,435 - ----------------------------------------------------------------------------------------------------------------- RESTAURANTS (0.4%) CBRL Group 2,950 102,896 Starbucks 4,750(b) 135,090 ------------------ Total 237,986 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- DRUGSTORES (0.3%) CVS 6,150 200,490 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (5.7%) Abercrombie & Fitch 3,000(b) 91,320 AutoZone 2,500(b) 229,500 Clarie's Stores 3,300 114,015 Family Dollar Stores 1,750 70,210 Gap 9,800 204,722 Home Depot 7,450 239,592 Limited Brands 10,650 180,624 Lowe's Companies 11,850(d) 650,091 Staples 19,600(b) 482,748 Wal-Mart Stores 25,050 1,482,208 ------------------ Total 3,745,030 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GROCERY (1.0%) Kroger 27,950(b) 536,919 Safeway 5,750(b) 140,358 ------------------ Total 677,277 - ----------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (0.1%) JDS Uniphase 9,650(b) $ 33,196 Lucent Technologies 27,900(b) 53,289 ------------------ Total 86,485 - ----------------------------------------------------------------------------------------------------------------- TEXTILES & APPAREL (0.9%) Coach 7,350(b) 426,594 Jones Apparel Group 5,850 180,707 ------------------ Total 607,301 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (2.2%) AES 4,150(b) 26,892 Ameren 1,450 61,625 American Electric Power 3,250 92,008 Calpine 2,550(b) 14,382 CenterPoint Energy 2,050 17,405 Consolidated Edison 1,900 75,107 Dominion Resources 2,350 142,363 Duke Energy 7,000 119,560 Entergy 1,850 97,033 Exelon 2,450 144,304 FirstEnergy 2,550 74,613 FPL Group 1,500 92,790 PG&E 3,500(b) 77,595 PPL 1,550 61,489 Progress Energy 2,000 80,980 Public Service Enterprise Group 1,900 80,446 Southern Co 5,450 154,670 TXU 2,950 64,900 ------------------ Total 1,478,162 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (0.4%) Dynegy Cl A 2,500(b) 7,725 El Paso 4,050 29,727 KeySpan 1,050 35,438 Kinder Morgan 800 42,599 Nicor 300 10,197 NiSource 1,750 33,845 Peoples Energy 250 10,038 Sempra Energy 1,400 41,650 Williams Companies 3,500 31,955 ------------------ Total 243,174 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (2.9%) ALLTEL 2,100 96,180 AT&T 5,300 118,190 BellSouth 12,450 313,740 CenturyTel 950 33,022 Citizens Communications 1,900(b) 21,660 Qwest Communications Intl 11,450(b) 50,953 SBC Communications 22,400 503,776 Sprint (FON Group) 6,050 89,359 Sprint (PCS Group) 6,900(b) 35,811 Verizon Communications 18,550 655,185 ------------------ Total 1,917,876 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $62,464,285) $ 63,055,278 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 98 AXP VP - BLUE CHIP ADVANTAGE FUND SHORT-TERM SECURITIES (4.1%)
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) U.S. GOVERNMENT AGENCY Federal Natl Mtge Assn Disc Nts 09-17-03 1.00% $ 500,000 $ 499,761 09-24-03 0.98 800,000 799,466 10-01-03 0.98 500,000 499,547 10-22-03 1.03 400,000 399,407 11-19-03 1.05 500,000 498,874 ------------------- TOTAL SHORT-TERM SECURITIES (Cost: $2,696,982) $ 2,697,055 ------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $65,161,267)(e) $ 65,752,333 ===================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 1.2% of net assets. (d) Partially pledged as initial margin deposit on the following open stock index futures contracts (see Note 7 to the financial statements): TYPE OF SECURITY CONTRACTS ------------------------------------------------------------------ PURCHASE CONTRACTS E-Mini S&P 500 Index, Sept. 2003 47 (e) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $66,165,535 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 4,610,358 Unrealized depreciation (5,023,560) ---------------------------------------------- Net unrealized depreciation $ (413,202) ---------------------------------------------- AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 99 INVESTMENTS IN SECURITIES AXP VP - CAPITAL RESOURCE FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (95.9%) AEROSPACE & DEFENSE (3.4%) Boeing 240,000 $ 8,973,600 Lockheed Martin 404,500 20,722,535 Northrop Grumman 114,900 10,970,652 Rockwell Automation 152,500 4,151,050 United Technologies 290,000 23,272,500 ------------------ Total 68,090,337 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (0.9%) FleetBoston Financial 231,800 6,858,962 U.S. Bancorp 429,300 10,260,270 ------------------ Total 17,119,232 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (5.7%) Altria Group 1,336,000 55,069,920 Anheuser-Busch 194,200 10,009,068 PepsiCo 1,095,000 48,771,300 ------------------ Total 113,850,288 - ----------------------------------------------------------------------------------------------------------------- BROKER DEALERS (1.5%) J.P. Morgan Chase 277,700 9,502,894 Merrill Lynch 139,200 7,486,176 Morgan Stanley 258,200 12,597,578 ------------------ Total 29,586,648 - ----------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.8%) American Standard 202,100(b) 16,206,399 - ----------------------------------------------------------------------------------------------------------------- CABLE (1.2%) Comcast Special Cl A 278,400(b) 7,895,424 EchoStar Communications Cl A 447,100(b) 16,497,990 ------------------ Total 24,393,414 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (1.8%) Dow Chemical 708,000 24,447,240 Lyondell Chemical 805,000 11,511,500 ------------------ Total 35,958,740 - ----------------------------------------------------------------------------------------------------------------- COMPUTER HARDWARE (2.8%) Cisco Systems 621,450(b) 11,900,768 Dell 943,700(b) 30,792,931 Sun Microsystems 3,427,800(b) 13,231,308 ------------------ Total 55,925,007 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (6.4%) Affiliated Computer Services Cl A 324,300(b) 16,088,523 First Data 714,900 27,452,160 Microsoft 3,109,500 82,463,940 ------------------ Total 126,004,623 - ----------------------------------------------------------------------------------------------------------------- ELECTRONICS (2.6%) Analog Devices 170,000(b) $ 6,970,000 Applied Materials 530,000(b) 11,448,000 Intel 852,000 24,384,240 Taiwan Semiconductor Mfg ADR 753,900(b),(c) 8,880,942 ------------------ Total 51,683,182 - ----------------------------------------------------------------------------------------------------------------- ENERGY (6.4%) ChevronTexaco 236,000 17,197,320 ConocoPhillips 1,080,000 60,307,200 Exxon Mobil 1,313,000 49,500,100 ------------------ Total 127,004,620 - ----------------------------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.9%) Transocean 1,276,900(b) 26,968,128 Weatherford Intl 258,200(b) 9,703,156 ------------------ Total 36,671,284 - ----------------------------------------------------------------------------------------------------------------- FINANCE COMPANIES (3.9%) Citigroup 1,770,000 76,729,500 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (4.3%) Capital One Financial 429,200 22,919,280 Fannie Mae 685,000 44,381,150 MBNA 788,600 18,405,924 ------------------ Total 85,706,354 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (13.3%) Amgen 300,000(b) 19,770,000 Medtronic 837,800 41,538,124 Mylan Laboratories 281,000 10,228,400 Pfizer 4,531,500 135,582,480 Wyeth 1,313,000 56,262,050 ------------------ Total 263,381,054 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (7.4%) AmerisourceBergen 1,204,200 70,096,482 Cardinal Health 1,030,100 58,643,593 McKesson 489,800 16,036,052 Select Medical 46,200(b) 1,330,560 ------------------ Total 146,106,687 - ----------------------------------------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (3.7%) Kimberly-Clark 396,000 20,239,560 Procter & Gamble 606,300 52,923,927 ------------------ Total 73,163,487 - ----------------------------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.9%) Expeditors Intl of Washington 201,500 7,598,565 United Parcel Service Cl B 157,000 9,853,320 ------------------ Total 17,451,885 - ----------------------------------------------------------------------------------------------------------------- INSURANCE (3.9%) ACE 124,050(c) $ 3,994,410 Allstate 270,300 9,663,225 American Intl Group 369,600 22,017,072 Chubb 471,900 32,060,886 Montpelier Re Holdings 378,241(b),(c),(e) 10,437,182 ------------------ Total 78,172,775 - ----------------------------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (3.3%) Mattel 963,100 18,607,092 Viacom Cl B 1,049,700 47,236,500 ------------------ Total 65,843,592 - ----------------------------------------------------------------------------------------------------------------- MACHINERY (2.1%) Caterpillar 309,800 22,252,934 Illinois Tool Works 160,000 11,566,400 SPX 153,700(b) 7,585,095 ------------------ Total 41,404,429 - ----------------------------------------------------------------------------------------------------------------- MEDIA (5.5%) Cendant 3,145,700(b) 56,559,686 Disney (Walt) 1,303,000 26,711,500 Gannett 127,200 9,975,024 InterActiveCorp 145,600(b) 5,388,656 Tribune 208,000 9,620,000 ------------------ Total 108,254,866 - ----------------------------------------------------------------------------------------------------------------- METALS (0.9%) Freeport McMoRan Cooper & Gold Cl B 621,000 18,630,000 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (4.4%) General Electric 2,295,000 67,863,150 ITT Inds 40,235 2,618,494 Tyco Intl 771,900(c) 15,885,702 ------------------ Total 86,367,346 - ----------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (1.1%) Avery Dennison 400,400 21,921,900 - ----------------------------------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (0.1%) Equity Office Properties Trust 91,800 2,553,876 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (4.8%) Best Buy 295,000(b) 15,342,950 Dollar General 540,000 12,382,200 Home Depot 933,600 30,024,576 Staples 214,200(b) 5,275,746 Wal-Mart Stores 555,900 32,892,603 ------------------ Total 95,918,075 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GROCERY (0.6%) Kroger 627,200(b) 12,048,512 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (0.2%) FirstEnergy 144,600 4,230,996 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $1,793,802,756) $ 1,900,379,108 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 100 AXP VP - CAPITAL RESOURCE FUND SHORT-TERM SECURITIES (4.3%)
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) U.S. GOVERNMENT AGENCY (--%) Federal Home Loan Bank Disc Nt 10-24-03 1.02% $ 700,000 $ 698,886 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (4.3%) AEGON Funding 10-15-03 1.03 4,219,000(d) 4,213,066 Amsterdam Funding 10-03-03 1.06 7,200,000(d) 7,192,580 ANZ (Delaware) Funding 10-03-03 1.03 16,200,000 16,182,758 Barton Capital 09-12-03 1.04% $ 6,042,000(d) $ 6,039,557 CIESCO LLC 09-02-03 1.07 18,100,000 18,097,847 CRC Funding LLC 09-15-03 1.05 7,500,000(d) 7,496,282 10-10-03 1.04 8,800,000(d) 8,788,761 Fleet Funding 09-16-03 1.04 7,875,000(d) 7,870,905 Greyhawk Funding LLC 09-22-03 1.04 2,100,000(d) 2,098,558 ING US Funding 10-02-03 1.03% $ 3,600,000 $ 3,596,337 Park Avenue Receivables 09-22-03 1.05 3,700,000(d) 3,697,410 ------------------- Total 85,274,061 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost:$85,977,439) $ 85,972,947 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $1,879,780,195)(f) $ 1,986,352,055 ==========================================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 2.0% of net assets. (d) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (e) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Aug. 31, 2003, is as follows:
ACQUISITION SECURITY DATES COST ------------------------------------------------------------------------------------------- Montpelier Re Holdings 12-10-01 thru 9-27-02 $ 6,304,017
(f) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $1,890,417,170 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 160,113,852 Unrealized depreciation (64,178,967) --------------------------------------------------------------------- Net unrealized appreciation $ 95,934,885 --------------------------------------------------------------------- AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 101 INVESTMENTS IN SECURITIES AXP VP - CASH MANAGEMENT FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) U.S. GOVERNMENT AGENCIES (8.0%) Federal Home Loan Bank Nt 04-08-04 1.20% $ 10,000,000 $ 10,000,000 Federal Natl Mtge Assn Nts 10-29-03 1.06 8,000,000 7,985,867 11-05-03 1.07 6,500,000 6,487,116 07-20-04 1.06 9,000,000 9,000,000 07-26-04 1.03 7,500,000 7,500,000 07-27-04 1.18 7,500,000 7,500,000 08-13-04 1.20 7,500,000 7,500,000 08-30-04 1.30 6,000,000 6,000,000 09-24-04 1.53 7,500,000 7,500,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT AGENCIES (Cost: $69,472,983) $ 69,472,983 - --------------------------------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) CERTIFICATES OF DEPOSIT (23.4%) Abbey Natl Yankee 03-03-04 1.04% $ 10,000,000(c) $ 9,999,232 Bank One 04-16-04 1.03 10,000,000(c) 9,999,372 Banque Nationale de Paris Yankee 06-07-04 1.04 7,500,000(c) 7,498,535 Bayerische Landesbank Girozentrale Yankee 04-16-04 1.29 10,000,000 9,999,055 Canadian Imperial Bank of Commerce Yankee 03-05-04 1.30 10,000,000 10,000,000 05-28-04 1.07 6,000,000(c) 5,999,550 06-18-04 1.00 6,000,000 6,000,000 Credit Agricole Yankee 10-08-03 1.03 2,500,000 2,500,000 10-15-03 1.06 5,000,000 5,000,000 Credit Suisse First Boston NY Yankee 10-07-03 1.05 6,000,000 6,000,000 01-16-04 1.12 10,000,000(c) 10,000,000 07-06-04 1.09 7,000,000(c) 7,000,000 Danske Bank NY Yankee 07-15-04 1.11 3,000,000 3,000,000 KBC Bank Yankee 09-08-03 1.04 7,000,000 7,000,000 Lloyds TBS Bank Yankee 04-01-04 1.09 6,000,000 6,000,000 Nordea Bank NY Yankee 01-15-04 1.05 6,000,000 5,999,886 Royal Bank of Scotland Yankee 04-19-04 1.34 10,000,000 9,999,043 Societe Generale Yankee 02-26-04 1.05 10,000,000(c) 9,999,504 03-03-04 1.05 10,000,000(c) 9,999,492 Svenska Handelsbanken Yankee 09-03-03 1.04 6,000,000 6,000,000 09-30-03 1.06 5,000,000 5,000,000 Toronto Dominion Yankee 10-14-03 1.02% $ 10,200,000 $ 10,200,125 Wells Fargo Bank 09-22-03 1.06 4,500,000 4,500,000 09-26-03 1.05 10,000,000 10,000,000 09-29-03 1.06 8,000,000 8,000,000 Westdeutsche Landesbank Yankee 11-21-03 1.05 8,000,000(c) 8,000,000 02-19-04 1.36 9,000,000 9,000,000 - -------------------------------------------------------------------------------------------------------------------------- TOTAL CERTIFICATES OF DEPOSIT (Cost: $202,693,794) $ 202,693,794 - --------------------------------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) COMMERCIAL PAPER (69.5%) ASSET-BACKED (34.6%) Amsterdam Funding 09-05-03 1.06% $ 5,000,000(b) $ 4,999,117 09-11-03 1.06 8,300,000(b) 8,297,067 09-17-03 1.06 3,600,000(b) 3,598,092 Barton Capital 10-16-03 1.06 5,000,000(b) 4,993,081 CAFCO LLC 09-02-03 1.04 6,000,000(b) 5,999,480 09-17-03 1.04 8,200,000(b) 8,195,736 CHARTA LLC 10-02-03 1.07 5,500,000(b) 5,494,605 10-06-03 1.07 10,000,000(b) 9,989,004 10-10-03 1.07 5,000,000(b) 4,993,907 10-15-03 1.08 3,500,000(b) 3,495,170 CIESCO LLC 10-03-03 1.07 6,000,000(b) 5,993,937 10-28-03 1.07 6,500,000(b) 6,488,602 CRC Funding LLC 09-04-03 1.04 8,000,000(b) 7,998,844 10-02-03 1.08 5,000,000(b) 4,995,050 10-06-03 1.08 5,000,000(b) 4,994,450 CXC LLC 09-02-03 1.04 8,000,000(b) 7,999,307 10-17-03 1.07 6,400,000(b) 6,390,869 10-21-03 1.07 3,000,000(b) 2,995,363 Edison Asset Securitization 09-15-03 1.06 5,000,000(b) 4,997,644 10-20-03 1.06 4,000,000(b) 3,993,993 Fairway Finance 09-15-03 1.00 5,100,000(b) 5,097,733 09-17-03 1.07 5,000,000(b) 4,997,325 09-19-03 1.07 4,000,000(b) 3,997,622 09-25-03 0.94 5,000,000(b) 4,996,606 Falcon Asset Securitization 09-22-03 1.06 7,000,000(b) 6,995,259 Fleet Funding 10-09-03 1.03% $ 7,400,000(b) $ 7,391,531 10-27-03 1.07 8,000,000(b) 7,986,209 11-04-03 1.09 8,700,000(b) 8,682,615 Galaxy Funding 09-11-03 0.94 5,000,000(b) 4,998,433 09-24-03 1.03 4,000,000(b) 3,997,139 10-21-03 1.07 2,000,000(b) 1,996,909 11-18-03 1.09 3,500,000(b) 3,491,522 11-19-03 1.09 1,800,000(b) 1,795,586 Greyhawk Funding LLC 10-07-03 1.08 6,800,000(b) 6,792,248 10-14-03 1.06 6,600,000(b) 6,591,255 10-24-03 1.08 5,500,000(b) 5,490,925 Old Line Funding 10-01-03 1.06 5,000,000(b) 4,995,289 10-07-03 1.06 2,000,000(b) 1,997,762 Park Avenue Receivables 10-22-03 1.06 9,700,000(b) 9,684,863 Preferred Receivables Funding 09-16-03 1.06 4,000,000(b) 3,997,998 Receivables Capital 09-12-03 1.07 6,500,000(b) 6,497,488 Sheffield Receivables 09-05-03 1.08 13,200,000(b) 13,197,625 09-15-03 1.06 5,000,000(b) 4,997,644 09-29-03 1.07 5,000,000(b) 4,995,542 Sigma Finance 05-06-04 1.07 7,500,000(b),(c) 7,499,744 05-10-04 1.07 7,500,000(b),(c) 7,499,234 06-09-04 1.06 7,000,000(b),(c) 6,998,928 Variable Funding Capital 09-09-03 1.06 5,600,000(b) 5,598,351 Windmill Funding 10-03-03 1.07 2,000,000(b) 1,997,979 10-10-03 1.04 4,900,000(b) 4,894,196 12-18-03 1.03 6,400,000(b) 6,379,858 12-22-03 1.03 7,000,000(b) 6,977,168 ------------------- Total 300,411,904 - -------------------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (22.2%) Allied Irish Bank North America 09-18-03 0.93 10,000,000 9,995,092 ANZ (Delaware) 12-11-03 1.03 7,500,000 7,477,898 Bank of Ireland 09-08-03 1.09 6,000,000(b) 5,998,373 09-08-03 1.10 6,000,000(b) 5,998,358 09-22-03 0.93 5,000,000(b) 4,997,029 09-25-03 1.04 3,000,000(b) 2,997,747 Barclays U.S. Funding 10-31-03 1.07 5,000,000 4,990,786 12-19-03 1.04 7,000,000 6,977,553
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 102 AXP VP - CASH MANAGEMENT FUND
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) COMMERCIAL PAPER (CONTINUED) BANKS AND SAVINGS & LOANS (CONT.) Danske Bank 09-30-03 1.04% $ 15,000,000 $ 14,986,566 10-15-03 1.06 6,200,000 6,191,602 12-23-03 1.03 2,000,000 1,993,419 HBOS Treasury Services 09-18-03 1.07 2,000,000 1,998,871 09-23-03 1.04 7,600,000 7,594,731 10-14-03 1.08 5,000,000 4,993,250 11-03-03 1.04 12,000,000 11,977,467 Landesbank Baden-Wuerttemberg Girozentrale 10-10-03 1.03 4,000,000 3,995,308 Nordea North America 09-24-03 1.04 7,000,000 6,994,944 10-24-03 1.06 13,000,000 12,978,946 10-24-03 1.07 7,000,000 6,988,557 Northern Rock 09-11-03 1.06 2,000,000(b) 1,999,293 10-27-03 1.06 8,500,000(b) 8,485,484 11-25-03 0.92 6,000,000(b) 5,986,660 11-26-03 1.05 4,700,000(b) 4,687,937 Societe Generale North America 09-10-03 1.10 5,000,000 4,998,327 Svenska Handelsbanken 10-01-03 1.04 9,000,000 8,991,680 10-03-03 1.03 4,000,000 3,996,109 Toronto Dominion Holdings 09-09-03 1.09 6,000,000 5,998,183 UBS Finance (Delaware) LLC 09-18-03 0.93 10,000,000 9,995,092 Westdeutsche Landesbank Girozentrale 01-27-04 1.36 7,500,000(b) 7,457,813 ------------------- Total 192,723,075 - -------------------------------------------------------------------------------------------------------------------------- BROKER DEALERS (4.8%) Citigroup Global Markets Holdings 10-08-03 1.04% $ 9,000,000 $ 8,989,909 Goldman Sachs Group 11-17-03 1.30 7,000,000 6,980,031 11-18-03 1.30 4,900,000 4,885,844 11-20-03 0.92 8,400,000 8,382,397 Lehman Brothers Holdings 09-22-04 1.16 7,500,000(c) 7,500,000 Merrill Lynch 11-19-03 1.15 5,000,000(c) 5,000,000 ------------------- Total 41,738,181 - -------------------------------------------------------------------------------------------------------------------------- FINANCE COMPANIES (1.8%) Household Finance 09-04-03 1.04 7,500,000 7,498,917 09-12-03 1.00 5,000,000 4,998,194 11-17-03 1.10 3,000,000 2,992,758 ------------------- Total 15,489,869 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (3.8%) American Honda Finance 10-23-03 1.09 5,000,000(b),(c) 5,003,611 BP Capital Markets 09-02-03 1.10 15,000,000 14,998,625 Toyota Motor Credit 09-16-03 0.93 4,000,000(b) 3,998,243 10-09-03 1.03 9,200,000(b) 9,189,471 ------------------- Total 33,189,950 - -------------------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (2.3%) GE Capital Intl Funding 10-16-03 1.06% $ 3,000,000(b) $ 2,995,848 12-11-03 1.05 4,400,000(b) 4,386,782 12-17-03 1.06 4,500,000(b) 4,485,558 General Electric Capital 09-12-03 1.02 3,500,000 3,498,711 11-07-03 1.02 4,500,000 4,491,203 ------------------- Total 19,858,102 - -------------------------------------------------------------------------------------------------------------------------- TOTAL COMMERCIAL PAPER (Cost: $603,411,081) $ 603,411,081 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $875,577,858)(d) $ 875,577,858 ==========================================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (c) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (d) Also represents the cost of securities for federal income tax purposes at Aug. 31, 2003. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 103 INVESTMENTS IN SECURITIES AXP VP - DIVERSIFIED BOND FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (99.9%) FOREIGN GOVERNMENT (1.6%) Dominican Republic (U.S. Dollar) 01-23-13 9.04% $ 2,000,000(c),(d) $ 1,890,000 Federal Republic of Brazil (U.S. Dollar) 03-12-08 11.50 850,000(c) 901,000 04-15-10 12.00 2,150,000(c) 2,259,650 04-15-14 8.00 1,108,269(c) 997,775 Federation of Russia (U.S. Dollar) 03-31-30 5.00 620,000(c),(j) 567,300 03-31-30 5.00 1,000,000(c),(d),(j) 913,750 Govt of Ukraine (U.S. Dollar) 06-11-13 7.65 1,000,000(c),(d) 980,000 Republic of Colombia (U.S. Dollar) 04-23-09 9.75 2,000,000(c) 2,210,000 01-23-12 10.00 1,300,000(c) 1,404,000 Republic of El Salvador (U.S. Dollar) 01-24-23 7.75 1,370,000(c),(d) 1,411,100 Republic of Peru (U.S. Dollar) 02-06-15 9.88 2,290,000(c) 2,519,000 Republic of Philippines (U.S. Dollar) 01-15-19 9.88 505,000(c) 527,725 United Mexican States (U.S. Dollar) 03-03-15 6.63 11,840,000(c) 11,780,800 ------------------- Total 28,362,100 - -------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (21.3%) Federal Home Loan Mtge Corp 07-15-13 4.50 44,500,000 42,707,985 Federal Natl Mtge Assn 04-15-06 2.13 16,500,000 16,313,006 08-15-08 3.25 69,000,000 67,324,679 U.S. Treasury 01-31-05 1.63 12,150,000(m) 12,161,871 05-31-05 1.25 10,150,000 10,061,188 06-30-05 1.13 15,310,000(m) 15,119,222 11-15-05 5.75 5,035,000 5,432,881 02-15-06 5.63 15,150,000 16,393,361 05-15-06 2.00 4,119,000 4,088,108 08-15-06 2.38 2,200,000(m) 2,193,297 11-15-07 3.00 7,510,000 7,472,157 08-15-13 4.25 43,748,000 43,016,533 11-15-16 7.50 890,000(m) 1,109,684 08-15-21 8.13 12,000,000 16,004,532 08-15-22 7.25 2,940,000(m) 3,623,091 08-15-23 6.25 47,200,000(m) 52,393,840 08-15-27 6.38% $ 22,930,000 $ 26,005,853 02-15-31 5.38 34,160,000(m) 34,893,893 ------------------- Total 376,315,181 - -------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (41.7%)(F) Federal Home Loan Mtge Corp 05-01-07 9.00 360,407 364,945 09-27-12 3.61 3,800,000 3,763,618 05-01-13 4.50 2,429,419 2,406,311 08-01-18 5.00 8,250,000 8,286,842 02-01-23 6.00 13,771,064 14,165,130 08-01-24 8.00 586,821 634,815 01-01-25 9.00 166,052 185,150 09-01-28 6.00 3,822,191 3,894,142 12-01-30 5.50 2,563,427 2,563,170 07-01-32 7.00 24,715,054 26,008,261 09-01-32 6.50 3,964,003 4,105,611 10-01-32 6.50 17,727,939 18,361,243 04-01-33 6.00 961,236 979,983 05-01-33 5.50 4,970,065 4,951,380 06-01-33 5.50 4,895,570 4,877,165 Collateralized Mtge Obligation 10-15-18 5.00 3,700,000 3,741,625 11-15-18 5.00 9,300,000 9,375,563 03-15-22 7.00 5,178,749 5,343,950 07-15-22 7.00 5,139,735 5,313,869 Interest Only 02-15-14 9.85 2,700,000(i) 314,128 06-15-18 24.49 2,607,640(i) 158,671 Federal Natl Mtge Assn 09-01-07 8.50 599,518 630,304 11-01-12 4.79 10,000,000 9,955,662 01-01-13 4.78 5,360,000 5,437,400 01-01-13 4.92 2,779,271 2,754,548 02-01-13 4.83 3,227,847 3,177,790 02-01-13 4.87 7,281,260 7,250,038 04-01-13 7.00 6,852,742 7,273,171 06-01-13 4.54 6,892,581 6,678,464 06-01-13 4.85 4,539,837 4,453,743 10-01-13 4.50 5,000,000(h) 4,939,050 12-01-13 5.50 5,917,720 6,073,481 04-01-14 5.50 62,927 64,583 08-01-16 6.00 2,097,959 2,174,123 08-01-16 6.50 2,466,849 2,595,316 02-01-17 7.00 3,524,192 3,746,362 03-01-17 6.50 2,933,864 3,091,145 08-01-17 6.00 4,158,948 4,332,122 08-01-17 6.50 7,235,305 7,612,340 09-01-17 6.00 1,529,420 1,584,881 09-01-17 6.50 6,668,032 7,060,753 02-01-18 5.50 14,428,155 14,745,538 03-01-18 5.50 3,741,347 3,833,748 04-01-18 5.00 4,479,897 4,528,716 09-01-18 4.50% $ 3,100,000 $ 3,046,234 09-01-18 5.00 54,325,000(h) 54,477,654 09-01-18 5.50 23,000,000(h) 23,488,750 11-01-21 8.00 77,299 84,038 04-01-22 8.00 334,172 363,164 04-01-23 8.50 1,041,507 1,138,123 08-01-23 5.50 10,470,740(h) 10,565,532 09-01-23 5.00 4,700,000(h) 4,600,125 09-01-23 5.50 8,000,000(h) 8,072,424 06-01-24 9.00 1,005,960 1,116,020 02-01-27 7.50 1,831,294 1,950,212 07-01-28 5.50 2,959,668 2,965,856 08-01-28 5.50 3,500,000 3,507,317 10-01-28 6.00 7,206,401 7,337,110 11-01-28 6.50 5,900,858 6,118,796 01-01-29 6.50 5,968,197 6,188,622 06-01-29 7.00 1,741,240(h) 1,836,779 08-01-32 6.50 7,868,739 8,142,493 08-01-32 7.00 1,783,827 1,880,721 09-01-32 6.00 29,733,501 30,238,270 10-01-32 6.50 6,989,305 7,274,086 11-01-32 7.00 3,608,458(h) 3,800,149 12-01-32 6.00 2,363,822 2,401,905 01-01-33 6.00 24,132,541 24,568,528 02-01-33 4.75 2,775,642(g) 2,829,769 02-01-33 5.50 5,513,353 5,494,348 02-15-33 5.50 6,597,641 6,853,696 02-28-33 6.00 2,174,250 2,218,183 03-01-33 4.93 4,666,387(g) 4,790,248 03-01-33 5.50 15,297,639 15,254,952 03-01-33 6.00 14,840,386 15,117,464 03-01-33 6.50 26,619,375 27,553,632 04-01-33 5.50 19,513,095 19,462,531 04-01-33 6.00 18,281,040 18,648,388 05-01-33 5.50 20,059,649 19,986,855 05-01-33 6.50 1,591,414 1,647,279 06-01-33 5.50 5,934,734 5,918,571 06-01-33 6.00 6,926,109 7,041,741 07-01-33 5.50 7,137,105 7,112,504 07-01-33 7.00 4,127,929(h) 4,347,225 09-01-33 5.00 25,685,000(h) 24,834,313 09-01-33 5.50 1,000,000(h) 995,000 09-01-33 6.00 6,500,000(h) 6,607,653 10-01-33 5.50 17,600,000(h) 17,457,000 10-01-33 6.50 17,500,000(h) 18,046,875 11-01-33 5.00 7,000,000(g),(h) 6,899,375 Collateralized Mtge Obligation 11-25-12 4.49 6,500,000 6,278,986 09-25-42 5.00 3,280,000 3,314,286 10-25-42 7.50 4,578,951 4,946,698 12-25-42 4.75 5,000,000 4,989,779 Interest Only 12-25-12 12.05 2,700,000(i) 256,543
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 104 AXP VP - DIVERSIFIED BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) MORTGAGE-BACKED SECURITIES (CONT.) Govt Natl Mtge Assn 03-15-33 7.00% $ 3,276,084 $ 3,464,183 05-15-33 6.00 5,713,212 5,837,377 09-01-33 5.50 15,150,000(h) 15,126,367 Collateralized Mtge Obligation Interest Only 01-20-32 10.48 3,200,000(i) 487,481 08-20-32 8.01 11,717,022(i) 3,406,632 ------------------- Total 736,177,692 - -------------------------------------------------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.4%) Alliant Techsystems 05-15-11 8.50 1,000,000 1,080,000 L-3 Communications 06-15-12 7.63 1,395,000 1,454,288 Raytheon 04-01-13 5.38 3,100,000 3,057,712 TD Funding Sr Sub Nts 07-15-11 8.38 750,000(d) 781,875 ------------------- Total 6,373,875 - -------------------------------------------------------------------------------------------------------------------------- AIRLINES (--%) Northwest Airlines 02-01-20 6.81 756,800 611,948 - -------------------------------------------------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (0.8%) DaimlerChrysler North America Holding 01-15-08 4.75 1,250,000 1,238,925 06-04-08 4.05 9,680,000 9,268,503 Ford Motor 10-01-28 6.63 1,015,000 828,578 02-01-29 6.38 2,670,000 2,096,433 ------------------- Total 13,432,439 - -------------------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (2.2%) AmSouth Bank NA Sub Nts 04-01-13 4.85 3,550,000 3,441,548 Bank of America Sub Nts 02-15-10 7.80 8,000,000 9,376,656 Banknorth Group 05-01-08 3.75 1,570,000 1,539,872 Credit Suisse First Boston USA 01-15-12 6.50 2,820,000 3,033,629 Fifth Third Bank 08-15-08 3.38 1,250,000 1,219,200 Marshall & Ilsley Series E 09-01-06 5.75 4,900,000 5,315,030 Wachovia 08-15-08 3.50 2,560,000 2,496,538 Washington Mutual Bank 06-15-11 6.88 10,700,000 11,933,581 ------------------- Total 38,356,054 - -------------------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.4%) Cott Beverages 12-15-11 8.00% $ 960,000 $ 1,003,200 Diageo Capital (U.S. Dollar) 03-20-08 3.38 6,850,000(c) 6,724,714 ------------------- Total 7,727,914 - -------------------------------------------------------------------------------------------------------------------------- BROKER DEALERS (2.5%) Goldman Sachs Group 01-15-11 6.88 1,715,000 1,906,406 04-01-13 5.25 1,580,000 1,557,387 07-15-13 4.75 2,460,000 2,329,866 LaBranche Sr Sub Nts 03-02-07 12.00 750,000 817,500 Lehman Brothers Holdings 08-07-08 3.50 4,830,000 4,683,506 Merrill Lynch 11-15-07 4.00 3,150,000 3,147,792 Morgan Stanley 04-15-06 6.10 6,000,000 6,480,510 04-15-11 6.75 1,250,000 1,378,036 03-01-13 5.30 5,300,000 5,211,013 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 6,939,078 6,555,541 Series 2003-T11 Cl A2 06-13-41 4.34 5,170,000 5,120,850 Morgan Stanley, Dean Witter Capital 1 Series 2002-IQ2 Cl A2 12-15-35 5.16 850,000 885,875 Series 2002-IQ2 Cl A3 12-15-35 5.52 1,550,000 1,613,690 Series 2002-TOP7 Cl A2 01-15-39 5.98 2,860,000 3,030,088 ------------------- Total 44,718,060 - -------------------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.7%) Louisiana Pacific Sr Nts 08-15-10 8.88 1,440,000 1,652,400 Masco 05-03-04 6.00 9,800,000 10,065,217 Ryland Group Sr Nts 06-01-08 5.38 1,250,000 1,240,625 ------------------- Total 12,958,242 - -------------------------------------------------------------------------------------------------------------------------- CABLE (1.0%) Comcast 03-15-11 5.50 12,235,000 12,302,414 Comcast Cable Communications Sr Nts 06-15-13 7.13 1,980,000 2,177,537 Cox Communications 06-01-13 4.63 1,610,000 1,490,973 DirectTV Holdings/Finance Sr Nts 03-15-13 8.38 750,000(d) 819,375 Rogers Cable (U.S. Dollar) 06-15-13 6.25% $ 1,000,000(c) $ 938,750 Veninfotel (U.S. Dollar) Cv Pay-in-kind 12-31-05 13.00 9,773,312(c),(k),(l) 97,733 ------------------- Total 17,826,782 - -------------------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.4%) AT&T Wireless Services Sr Nts 03-01-11 7.88 5,650,000 6,382,008 Nextel Communications Sr Nts 08-01-15 7.38 520,000 520,000 ------------------- Total 6,902,008 - -------------------------------------------------------------------------------------------------------------------------- CHEMICALS (0.4%) Airgas 10-01-11 9.13 750,000 825,000 Compass Minerals Group 08-15-11 10.00 1,250,000 1,381,250 Dow Chemical 02-01-11 6.13 2,795,000 2,902,228 MacDermid 07-15-11 9.13 260,000 286,000 Praxair 06-15-08 2.75 1,470,000 1,386,592 Rhodia (U.S. Dollar) 06-01-10 7.63 190,000(c),(d) 193,800 06-01-11 8.88 115,000(c),(d) 115,575 ------------------- Total 7,090,445 - -------------------------------------------------------------------------------------------------------------------------- ELECTRONICS (--%) Flextronics Intl (U.S. Dollar) Sr Sub Nts 05-15-13 6.50 500,000(c),(d) 478,750 - -------------------------------------------------------------------------------------------------------------------------- ENERGY (0.9%) Amerada Hess 08-15-11 6.65 770,000 828,291 Conoco Funding (U.S. Dollar) 10-15-11 6.35 7,810,000(c) 8,500,216 Devon Financing 09-30-11 6.88 1,610,000 1,778,665 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 500,000(d) 485,000 Newfield Exploration Sr Nts 03-01-11 7.63 1,500,000 1,605,000 Westport Resources 11-01-11 8.25 750,000 802,500 XTO Energy Sr Nts 04-15-12 7.50 1,260,000 1,354,500 04-15-13 6.25 705,000 705,000 ------------------- Total 16,059,172 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 105 AXP VP - DIVERSIFIED BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) ENERGY EQUIPMENT & SERVICES (0.1%) Grant Prideco Escrow 12-15-09 9.00% $ 1,000,000 $ 1,052,500 Key Energy Services Sr Nts 03-01-08 8.38 190,000 198,550 05-01-13 6.38 540,000 513,000 Offshore Logistics 06-15-13 6.13 365,000(d) 346,750 ------------------- Total 2,110,800 - -------------------------------------------------------------------------------------------------------------------------- FINANCE COMPANIES (2.7%) Citigroup Sub Nts 10-01-10 7.25 23,030,000 26,371,745 GMAC 09-15-11 6.88 11,580,000 11,584,285 Household Finance 01-24-06 6.50 4,250,000 4,610,999 10-15-11 6.38 4,000,000 4,281,472 ------------------- Total 46,848,501 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (5.4%) Bank of America First Union NB Commercial Mtge Series 2001-3 Cl A2 04-11-37 5.46 2,050,000 2,115,781 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 4,327,471 4,244,470 Capital One Bank Sr Nts 02-01-06 6.88 880,000 943,595 Chase Manhattan Bank-First Union Natl Series 1999-1 C1 A2 08-15-31 7.44 7,100,000 8,102,993 Citibank Credit Card Issuance Trust Series 2003-A5 Cl A5 04-07-08 2.50 5,000,000 4,970,800 Series 2003-A6 Cl A6 05-17-10 2.90 4,500,000 4,521,825 Commercial Mtge Acceptance Series 1998-C1 C1 A2 07-15-31 6.49 8,000,000 8,795,638 General Electric Capital 03-15-07 5.38 3,750,000 3,983,250 06-15-12 6.00 1,070,000 1,126,582 Greenwich Capital Commercial Funding Series 2002-C1 Cl A3 01-11-17 4.50 3,000,000 2,976,059 Series 2002-C1 Cl A4 01-11-35 4.95 3,300,000 3,245,656 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 4,700,000(c) 4,687,305 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39% $ 3,590,000 $ 3,705,286 Series 2002-C2 Cl A4 06-15-31 5.59 2,395,000 2,468,619 Series 2002-C4 Cl A4 09-15-26 4.56 5,000,000 4,916,861 Series 2002-C4 Cl A5 09-15-31 4.85 3,000,000 2,937,397 Series 2003-C3 Cl A2 05-15-27 3.09 7,500,000 7,181,827 MBNA Credit Card Master Note Trust Series 2003-A1 Cl A1 07-15-10 3.30 2,850,000 2,808,476 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 1,250,000 1,241,894 Residential Asset Securities Series 2002-KS1 Cl A14 11-25-29 5.86 3,800,000 3,937,446 Residential Funding Mtge 10-25-17 5.50 2,900,902 2,928,838 SLM 03-17-08 3.63 2,700,000 2,661,414 TIAA Global Markets 01-22-08 3.88 8,570,000(d) 8,589,625 Toyota Motor Credit 08-01-08 2.88 2,260,000 2,166,413 ------------------- Total 95,258,050 - -------------------------------------------------------------------------------------------------------------------------- FOOD (0.8%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75 250,000(c),(d) 256,250 Chiquita Brands Intl Sr Nts 03-15-09 10.56 250,000 272,500 General Mills 02-15-07 5.13 4,000,000 4,273,308 Kellogg Series B 04-01-11 6.60 5,110,000 5,637,097 Kraft Foods 11-01-11 5.63 3,825,000 3,840,912 ------------------- Total 14,280,067 - -------------------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (0.1%) Apogent Technologies Sr Sub Nts 05-15-13 6.50 750,000(d) 736,875 Kinetic Concepts Sr Sub Nts 05-15-13 7.38 375,000(d) 375,000 ------------------- Total 1,111,875 - -------------------------------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (0.2%) AmerisourceBergen 11-15-12 7.25% $ 1,000,000 $ 1,009,999 Fisher Scientific Intl Sr Sub Nts 09-01-13 8.00 375,000(d) 385,313 Omnicare Sr Sub Nts 06-01-13 6.13 825,000 785,813 Province Healthcare Sr Sub Nts 06-01-13 7.50 250,000 240,625 Tenet Healthcare Sr Nts 06-01-12 6.50 500,000 465,000 ------------------- Total 2,886,750 - -------------------------------------------------------------------------------------------------------------------------- HOME BUILDING (0.2%) D.R. Horton 07-01-13 5.88 750,000 676,875 Meritage 06-01-11 9.75 1,140,000 1,215,525 NVR Sr Nts 06-15-10 5.00 1,250,000 1,168,750 ------------------- Total 3,061,150 - -------------------------------------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.0%) Burlington North Santa Fe 12-15-05 6.38 3,000,000 3,255,558 Canadian Natl Railways (U.S. Dollar) 10-15-11 6.38 4,190,000(c) 4,568,960 CSX 03-15-11 6.75 2,910,000 3,197,601 Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-07 9.50 2,290,000(b),(c) 1,471,325 Interpool 08-01-07 7.35 200,000 195,000 Union Pacific 02-01-08 6.63 310,000 340,642 01-15-11 6.65 2,450,000 2,692,281 04-15-12 6.50 2,100,000 2,297,866 ------------------- Total 18,019,233 - -------------------------------------------------------------------------------------------------------------------------- INSURANCE (1.2%) Allstate 06-01-33 5.35 1,230,000 1,076,582 Sr Nts 02-15-12 6.13 820,000 881,280 ASIF Global Financing 01-17-13 4.90 10,190,000(d) 9,928,321 MassMutual Global Funding II 07-15-08 2.55 3,430,000(d) 3,213,313 Met Life Global Funding I 06-19-08 2.60 4,740,000(d) 4,435,929 Travelers Property Casualty Sr Nts 03-15-13 5.00 2,380,000 2,330,615 ------------------- Total 21,866,040 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 106 AXP VP - DIVERSIFIED BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) LEISURE TIME & ENTERTAINMENT (0.6%) AOL Time Warner 05-01-12 6.88% $ 795,000 $ 864,059 05-01-32 7.70 870,000 954,332 KSL Resorts Series 2003-1A Cl C 05-15-13 2.04 1,700,000 1,699,868 Viacom 05-15-11 6.63 6,485,000 7,169,822 ------------------- Total 10,688,081 - -------------------------------------------------------------------------------------------------------------------------- LODGING & GAMING (0.2%) Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 750,000 803,438 Coast Hotels & Casino 04-01-09 9.50 500,000 532,500 Hilton Hotels 12-01-12 7.63 375,000 396,563 Mohegan Tribal Gaming Sr Sub Nts 04-01-12 8.00 975,000 1,038,374 Park Place Entertainment Sr Sub Nts 03-15-10 7.88 250,000 266,875 ------------------- Total 3,037,750 - -------------------------------------------------------------------------------------------------------------------------- MACHINERY (--%) Joy Global Series B 03-15-12 8.75 750,000 810,000 - -------------------------------------------------------------------------------------------------------------------------- MEDIA (2.0%) Alliance Atlantis Communications (U.S. Dollar) Sr Sub Nts 12-15-09 13.00 500,000(c) 559,375 AOA Holdings LLC Sr Nts 06-15-08 12.00 2,500,000(l) 2,692,500 AOL Time Warner 04-15-06 6.13 2,907,000 3,108,516 Belo (AH) 11-01-08 8.00 3,800,000 4,378,094 CanWest Media (U.S. Dollar) Sr Sub Nts 05-15-11 10.63 750,000(c) 836,250 CBD Media/Finance Sr Sub Nts 06-01-11 8.63 970,000(d) 1,018,500 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 295,000(c) 311,963 Dex Media West/Finance Sr Nts 08-15-10 8.50 350,000(d) 380,625 Sr Sub Nts 08-15-13 9.88 305,000(d) 340,075 Hollinger Intl Publishing Sr Nts 12-15-10 9.00% $ 600,000 $ 622,500 Lamar Media Corp 09-15-07 8.63 930,000 960,225 Morris Publishing Sr Sub Nts 08-01-13 7.00 675,000(d) 675,000 Nexstar Finance LLC 04-01-08 12.00 500,000 560,000 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 385,000(c) 425,425 Radio One Series B 07-01-11 8.88 500,000 546,250 Sinclair Broadcast Group 03-15-12 8.00 600,000 625,500 Sun Media (U.S. Dollar) Sr Nts 02-15-13 7.63 750,000(c) 774,375 Susquehanna Media Sr Sub Nts 04-15-13 7.38 330,000 336,188 TCI Communications 02-15-06 6.88 2,362,000 2,559,903 Time Warner 08-15-04 7.98 1,500,000 1,574,790 08-15-07 8.18 3,000,000 3,410,766 01-15-28 6.95 5,000,000 5,030,474 United Artists Theatre 07-01-15 9.30 3,750,106 3,656,353 ------------------- Total 35,383,647 - -------------------------------------------------------------------------------------------------------------------------- METALS (--%) Euramax Intl Sr Sub Nts 08-15-11 8.50 355,000(d) 358,550 Jorgensen Earle M 06-01-12 9.75 250,000 263,750 Peabody Energy Series B 03-15-13 6.88 250,000 250,000 ------------------- Total 872,300 - -------------------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (1.1%) General Electric 02-01-13 5.00 17,390,000 17,057,503 SPX Sr Nts 06-15-11 6.25 315,000 308,700 Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 980,000(c) 997,150 Vivendi Universal (U.S. Dollar) Sr Nts 07-15-08 6.25 750,000(c),(d) 750,000 ------------------- Total 19,113,353 - -------------------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (1.1%) Ball 12-15-12 6.88% $ 730,000 $ 737,300 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 1,000,000(c),(d) 983,070 Crown Euro Holdings (U.S. Dollar) 03-01-13 10.88 250,000(c),(d) 273,750 Crown Paper Sr Sub Nts 09-01-05 11.00 3,450,000(b) 345 Domtar (U.S. Dollar) 10-15-11 7.88 535,000(c) 614,201 Georgia-Pacific Sr Nts 02-01-10 8.88 500,000(d) 525,000 Graphic Packaging Intl Sr Nts 08-15-11 8.50 270,000(d) 282,150 Intl Paper 10-30-12 5.85 920,000 937,541 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 1,000,000(c),(d) 987,500 Packaging Corp of America 08-01-13 5.75 1,980,000(d) 1,920,303 Stone Container Sr Nts 07-01-12 8.38 750,000 795,000 Weyerhaeuser 03-15-07 6.13 11,030,000 11,896,086 ------------------- Total 19,952,246 - -------------------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (0.4%) Sonic Automotive Sr Sub Nts 08-15-13 8.63 250,000(d) 252,500 Wal-Mart CRAVE 401 07-17-06 7.00 5,661,454(d) 6,124,108 William Carter Series B 08-15-11 10.88 500,000 550,000 ------------------- Total 6,926,608 - -------------------------------------------------------------------------------------------------------------------------- RETAIL -- GROCERY (0.2%) Kroger Sr Nts 07-15-06 8.15 3,000,000 3,372,750 - -------------------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (1.0%) Qwest 11-01-04 7.20 1,000,000 1,015,000 Sprint Capital 03-15-12 8.38 3,895,000 4,423,622 Telus (U.S. Dollar) 06-01-07 7.50 3,570,000(c) 3,896,805
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 107 AXP VP - DIVERSIFIED BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) TELECOM EQUIPMENT & SERVICES (CONT.) Verizon Maryland 03-01-12 6.13% $ 2,955,000 $ 3,139,877 Verizon Virginia Cl A 03-15-13 4.63 3,400,000 3,215,414 Vodafone Group (U.S. Dollar) 02-15-10 7.75 1,860,000(c) 2,153,675 ------------------- Total 17,844,393 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (4.8%) American Electric Power Sr Nts 06-01-15 5.25 2,370,000 2,194,051 Carolina Power & Light 07-15-12 6.50 500,000 538,055 Cincinnati Gas & Electric 09-15-12 5.70 800,000 826,216 Cleveland Electric Illuminating 1st Mtge Series B 05-15-05 9.50 11,000,000 11,073,281 Columbus Southern Power 03-01-13 5.50 1,850,000(d) 1,841,888 Commonwealth Edison 02-01-08 3.70 3,600,000 3,571,452 Consolidated Natural Gas Sr Nts 04-15-11 6.85 830,000 925,093 Consumers Energy 1st Mtge 04-15-08 4.25 8,650,000(d) 8,543,865 Dominion Resources Sr Nts 09-17-12 5.70 7,150,000 7,325,232 Sr Nts Series F 08-01-33 5.25 830,000 783,994 Duke Energy 01-15-12 6.25 5,700,000 5,989,304 1st Mtge 03-05-08 3.75 5,800,000(d) 5,769,840 Duke Energy Field Services 08-16-05 7.50 2,500,000 2,729,450 Exelon Sr Nts 05-01-11 6.75 760,000 833,089 FirstEnergy Series B 11-15-11 6.45 4,700,000 4,594,532 Florida Power 1st Mtge 03-01-13 4.80 5,460,000 5,350,145 FPL Group Capital 04-11-06 3.25 1,040,000 1,044,638 Indianapolis Power & Light 07-01-13 6.30 1,040,000(d) 1,034,779 IPALCO Enterprises 11-14-08 8.38% $ 190,000 $ 199,500 11-14-11 8.63 1,400,000 1,470,000 Midamerican Energy 01-15-13 5.13 4,000,000 3,971,872 NiSource Finance Sr Nts 03-01-13 6.15 1,770,000 1,810,940 Northern States Power 1st Mtge 08-01-10 4.75 1,440,000 1,423,354 Northern States Power - Minnesota 1st Mtge Series B 08-29-12 8.00 1,560,000 1,850,556 Ohio Power 02-15-13 5.50 510,000(d) 507,757 PG&E 07-15-08 6.88 1,010,000(d) 1,027,645 PowerGen US Funding LLC 10-15-04 4.50 4,000,000 4,099,412 Public Service Colorado 1st Mtge 03-01-13 4.88 760,000(d) 730,159 Tampa Electric 08-15-07 5.38 460,000 471,282 Teco Energy Sr Nts 06-15-10 7.50 465,000 453,375 Xcel Energy Sr Nts 07-01-08 3.40 1,190,000(d) 1,131,404 ------------------- Total 84,116,160 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (0.5%) ANR Pipeline 03-15-10 8.88 1,095,000 1,155,225 Duke Energy 09-15-03 7.38 2,071,000 2,073,744 El Paso Production Holding 06-01-13 7.75 500,000(d) 480,000 NiSource Finance 07-15-14 5.40 1,620,000 1,535,760 Northwest Pipeline 03-01-10 8.13 245,000 254,800 Panhandle Eastern Pipeline 08-15-08 4.80 1,270,000(d) 1,264,628 Southern Natural Gas 03-15-10 8.88 750,000 791,250 Transcontinental Gas Pipeline Series B 08-15-11 7.00 1,000,000 981,250 ------------------- Total 8,536,657 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (1.9%) AT&T Sr Nts 11-15-06 7.00% $ 510,000(j) $ 565,575 British Telecom (U.S. Dollar) 12-15-10 8.38 6,370,000(c) 7,559,132 Citizens Communications 05-15-11 9.25 1,900,000 2,341,438 Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 2,760,000(c) 2,646,923 06-15-30 8.25 1,500,000(c) 1,801,329 France Telecom (U.S. Dollar) 03-01-11 8.25 670,000(c),(j) 799,771 03-01-31 10.00 750,000(c),(j) 966,749 SBC Communications 03-15-11 6.25 1,935,000 2,090,992 08-15-12 5.88 2,240,000 2,366,762 Verizon Global Funding 06-15-12 6.88 980,000 1,079,625 Verizon New England Sr Nts 09-15-11 6.50 7,460,000 8,084,998 Verizon Pennsylvania Cl A 11-15-11 5.65 3,470,000 3,570,595 ------------------- Total 33,873,889 - -------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $1,789,425,998) $ 1,763,360,962 - --------------------------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) COMMON STOCKS (--%) BayCorp Holdings 28(b) $ 364 Davel Communications 1,087,416(b) 8,699 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $7,144,987) $ 9,063 - -----------------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) PREFERRED STOCK (--%) Intermedia Communications 13.50% Pay-in-kind Series B 1 $ 8 - ----------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCK (Cost: $496) $ 8 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 108 AXP VP - DIVERSIFIED BOND FUND
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (15.2%)(n) U.S. GOVERNMENT AGENCY (7.0%) Federal Natl Mtge Assn Disc Nts 10-01-03 0.98% $ 39,700,000 $ 39,664,005 10-15-03 1.06 17,700,000 17,677,143 11-12-03 1.07 25,000,000 24,948,725 11-19-03 1.05 17,300,000 17,261,023 12-01-03 1.07 24,500,000 24,435,688 ------------------- Total 123,986,584 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (8.2%) AEGON Funding 11-25-03 1.08% $ 10,000,000(e) $ 9,973,844 BASF 11-24-03 1.06 9,700,000(e) 9,674,917 11-24-03 1.07 7,700,000(e) 7,680,089 CAFCO LLC 10-21-03 1.07 5,000,000(e) 4,992,124 Charta LLC 09-19-03 1.07 11,400,000(e) 11,392,884 11-18-03 1.08 10,000,000(e) 9,975,925 Citigroup 09-02-03 1.10 4,500,000 4,499,450 Dexia Bank (Delaware) LLC 09-03-03 1.03 10,800,000 10,798,455 Fairway Finance 09-02-03 1.10 13,400,000(e) 13,398,362 Fleet Funding 09-03-03 1.04% $ 14,936,000(e) $ 14,934,274 Galaxy Funding 10-17-03 1.07 3,800,000(e) 3,794,466 10-22-03 1.07 8,600,000(e) 8,586,197 Old Line Funding 09-05-03 1.04 18,100,000(e) 18,096,341 Park Avenue Receivables 09-09-03 1.03 5,200,000(e) 5,198,363 09-22-03 1.05 11,800,000(e) 11,791,740 Total 144,787,431 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $268,769,014) $ 268,774,015 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $2,065,340,495)(o) $ 2,032,144,048 ==========================================================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 109 AXP VP - DIVERSIFIED BOND FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Aug. 31, 2003, the value of foreign securities represented 4.7% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (h) At Aug. 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $207,512,889. (i) 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 Aug. 31, 2003. (j) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (k) Pay-in-kind securities are securities in which the issuer makes interest or dividend payments in cash or in additional securities. The securities usually have the same terms as the original holdings. (l) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Aug. 31, 2003, is as follows:
ACQUISITION SECURITY DATES COST --------------------------------------------------------------------------------------------------------- AOA Holdings LLC 12.00% Sr Nts 2008 06-02-02 $ 2,500,000 Veninfotel (U.S. Dollar) 13.00% Cv Pay-in-kind 2005 05-01-02 thru 3-10-03 9,009,157
(m) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 7 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT --------------------------------------------------------------------------------------------------------- PURCHASE CONTRACTS Eurodollar, Sept. 2003, 90-day $ 96,500,000 Eurodollar, Sept. 2007, 90-day 89,250,000 SALE CONTRACTS U.S. Treasury Notes, Sept. 2003, 5-year 400,000 U.S. Treasury Notes, Sept. 2003, 10-year 40,500,000 U.S. Treasury Notes, Dec. 2003, 5-year 11,400,000 U.S. Treasury Notes, Dec. 2003, 10-year 109,800,000
(n) At Aug. 31, 2003, cash or short-term securities were held to cover open call options on futures written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Notes, Dec. 2003, 10-year $ 19,700,000 $ 110 Nov. 2003 $ 366,296
At Aug. 31, 2003, cash or short-term securities were designated to cover open put options on futures written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Notes, Dec. 2003, 10-year $ 19,700,000 $ 110 Nov. 2003 $ 421,702
(o) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $2,066,631,709 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 18,021,259 Unrealized depreciation (52,508,920) ---------------------------------------------------------------------------------------------------------------------------- Net unrealized depreciation $ (34,487,661) ----------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 110 INVESTMENTS IN SECURITIES AXP VP - DIVERSIFIED EQUITY INCOME FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (96.5%) AEROSPACE & DEFENSE (4.0%) Goodrich 223,517 $ 5,818,148 Honeywell Intl 168,200 4,876,118 Rockwell Automation 83,600 2,275,592 United Technologies 23,800 1,909,950 ------------------ Total 14,879,808 - ----------------------------------------------------------------------------------------------------------------- AIRLINES (2.5%) AMR 369,800(b) 4,067,800 Continental Airlines Cl B 172,500(b) 2,632,350 Delta Air Lines 100,200 1,289,574 Northwest Airlines Cl A 135,300(b) 1,213,641 ------------------ Total 9,203,365 - ----------------------------------------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (2.2%) Eaton 36,699 3,436,494 General Motors 111,514 4,583,226 ------------------ Total 8,019,720 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (3.2%) Bank of America 54,600 4,327,050 FleetBoston Financial 92,673 2,742,194 Washington Mutual 125,910 4,907,972 ------------------ Total 11,977,216 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.4%) Altria Group 34,400 1,417,968 - ----------------------------------------------------------------------------------------------------------------- BROKER DEALERS (3.4%) J.P. Morgan Chase 52,820 1,807,500 Lehman Brothers Holdings 28,423 1,868,244 Merrill Lynch 81,200 4,366,936 Morgan Stanley 92,368 4,506,635 ------------------ Total 12,549,315 - ----------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.6%) Fluor 64,955 2,392,942 - ----------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.5%) Vodafone Group ADR 91,100(c) 1,667,130 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (1.5%) Dow Chemical 143,111 4,941,623 Imperial Chemical Inds ADR 62,400(c) 773,760 ------------------ Total 5,715,383 - ----------------------------------------------------------------------------------------------------------------- COMPUTER HARDWARE (0.8%) Hewlett-Packard 140,500 2,798,760 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (1.0%) Electronic Data Systems 163,900 3,577,937 - ----------------------------------------------------------------------------------------------------------------- ENERGY (8.8%) BP ADR 103,121(c) $ 4,302,208 Burlington Resources 15,900 769,878 ChevronTexaco 85,885 6,258,439 ConocoPhillips 78,050 4,358,312 Kerr-McGee 113,728 4,998,346 Marathon Oil 184,000 5,131,760 Petroleo Brasileiro ADR 158,400(c) 3,500,640 Unocal 107,200 3,282,464 ------------------ Total 32,602,047 - ----------------------------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (2.9%) Baker Hughes 23,000 769,580 Halliburton 64,700 1,564,446 McDermott Intl 406,250(b) 2,055,625 Schlumberger 34,400 1,703,144 Tidewater 156,649 4,498,959 ------------------ Total 10,591,754 - ----------------------------------------------------------------------------------------------------------------- ENGINEERING & CONSTRUCTION (1.4%) Hanson ADR 156,694(c) 5,100,390 - ----------------------------------------------------------------------------------------------------------------- FINANCE COMPANIES (2.4%) Citigroup 204,461 8,863,384 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (1.9%) Capital One Financial 68,900 3,679,260 MBNA 148,100 3,456,654 ------------------ Total 7,135,914 - ----------------------------------------------------------------------------------------------------------------- FOOD (0.6%) Archer-Daniels-Midland 152,490 2,115,036 - ----------------------------------------------------------------------------------------------------------------- FURNITURE & APPLIANCES (2.1%) Stanley Works 61,500 1,861,605 Whirlpool 86,925 6,048,242 ------------------ Total 7,909,847 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (0.5%) Schering-Plough 112,100 1,702,799 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (3.7%) PacifiCare Health Systems 226,784(b) 11,293,843 Tenet Healthcare 142,700(b) 2,290,335 ------------------ Total 13,584,178 - ----------------------------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.9%) Burlington Northern Santa Fe 254,120 7,204,302 - ----------------------------------------------------------------------------------------------------------------- INSURANCE (12.1%) ACE 152,500(c) $ 4,910,500 Hartford Financial Services Group 35,600 1,894,632 Jefferson-Pilot 75,448 3,340,083 Lincoln Natl 75,515 2,674,741 Loews 107,156 4,410,541 SAFECO 142,122 5,124,919 St. Paul Companies 164,500 5,718,020 Torchmark 74,566 3,009,484 Travelers Property Casualty Cl A 440,582 6,780,557 UnumProvident 79,700 1,123,770 XL Capital Cl A 82,919(c) 6,281,114 ------------------ Total 45,268,361 - ----------------------------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (2.1%) Royal Caribbean Cruises 253,400 7,893,410 - ----------------------------------------------------------------------------------------------------------------- MACHINERY (8.0%) Caterpillar 169,766 12,194,291 Ingersoll-Rand Cl A 145,690(c) 8,671,468 Parker-Hannifin 100,330 4,968,342 Tomkins ADR 227,200(c) 3,794,240 ------------------ Total 29,628,341 - ----------------------------------------------------------------------------------------------------------------- MEDIA (1.1%) Donnelley (RR) & Sons 157,811 3,967,369 - ----------------------------------------------------------------------------------------------------------------- METALS (1.1%) Alcoa 139,617 3,987,462 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (9.8%) Cooper Inds Cl A 48,400 2,463,076 Crane 135,222 3,460,331 Diebold 50,790 2,483,631 Dover 63,341 2,408,225 Eastman Kodak 96,931 2,703,406 Martin Marietta Materials 43,869 1,677,112 Monsanto 156,300 4,018,473 Pentair 47,300 2,024,440 Pitney Bowes 69,009 2,691,351 Textron 148,395 6,677,774 YORK Intl 180,831 5,837,224 ------------------ Total 36,445,043 - ----------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (2.6%) Abitibi-Consolidated 341,050(c) 2,581,749 Intl Paper 173,090 7,018,799 ------------------ Total 9,600,548 - ----------------------------------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (2.3%) Crescent Real Estate Equities 434,287 6,301,504 Starwood Hotels & Resorts Worldwide 61,700 2,087,311 ------------------ Total 8,388,815 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 111 AXP VP - DIVERSIFIED EQUITY INCOME FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) RETAIL -- GENERAL (1.6%) Limited Brands 227,200 $ 3,853,312 Penney (JC) 97,200 2,062,584 ------------------ Total 5,915,896 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GROCERY (1.3%) SUPERVALU 207,035 4,989,544 TELECOM EQUIPMENT & SERVICES (1.3%) Motorola 184,600 1,980,758 Nokia ADR 162,800(c) 2,652,012 ------------------ Total 4,632,770 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (0.5%) El Paso 244,500 1,794,630 UTILITIES -- TELEPHONE (6.4%) AT&T 178,800 3,987,240 BellSouth 217,600 5,483,520 SBC Communications 186,300 4,189,887 Sprint (FON Group) 279,600 4,129,692 Verizon Communications 164,786 5,820,242 ------------------ Total 23,610,581 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $332,290,792) $ 357,131,965 - -----------------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) PREFERRED STOCKS (0.6%) Baxter Intl 7.00% Cv 17,800 $ 920,794 Xerox Cv 6,250(b) 668,438 7.50% Cv 9,000(d) 601,875 - ----------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (Cost: $1,965,000) $ 2,191,107 - -----------------------------------------------------------------------------------------------------------------
ISSUER ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (4.3%) U.S. GOVERNMENT AGENCY (2.6%) Federal Natl Mtge Assn Disc Nts 10-22-03 1.03% $ 5,000,000 $ 4,992,582 10-29-03 0.99 1,600,000 1,597,416 11-12-03 1.07 3,000,000 2,993,847 Total 9,583,845 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (1.7%) Credit Suisse First Boston 10-21-03 1.06 1,800,000(e) 1,797,191 Fairway Finance 09-02-03 1.10 4,600,000(e) 4,599,438 ------------------- Total 6,396,629 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $15,980,002) $ 15,980,474 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $350,235,794)(f) $ 375,303,546 ==========================================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 12.0% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (f) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $354,536,643 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 40,621,398 Unrealized depreciation (19,854,495) ---------------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation $ 20,766,903 ----------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 112 INVESTMENTS IN SECURITIES AXP VP - EMERGING MARKETS FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (89.3%)(C) BRAZIL (7.0%) BEVERAGES & TOBACCO (0.6%) Companhia de Bebidas das Americas ADR 4,434 $ 98,390 - ----------------------------------------------------------------------------------------------------------------- ENERGY (2.5%) Petroleo Brasileiro ADR 7,879 174,126 Petroleo Brasileiro ADR 11,158 227,623 ------------------ Total 401,749 - ----------------------------------------------------------------------------------------------------------------- METALS (0.7%) Companhia Vale do Rio Doce ADR 3,100 116,095 - ----------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (1.1%) Aracruz Celulose ADR 6,367 174,010 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (2.1%) Brasil Telecom Participacoes 9,122 345,724 - ----------------------------------------------------------------------------------------------------------------- CHILE (1.7%) BANKS AND SAVINGS & LOANS Banco Santander Chile ADR 6,300 131,985 - ----------------------------------------------------------------------------------------------------------------- METALS (0.9%) Antofagasta 12,304 151,802 - ----------------------------------------------------------------------------------------------------------------- CHINA (9.7%) AUTOMOTIVE & RELATED (1.5%) Denway Motors Limited 438,000 247,097 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (1.1%) BOC Hong Kong Holdings 138,500 177,579 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (0.7%) Sinopec Shanghai Petrochemical 484,000 117,287 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (1.1%) Legend Group 398,000 170,950 - ----------------------------------------------------------------------------------------------------------------- ENERGY (1.3%) CNOOC 109,000 204,043 - ----------------------------------------------------------------------------------------------------------------- METALS (0.7%) Yanzhou Coal Mining Cl H 196,000 116,856 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (1.1%) Cosco Pacific 66,000 73,622 Zhejiang Expressway 224,000 109,136 ------------------ Total 182,758 - ----------------------------------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (0.6%) Sun Hung Kai Properties 14,000 100,970 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (1.6%) China Mobile 102,000 262,214 - ----------------------------------------------------------------------------------------------------------------- HUNGARY (1.3%) BANKS AND SAVINGS & LOANS OTP Bank 18,300(b) $ 208,362 - ----------------------------------------------------------------------------------------------------------------- INDIA (5.7%) BANKS AND SAVINGS & LOANS (1.9%) Housing Development Finance 30,146(b) 317,342 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (1.2%) ITC Limited 10,843(b) 196,896 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (1.7%) Infosys Technologies 3,203 273,234 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (0.9%) Cipla Limited 6,525 143,830 - ----------------------------------------------------------------------------------------------------------------- INDONESIA (1.2%) BANKS AND SAVINGS & LOANS (0.3%) PT Bank Danamon Indonesia 272,000 47,283 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.9%) Hanjiya Mandala Sampoerna 321,000 153,217 - ----------------------------------------------------------------------------------------------------------------- ISRAEL (2.2%) BANKS AND SAVINGS & LOANS (0.7%) Bank Hapoalim 60,007(b) 117,070 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (0.5%) Check Point Software Technologies 4,575(b) 79,925 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (1.0%) Teva Pharmaceutical Inds ADR 2,846 167,095 - ----------------------------------------------------------------------------------------------------------------- MALAYSIA (5.1%) BANKS AND SAVINGS & LOANS (1.8%) Malayan Banking Berhad 121,900 296,730 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.8%) British American Tobacco Malaysia Berhad 11,800 127,316 - ----------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (1.4%) Maxis Communications Berhad 136,000 230,842 - ----------------------------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (1.1%) Resorts World Berhad 67,300 182,418 - ----------------------------------------------------------------------------------------------------------------- MEXICO (7.7%) BEVERAGES & TOBACCO (1.4%) Grupo Modelo Series C 93,877 $ 224,631 - ----------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (1.9%) America Movil ADR Series L 13,657 314,111 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (0.9%) Grupo Aeroportuario del Sureste ADR 9,900 147,213 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (0.8%) Wal-Mart de Mexico 49,356 135,234 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (2.7%) Telefonos de Mexico ADR Cl L 14,390 436,161 - ----------------------------------------------------------------------------------------------------------------- RUSSIA (5.2%) ENERGY (4.4%) Lukoil Holding ADR 5,062 394,835 YUKOS ADR 5,650 323,463 ------------------ Total 718,298 - ----------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (0.8%) VimpelCom ADR 2,344(b) 126,365 - ----------------------------------------------------------------------------------------------------------------- SINGAPORE (1.0%) BANKS AND SAVINGS & LOANS United Overseas Bank 22,000 159,393 - ----------------------------------------------------------------------------------------------------------------- SOUTH AFRICA (5.9%) BANKS AND SAVINGS & LOANS (2.3%) Standard Bank Group 81,333 365,055 - ----------------------------------------------------------------------------------------------------------------- INSURANCE (1.0%) Old Mutual 102,700(b) 155,948 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (0.9%) Imperial Holdings 17,700(b) 141,866 - ----------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (1.8%) Sappi 23,492 299,659 - ----------------------------------------------------------------------------------------------------------------- SOUTH KOREA (17.1%) AUTOMOTIVE & RELATED (0.5%) Hyundai Motor 2,530 84,172 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (3.4%) Kookmin Bank 14,920 543,869 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.9%) KT&G 9,140 151,267 - ----------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.8%) Kumgang Korea Chemical 1,490 122,159 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (1.7%) LG Chem 6,350 278,629 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 113 AXP VP - EMERGING MARKETS FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) SOUTH KOREA (CONT.) ELECTRONICS (8.6%) LG Electronics 5,990 $ 325,364 Samsung Electronics 2,850 1,052,196 ------------------ Total 1,377,560 - ----------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (1.3%) SK Telecom 1,275 217,505 - ----------------------------------------------------------------------------------------------------------------- TAIWAN (13.3%) AUTOMOTIVE & RELATED (0.9%) China Motor 85,750 150,624 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (3.7%) Chinatrust Financial Holding 425,130 345,999 Taishin Financial Holdings 443,000 252,899 Total 598,898 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (1.5%) Formosa Chemicals & Fibre 185,480 242,181 - ----------------------------------------------------------------------------------------------------------------- COMPUTER HARDWARE (3.4%) Compal Electronics 162,000 246,619 Hon Hai Precision Inds 73,600 303,811 ------------------ Total 550,430 - ----------------------------------------------------------------------------------------------------------------- ELECTRONICS (2.9%) Taiwan Semiconductor Mfg 218,560 428,700 United Microelectronics 48,000 45,751 ------------------ Total 474,451 - ----------------------------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.9%) Evergreen Marine 207,060 142,453 - ----------------------------------------------------------------------------------------------------------------- THAILAND (3.8%) BANKS AND SAVINGS & LOANS (1.9%) Bangkok Bank 149,300 $ 307,030 - ----------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.9%) Siam Cement 35,900 148,528 - ----------------------------------------------------------------------------------------------------------------- HOME BUILDING (1.0%) Land & Houses Public 653,400 170,148 - ----------------------------------------------------------------------------------------------------------------- TURKEY (1.3%) FOOD (0.7%) Migros Turk T.A.S 10,693,589 115,194 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (0.6%) Koc Holding 9,422,000 92,758 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $12,431,134) $ 14,532,859 - -----------------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) PREFERRED STOCK (3.6%) BRAZIL Banco Itau Holding Financeira 4,353,000 $ 329,599 - ----------------------------------------------------------------------------------------------------------------- SOUTH KOREA Samsung Electronics 1,380 249,472 - ----------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCK (Cost: $506,188) $ 579,071 - -----------------------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (6.1%) U.S. GOVERNMENT AGENCY Federal Natl Mtge Assn Disc Nts 10-08-03 0.99% $ 500,000 $ 499,456 11-26-03 1.07 500,000 498,772 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $998,156) $ 998,228 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $13,935,478)(d) $ 16,110,158 ==========================================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. (d) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $14,119,848 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 2,063,264 Unrealized depreciation (72,954) ---------------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation $ 1,990,310 ----------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 114 INVESTMENTS IN SECURITIES AXP VP - EQUITY SELECT FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (96.2%) BROKER DEALERS (2.2%) Legg Mason 51,985 $ 3,734,083 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (1.9%) Sigma-Aldrich 58,586 3,207,584 - ----------------------------------------------------------------------------------------------------------------- COMPUTER HARDWARE (1.6%) Network Appliance 112,500(b) 2,521,125 NVIDIA 12,400(b) 225,184 ------------------ Total 2,746,309 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (23.9%) Acxiom 122,295(b) 1,976,287 Advent Software 47,614(b) 804,677 BMC Software 225,067(b) 3,303,984 Citrix Systems 18,800(b) 387,092 Dendrite Intl 212,305(b) 3,089,038 Digital River 26,000(b) 693,680 DST Systems 32,962(b) 1,305,295 Electronic Arts 11,450(b) 1,027,638 Fair, Isaac & Co 77,905 4,565,232 Fiserv 122,613(b) 4,763,514 Intuit 29,672(b) 1,344,735 Investors Financial Services 56,945 1,702,086 Juniper Networks 56,300(b) 969,486 Kronos 8,650(b) 499,909 Magma Design Automation 21,600(b) 455,760 Manugistics Group 134,265(b) 617,619 McData Cl B 147,934(b) 1,488,216 Mercury Interactive 10,900(b) 478,401 NetScreen Technologies 68,100(b) 1,629,633 Paychex 121,155 4,361,580 QLogic 13,500(b) 661,770 Reynolds & Reynolds Cl A 13,600 395,080 SunGard Data Systems 133,000(b) 3,750,600 Symantec 3,200(b) 183,776 Synopsys 2,450(b) 167,115 ------------------ Total 40,622,203 - ----------------------------------------------------------------------------------------------------------------- ELECTRONICS (9.9%) Altera 51,300(b) 1,151,172 American Power Conversion 122,850 2,201,472 Broadcom Cl A 28,900(b) 794,172 Integrated Circuit Systems 14,900(b) 514,348 KLA-Tencor 23,130(b) 1,372,997 Maxim Integrated Products 79,924 3,589,387 Microchip Technology 121,137 3,393,047 Micron Technology 39,000(b) 560,040 Novellus Systems 77,926(b) 3,113,923 Symbol Technologies 12,100 163,834 ------------------ Total 16,854,392 - ----------------------------------------------------------------------------------------------------------------- ENERGY (6.3%) Apache 37,573 $ 2,591,786 Murphy Oil 63,288 3,653,616 Newfield Exploration 43,239(b) 1,698,860 Pogo Producing 59,193 2,720,510 ------------------ Total 10,664,772 - ----------------------------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.6%) ENSCO Intl 70,362 1,966,618 Nabors Inds 20,600(b),(c) 827,090 ------------------ Total 2,793,708 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (0.1%) CapitalSource 11,900(b) 209,440 - ----------------------------------------------------------------------------------------------------------------- FOOD (0.4%) Performance Food Group 17,243(b) 676,098 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (14.8%) American Pharmaceutical Partners 34,600(b) 1,648,344 Applera-Applied Biosystems Group 81,119 1,765,149 Biogen 51,639(b) 2,037,675 Biomet 121,408 3,609,459 Diagnostic Products 80,435 3,048,487 Esperion Therapeutics 17,300(b) 312,957 Gen-Probe 17,300(b) 1,094,052 IDEC Pharmaceuticals 57,345(b) 1,992,739 Invitrogen 55,816(b) 3,218,909 MedImmune 93,810(b) 3,271,154 St. Jude Medical 15,300(b) 796,671 Techne 67,255(b) 2,255,733 ------------------ Total 25,051,329 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (6.9%) AmerisourceBergen 13,050 759,641 Express Scripts Cl A 49,509(b) 3,208,678 First Health Group 44,665(b) 1,171,116 Health Management Associates Cl A 167,650 3,735,243 Lincare Holdings 81,296(b) 2,815,280 ------------------ Total 11,689,958 - ----------------------------------------------------------------------------------------------------------------- INDUSTRIAL SERVICES (3.4%) Cintas 44,281 1,768,140 Fastenal 101,112 4,087,958 ------------------ Total 5,856,098 - ----------------------------------------------------------------------------------------------------------------- INSURANCE (0.2%) Axis Capital Holdings 15,300(b),(c) 375,615 - ----------------------------------------------------------------------------------------------------------------- MEDIA (3.9%) Catalina Marketing 45,880(b) $ 638,191 Citadel Broadcasting 19,500(b) 430,560 Univision Communications Cl A 94,166(b) 3,530,283 Westwood One 64,009(b) 2,054,689 ------------------ Total 6,653,723 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (6.1%) Danaher 39,807 3,075,092 DeVry 98,475(b) 2,555,426 Martin Marietta Materials 44,536 1,702,611 Robert Half Intl 86,577(b) 1,925,472 Strayer Education 11,750 1,122,125 ------------------ Total 10,380,726 - ----------------------------------------------------------------------------------------------------------------- RESTAURANTS (5.1%) Brinker Intl 90,450(b) 3,093,390 CBRL Group 43,201 1,506,851 Cheesecake Factory (The) 49,448(b) 1,801,885 Starbucks 82,252(b) 2,339,247 ------------------ Total 8,741,373 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (7.3%) 99 Cents Only Stores 93,420(b) 3,347,239 Whole Foods Market 78,539(b) 4,267,024 Williams-Sonoma 160,222(b) 4,904,395 ------------------ Total 12,518,658 - ----------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (0.6%) Corning 46,700(b) 385,275 JDS Uniphase 209,000(b) 718,960 ------------------ Total 1,104,235 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $147,828,652) $ 163,880,304 - -----------------------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (4.1%) U.S. GOVERNMENT AGENCY (3.0%) Federal Natl Mtge Assn Disc Nts 10-01-03 0.98% $ 1,000,000 $ 999,093 10-22-03 1.00 1,300,000 1,298,071 11-12-03 1.07 2,900,000 2,894,053 ------------------- Total 5,191,217 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (1.1%) Societe Generale North America 09-02-03 1.05 1,800,000 1,799,790 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $6,990,680) $ 6,991,007 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $154,819,332)(d) $ 170,871,311 ==========================================================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 115 AXP VP - EQUITY SELECT FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 0.7% of net assets. (d) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $155,653,190 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 18,633,071 Unrealized depreciation (3,414,950) - -------------------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation $ 15,218,121 - --------------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 116 INVESTMENTS IN SECURITIES AXP VP - GLOBAL BOND FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (94.7%)(c) AUSTRALIA (1.7%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75% $ 50,000(d) $ 51,250 New South Wales Treasury (Australian Dollar) 03-01-08 8.00 4,150,000 2,959,263 Telstra (U.S. Dollar) 04-01-12 6.38 250,000 272,739 Westpac Banking (Japanese Yen) 09-22-03 0.88 220,000,000 1,886,591 ------------------- Total 5,169,843 - -------------------------------------------------------------------------------------------------------------------------- AUSTRIA (2.9%) Oesterreich Kontrollbank (Japanese Yen) 03-22-10 1.80 530,000,000 4,795,391 Republic of Austria (European Monetary Unit) 10-20-07 5.50 3,500,000 4,153,339 ------------------- Total 8,948,730 - -------------------------------------------------------------------------------------------------------------------------- BRAZIL (1.0%) Federal Republic of Brazil (U.S. Dollar) 03-12-08 11.50 700,000 742,000 04-15-10 12.00 1,700,000 1,786,700 04-15-14 8.00 714,217 643,010 ------------------- Total 3,171,710 - -------------------------------------------------------------------------------------------------------------------------- CANADA (3.4%) Canadian Pacific Railway (Canadian Dollar) 06-15-10 4.90 195,000(d) 137,641 CanWest Media (U.S. Dollar) Series B 04-15-13 7.63 125,000 129,375 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 100,000(d) 98,196 Conoco Funding (U.S. Dollar) 10-15-11 6.35 300,000 326,513 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 80,000 84,600 Govt of Canada (Canadian Dollar) 11-05-08 5.25 1,000,000 1,073,974 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 150,000(d) 148,125 Province of British Columbia (Canadian Dollar) 08-23-10 6.38% 3,900,000 $ 3,070,405 Province of Ontario (Canadian Dollar) 03-08-06 5.90 2,000,000 1,524,594 (Japanese Yen) 01-25-10 1.88 180,000,000 1,626,341 Province of Quebec (Japanese Yen) (MBIA Insured) 05-09-13 1.60 80,000,000(f) 696,094 (U.S. Dollar) 12-01-05 6.50 2,000,000 1,536,662 Rogers Cable (U.S. Dollar) 06-15-13 6.25 165,000 154,894 Sun Media (U.S. Dollar) Sr Nts 02-15-13 7.63 100,000 103,250 ------------------- Total 10,710,664 - -------------------------------------------------------------------------------------------------------------------------- COLOMBIA (0.5%) Republic of Colombia (U.S. Dollar) 01-23-12 10.00 1,500,000 1,620,000 - -------------------------------------------------------------------------------------------------------------------------- CROATIA (0.1%) Croatia (European Monetary Unit) 03-14-11 6.75 340,000 411,921 - -------------------------------------------------------------------------------------------------------------------------- DENMARK (0.9%) Kingdom of Denmark (Danish Krone) 03-15-06 8.00 8,000,000 1,321,974 Realkredit Danmark (Danish Krone) 01-01-05 4.00 9,000,000 1,353,969 ------------------- Total 2,675,943 - -------------------------------------------------------------------------------------------------------------------------- DOMINICAN REPUBLIC (0.4%) Dominican Republic (U.S. Dollar) 01-23-13 9.04 1,300,000(d) 1,228,500 - -------------------------------------------------------------------------------------------------------------------------- EL SALVADOR (0.3%) Republic of El Salvador (U.S. Dollar) 01-24-23 7.75 1,010,000(d) 1,040,300 - -------------------------------------------------------------------------------------------------------------------------- FINLAND (2.2%) Republic of Finland (European Monetary Unit) 07-04-06 2.75 6,380,000 6,966,446 - -------------------------------------------------------------------------------------------------------------------------- FRANCE (5.8%) Cie Financement Foncier (European Monetary Unit) 06-24-05 5.00% 900,000 $ 1,027,593 Crown Euro Holdings (U.S. Dollar) 03-01-13 10.88 25,000(d) 27,375 Dexia Municipal Agency (European Monetary Unit) 04-26-07 5.38 2,200,000 2,582,620 France Telecom (U.S. Dollar) 03-01-06 8.70 350,000 388,986 Govt of France (European Monetary Unit) 04-25-05 7.50 2,800,000 3,311,134 01-12-07 3.75 6,700,000 7,495,176 10-25-11 5.00 2,300,000 2,689,540 Michelin Finance Luxembourg (European Monetary Unit) 04-16-09 6.13 250,000 298,157 Rhodia (U.S. Dollar) 06-01-10 7.63 10,000(d) 10,200 06-01-11 8.88 5,000(d) 5,025 Vivendi Universal (U.S. Dollar) Sr Nts 07-15-08 6.25 85,000(d) 85,000 ------------------- Total 17,920,806 - -------------------------------------------------------------------------------------------------------------------------- GERMANY (14.1%) Allgemeine Hypo Bank (European Monetary Unit) 09-02-09 5.00 1,410,000(d) 1,635,684 Bayerische Landesbank (Japanese Yen) Sr Nts 04-22-13 1.40 80,000,000 684,848 DaimlerChrysler North American Holding (European Monetary Unit) 01-16-07 5.63 330,000 379,549 Depfa Pfandbriefbank (European Monetary Unit) 01-15-10 5.50 1,200,000 1,431,616 Deutsche Bank (European Monetary Unit) 07-28-09 4.25 250,000 276,818 Deutsche Telekom Intl Finance (European Monetary Unit) 05-29-07 7.50 250,000 305,813 (U.S. Dollar) 07-22-13 5.25 700,000 671,321 Eurohypo AG (European Monetary Unit) 07-05-10 5.75 1,500,000 1,816,762
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 117 AXP VP - GLOBAL BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) GERMANY (CONT.) Federal Republic of Germany (European Monetary Unit) 08-19-05 5.00% 4,400,000 $ 5,038,974 07-04-08 4.13 5,400,000 6,089,278 07-04-09 4.50 5,500,000 6,290,251 01-04-10 5.38 4,240,000 5,066,628 06-20-16 6.00 2,914,364 3,678,847 07-04-27 6.50 3,570,000 4,821,803 Hypothekenbk In Essen (European Monetary Unit) 07-06-09 4.25 1,400,000 1,567,100 KFW Intl Finance (British Pound) 12-07-05 6.38 1,600,000 2,641,756 Westfaelische Hypobank (European Monetary Unit) 04-24-06 4.75 1,200,000 1,372,289 ------------------- Total 43,769,337 - -------------------------------------------------------------------------------------------------------------------------- GREECE (3.3%) Hellenic Republic (European Monetary Unit) 06-21-06 2.75 4,700,000 5,117,392 05-18-11 5.35 4,300,000 5,106,200 ------------------- Total 10,223,592 - -------------------------------------------------------------------------------------------------------------------------- HUNGARY (1.8%) Govt of Hungary (Hungarian Forint) 04-12-05 7.75 970,000,000 4,062,840 02-12-11 7.50 390,000,000 1,674,078 ------------------- Total 5,736,918 - -------------------------------------------------------------------------------------------------------------------------- IRELAND (--%) JSG Funding (U.S. Dollar) Sr Nts 10-01-12 9.63 60,000 64,800 - -------------------------------------------------------------------------------------------------------------------------- ITALY (2.8%) Buoni Poliennali Del Tes (European Monetary Unit) 11-01-26 7.25 3,075,191 4,458,785 Republic of Italy (Japanese Yen) 03-27-08 3.80 400,000,000 3,908,687 Telecom Italia (European Monetary Unit) 02-01-07 5.63 250,000 287,924 ------------------- Total 8,655,396 - -------------------------------------------------------------------------------------------------------------------------- JAPAN (2.4%) Development Bank of Japan (Japanese Yen) 06-20-12 1.40 770,000,000 6,623,628 Toyota Motor Credit (Japanese Yen) 06-09-08 .75 113,000,000 963,617 ------------------- Total 7,587,245 - -------------------------------------------------------------------------------------------------------------------------- MALAYSIA (0.2%) Petronas Capital (U.S. Dollar) 05-22-12 7.00% $ 700,000(d) $ 765,774 - -------------------------------------------------------------------------------------------------------------------------- MEXICO (1.0%) United Mexican States (U.S. Dollar) 03-03-15 6.63 3,060,000 3,044,700 - -------------------------------------------------------------------------------------------------------------------------- NETHERLANDS (2.2%) Bank of Nederlandse Gemeenten (British Pound) 08-06-07 7.38 760,000 1,317,264 Govt of Netherlands (European Monetary Unit) 07-15-12 5.00 4,500,000 5,259,110 Intl Nederland Bank (European Monetary Unit) Sr Nts 01-29-09 4.25 300,000 336,488 ------------------- Total 6,912,862 - -------------------------------------------------------------------------------------------------------------------------- NETHERLANDS ANTILLES (0.2%) RWE Finance (European Monetary Unit) 10-26-07 5.50 250,000 292,663 Vodafone Finance (European Monetary Unit) 05-27-09 4.75 360,000 405,634 ------------------- Total 698,297 - -------------------------------------------------------------------------------------------------------------------------- NEW ZEALAND (1.0%) Govt of New Zealand (New Zealand Dollar) 11-15-06 8.00 5,100,000 3,153,208 - -------------------------------------------------------------------------------------------------------------------------- NORWAY (1.7%) A/S Eksportfinans (Japanese Yen) 06-21-10 1.80 180,000,000 1,610,614 Govt of Norway (Norwegian Krone) 05-16-11 6.00 27,000,000 3,850,377 ------------------- Total 5,460,991 - -------------------------------------------------------------------------------------------------------------------------- PERU (0.4%) Republic of Peru (U.S. Dollar) 02-21-12 9.13 250,000 267,500 02-06-15 9.88 950,000 1,045,000 ------------------- Total 1,312,500 - -------------------------------------------------------------------------------------------------------------------------- PHILIPPINE ISLANDS (0.1%) Republic of Philippines (U.S. Dollar) 01-15-19 9.88 370,000 386,650 - -------------------------------------------------------------------------------------------------------------------------- POLAND (0.4%) Republic of Poland (Polish Zloty) 02-12-06 8.50 4,850,000 1,315,747 - -------------------------------------------------------------------------------------------------------------------------- ROMANIA (0.1%) Govt of Romania (European Monetary Unit) 05-08-12 8.50% 240,000 $ 293,007 - -------------------------------------------------------------------------------------------------------------------------- RUSSIA (0.5%) Federation of Russia (U.S. Dollar) 03-31-30 5.00 1,300,000(d),(k) 1,187,875 03-31-30 5.00 300,000(k) 274,500 ------------------- Total 1,462,375 - -------------------------------------------------------------------------------------------------------------------------- SINGAPORE (--%) Flextronics Intl (U.S. Dollar) Sr Sub Nts 05-15-13 6.50 100,000(d) 95,750 - -------------------------------------------------------------------------------------------------------------------------- SOUTH KOREA (0.1%) Korea Development Bank (Japanese Yen) 06-25-08 0.98 40,000,000 332,388 - -------------------------------------------------------------------------------------------------------------------------- SPAIN (5.2%) Govt of Spain (European Monetary Unit) 10-31-07 4.25 7,300,000 8,293,619 01-31-10 4.00 5,800,000 6,433,496 La Caixa De Barcelona (European Monetary Unit) 03-04-10 3.50 1,500,000 1,602,964 ------------------- Total 16,330,079 - -------------------------------------------------------------------------------------------------------------------------- SUPRA-NATIONAL (1.9%) European Investment Bank (British Pound) 12-07-06 7.63 1,500,000 2,586,091 Inter-American Development Bank (Japanese Yen) 07-08-09 1.90 361,000,000 3,290,618 ------------------- Total 5,876,709 - -------------------------------------------------------------------------------------------------------------------------- SWEDEN (0.4%) Govt of Sweden (Swedish Krona) 04-20-06 3.50 10,300,000 1,227,569 - -------------------------------------------------------------------------------------------------------------------------- UKRAINE (0.2%) Govt of Ukraine (U.S. Dollar) 06-11-13 7.65 550,000(d) 539,000 - -------------------------------------------------------------------------------------------------------------------------- UNITED KINGDOM (2.0%) British Telecom (U.S. Dollar) 12-15-10 8.38 350,000 415,337 GE Financial Assurance (Japanese Yen) 06-20-11 1.60 80,000,000 662,367 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 300,000 299,190
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 118 AXP VP - GLOBAL BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) UNITED KINGDOM (CONT.) United Kingdom Treasury (British Pound) 12-07-06 7.50% 350,000 $ 606,483 12-07-07 7.25 2,350,000 4,122,278 ------------------- Total 6,105,655 - -------------------------------------------------------------------------------------------------------------------------- UNITED STATES (33.6%) Airgas (U.S. Dollar) 10-01-11 9.13 75,000 82,500 Allied Waste North America (U.S. Dollar) Series B 04-01-08 8.88 100,000 107,250 AmerisourceBergen (U.S. Dollar) Sr Nts 11-15-12 7.25 25,000 25,250 ANR Pipeline (U.S. Dollar) Sr Nts 03-15-10 8.88 100,000 105,500 AOL Time Warner (U.S. Dollar) 05-01-12 6.88 600,000 652,120 Apogent Technologies (U.S. Dollar) Sr Sub Nts 05-15-13 6.50 100,000(d) 98,250 ASIF Global Financing (U.S. Dollar) 01-17-13 4.90 900,000(d) 876,888 AT&T (U.S. Dollar) 03-15-09 6.00 5,000 5,188 (U.S. Dollar) Sr Nts 11-15-06 7.00 250,000 277,243 AT&T Broadband (U.S. Dollar) 03-15-13 8.38 48,000 57,013 AT&T Wireless Services (U.S. Dollar) Sr Nts 03-01-11 7.88 300,000 338,868 Ball (U.S. Dollar) 12-15-12 6.88 145,000 146,450 Bank of America (U.S. Dollar) Sr Nts 02-01-07 5.25 500,000 532,010 (U.S. Dollar) Sub Nts 08-15-13 4.75 500,000 479,717 Bayerische Landesbank (U.S. Dollar) Sub Nts 12-01-08 5.88 800,000 860,646 Bear Stearns Commercial Mtge Securities (U.S. Dollar) Series 2003-T10 Cl A1 03-13-40 4.00 393,406 385,861 CBD Media/Finance (U.S. Dollar) Sr Sub Nts 06-01-11 8.63 60,000(d) 63,000 Chiquita Brands Intl (U.S. Dollar) Sr Nts 03-15-09 10.56 75,000 81,750 Choctaw Resort Development Enterprises (U.S. Dollar) Sr Nts 04-01-09 9.25% $ 85,000 $ 91,056 Citibank Credit Card Issuance Trust (U.S. Dollar) Series 2003-A5 Cl A5 04-07-08 2.50 200,000 198,832 (U.S. Dollar) Series 2003-A6 Cl A6 05-17-10 2.90 200,000 200,970 Citicorp (Deutsche Mark) 09-19-09 6.25 3,000,000 1,829,479 Coast Hotels & Casino (U.S. Dollar) 04-01-09 9.50 90,000 95,850 Comcast (U.S. Dollar) 03-15-11 5.50 600,000 603,305 Compass Minerals Group (U.S. Dollar) 08-15-11 10.00 115,000 127,075 Cott Beverages (U.S. Dollar) 12-15-11 8.00 50,000 52,250 D.R. Horton (U.S. Dollar) Sr Nts 05-01-13 6.88 75,000 72,375 DaimlerChrysler North American Holding (U.S. Dollar) 06-04-08 4.05 500,000 478,744 Del Monte (U.S. Dollar) Series B 05-15-11 9.25 100,000 106,000 Dex Media West/Finance (U.S. Dollar) Sr Nts 08-15-10 8.50 35,000(d) 38,063 (U.S. Dollar) Sr Sub Nts 08-15-13 9.88 30,000(d) 33,450 DirectTV Holdings/Finance (U.S. Dollar) Sr Nts 03-15-13 8.38 75,000(d) 81,938 El Paso Production Holding (U.S. Dollar) 06-01-13 7.75 90,000(d) 86,400 Emmis Communications (U.S. Dollar) Series B 03-15-09 8.13 110,000 113,575 Euramax Intl (U.S. Dollar) Sr Sub Nts 08-15-11 8.50 25,000(d) 25,250 Federal Home Loan Mtge Corp (European Monetary Unit) 01-15-06 5.25 900,000 1,038,675 (U.S. Dollar) 07-01-17 6.00 686,863 710,451 09-01-17 6.50 443,529 465,248 08-01-32 6.50 451,636 467,770 04-01-33 6.00 1,518,753 1,548,374 Federal Natl Mtge Assn (U.S. Dollar) 08-15-04 6.50% $ 1,000,000 $ 1,048,165 05-15-08 6.00 3,000,000 3,293,711 01-01-13 4.92 317,631 314,806 02-01-13 4.87 820,634 817,115 04-01-17 6.50 879,548 931,343 08-01-17 6.00 1,267,626 1,320,692 09-01-17 6.00 983,938 1,024,668 08-01-18 4.50 500,000 491,328 09-01-18 5.00 1,940,000(h) 1,945,451 10-01-18 5.00 1,500,000(h) 1,499,532 10-01-18 5.50 2,500,000(h) 2,544,530 09-01-23 5.00 850,000(h) 831,938 03-01-29 6.50 620,198 642,685 07-01-29 6.50 1,100,000(h) 1,137,125 08-01-29 6.50 2,500,000(h) 2,578,125 05-01-32 7.50 698,379 742,313 07-01-32 6.50 600,249 621,320 08-01-32 6.50 667,933 691,380 11-01-32 7.50 1,195,121 1,270,305 03-01-33 5.50 1,482,390 1,478,037 03-01-33 6.00 2,128,511 2,164,046 04-01-33 6.00 3,304,138 3,367,561 07-01-33 7.00 2,800,000(h) 2,948,750 09-01-33 5.00 900,000(h) 870,192 10-01-32 5.50 5,100,000(h) 5,058,562 Collateralized Mtge Obligation (U.S. Dollar) 10-25-42 7.50 457,895(l) 494,670 Fisher Scientific Intl (U.S. Dollar) Sr Sub Nts 09-01-13 8.00 35,000(d) 35,963 Ford Motor (U.S. Dollar) 10-01-28 6.63 326,000 266,125 General Electric (U.S. Dollar) 02-01-13 5.00 550,000 539,484 General Electric Capital (European Monetary Unit) 06-20-07 5.13 250,000 289,449 Georgia-Pacific (U.S. Dollar) Sr Nts 02-01-10 8.88 65,000(d) 68,250 02-01-13 9.38 25,000(d) 26,750 GMAC (U.S. Dollar) 09-15-06 6.13 1,000,000 1,043,427 Goldman Sachs Group (U.S. Dollar) 05-15-09 6.65 250,000 277,528 07-15-13 4.75 300,000 284,130
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 119 AXP VP - GLOBAL BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) UNITED STATES (CONT.) Govt Natl Mtge Assn (U.S. Dollar) 03-15-33 7.00% $ 349,449 $ 369,513 09-01-33 5.50 1,200,000(h) 1,198,128 Collateralized Mtge Obligation Interest Only (U.S. Dollar) 01-20-32 10.48 3,000,000(b),(l) 457,013 Grant Prideco Escrow (U.S. Dollar) 12-15-09 9.00 125,000 131,563 Graphic Packaging Intl (U.S. Dollar) Sr Nts 08-15-11 8.50 25,000(d) 26,125 Greenwich Capital Commercial Funding (U.S. Dollar) Series 2002-C1 Cl A4 01-11-35 4.95 375,000 368,825 Gulfterra Energy Partner (U.S. Dollar) Sr Nts 06-01-10 6.25 50,000(d) 48,500 Hilton Hotels (U.S. Dollar) 12-01-12 7.63 100,000 105,750 Household Finance (U.S. Dollar) 10-15-11 6.38 800,000 856,294 Intl Paper (European Monetary Unit) 08-11-06 5.38 350,000 399,767 IPALCO Enterprises (U.S. Dollar) 11-14-08 8.38 140,000 147,000 J.P. Morgan Chase (U.S. Dollar) Sub Nts 02-01-11 6.75 300,000 332,158 Jorgensen Earle M. (U.S. Dollar) 06-01-12 9.75 30,000 31,650 Joy Global (U.S. Dollar) Series B 03-15-12 8.75 35,000 37,800 Key Energy Services (U.S. Dollar) Sr Nts 03-01-08 8.38 65,000 67,925 05-01-13 6.38 45,000 42,750 Kinetic Concepts (U.S. Dollar) Sr Sub Nts 05-15-13 7.38 60,000(d) 60,000 L-3 Communications (U.S. Dollar) 06-15-12 7.63 150,000 156,375 LaBranche (U.S. Dollar) Sr Sub Nts 03-02-07 12.00 175,000 190,750 Lamar Media (U.S. Dollar) 09-15-07 8.63 165,000 170,362 (U.S. Dollar) Sr Sub Nts 01-01-13 7.25 40,000(d) 41,500 Lehman Brothers Holdings (U.S. Dollar) 08-07-08 3.50% $ 300,000 $ 290,901 MacDermid (U.S. Dollar) 07-15-11 9.13 20,000 22,000 MBNA Credit Card Master Note Trust (U.S. Dollar) Series 2003-A1 Cl A1 07-15-10 3.30 200,000 197,086 Merisant (U.S. Dollar) Sr Sub Nts 07-15-13 9.50 60,000(d) 63,600 Meritage (U.S. Dollar) Sr Nts 06-01-11 9.75 55,000 58,644 Metris Master Trust (U.S. Dollar) Series 2001-1 Cl C 12-20-07 2.85 300,000(d) 255,000 (U.S. Dollar) Series 2001-3 Cl C 07-21-08 2.80 200,000(d) 156,000 Mohegan Tribal Gaming (U.S. Dollar) Sr Sub Nts 07-15-09 6.38 25,000(d) 24,938 Morgan Stanley, Dean Witter (European Monetary Unit) 03-16-06 5.25 1,100,000 1,264,685 Morris Publishing (U.S. Dollar) Sr Sub Nts 08-01-13 7.00 35,000(d) 35,000 Newfield Exploration (U.S. Dollar) Sr Sub Nts 08-15-12 8.38 170,000 180,200 Nextel Communications (U.S. Dollar) Sr Nts 08-01-15 7.38 80,000 80,000 Nissan Auto Receivables Owner Trust (U.S. Dollar) Series 2003-A Cl A4 07-15-08 2.61 200,000 198,703 Northwest Pipeline (U.S. Dollar) Sr Nts 03-01-10 8.13 5,000 5,200 NVR (U.S. Dollar) Sr Nts 06-15-10 5.00 210,000 196,350 Offshore Logistics (U.S. Dollar) 06-15-13 6.13 15,000(d) 14,250 Omnicare (U.S. Dollar) Sr Sub Nts 06-01-13 6.13 110,000 104,775 Owens-Brockway Glass (U.S. Dollar) 05-15-11 7.75 70,000(d) 70,350 Park Place Entertainment (U.S. Dollar) Sr Nts 04-15-13 7.00 20,000 20,650 (U.S. Dollar) Sr Sub Nts 05-15-11 8.13 40,000 43,200 Peabody Energy (U.S. Dollar) Series B 03-15-13 6.88% $ 95,000 $ 95,000 Qwest (U.S. Dollar) 11-01-04 7.20 85,000 86,275 Ryland Group (U.S. Dollar) Sr Nts 06-01-08 5.38 170,000 168,725 SBC Communications (U.S. Dollar) 08-15-12 5.88 200,000 211,318 Schuler Homes (U.S. Dollar) 07-15-09 9.38 40,000 43,000 Smurfit-Stone Container (U.S. Dollar) 10-01-12 8.25 40,000 41,400 Sonic Automotive (U.S. Dollar) Sr Sub Nts 08-15-13 8.63 30,000(d) 30,300 Southern Natural Gas (U.S. Dollar) Sr Nts 03-15-10 8.88 105,000 110,775 Sprint Capital (U.S. Dollar) 03-15-12 8.38 200,000 227,144 SPX (U.S. Dollar) Sr Nts 06-15-11 6.25 155,000 151,900 Stone Container (U.S. Dollar) Sr Nts 07-01-12 8.38 90,000 95,400 Susquehanna Media (U.S. Dollar) Sr Sub Nts 04-15-13 7.38 15,000 15,281 TD Funding (U.S. Dollar) Sr Sub Nts 07-15-11 8.38 100,000(d) 104,250 Teco Energy (U.S. Dollar) Sr Nts 06-15-10 7.50 25,000 24,375 Tenet Healthcare (U.S. Dollar) Sr Nts 12-01-11 6.38 115,000 106,950 Toll (U.S. Dollar) 02-01-09 8.13 35,000 36,838 TRAINS 10-2002 (U.S. Dollar) 01-15-12 6.96 1,368,000(d),(e) 1,530,724 Transcontinental Gas Pipeline (U.S. Dollar) Series B 08-15-11 7.00 100,000 98,125
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 120 AXP VP - GLOBAL BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) UNITED STATES (CONT.) U.S. Treasury (U.S. Dollar) 02-15-05 7.50% $ 5,700,000(g) $ 6,183,166 11-15-05 5.75 125,000 134,878 05-15-06 2.00 626,000 621,305 08-15-06 2.38 310,000 309,055 08-15-07 3.25 1,968,000 1,985,067 08-15-13 4.25 5,405,000 5,314,628 11-15-16 7.50 13,000,000(g) 16,208,867 02-15-31 5.38 3,030,000(g) 3,095,097 Verizon Global Funding (U.S. Dollar) 06-15-07 6.13 500,000 542,035 Wachovia (U.S. Dollar) 08-15-08 3.50 200,000 195,042 Washington Mutual (U.S. Dollar) Sr Nts 01-15-07 5.63 1,000,000 1,070,557 Wells Fargo (U.S. Dollar) Sr Nts 02-15-07 5.13 500,000 529,043 William Carter (U.S. Dollar) Series B 08-15-11 10.88% $ 60,000 $ 66,000 XTO Energy (U.S. Dollar) Sr Nts 04-15-12 7.50 130,000 139,750 04-15-13 6.25 80,000 80,000 ------------------- Total 104,773,640 - -------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $288,181,764) $ 295,989,052 - --------------------------------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (13.9%)(j) U.S. GOVERNMENT AGENCIES (4.2%) Federal Home Loan Bank Disc Nt 09-26-03 1.02% $ 3,800,000 $ 3,796,886 Federal Natl Mtge Assn Disc Nt 09-24-03 0.98 9,400,000 9,393,737 ------------------- Total 13,190,623 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (9.6%) BP Capital Markets 09-02-03 1.10 10,500,000 10,498,716 Citigroup 09-02-03 1.10 14,000,000 13,998,289 Receivables Capital 09-18-03 1.06 3,300,000(i) 3,298,057 Societe Generale North America 09-02-03 1.05 2,300,000 2,299,732 ------------------- Total 30,094,794 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $43,286,404) $ 43,285,417 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $331,468,168)(m) $ 339,274,469 ==========================================================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 121 AXP VP - GLOBAL BOND FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) 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 Aug. 31, 2003. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) Represents ownership in a cash TRAINS (Targeted Return Index Securities) comprised of a portfolio of 23 corporate bonds selected to target a maturity range of 7 to 15 years in the corresponding Lehman Brothers Credit Index with a current maturity date of Jan 15, 2012. (f) The following abbreviation is used in the portfolio security description to identify the insurer of the issue: MBIA -- Municipal Bond Investors Assurance (g) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 7 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT - --------------------------------------------------------------------------------------------------------------------------------- PURCHASE CONTRACTS Eurodollar, Sept. 2003, 90-day $ 16,250,000 Eurodollar, Sept. 2007, 90-day 15,000,000 German bund, Sept. 2003, 10-year 2,800,000
(h) At Aug. 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $20,736,065. (i) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (j) At Aug. 31, 2003, cash or short-term securities were held to cover open call options on futures written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds, 10-year $ 3,300,000 $ 110.00 Dec. 2003 $ 61,360
At Aug. 31, 2003, cash or short-term securities were designated to cover open put options on futures written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds, 10-year $ 3,300,000 $ 110.00 Dec. 2003 $ 70,640
(k) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (l) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (m) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $331,532,298 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 11,438,789 Unrealized depreciation (3,696,618) ---------------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation $ 7,742,171 ----------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 122 INVESTMENTS IN SECURITIES AXP VP - GROWTH FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (86.6%) AEROSPACE & DEFENSE (2.9%) Boeing 18,300 $ 684,237 Lockheed Martin 88,500 4,533,855 Northrop Grumman 4,800 458,304 United Technologies 8,700 698,175 ------------------ Total 6,374,571 - ----------------------------------------------------------------------------------------------------------------- AIRLINES (0.4%) JetBlue Airways 15,100(b) 813,890 - ----------------------------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (0.3%) U.S. Bancorp 27,600 659,640 - ----------------------------------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (4.4%) Altria Group 78,500 3,235,770 Anheuser-Busch 20,500 1,056,570 Coca-Cola 37,730 1,642,010 Pepsi Bottling Group 49,700 1,198,764 PepsiCo 58,317 2,597,439 ------------------ Total 9,730,553 - ----------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.2%) American Standard 4,500(b) 360,855 - ----------------------------------------------------------------------------------------------------------------- CABLE (3.4%) Comcast Cl A 40,400(b) 1,201,900 EchoStar Communications Cl A 61,600(b) 2,273,040 NTL 103,900(b) 4,180,936 ------------------ Total 7,655,876 - ----------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (1.0%) Vodafone Group 642,300(c) 1,175,972 Vodafone Group ADR 53,200(c) 973,560 ------------------ Total 2,149,532 - ----------------------------------------------------------------------------------------------------------------- CHEMICALS (0.5%) Dow Chemical 13,300 459,249 Eastman Chemical 15,600 558,636 ------------------ Total 1,017,885 - ----------------------------------------------------------------------------------------------------------------- COMPUTER HARDWARE (2.5%) Cisco Systems 86,300(b) 1,652,645 Dell 49,100(b) 1,602,133 Sun Microsystems 589,000(b) 2,273,540 ------------------ Total 5,528,318 - ----------------------------------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (6.3%) Affiliated Computer Services Cl A 16,100(b) 798,721 First Data 74,300 2,853,120 Microsoft 353,846 9,383,996 Network Associates 16,100(b) 224,112 Oracle 64,100(b) 819,198 ------------------ Total 14,079,147 - ----------------------------------------------------------------------------------------------------------------- ELECTRONICS (0.4%) Taiwan Semiconductor Mfg ADR 79,204(b),(c) $ 933,023 - ----------------------------------------------------------------------------------------------------------------- ENERGY (3.4%) Anadarko Petroleum 44,300 1,927,050 Apache 30,794 2,124,170 Burlington Resources 38,500 1,864,170 Devon Energy 12,791 661,934 Newfield Exploration 11,500(b) 451,835 XTO Energy 22,200 465,978 ------------------ Total 7,495,137 - ----------------------------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (3.1%) ENSCO Intl 22,645 632,928 Halliburton 31,500 761,670 Rowan Companies 26,680(b) 668,067 Schlumberger 67,674 3,350,540 Transocean 66,500(b) 1,404,480 ------------------ Total 6,817,685 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (2.7%) Capital One Financial 4,700 250,980 Fannie Mae 22,473 1,456,026 Freddie Mac 17,644 937,779 MBNA 40,400 942,936 Nomura Holdings 130,000(c) 1,891,840 Nomura Holdings ADR 31,200(c) 457,080 ------------------ Total 5,936,641 - ----------------------------------------------------------------------------------------------------------------- FOOD (1.3%) General Mills 8,600 398,696 Kellogg 22,600 757,778 Kraft Foods Cl A 61,300 1,820,610 ------------------ Total 2,977,084 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (16.8%) Allergan 6,446 512,199 Amgen 58,595(b) 3,861,411 Bard (CR) 5,400 361,800 Becton, Dickinson & Co 15,050 549,927 Bristol-Myers Squibb 31,400 796,618 Gilead Sciences 11,500(b) 767,050 GlaxoSmithKline ADR 34,000(c) 1,320,220 Guidant 43,750 2,196,250 Johnson & Johnson 79,600 3,946,568 Lilly (Eli) 13,500 898,155 Medco Health Solutions 7,725(b) 206,272 Medtronic 44,900 2,226,142 Merck & Co 64,100 3,225,512 Millennium Pharmaceuticals 57,400(b) 797,860 Mylan Laboratories 19,200 698,880 Pfizer 293,506 8,781,699 Schering-Plough 149,100 2,264,829 Teva Pharmaceutical Inds ADR 7,200(c) 422,726 Wyeth 92,100 3,946,485 ------------------ Total 37,780,603 - ----------------------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (6.7%) AmerisourceBergen 7,600 $ 442,396 Anthem 6,481(b) 474,409 Cardinal Health 27,800 1,582,654 Caremark Rx 89,600(b) 2,251,648 IMS Health 81,500 1,586,805 Lincare Holdings 21,500(b) 744,545 McKesson 68,000 2,226,320 Select Medical 56,100(b) 1,615,680 Tenet Healthcare 114,900(b) 1,844,145 WebMD 242,900(b) 2,501,870 ------------------ Total 15,270,472 - ----------------------------------------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (5.0%) Avon Products 9,900 634,590 Colgate-Palmolive 41,700 2,305,176 Gillette 82,800 2,687,688 Kimberly-Clark 47,800 2,443,058 Procter & Gamble 35,600 3,107,524 ------------------ Total 11,178,036 - ----------------------------------------------------------------------------------------------------------------- INSURANCE (1.8%) ACE 20,500(c) 660,100 Allstate 37,100 1,326,325 Chubb 28,600 1,943,084 ------------------ Total 3,929,509 - ----------------------------------------------------------------------------------------------------------------- INVESTMENT COMPANIES (1.1%) iShares MSCI Japan Index Fund 292,100 2,424,430 - ----------------------------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (1.0%) Viacom Cl B 47,200 2,124,000 - ----------------------------------------------------------------------------------------------------------------- MEDIA (4.7%) Cendant 127,100(b) 2,285,258 Disney (Walt) 78,750 1,614,375 InterActiveCorp 113,830(b) 4,212,844 Liberty Media Cl A 50,950(b) 616,495 Omnicom Group 18,150 1,417,515 Tribune 8,600 397,750 ------------------ Total 10,544,237 - ----------------------------------------------------------------------------------------------------------------- METALS (0.9%) Freeport McMoRan Cooper & Gold Cl B 63,800 1,914,000 - ----------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (2.2%) General Electric 74,400 2,200,008 Harman Intl Inds 10,900 1,086,185 Sony 19,000(c) 625,300 Tyco Intl 52,900(c) 1,088,682 ------------------ Total 5,000,175 - -----------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 123 AXP VP - GROWTH FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) PRECIOUS METALS (3.1%) Barrick Gold 171,200(c) $ 3,459,952 Glamis Gold 16,100(b) 227,171 Newmont Mining 84,000 3,297,840 ------------------ Total 6,984,963 - ----------------------------------------------------------------------------------------------------------------- RESTAURANTS (1.8%) McDonald's 183,200 4,107,344 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (3.8%) Circuit City Stores 249,500 2,602,285 Home Depot 89,509 2,878,609 Kohl's 13,100(b) 828,575 Staples 35,450(b) 873,134 Wal-Mart Stores 20,200 1,195,234 ------------------ Total 8,377,837 - ----------------------------------------------------------------------------------------------------------------- RETAIL -- GROCERY (0.4%) Kroger 35,300(b) 678,113 Safeway 12,250(b) 299,023 ------------------ Total 977,136 - ----------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (3.6%) China Mobile 900(c) 24,336 Motorola 346,300 3,715,799 Nokia ADR 191,400(c) 3,117,906 QUALCOMM 28,900 1,192,992 ------------------ Total 8,051,033 - ----------------------------------------------------------------------------------------------------------------- TEXTILES & APPAREL (0.9%) Polo Ralph Lauren 70,300 2,059,790 - ----------------------------------------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (--%) Kinder Morgan Management LLC 1 36 - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $174,224,900) $ 193,253,438 - -----------------------------------------------------------------------------------------------------------------
EXERCISE EXPIRATION ISSUER CONTRACTS PRICE DATE VALUE(a) OPTIONS PURCHASED (0.5%) PUTS Mini 100 1,225 $ 130 Sept. 2003 $ 186,812 Index Nasdaq 100 Index 6,895 28 Sept. 2003 17,238 Nasdaq 100 Index 4,945 32 Oct. 2003 407,962 S&P 500 Index 111 975 Sept. 2003 60,495 S&P 500 Index 188 980 Sept. 2003 122,200 S&P 500 Index 281 975 Oct. 2003 407,450 - --------------------------------------------------------------------------------------------------- TOTAL OPTIONS PURCHASED (Cost: $3,224,688) $ 1,202,157 - ---------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (14.4%) U.S. GOVERNMENT AGENCY (10.4%) Federal Natl Mtge Assn Disc Nts 09-30-03 1.04% $ 3,000,000 $ 2,997,325 10-01-03 0.97 3,200,000 3,197,099 10-08-03 0.99 3,000,000 2,996,737 10-17-03 1.05 3,100,000 3,095,685 10-22-03 1.00 3,000,000 2,995,549 11-12-03 1.07 500,000 498,975 11-19-03 1.01 3,900,000 3,891,212 11-26-03 1.07 3,500,000 3,491,403 ------------------- Total 23,163,985 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (4.0%) AEGON Funding 10-15-03 1.03 2,000,000(d) 1,997,232 11-25-03 1.08 2,600,000(d) 2,593,200 Ciesco LLC 09-02-03 1.07 1,600,000 1,599,810 Galaxy Funding 10-17-03 1.07 800,000(d) 798,835 Receivables Capital 09-18-03 1.06 2,000,000(d) 1,998,822 ------------------- Total 8,987,899 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $32,151,656) $ 32,151,884 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $209,601,244)(e) $ 226,607,479 ==========================================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 7.2% of net assets. (d) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (e) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $215,630,514 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 15,216,063 Unrealized depreciation (4,239,098) - -------------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation $ 10,976,965 - --------------------------------------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 124 INVESTMENTS IN SECURITIES AXP VP - HIGH YIELD BOND FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (94.3%) AEROSPACE & DEFENSE (1.6%) Alliant Techsystems 05-15-11 8.50% $ 2,900,000 $ 3,132,000 Armor Holdings Sr Sub Nts 08-15-13 8.25 1,505,000(d) 1,557,675 L-3 Communications 06-15-12 7.63 5,885,000 6,135,113 TD Funding Sr Sub Nts 07-15-11 8.38 2,560,000(d) 2,668,800 ------------------- Total 13,493,588 - -------------------------------------------------------------------------------------------------------------------------- AIRLINES (0.2%) United Air Lines 01-01-14 7.78 2,014,237 1,471,319 - -------------------------------------------------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (2.2%) Advanced Accessory System Sr Nts 06-15-11 10.75 2,170,000(d) 2,256,800 Dana 08-15-11 9.00 1,600,000 1,680,000 Delco Remy Intl Sr Nts 12-15-07 8.63 760,000 733,400 LDM Technologies Series B 01-15-07 10.75 3,385,000 3,368,075 RJ Tower 06-01-13 12.00 3,150,000(d) 3,071,250 Tenneco Automotive 07-15-13 10.25 3,555,000(d) 3,679,425 Series B 10-15-09 11.63 1,600,000 1,464,000 TRW Automotive Sr Sub Nts 02-15-13 11.00 1,980,000(d) 2,267,100 ------------------- Total 18,520,050 - -------------------------------------------------------------------------------------------------------------------------- BROKER DEALERS (0.6%) LaBranche Sr Sub Nts 03-02-07 12.00 4,880,000 5,319,200 - -------------------------------------------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (1.0%) Associated Materials 04-15-12 9.75 2,655,000 2,781,113 Interface 04-01-08 7.30 3,265,000 2,807,900 Nortek Sr Sub Nts Series B 06-15-11 9.88 2,335,000 2,440,075 ------------------- Total 8,029,088 - -------------------------------------------------------------------------------------------------------------------------- CABLE (6.2%) Charter Communications Holdings LLC/Capital Sr Disc Nts (Zero coupon through 01-15-07, thereafter 12.13%) 01-15-12 18.76% $ 14,730,000(h) $ 6,923,100 Sr Nts 11-15-09 9.63 1,600,000 1,224,000 05-15-11 10.00 5,610,000 4,235,550 Coaxial Communications/Phoenix 08-15-06 10.00 2,610,000 2,717,663 CSC Holdings Sr Nts 07-15-08 7.25 4,450,000 4,450,000 Sr Sub Deb 05-15-16 10.50 4,800,000 5,232,000 DirecTV Holdings/Finance Sr Nts 03-15-13 8.38 7,030,000(d) 7,680,274 EchoStar DBS Sr Nts 01-15-09 9.13 1,752,000 1,940,340 Lodgenet Entertainment Sr Sub Deb 06-15-13 9.50 2,060,000 2,142,400 Mediacom Broadband LLC 07-15-13 11.00 1,620,000 1,765,800 Mediacom LLC/Mediacom Capital Sr Nts 01-15-13 9.50 4,600,000 4,645,999 Pegasus Satellite Sr Disc Nts (Zero coupon through 03-01-04, thereafter 13.50%) 03-01-07 22.27 440,000(h) 283,800 Sr Nts 08-01-06 12.38 3,660,000 3,001,200 01-15-10 11.25 5,402,000(d) 4,375,620 Rogers Cable (U.S. Dollar) 06-15-13 6.25 2,045,000(c) 1,919,744 Veninfotel (U.S. Dollar) Cv Pay-in-kind 12-31-05 13.00 1,699,707(c),(f),(i) 16,997 ------------------- Total 52,554,487 - -------------------------------------------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (8.9%) ACC Escrow Sr Nts 08-01-11 10.00 6,530,000(d) 6,954,450 Alamosa Delaware 02-01-11 12.50 4,600,000 4,232,000 Alamosa Holdings (Zero coupon through 02-15-05, thereafter 12.88%) 02-15-10 17.08 1,900,000(h) 1,396,500 American Tower Sr Nts 02-01-09 9.38% $ 4,639,000 $ 4,696,988 American Tower Escrow Zero Coupon 08-01-08 14.66 455,000(j) 300,300 Crown Castle Intl Sr Nts 05-15-11 9.00 2,635,000 2,674,525 08-01-11 9.38 2,335,000 2,434,238 08-01-11 9.50 1,600,000 1,656,000 Dobson/Sygnet Communications Sr Nts 12-15-08 12.25 10,020,000 10,721,399 Nextel Communications Sr Disc Nts 10-31-07 9.75 6,510,000 6,705,300 Sr Nts 08-01-15 7.38 8,695,000 8,695,000 Nextel Partners Sr Nts 03-15-10 11.00 1,505,000 1,617,875 Rural Cellular Sr Nts 02-01-10 9.88 2,710,000(d) 2,696,450 Sr Sub Nts Series B 05-15-08 9.63 5,545,000 4,935,050 Triton PCS Sr Nts 06-01-13 8.50 2,705,000(d) 2,894,350 US Unwired Series B (Zero coupon through 11-01-04, thereafter 13.38%) 11-01-09 23.27 5,555,000(h) 3,083,025 Western Wireless Sr Nts 07-15-13 9.25 9,380,000(d) 9,380,000 ------------------- Total 75,073,450 - -------------------------------------------------------------------------------------------------------------------------- CHEMICALS (4.3%) Arco Chemical 02-01-20 9.80 3,435,000 2,988,450 Avecia Group (U.S. Dollar) 07-01-09 11.00 740,000(c) 629,000 Huntsman ICI Chemicals LLC 07-01-09 10.13 2,420,000 2,286,900 Huntsman Intl LLC Sr Nts 03-01-09 9.88 2,805,000(d) 2,889,150 03-01-09 9.88 250,000 257,500
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 125 AXP VP - HIGH YIELD BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) CHEMICALS (CONT.) IMC Global Series B 06-01-08 10.88% $ 790,000 $ 817,650 Sr Nts 08-01-13 10.88 2,250,000(d) 2,306,250 Lyondell Chemical Series A 05-01-07 9.63 2,860,000 2,831,400 Noveon Pay-in-kind Series B 08-31-11 13.00 3,740,000(f),(i) 3,852,200 Series B 02-28-11 11.00 2,785,000 3,091,350 Resolution Performance Sr Sub Nts 11-15-10 13.50 6,565,000 5,678,724 Resolution Performance Products LLC/RPP Capital Sr Nts 04-15-10 9.50 2,555,000 2,529,450 Rhodia (U.S. Dollar) 06-01-11 8.88 3,285,000(c),(d) 3,301,425 Rockwood Specialties Sr Sub Nts 05-15-11 9.63 2,305,000(d) 2,402,963 Sovereign Specialty Chemicals 03-15-10 11.88 490,000 475,300 ------------------- Total 36,337,712 - -------------------------------------------------------------------------------------------------------------------------- ELECTRONICS (0.8%) Flextronics Intl (U.S. Dollar) Sr Sub Nts 05-15-13 6.50 3,550,000(c),(d) 3,399,125 Worldspan LP/WS Financing Sr Nts 06-15-11 9.63 3,530,000(d) 3,653,550 ------------------- Total 7,052,675 - -------------------------------------------------------------------------------------------------------------------------- ENERGY (5.1%) Chesapeake Energy Sr Nts Series B 03-15-12 8.50 1,620,000 1,701,000 Encore Acquisition 06-15-12 8.38 1,200,000 1,248,000 Eott Energy Partners LP/Energy Finance 10-01-09 11.00 11,570,000(b) 11,627,850 Forest Oil 05-01-14 7.75 2,250,000 2,210,625 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 5,815,000(d) 5,640,550 Hanover Equipment Trust Series B 09-01-11 8.75 4,595,000 4,572,025 Hilcorp Energy/Finance Sr Nts 09-01-10 10.50 9,000,000(d) 9,472,500 Newfield Exploration Sr Nts 03-01-11 7.63% $ 700,000 $ 749,000 Sr Sub Nts 08-15-12 8.38 2,938,000 3,114,280 Westport Resources 11-01-11 8.25 2,105,000 2,252,350 ------------------- Total 42,588,180 - -------------------------------------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.8%) Dresser 04-15-11 9.38 3,640,000 3,712,800 Grant Prideco Series B 12-01-07 9.63 3,150,000 3,354,750 Grant Prideco Escrow 12-15-09 9.00 1,795,000 1,889,238 Key Energy Services Sr Nts 05-01-13 6.38 1,075,000 1,021,250 Sr Nts Series C 03-01-08 8.38 2,545,000 2,659,525 Offshore Logistics 06-15-13 6.13 1,350,000(d) 1,282,500 Plains All American Pipeline 10-15-12 7.75 1,150,000 1,219,000 ------------------- Total 15,139,063 - -------------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES (0.8%) Metris Companies 11-01-04 10.00 3,955,000 2,728,950 07-15-06 10.13 2,650,000 1,828,500 Metris Master Trust Series 2001-1 Cl C 12-20-07 2.86 1,850,000(d) 1,572,500 Series 2001-3 Cl C 07-21-08 2.81 1,100,000(d) 858,000 ------------------- Total 6,987,950 - -------------------------------------------------------------------------------------------------------------------------- FOOD (3.0%) B&G Foods Series D 08-01-07 9.63 2,030,000 2,060,450 Burns Philp Capital Property (U.S. Dollar) 07-15-12 9.75 5,590,000(c),(d) 5,422,300 (U.S. Dollar) Sr Sub Nts 02-15-11 10.75 6,125,000(c),(d) 6,278,125 Chiquita Brands Intl Sr Nts 03-15-09 10.56 5,000,000 5,450,000 Del Monte Series B 05-15-11 9.25 4,680,000 4,960,800 Merisant Sr Sub Nts 07-15-13 9.50 1,400,000(d) 1,484,000 ------------------- Total 25,655,675 - -------------------------------------------------------------------------------------------------------------------------- FURNITURE & APPLIANCES (0.2%) Falcon Products Series B 06-15-09 11.38% $ 1,855,000 $ 1,409,800 - -------------------------------------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (0.7%) Apogent Technologies Sr Sub Nts 05-15-13 6.50 1,905,000(d) 1,871,663 Kinetic Concepts Sr Sub Nts 05-15-13 7.38 4,350,000(d) 4,350,000 ------------------- Total 6,221,663 - -------------------------------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (3.5%) AmerisourceBergen 11-15-12 7.25 1,430,000 1,444,300 Ardent Health Services Sr Sub Nts 08-15-13 10.00 4,965,000(d) 5,033,269 Iasis Healthcare 10-15-09 8.50 3,345,000 3,370,088 10-15-09 13.00 2,210,000 2,469,675 Province Healthcare Sr Sub Nts 06-01-13 7.50 3,845,000 3,700,813 Tenet Healthcare Sr Nts 12-01-11 6.38 1,540,000 1,432,200 06-01-12 6.50 2,310,000 2,148,300 Triad Hospitals Series B 05-01-09 8.75 2,195,000 2,337,675 Vanguard Health Systems 08-01-11 9.75 7,170,000 7,313,399 ------------------- Total 29,249,719 - -------------------------------------------------------------------------------------------------------------------------- HOME BUILDING (2.3%) KB HOME Sr Sub Nts 02-01-10 7.75 1,290,000 1,315,800 Lyon (William) Homes 04-01-13 10.75 3,435,000 3,649,688 Meritage 06-01-11 9.75 3,420,000 3,646,575 Schuler Homes 07-15-11 10.50 3,930,000 4,342,650 Standard Pacific Sr Nts 04-01-09 8.50 1,250,000 1,281,250 09-15-10 9.50 380,000 408,500 Sr Sub Nts 04-15-12 9.25 500,000 525,000 WCI Communities 02-15-11 10.63 3,805,000 4,042,812 ------------------- Total 19,212,275 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 126 AXP VP - HIGH YIELD BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) HOUSEHOLD PRODUCTS (0.4%) Jafra Cosmetics/Distribution Sr Sub Nts 05-15-11 10.75% $ 2,005,000(d) $ 2,105,250 Revlon Consumer Products 12-01-05 12.00 1,480,000 1,420,800 ------------------- Total 3,526,050 - -------------------------------------------------------------------------------------------------------------------------- INDUSTRIAL SERVICES (3.9%) Alliance Laundry System Series B 05-01-08 9.63 190,000 185,250 Allied Waste North America 09-01-12 9.25 2,705,000 2,921,400 Series B 01-01-09 7.88 1,170,000 1,197,788 08-01-09 10.00 3,600,000 3,897,000 Sr Nts 04-15-13 7.88 5,600,000 5,711,999 Interline Brands Sr Sub Nts 05-15-11 11.50 5,250,000(d) 5,433,750 Intl Wire Group Series B 06-01-05 11.75 780,000 397,800 Sr Sub Nts 06-01-05 11.75 775,000 395,250 Motors & Gears Sr Nts Series D 11-15-06 10.75 4,522,000 3,911,530 Natl Waterworks Series B 12-01-12 10.50 3,075,000 3,351,750 United Rentals North America Series B 04-15-08 10.75 770,000 847,000 Williams Scotsman 06-01-07 9.88 2,000,000 1,960,000 08-15-08 10.00 2,900,000(d) 3,074,000 ------------------- Total 33,284,517 - -------------------------------------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.3%) Interpool 08-01-07 7.20 1,700,000 1,649,000 08-01-07 7.35 1,085,000 1,057,875 ------------------- Total 2,706,875 - -------------------------------------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (0.4%) Remington Arms 02-01-11 10.50 2,990,000 3,019,900 - -------------------------------------------------------------------------------------------------------------------------- LODGING & GAMING (4.6%) Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25% $ 2,530,000 $ 2,710,263 Extended Stay America Sr Sub Nts 06-15-11 9.88 1,970,000 2,093,125 Hammons (John Q) Hotels 1st Mtge Series B 05-15-12 8.88 1,070,000 1,118,150 Hilton Hotels 12-01-12 7.63 1,310,000 1,385,325 HMH Properties Series B 08-01-08 7.88 1,830,000 1,839,150 MeriStar Hospitality 01-15-08 9.00 1,605,000 1,588,950 Sr Sub Nts 08-15-07 8.75 1,420,000 1,292,200 Mohegan Tribal Gaming Sr Sub Nts 07-01-11 8.38 2,525,000 2,720,688 Old Evangeline Downs 03-01-10 13.00 2,420,000(d) 2,465,375 Park Place Entertainment Sr Sub Nts 05-15-11 8.13 3,670,000 3,963,600 Prime Hospitality Sr Sub Nts Series B 05-01-12 8.38 2,270,000 2,190,550 RFS Partnership LP 03-01-12 9.75 1,490,000 1,512,350 Riviera Holdings 06-15-10 11.00 1,600,000 1,560,000 Starwood Hotels Resorts 05-01-12 7.88 1,470,000 1,536,150 Trump Atlantic City Assn/Funding 1st Mtge 05-01-06 11.25 1,920,000 1,526,400 Venetian Casino/LV Sands 06-15-10 11.00 1,915,000 2,178,313 Wheeling Island Gaming 12-15-09 10.13 2,575,000 2,626,500 Wynn Las Vegas LLC 2nd Mtge 11-01-10 12.00 3,770,000 4,278,949 ------------------- Total 38,586,038 - -------------------------------------------------------------------------------------------------------------------------- MACHINERY (0.8%) Columbus McKinnon 08-01-10 10.00 1,700,000(d) 1,755,250 Joy Global Series B 03-15-12 8.75 2,150,000 2,322,000 Terex 07-15-11 9.25 2,890,000 3,085,075 ------------------- Total 7,162,325 - -------------------------------------------------------------------------------------------------------------------------- MEDIA (9.5%) Alliance Atlantis Communications (U.S. Dollar) Sr Sub Nts 12-15-09 13.00% $ 3,550,000(c) $ 3,971,563 American Media 01-15-11 8.88 2,245,000 2,390,925 AOA Holdings LLC Sr Nts 06-15-08 12.00 6,500,000(i) 7,000,499 Canwest Media (U.S. Dollar) Series B 04-15-13 7.63 1,290,000(c) 1,335,150 (U.S. Dollar) Sr Sub Nts 05-15-11 10.63 1,720,000(c) 1,917,800 CBD Media/Finance Sr Sub Nts 06-01-11 8.63 1,990,000(d) 2,089,500 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 2,910,000(c) 3,077,325 Dex Media East LLC/Finance Sr Nts 11-15-09 9.88 3,590,000 4,065,675 Dex Media West/Finance Sr Nts 08-15-10 8.50 3,690,000(d) 4,012,875 Sr Sub Nts 08-15-13 9.88 5,795,000(d) 6,461,424 Hollinger Intl Publishing Sr Nts 12-15-10 9.00 2,225,000 2,308,438 03-01-11 11.88 1,445,000(c),(d) 1,578,663 Lamar Media 09-15-07 8.63 955,000 986,038 01-01-13 7.25 2,265,000 2,349,938 Nexstar Finance Holdings LLC (Zero coupon through 04-01-08, thereafter 11.38%) 04-01-13 11.21 3,820,000(h) 2,635,800 Nexstar Finance LLC 04-01-08 12.00 3,638,000 4,074,560 Paxson Communications (Zero coupon through 01-15-06, thereafter 12.25%) 01-15-09 11.71 3,215,000(h) 2,572,000 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 4,105,000(c) 4,536,025 Radio One Series B 07-01-11 8.88 2,495,000 2,725,788 Sinclair Broadcast Group 03-15-12 8.00 4,820,000 5,024,849 Sun Media (U.S. Dollar) Sr Nts 02-15-13 7.63 1,410,000(c) 1,455,825
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 127 AXP VP - HIGH YIELD BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) MEDIA (CONT.) Susquehanna Media Sr Sub Nts 05-15-09 8.50% $ 3,150,000 $ 3,307,500 04-15-13 7.38 795,000 809,906 United Artists Theatre 07-01-15 9.30 3,818,203 3,722,748 Von Hoffman 03-15-09 10.25 2,895,000 3,083,175 Von Hoffman Press 05-15-07 10.38 1,300,000 1,300,000 ------------------- Total 78,793,989 - -------------------------------------------------------------------------------------------------------------------------- METALS (1.9%) Euramax Intl Sr Sub Nts 08-15-11 8.50 3,355,000(d) 3,388,550 Fastentech Sr Nts 05-01-11 11.50 500,000(d) 505,000 Jorgensen Earle M 06-01-12 9.75 3,150,000 3,323,250 Koppers Inds 12-01-07 9.88 3,430,000 3,498,600 Peabody Energy Series B 03-15-13 6.88 3,360,000 3,360,000 United States Steel Sr Nts 05-15-10 9.75 2,100,000 2,131,500 ------------------- Total 16,206,900 - -------------------------------------------------------------------------------------------------------------------------- MISCELLANEOUS (1.5%) Alderwoods Group 01-02-09 12.25 5,108,000 5,465,560 Corrections Corp of America Sr Nts 05-01-11 7.50 2,970,000(d) 3,029,400 Rent-Way 06-15-10 11.88 2,560,000(d) 2,649,600 United Rentals Series B 01-15-09 9.25 1,545,000 1,537,275 ------------------- Total 12,681,835 - -------------------------------------------------------------------------------------------------------------------------- MULTI-INDUSTRY (2.4%) Jordan Inds Sr Nts Series D 08-01-07 10.38 3,390,000 1,525,500 SPX Sr Nts 06-15-11 6.25 2,935,000 2,876,300 01-01-13 7.50 1,605,000 1,685,250 Vivendi Universal (U.S. Dollar) Sr Nts 07-15-08 6.25 12,315,000(c),(d) 12,315,000 04-15-10 9.25 1,950,000(c),(d) 2,174,250 ------------------- Total 20,576,300 - -------------------------------------------------------------------------------------------------------------------------- PAPER & PACKAGING (5.8%) Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25% $ 2,255,000(c),(d) $ 2,226,813 Crown Euro Holdings (U.S. Dollar) 03-01-11 9.50 2,755,000(c),(d) 2,934,075 03-01-13 10.88 3,875,000(c),(d) 4,243,124 Crown Paper Sr Sub Nts 09-01-05 11.00 4,785,000(b) 479 Doman Inds (U.S. Dollar) Sr Nts Series B 11-15-07 9.25 3,810,000(b),(c) 685,800 Georgia-Pacific 06-15-15 7.70 2,940,000 2,712,150 Sr Nts 02-01-10 8.88 2,540,000(d) 2,667,000 02-01-13 9.38 3,495,000(d) 3,739,650 Graphic Packaging Intl Sr Nts 08-15-11 8.50 2,520,000(d) 2,633,400 Jefferson Smurfit 06-01-13 7.50 1,705,000 1,726,313 JSG Funding (U.S. Dollar) Sr Nts 10-01-12 9.63 6,400,000(c) 6,911,999 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 1,750,000(c),(d) 1,728,125 Norske Skog Canada (U.S. Dollar) 06-15-11 8.63 300,000(c) 305,250 Owens Brockway Glass 02-15-09 8.88 520,000 546,000 05-15-11 7.75 475,000(d) 477,375 11-15-12 8.75 2,220,000 2,331,000 Sr Nts 05-15-13 8.25 3,185,000(d) 3,232,775 Plastipak Holdings 09-01-11 10.75 2,875,000 3,119,375 Smurfit-Stone Container 10-01-12 8.25 3,070,000 3,177,450 Stone Container Sr Nts 07-01-12 8.38 3,260,000 3,455,600 ------------------- Total 48,853,753 - -------------------------------------------------------------------------------------------------------------------------- RESTAURANTS (0.4%) Domino's Sr Sub Nts 07-01-11 8.25 3,605,000(d) 3,785,250 - -------------------------------------------------------------------------------------------------------------------------- RETAIL -- DRUGSTORES (0.6%) Rite Aid 07-01-08 11.25 1,560,000 1,669,200 12-15-08 6.13 500,000(d) 445,000 05-01-10 8.13 3,010,000(d) 3,085,250 ------------------- Total 5,199,450 - -------------------------------------------------------------------------------------------------------------------------- RETAIL -- GENERAL (1.2%) Finlay Enterprises 05-01-08 9.00% $ 495,000 $ 491,288 Flooring America Series B 10-15-07 9.25 1,109,000(b) 111 PCA LLC/PCA Finance Sr Nts 08-01-09 11.88 4,391,000 4,764,234 Sonic Automotive Sr Sub Nts 08-15-13 8.63 1,725,000(d) 1,742,250 United Auto Group 03-15-12 9.63 2,680,000 2,870,950 ------------------- Total 9,868,833 - -------------------------------------------------------------------------------------------------------------------------- RETAIL -- GROCERY (0.1%) Dairy Mart Convenience Stores Sr Sub Nts 03-15-04 10.25 3,850,000(b) 693,000 - -------------------------------------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (3.4%) Alaska Communications Systems Hldgs Sr Nts 08-15-11 9.88 4,000,000(d) 4,020,000 Avaya 04-01-09 11.13 475,000 532,000 Cincinnati Bell 07-15-13 7.25 5,985,000(d) 5,856,861 Fairpoint Communications Sr Sub Nts 05-01-10 12.50 2,475,000 2,623,500 Sr Sub Nts Series B 05-01-08 9.50 2,810,000 2,669,500 Marconi (U.S. Dollar) 04-30-08 8.00 2,200,000(c),(d) 2,013,000 NATG Holdings LLC/Orius Capital Series B 02-01-10 12.75 4,600,000(b) 9,200 Qwest Capital Funding 07-15-05 6.25 1,585,000 1,497,825 Qwest Services 12-15-10 13.50 8,238,000(d) 9,432,510 ------------------- Total 28,654,396 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (4.8%) AES 05-15-13 8.75 5,370,000(d) 5,477,401 Aquila Sr Nts 11-15-09 7.63 1,535,000 1,274,050 02-01-11 9.95 4,435,000 4,035,850 CMS Energy Sr Nts 07-15-08 8.90 375,000 376,406 08-01-10 7.75 4,790,000(d) 4,622,350
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 128 AXP VP - HIGH YIELD BOND FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (CONTINUED) UTILITIES -- ELECTRIC (CONT.) FirstEnergy Series B 11-15-11 6.45% $ 2,000,000 $ 1,955,120 IPALCO Enterprises 11-14-08 8.38 1,940,000 2,037,000 11-14-11 8.63 3,405,000 3,575,250 Midwest Generation LLC Series A 07-02-09 8.30 2,200,000 2,023,859 PG&E 07-15-08 6.88 2,905,000(d) 2,955,750 PG&E Gas Transmission Sr Nts 06-01-05 7.10 3,910,000 3,910,000 Southern Star Central 08-01-10 8.50 5,000,000(d) 5,100,000 Teco Energy Sr Nts 06-15-10 7.50 3,150,000 3,071,250 ------------------- Total 40,414,286 - -------------------------------------------------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (5.8%) ANR Pipeline 03-15-10 8.88 4,515,000 4,763,325 Calpine Canada Energy Finance (U.S. Dollar) 05-01-08 8.50 1,060,000(c) 805,600 Colorado Interstate Gas 06-15-05 10.00 1,525,000 1,635,563 Dynegy Holdings 07-15-10 9.88 1,370,000(d) 1,390,550 07-15-13 10.13 1,600,000(d) 1,656,000 El Paso 06-15-12 7.88 5,700,000(d) 5,016,000 El Paso Production Holding 06-01-13 7.75 9,950,000(d) 9,551,999 Northwest Pipeline 12-01-07 6.63 1,455,000 1,447,725 03-01-10 8.13 1,715,000 1,783,600 Sonat 06-01-05 6.88 3,125,000 3,046,875 07-15-11 7.63 2,810,000 2,444,700 Southern Natural Gas 03-15-10 8.88 3,700,000 3,903,500 Transcontinental Gas Pipeline 01-15-08 6.25 1,700,000 1,649,000 Series B 08-15-11 7.00 3,980,000 3,905,375 Sr Nts Series B 07-15-12 8.88 2,030,000 2,187,325 Williams Companies Sr Nts 06-01-10 8.63 3,910,000 4,105,500 ------------------- Total 49,292,637 - -------------------------------------------------------------------------------------------------------------------------- VARIABLE RATE SENIOR LOAN INTERESTS (3.2%)(L) American Commercial Lines LLC Term Loan A 06-30-05 5.13% $ 1,643,110 $ 1,371,997 Term Loan B 06-30-06 5.38 2,377,711 1,997,277 Charter Communications Term Loan B 03-18-08 3.88 2,188,917 2,038,429 Eott Energy Term Loan A 03-31-03 9.00 1,333,333 1,320,000 Term Loan B 03-31-03 10.00 666,667 660,000 Metris Companies Term Loan 06-30-04 12.00 2,214,000 2,147,580 Qwest Term Loan B 06-30-10 6.95 15,720,000(k) 15,012,600 Rural Cellular Term Loan A 04-03-08 6.00 2,450,239 2,339,978 ------------------- Total 26,887,861 - -------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $776,189,698) $ 794,510,089 - --------------------------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) COMMON STOCKS (--%)(b) Davel Communications 272,729 $ 2,182 PFB Telecom Cl B 204,171(g) -- Stellex Aerostructures 268(g) -- - ----------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $8,533,931) $ 2,182 - -----------------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE(a) PREFERRED STOCKS & OTHER (2.3%) CSC Holdings 11.13% Cm Series M 16,767 $ 1,752,152 11.75% Cm Series H 40,975 4,302,374 Dobson Communications 12.25% Pay-in-kind 750(f) 753,750 13.00% Pay-in-kind 1,771(f) 1,779,855 HMP Equity Holdings 1,840(b) 892,400 Intermedia Communications 13.50% Pay-in-kind Series B 1(f) 9 NTL Warrants 1(b) 2 Pegasus Satellite 12.75% Cm Series B -- 338 SGW Holding Cm Pay-in-kind Series B 20,650(f),(g),(i) -- Cv Series A 9,677(b),(g),(i) -- Warrants 250(b),(g),(i) -- Varde Fund V LP 5,000,000(b),(e),(i) 7,681,056 Wayland Investment Fund LLC 6,000,000(b),(e),(i) 2,255,220 - ----------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS & OTHER (Cost: $21,081,427) $ 19,417,156 - -----------------------------------------------------------------------------------------------------------------
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) SHORT-TERM SECURITIES (3.6%) U.S. GOVERNMENT AGENCY (3.0%) Federal Natl Mtge Assn Disc Nts 09-17-03 1.00% $ 5,600,000 $ 5,597,330 11-12-03 1.07 10,000,000 9,979,490 11-26-03 1.07 10,000,000 9,975,440 Total 25,552,260 - -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (0.6%) BP Capital Markets 09-02-03 1.10 5,100,000 5,099,377 - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $30,648,583) $ 30,651,637 - -------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $836,453,639)(m) $ 844,581,064 ==========================================================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 129 AXP VP - HIGH YIELD BOND FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Aug. 31, 2003, the value of foreign securities represented 8.9% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (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) Negligible market value. (h) 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. (i) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Aug. 31, 2003, is as follows:
ACQUISITION SECURITY DATES COST ----------------------------------------------------------------------------------------- AOA Holdings LLC 12.00% Sr Nts 2008 06-02-02 $ 6,500,000 Noveon 13.00% Pay-in-kind Series B 2011 03-10-03 3,740,000 SGW Holding Cm Pay-in-kind Series B 08-12-97 thru 08-26-03 271,392 Cv Series A 08-12-97 100,002 Warrants 08-12-97 78,900 Varde Fund V LP 04-27-00 thru 06-19-00 5,000,000 Veninfotel (U.S. Dollar) 13.00% Cv Pay-in-kind 2005 05-01-02 thru 03-10-03 1,566,810 Wayland Investment Fund LLC 05-17-00 6,671,880
(j) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (k) At Aug. 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $2,105,625. (l) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (m) At Aug 31, 2003, the cost of securities for federal income tax purposes was $834,878,765 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 45,353,273 Unrealized depreciation (35,650,974) ----------------------------------------------------------------------------------------- Net unrealized appreciation $ 9,702,299 -----------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 130 INVESTMENTS IN SECURITIES AXP VP - INTERNATIONAL FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (96.1%)(c) BRAZIL (0.8%) ENERGY Petroleo Brasileiro ADR 298,222 $ 6,083,729 - --------------------------------------------------------------------------------- DENMARK (2.4%) BANKS AND SAVINGS & LOANS (0.9%) Danske Bank 354,576 6,500,739 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (0.7%) Novo Nordisk Cl B 147,850 5,246,435 - --------------------------------------------------------------------------------- MISCELLANEOUS (0.8%) A P Moller - Maersk 896 5,881,969 - --------------------------------------------------------------------------------- FINLAND (2.3%) PAPER & PACKAGING (0.8%) Stora Enso 438,876 5,714,644 - --------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (1.6%) Nokia 705,007 11,548,483 - --------------------------------------------------------------------------------- FRANCE (9.1%) AUTOMOTIVE & RELATED (1.1%) Renault 137,230 8,271,496 - --------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (1.9%) BNP Paribas 286,831 14,290,692 - --------------------------------------------------------------------------------- ENERGY (3.0%) TotalFinaElf 142,584 21,869,047 - --------------------------------------------------------------------------------- ENGINEERING & CONSTRUCTION (0.7%) Compagnie de Saint-Gobain 129,364 5,054,801 - --------------------------------------------------------------------------------- INSURANCE (0.7%) AXA 289,244 5,128,609 - --------------------------------------------------------------------------------- MACHINERY (1.7%) Schneider Electric 230,272 12,433,469 - --------------------------------------------------------------------------------- GERMANY (5.7%) CHEMICALS (1.1%) BASF 178,690 8,227,944 - --------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (0.7%) SAP 45,296 5,435,540 - --------------------------------------------------------------------------------- ELECTRONICS (1.2%) Infineon Technologies 228,448(b) 3,345,845 Siemens 89,093 5,516,776 --------------- Total 8,862,621 - --------------------------------------------------------------------------------- INSURANCE (0.7%) Allianz 59,760 5,328,228 - --------------------------------------------------------------------------------- TEXTILES & APPAREL (0.6%) Adidas-Salomon 55,597 4,655,516 - --------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (0.5%) E.ON 65,948 3,410,242 - --------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (0.9%) Deutsche Telekom 442,391(b) $ 6,314,112 - --------------------------------------------------------------------------------- HONG KONG (1.2%) FINANCIAL SERVICES Cheung Kong 1,146,000 8,889,587 - --------------------------------------------------------------------------------- INDIA (0.7%) HOUSEHOLD PRODUCTS Reckitt Benckiser 271,635 5,112,940 - --------------------------------------------------------------------------------- IRELAND (0.7%) BANKS AND SAVINGS & LOANS Anglo Irish Bank 526,523 5,208,406 - --------------------------------------------------------------------------------- ITALY (2.4%) BANKS AND SAVINGS & LOANS (1.4%) UniCredito Italiano 2,211,279 10,269,436 - --------------------------------------------------------------------------------- ENERGY (1.0%) Eni 495,327 7,482,955 - --------------------------------------------------------------------------------- JAPAN (22.5%) AUTOMOTIVE & RELATED (1.9%) Nissan Motor 550,000 5,906,325 Toyota Motor 290,000 8,003,085 --------------- Total 13,909,410 - --------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (1.6%) Mitsubishi Tokyo Financial Group 1,063 6,195,063 Mitsui Fudosan 730,000 5,887,299 --------------- Total 12,082,362 - --------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.8%) Asahi Glass 800,000 5,622,215 - --------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (1.1%) NTT DoCoMo 3,092 7,949,949 - --------------------------------------------------------------------------------- CHEMICALS (1.0%) Shin-Etsu Chemical 65,400 2,567,124 Sumitomo Chemical 1,350,000 4,882,585 --------------- Total 7,449,709 - --------------------------------------------------------------------------------- ELECTRONICS (3.7%) Alps Electric 133,000 2,261,502 Hitachi 538,000 2,932,533 Hitachi Maxell 244,800 3,543,600 Keyence 29,700 6,203,197 Murata Manufacturing 17,200 967,021 Rohm 19,200 2,507,782 Tokyo Electron 120,000 8,453,891 --------------- Total 26,869,526 - --------------------------------------------------------------------------------- ENGINEERING & CONSTRUCTION (0.3%) Daiwa House Inds 278,000 2,165,770 - --------------------------------------------------------------------------------- FINANCIAL SERVICES (1.4%) Nomura Holdings 450,000 $ 6,548,680 Sumitomo Trust & Banking 882,000 3,976,106 --------------- Total 10,524,786 - --------------------------------------------------------------------------------- FURNITURE & APPLIANCES (1.0%) Matsushita Electric Industrial 590,000 7,524,169 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (1.0%) Chugai Pharmaceutical 193,600 2,050,819 Yamanouchi Pharmaceutical 207,200 5,433,939 --------------- Total 7,484,758 - --------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (0.4%) Kao 146,000 2,752,828 - --------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.5%) East Japan Railway 1,900 8,027,939 Yamato Transport 268,000 3,190,367 --------------- Total 11,218,306 - --------------------------------------------------------------------------------- INSURANCE (0.4%) Millea Holdings 291 3,017,741 - --------------------------------------------------------------------------------- MACHINERY (1.1%) Amada 600,000 2,591,704 SMC 48,500 5,395,355 --------------- Total 7,987,059 - --------------------------------------------------------------------------------- MEDIA (1.2%) Dai Nippon Printing 244,000 3,109,599 Dentsu 387 1,701,500 Nippon Telegraph & Telephone 922 4,061,604 --------------- Total 8,872,703 - --------------------------------------------------------------------------------- MULTI-INDUSTRY (1.8%) Canon 193,000 9,279,483 Mitsubishi 500,000 4,225,231 --------------- Total 13,504,714 - --------------------------------------------------------------------------------- PAPER & PACKAGING (0.9%) Nippon Unipac Holding 1,500 6,864,930 - --------------------------------------------------------------------------------- RETAIL -- GENERAL (0.6%) Seven-Eleven Japan 167,000 4,565,735 - --------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (0.8%) Tokyo Electric Power 298,900 5,815,076 - --------------------------------------------------------------------------------- LUXEMBORG (1.5%) METALS Arcelor 868,914 11,209,270 - --------------------------------------------------------------------------------- MEXICO (1.0%) FINANCIAL SERVICES Grupo Financiero BBVA Bancomer Cl B 8,681,260(b) 7,073,736 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 131 AXP VP - INTERNATIONAL FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) NETHERLANDS (3.0%) ENERGY (1.7%) Royal Dutch Petroleum 281,595 $ 12,567,479 - --------------------------------------------------------------------------------- INDUSTRIAL SERVICES (1.3%) Koninklijke (Royal) Electronics 396,140 9,655,268 - --------------------------------------------------------------------------------- SINGAPORE (1.7%) BANKS AND SAVINGS & LOANS (0.9%) United Overseas Bank 927,000 6,716,242 - --------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.8%) Keppel 1,896,000 5,678,590 - --------------------------------------------------------------------------------- SOUTH KOREA (2.3%) BEVERAGES & TOBACCO (1.0%) KT&G 465,750 7,708,148 - --------------------------------------------------------------------------------- ELECTRONICS (1.3%) Samsung Electronics 25,310 9,344,239 - --------------------------------------------------------------------------------- SWEDEN (2.6%) BANKS AND SAVINGS & LOANS (0.6%) Skandinaviska Enskilda AB Cl A 475,477 4,549,366 - --------------------------------------------------------------------------------- FURNITURE & APPLIANCES (0.8%) Electrolux Cl B 263,273 5,872,412 - --------------------------------------------------------------------------------- MACHINERY (1.2%) Atlas Copco Cl A 284,780 8,514,926 - --------------------------------------------------------------------------------- SWITZERLAND (6.9%) BANKS AND SAVINGS & LOANS (1.4%) UBS 197,214(b) 10,638,333 - --------------------------------------------------------------------------------- ENGINEERING & CONSTRUCTION (1.1%) Holcim 211,047 8,363,221 - --------------------------------------------------------------------------------- FOOD (1.1%) Nestle 38,727 8,433,640 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (3.2%) Novartis 516,616 18,996,625 Roche Holding 57,212 4,381,127 --------------- Total 23,377,752 - --------------------------------------------------------------------------------- TAIWAN (2.4%) BANKS AND SAVINGS & LOANS (0.8%) Chinatrust Financial Holding 6,966,360 $ 5,669,676 - --------------------------------------------------------------------------------- COMPUTER HARDWARE (0.5%) Hon Hai Precision Inds 882,000 3,640,787 - --------------------------------------------------------------------------------- ELECTRONICS (1.1%) Taiwan Semiconductor Mfg 4,432,040 8,693,327 - --------------------------------------------------------------------------------- UNITED KINGDOM (26.9%) BANKS AND SAVINGS & LOANS (3.8%) HBOS 1,028,309 11,450,758 Royal Bank of Scotland Group 673,106 16,758,153 --------------- Total 28,208,911 - --------------------------------------------------------------------------------- BEVERAGES & TOBACCO (2.1%) British American Tobacco 756,254 7,643,750 Diageo 728,828 7,816,147 --------------- Total 15,459,897 - --------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (3.1%) Vodafone Group 12,397,108 22,697,568 - --------------------------------------------------------------------------------- ENERGY (2.5%) BP 2,698,603 18,311,935 - --------------------------------------------------------------------------------- FINANCIAL SERVICES (3.2%) HSBC Holdings 1,841,169 23,676,753 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (4.1%) AstraZeneca 197,212 7,580,146 GlaxoSmithKline 1,207,145 23,046,484 --------------- Total 30,626,630 - --------------------------------------------------------------------------------- INSURANCE (1.1%) Prudential 1,124,926 7,766,871 - --------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (2.1%) Carnival 317,527 10,321,206 Granda 3,331,058 5,400,625 --------------- Total 15,721,831 - --------------------------------------------------------------------------------- LODGING & GAMING (0.4%) William Hill 657,112 3,227,297 - --------------------------------------------------------------------------------- MEDIA (1.9%) British Sky Broadcasting Group 721,270(b) $ 7,552,554 United Business Media 978,498 6,810,054 --------------- Total 14,362,608 - --------------------------------------------------------------------------------- RETAIL -- GROCERY (0.9%) Tesco 1,904,623 6,507,298 - --------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (1.6%) mm02 14,285,048(b) 11,975,551 - --------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $672,651,750) $ 709,652,948 - --------------------------------------------------------------------------------- ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (3.3%) U.S. GOVERNMENT AGENCY (2.6%) Federal Natl Mtge Assn Disc Nts 10-01-03 0.97% $ 300,000 $ 299,728 11-12-03 1.07 10,300,000 10,278,874 11-17-03 1.00 8,400,000 8,381,554 -------------- Total 18,960,156 - ---------------------------------------------------------------------------------------------- COMMERCIAL PAPER (0.7%) Fairway Finance 09-02-03 1.10 5,100,000(d) 5,099,377 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $24,058,188) $ 24,059,533 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $696,709,938)(e) $ 733,712,481 ==============================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. (d) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (e) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $707,502,069 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 47,389,973 Unrealized depreciation (21,179,561) ----------------------------------------------------------------------------------------- Net unrealized appreciation $ 26,210,412 -----------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 132 INVESTMENTS IN SECURITIES AXP VP - MANAGED FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (61.4%) AEROSPACE & DEFENSE (2.1%) Boeing 216,800 $ 8,106,152 General Dynamics 57,000 4,908,270 Lockheed Martin 308,000 15,778,840 Northrop Grumman 151,000 14,417,480 Stellex Aerostructures 290(b),(h) -- United Technologies 100,000 8,025,000 --------------- Total 51,235,742 - ----------------------------------------------------------------------------------------- AIRLINES (--%) Northwest Airlines Cl A 120,000(b) 1,076,400 - ----------------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (0.2%) General Motors 145,000 5,959,500 - ----------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (7.4%) Bank of America 472,400 37,437,699 Bank of New York 450,000 13,239,000 Bank One 260,000 10,262,200 FleetBoston Financial 473,400 14,007,906 Golden West Financial 65,000 5,607,550 Mellon Financial 319,700 10,022,595 PNC Financial Services Group 233,000 11,090,800 U.S. Bancorp 1,045,400 24,985,060 Wachovia 342,000 14,415,300 Washington Mutual 281,000 10,953,380 Wells Fargo 481,800 24,157,452 --------------- Total 176,178,942 - ----------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (2.6%) Altria Group 617,300 25,445,106 Coca-Cola 354,000 15,406,080 Pepsi Bottling Group 315,000 7,597,800 PepsiCo 314,900 14,025,646 --------------- Total 62,474,632 - ----------------------------------------------------------------------------------------- BROKER DEALERS (2.6%) J.P. Morgan Chase 722,000 24,706,840 Merrill Lynch 356,800 19,188,704 Morgan Stanley 405,000 19,759,950 --------------- Total 63,655,494 - ----------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.6%) American Standard 59,700(b) 4,787,343 Masco 198,000 4,908,420 Temple-Inland 110,000 5,475,800 --------------- Total 15,171,563 - ----------------------------------------------------------------------------------------- CABLE (1.2%) Comcast Cl A 277,814(b) 8,264,967 Comcast Special Cl A 188,200(b) 5,337,352 EchoStar Communications Cl A 180,000(b) 6,642,000 NTL 246,700(b) 9,927,208 --------------- Total 30,171,527 - ----------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.1%) Vodafone Group ADR 198,000(c) $ 3,623,400 - ----------------------------------------------------------------------------------------- CHEMICALS (1.6%) Dow Chemical 581,300 20,072,289 du Pont (EI) de Nemours 177,400 7,936,876 Eastman Chemical 89,300 3,197,833 Lyondell Chemical 370,000 5,291,000 RPM Intl 245,000 3,341,800 --------------- Total 39,839,798 - ----------------------------------------------------------------------------------------- COMPUTER HARDWARE (1.9%) Apple Computer 353,900(b) 8,008,757 Cisco Systems 72,400(b) 1,386,460 Dell 198,800(b) 6,486,844 Hewlett-Packard 1,043,800 20,792,496 Sun Microsystems 2,246,750(b) 8,672,455 --------------- Total 45,347,012 - ----------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (1.3%) Affiliated Computer Services Cl A 128,100(b) 6,355,041 Cadence Design Systems 338,300(b) 4,810,626 First Data 76,000 2,918,400 Microsoft 679,400 18,017,688 --------------- Total 32,101,755 - ----------------------------------------------------------------------------------------- ELECTRONICS (1.2%) ChipPAC Cl A 695,800(b) 4,376,582 Micron Technology 360,000(b) 5,169,600 Natl Semiconductor 215,000(b) 6,265,100 Solectron 403,200(b) 2,390,976 Teradyne 177,000(b) 3,155,910 Texas Instruments 290,000 6,916,500 --------------- Total 28,274,668 - ----------------------------------------------------------------------------------------- ENERGY (4.9%) Anadarko Petroleum 88,000 3,828,000 Burlington Resources 153,000 7,408,260 ChevronTexaco 496,000 36,143,520 ConocoPhillips 578,000 32,275,520 Exxon Mobil 959,600 36,176,919 --------------- Total 115,832,219 - ----------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.0%) Schlumberger 175,000 8,664,250 Transocean 475,000(b) 10,032,000 Weatherford Intl 125,000(b) 4,697,500 --------------- Total 23,393,750 - ----------------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (0.4%) Allied Waste Inds 882,950(b) 9,765,427 - ----------------------------------------------------------------------------------------- FINANCE COMPANIES (3.0%) Citigroup 1,627,400 70,547,790 - ----------------------------------------------------------------------------------------- FINANCIAL SERVICES (2.8%) Capital One Financial 234,600 $ 12,527,640 Fannie Mae 276,000 17,882,040 Freddie Mac 319,300 16,970,795 MBNA 874,500 20,410,830 --------------- Total 67,791,305 - ----------------------------------------------------------------------------------------- FOOD (0.6%) General Mills 203,200 9,420,352 Kraft Foods Cl A 188,100 5,586,570 --------------- Total 15,006,922 - ----------------------------------------------------------------------------------------- FURNITURE & APPLIANCES (0.1%) Leggett & Platt 145,000 3,358,200 - ----------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (2.9%) Bristol-Myers Squibb 165,000 4,186,050 Medco Health Solutions 149,441(b) 3,990,073 Merck & Co 428,200 21,547,024 Pfizer 442,000 13,224,640 Schering-Plough 951,800 14,457,842 Wyeth 288,900 12,379,365 --------------- Total 69,784,994 - ----------------------------------------------------------------------------------------- HEALTH CARE SERVICES (1.2%) AmerisourceBergen 40,000 2,328,400 HCA 127,000 4,824,730 Lincare Holdings 105,000(b) 3,636,150 McKesson 157,000 5,140,180 Select Medical 147,600(b) 4,250,880 Tenet Healthcare 545,700(b) 8,758,485 --------------- Total 28,938,825 - ----------------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (1.3%) Clorox 77,000 3,299,450 Kimberly-Clark 267,000 13,646,370 Procter & Gamble 168,200 14,682,178 --------------- Total 31,627,998 - ----------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.3%) Union Pacific 131,300 8,001,422 - ----------------------------------------------------------------------------------------- INSURANCE (3.9%) ACE 212,800(c) 6,852,160 Allstate 571,600 20,434,700 American Intl Group 389,600 23,208,472 Chubb 211,500 14,369,310 CIGNA 99,500 4,744,160 Hartford Financial Services Group 115,000 6,120,300 Montpelier Re Holdings 85,900(b),(c) 2,633,694 Prudential Financial 171,000 6,226,110 Travelers Property Casualty Cl A 295,000 4,540,050 Travelers Property Casualty Cl B 161,997 2,509,334 --------------- Total 91,638,290 - -----------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 133 AXP VP - MANAGED FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) LEISURE TIME & ENTERTAINMENT (1.3%) AOL Time Warner 432,000(b) $ 7,067,520 Mattel 327,300 6,323,436 Viacom Cl B 384,900 17,320,500 --------------- Total 30,711,456 - ----------------------------------------------------------------------------------------- MACHINERY (0.7%) Caterpillar 99,600 7,154,268 Illinois Tool Works 75,000 5,421,750 SPX 87,100(b) 4,298,385 --------------- Total 16,874,403 - ----------------------------------------------------------------------------------------- MEDIA (2.6%) Cendant 624,200(b) 11,223,116 Disney (Walt) 1,012,300 20,752,150 InterActiveCorp 116,300(b) 4,304,263 Liberty Media Cl A 977,600(b) 11,828,960 McGraw-Hill Companies 50,000 3,050,000 Scripps (EW) Cl A 40,000 3,463,600 Tribune 168,000 7,770,000 --------------- Total 62,392,089 - ----------------------------------------------------------------------------------------- METALS (0.6%) Alcan 90,000(c) 3,273,300 Alcoa 230,000 6,568,800 Phelps Dodge 110,000(b) 5,278,900 --------------- Total 15,121,000 - ----------------------------------------------------------------------------------------- MULTI-INDUSTRY (1.5%) Dover 270,000 10,265,400 General Electric 530,000 15,672,100 ITT Inds 50,000 3,254,000 Tyco Intl 390,000(c) 8,026,200 --------------- Total 37,217,700 - ----------------------------------------------------------------------------------------- PAPER & PACKAGING (1.0%) Avery Dennison 172,900 9,466,275 Bowater 145,000 6,279,950 Intl Paper 135,000 5,474,250 Weyerhaeuser 66,900 3,980,550 --------------- Total 25,201,025 - ----------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (0.6%) Apartment Investment & Management Cl A 90,000 3,469,500 Equity Office Properties Trust 288,000 8,012,160 Starwood Hotels & Resorts Worldwide 96,000 3,247,680 --------------- Total 14,729,340 - ----------------------------------------------------------------------------------------- RESTAURANTS (0.7%) Brinker Intl 196,000(b) 6,703,200 McDonald's 478,200 10,721,244 --------------- Total 17,424,444 - ----------------------------------------------------------------------------------------- RETAIL -- GENERAL (1.9%) BJ's Wholesale Club 150,000(b) $ 3,276,000 Circuit City Stores 419,500 4,375,385 Costco Wholesale 156,000(b) 5,006,040 Dollar General 79,000 1,811,470 Home Depot 315,000 10,130,400 Sonic Automotive 205,000(b) 5,637,500 Staples 106,550(b) 2,624,327 Target 166,300 6,751,780 Wal-Mart Stores 119,000 7,041,230 --------------- Total 46,654,132 - ----------------------------------------------------------------------------------------- RETAIL -- GROCERY (0.5%) Kroger 317,000(b) 6,089,570 Safeway 200,000(b) 4,882,000 --------------- Total 10,971,570 - ----------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (0.6%) Motorola 584,300 6,269,539 Nokia ADR 576,600(c) 9,392,814 --------------- Total 15,662,353 - ----------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (1.6%) Dominion Resources 207,200 12,552,179 DTE Energy 60,000 2,094,600 Exelon 185,000 10,896,500 FirstEnergy 200,000 5,852,000 FPL Group 37,900 2,344,494 Pepco Holdings 267,800 4,651,686 --------------- Total 38,391,459 - ----------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (2.6%) BellSouth 895,800 22,574,160 Davel Communications 383,987(b) 3,072 KT ADR 365,000(c) 6,880,250 SBC Communications 560,000 12,594,400 Verizon Communications 558,600 19,729,752 --------------- Total 61,781,634 - ----------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $1,404,456,387) $ 1,483,930,180 - ----------------------------------------------------------------------------------------- ISSUER SHARES VALUE(a) PREFERRED STOCKS & OTHER (--%) Intermedia Communications 13.50% Pay-in-kind Series B --(b),(e),(h) $ -- Mexico Value Recovery Series B Rights 2,000,000(b),(c),(h) -- Mexico Value Recovery Series C Rights 2,000,000(b),(c),(h) -- Mexico Value Recovery Series D Rights 2,000,000(b),(c),(h) -- Mexico Value Recovery Series E Rights 2,000,000(b),(c),(h) -- Paxson Communications 13.25% Pay-in-kind --(e) 1,167 Pegasus Satellite 12.75% Cm Series B 1 566 - ----------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS & OTHER (Cost: $981) $ 1,733 - ----------------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - ----------------------------------------------------------------------------------------- BONDS (32.6%) FOREIGN GOVERNMENT (0.2%) United Mexican States (U.S. Dollar) 03-03-15 6.63% $ 4,940,000(c) $ 4,915,300 - ----------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS & AGENCIES (6.9%) Federal Home Loan Mtge Corp 07-15-13 4.50 30,200,000 28,983,847 Federal Natl Mtge Assn 05-15-08 6.00 22,985,000 25,235,323 U.S. Treasury 07-31-04 2.25 3,650,000(i) 3,683,076 05-31-05 1.25 4,400,000 4,361,500 06-30-05 1.13 28,320,000 27,967,104 11-15-05 5.75 12,800,000 13,811,494 05-15-06 2.00 7,418,000 7,362,365 08-15-06 2.38 3,700,000 3,688,726 08-15-07 3.25 290,000 292,515 08-15-08 3.25 3,150,000 3,122,192 08-15-13 4.25 9,970,000 9,803,302 08-15-22 7.25 2,450,000(i) 3,019,243 02-15-26 6.00 9,200,000(i) 9,949,653 08-15-27 6.38 10,440,000(i) 11,840,432 11-15-28 5.25 7,600,000 7,470,861 02-15-31 5.38 5,848,000(i) 5,973,638 --------------- Total 166,565,271 - ----------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES (13.6%)(f) Federal Home Loan Mtge Corp 09-27-12 3.61 1,700,000 1,683,724 05-01-13 4.50 1,943,535 1,925,049 04-01-17 6.00 9,408,706 9,731,811 08-01-18 5.00 8,487,387 8,535,955 04-01-22 6.50 15,471,016 16,197,885 10-01-22 6.50 1,637,546 1,714,482 08-01-24 8.00 324,857 351,425 12-01-30 5.50 5,899,394 5,898,803 05-01-32 6.50 10,788,994 11,245,572 07-01-32 7.00 4,759,960 5,009,023 08-01-32 6.50 3,540,352 3,666,825 09-01-32 6.50 1,016,721 1,053,041 04-01-33 6.00 3,844,944 3,919,933 05-01-33 5.50 3,976,052 3,961,104 Collateralized Mtge Obligation 10-15-18 5.00 1,700,000 1,719,125 11-15-18 5.00 4,400,000 4,435,750 02-15-33 5.50 2,418,136 2,511,983 Interest Only 02-15-14 9.85 1,200,000(l) 139,612 06-15-18 24.49 1,095,148(l) 66,638 Federal Natl Mtge Assn 06-01-10 6.50 1,517,491 1,604,994 08-01-11 8.50 918,027 997,524 01-01-13 4.92 2,952,976 2,926,708 02-01-13 4.87 7,748,773 7,715,546 06-01-13 4.54 3,196,559 3,097,259 06-01-13 4.85 2,145,198 2,104,516 10-01-13 4.50 2,000,000(k) 1,975,620 04-01-14 5.50 11,872,787 12,173,822 08-01-14 5.50 9,300,000(k) 9,497,625 08-01-16 6.50 1,096,377 1,153,474
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 134 AXP VP - MANAGED FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - ----------------------------------------------------------------------------------------- BONDS (CONTINUED) MORTGAGE-BACKED SECURITIES (CONT.) Federal Natl Mtge Assn (cont.) 03-01-17 6.50% $ 2,823,103 $ 2,970,123 08-01-17 6.50 2,825,370 2,972,601 08-01-18 4.50 4,000,000 3,930,625 09-01-18 5.00 16,050,000(k) 16,095,102 04-01-22 8.00 362,492 393,941 08-01-22 7.00 1,094,289 1,155,165 02-01-23 7.00 990,361 1,045,456 04-01-23 8.50 694,362 758,775 07-01-23 5.50 3,509,891(k) 3,541,666 08-01-23 5.50 3,555,656(k) 3,587,845 09-01-23 5.00 2,250,000(k) 2,202,188 09-01-23 5.50 4,100,000(k) 4,137,117 05-01-24 6.00 1,806,633 1,848,065 06-01-24 9.00 389,513 432,129 02-01-25 8.50 370,760 403,013 05-01-25 8.50 341,461 371,165 11-01-25 7.50 780,352 832,935 03-01-26 7.00 1,092,058 1,154,673 07-01-28 5.50 1,479,834 1,482,928 02-01-29 7.00 1,805,882(k) 1,909,425 03-01-29 6.50 221,555 229,737 05-01-29 6.50 4,867,893 5,044,393 07-01-29 7.00 3,306,387(k) 3,487,804 07-01-29 6.00 5,000,000(k) 5,082,810 08-01-29 7.00 1,079,706 1,138,948 05-01-32 7.00 1,358,380 1,430,541 08-01-32 6.50 6,281,098 6,501,587 08-01-32 7.00 820,560 865,132 09-01-32 6.00 7,052,102 7,173,557 09-01-32 6.50 1,089,916 1,128,176 10-01-32 5.50 8,400,000(k) 8,331,750 10-01-32 7.00 2,346,942 2,471,618 11-01-32 7.50 1,448,544 1,539,670 12-01-32 7.00 4,101,090 4,318,950 02-01-33 5.50 2,479,957 2,471,409 02-01-33 6.00 3,235,562 3,289,580 02-01-33 7.00 1,149,740 1,210,817 02-28-33 6.00 5,938,621 6,058,617 03-01-33 5.50 10,770,726 10,747,494 03-31-33 5.50 1,976,273 1,969,059 04-01-33 5.50 4,822,623 4,806,000 04-01-33 6.00 11,458,844 11,676,316 05-01-33 5.50 3,361,441 3,349,798 05-01-33 6.00 16,137,682 16,447,430 07-01-33 5.50 8,304,210 8,281,620 09-01-33 5.00 9,550,000(k) 9,233,704 Collateralized Mtge Obligation 09-25-42 5.00 1,140,000 1,151,917 10-25-42 7.50 1,831,580 1,978,679 12-25-42 4.75 3,000,000 2,993,867 Interest Only 12-25-12 12.05 1,200,000(l) 114,019 Govt Natl Mtge Assn 12-15-08 7.00 2,694,476 2,873,750 03-15-33 7.00 1,528,839 1,616,619 05-15-33 6.00 2,618,556 2,675,465 09-01-33 5.50 7,200,000(k) 7,188,768 --------------- Total 327,119,366 - ----------------------------------------------------------------------------------------- AEROSPACE & DEFENSE (0.1%) Alliant Techsystems 05-15-11 8.50% $ 300,000 $ 324,000 L-3 Communications 06-15-12 7.63 400,000 417,000 Raytheon 04-01-13 5.38 1,450,000 1,430,221 TD Funding Sr Sub Nts 07-15-11 8.38 200,000(d) 208,500 --------------- Total 2,379,721 - ----------------------------------------------------------------------------------------- AIRLINES (--%) Northwest Airlines 02-01-20 6.81 334,400 270,396 - ----------------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (0.2%) DaimlerChrysler North American Holding 06-04-08 4.05 5,200,000 4,978,948 Ford Motor 02-01-29 6.38 370,000 290,517 --------------- Total 5,269,465 - ----------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (0.9%) AmSouth Bank NA Sub Nts 04-01-13 4.85 1,620,000 1,570,509 Bank of America Sub Nts 02-15-10 7.80 4,700,000 5,508,786 Bank United 03-15-09 8.00 3,500,000 4,061,512 Banknorth Group 05-01-08 3.75 700,000 686,567 Credit Suisse First Boston USA 01-15-12 6.50 1,260,000 1,355,451 Fifth Third Bank 08-15-08 3.38 590,000 575,462 Fleet Natl Bank Sub Nts 01-15-09 5.75 560,000 599,738 Wachovia 08-15-08 3.50 1,200,000 1,170,252 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 5,000,000 5,498,785 --------------- Total 21,027,062 - ----------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.2%) Diageo Capital (U.S. Dollar) 11-19-07 3.50 3,500,000(c) 3,467,954 03-20-08 3.38 590,000(c) 579,209 --------------- Total 4,047,163 - ----------------------------------------------------------------------------------------- BROKER DEALERS (0.6%) Goldman Sachs Group 01-15-11 6.88% $ 770,000 $ 855,937 04-01-13 5.25 720,000 709,695 07-15-13 4.75 1,170,000 1,108,107 LaBranche Sr Sub Nts 03-02-07 12.00 150,000 163,500 Lehman Brothers Holdings 08-07-08 3.50 2,300,000 2,230,241 Merrill Lynch 11-15-07 4.00 1,200,000 1,199,159 Morgan Stanley 04-15-11 6.75 1,930,000 2,127,688 03-01-13 5.30 2,320,000 2,281,047 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 2,973,890 2,809,519 Series 2003-T11 Cl A2 06-13-41 4.34 2,420,000 2,396,994 Morgan Stanley, Dean Witter Capital 1 Series 2002-IQ2 Cl A2 12-15-35 5.16 380,000 396,038 Series 2002-IQ2 Cl A3 12-15-35 5.52 670,000 697,530 --------------- Total 16,975,455 - ----------------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (--%) Ryland Group Sr Nts 06-01-08 5.38 730,000 724,525 - ----------------------------------------------------------------------------------------- CABLE (0.4%) Comcast 03-15-11 5.50 5,790,000 5,821,902 Comcast Cable Communications 11-15-08 6.20 2,100,000 2,250,079 Cox Communications 06-01-13 4.63 770,000 713,074 DirectTV Holdings/Finance Sr Nts 03-15-13 8.38 250,000(d) 273,125 Rogers Cable (U.S. Dollar) 06-15-13 6.25 440,000(c) 413,050 --------------- Total 9,471,230 - ----------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.1%) AT&T Wireless Services Sr Nts 03-01-11 7.88 2,650,000 2,993,331 Nextel Communications Sr Nts 08-01-15 7.38 150,000 150,000 --------------- Total 3,143,331 - -----------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 135 AXP VP - MANAGED FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - --------------------------------------------------------------------------------------------- BONDS (CONTINUED) CHEMICALS (0.1%) Airgas 10-01-11 9.13% $ 225,000 $ 247,500 Compass Minerals Group 08-15-11 10.00 225,000 248,625 Dow Chemical 02-01-11 6.13 1,205,000 1,251,228 MacDermid 07-15-11 9.13 200,000 220,000 Praxair 06-15-08 2.75 660,000 622,552 Rhodia (U.S. Dollar) 06-01-10 7.63 48,000(c,d) 48,960 06-01-11 8.88 30,000(c,d) 30,150 --------------- Total 2,669,015 - --------------------------------------------------------------------------------------------- ELECTRONICS (--%) Flextronics Intl (U.S. Dollar) Sr Sub Nts 05-15-13 6.50 100,000(c,d) 95,750 - --------------------------------------------------------------------------------------------- ENERGY (0.4%) Amerada Hess 08-15-11 6.65 360,000 387,253 Conoco Funding (U.S. Dollar) 10-15-06 5.45 2,000,000(c) 2,145,968 10-15-11 6.35 4,970,000(c) 5,409,229 Devon Financing 09-30-11 6.88 740,000 817,523 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 215,000(d) 208,550 Newfield Exploration Sr Sub Nts 08-15-12 8.38 550,000 583,000 Westport Resources 11-01-11 8.25 350,000 374,500 XTO Energy Sr Nts 04-15-12 7.50 320,000 344,000 04-15-13 6.25 180,000 180,000 --------------- Total 10,450,023 - --------------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (--%) Grant Prideco Escrow 12-15-09 9.00 400,000 421,000 Key Energy Services Sr Nts 03-01-08 8.38 180,000 188,100 05-01-13 6.38 110,000 104,500 Offshore Logistics 06-15-13 6.13 60,000(d) 57,000 --------------- Total 770,600 - --------------------------------------------------------------------------------------------- FINANCE COMPANIES (1.0%) Citigroup Sub Nts 10-01-10 7.25% $ 11,050,000 $ 12,653,399 Ford Motor Credit 10-28-09 7.38 2,500,000 2,574,800 GMAC 09-15-11 6.88 5,540,000 5,542,050 Household Finance 05-15-11 6.75 2,410,000 2,644,493 --------------- Total 23,414,742 - --------------------------------------------------------------------------------------------- FINANCIAL SERVICES (1.8%) Banc of America Commerical Mtge Obligation Series 2002-2 Cl A3 07-11-43 5.12 3,000,000 3,012,402 Bank of America First Union NB Commercial Mtge Series 2001-3 Cl A2 04-11-37 5.46 910,000 939,201 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 3,230,851 3,168,883 Capital One Bank Sr Nts 02-01-06 6.88 390,000 418,184 Chase Manhattan Bank-First Union Natl Series 1999-1 C1 A2 08-15-31 7.44 1,750,000 1,997,217 Citibank Credit Card Issuance Trust Series 2003-A3 Cl A3 03-10-10 3.10 2,400,000 2,329,800 Series 2003-A6 Cl A6 05-17-10 2.90 2,000,000 2,009,700 Commerical Mtge Acceptance Series 1998-C1 C1 A2 07-15-31 6.49 3,600,000 3,958,036 Greenwich Capital Commercial Funding Series 2002-C1 Cl A4 01-11-35 4.95 3,505,000 3,447,279 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 2,000,000(c) 1,994,598 LB-UBS Commercial Mtge Trust Series 2002-C4 Cl A2 09-15-26 4.02 3,000,000 2,992,609 Series 2002-C4 Cl A5 09-15-31 4.85 1,000,000 979,132 Series 2003-C3 Cl A2 06-15-36 3.09 3,300,000 3,160,004 MBNA Credit Card Master Note Trust Series 2003-A1 Cl A1 07-15-10 3.30 1,285,000 1,266,278 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 550,000 546,433 Residential Asset Securities Series 2002-KS1 Cl A14 11-25-29 5.86% $ 1,800,000 $ 1,865,106 SLM 03-17-08 3.63 1,180,000 1,163,137 TIAA Global Markets 11-15-07 4.13 4,300,000(d) 4,351,767 01-22-08 3.88 730,000(d) 731,672 Toyota Motor Credit 08-01-08 2.88 1,050,000 1,006,520 --------------- Total 41,337,958 - --------------------------------------------------------------------------------------------- FOOD (0.3%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75 75,000(c),(d) 76,875 Chiquita Brands Intl Sr Nts 03-15-09 10.56 200,000 218,000 Del Monte Sr Sub Nts 12-15-12 8.63 150,000(d) 156,750 General Mills 02-15-12 6.00 1,950,000 2,056,899 Kellogg Series B 04-01-11 6.60 2,350,000 2,592,402 Kraft Foods 11-01-11 5.63 1,810,000 1,817,530 Merisant Sr Sub Nts 07-15-13 9.50 155,000(d) 164,300 --------------- Total 7,082,756 - --------------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (--%) Apogent Technologies Sr Sub Nts 05-15-13 6.50 200,000(d) 196,500 Kinetic Concepts Sr Sub Nts 05-15-13 7.38 100,000(d) 100,000 --------------- Total 296,500 - --------------------------------------------------------------------------------------------- HEALTH CARE SERVICES (--%) AmerisourceBergen 11-15-12 7.25 200,000 202,000 Fisher Scientific Intl Sr Sub Nts 09-01-13 8.00 100,000(d) 102,750 Omnicare Series B 03-15-11 8.13 200,000 212,000 Province Healthcare Sr Sub Nts 06-01-13 7.50 100,000 96,250 --------------- Total 613,000 - ---------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 136 AXP VP - MANAGED FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - --------------------------------------------------------------------------------------------- BONDS (CONTINUED) HOME BUILDING (--%) D.R. Horton 07-01-13 5.88% $ 330,000 $ 297,825 NVR Sr Nts 06-15-10 5.00 800,000 748,000 --------------- Total 1,045,825 - --------------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (0.3%) Burlington North Santa Fe 12-15-05 6.38 240,000 260,445 Canadian Natl Railways (U.S. Dollar) 10-15-11 6.38 1,830,000(c) 1,995,513 CSX 11-01-09 4.88 3,000,000 3,002,729 Interpool 08-01-07 7.35 50,000 48,750 Union Pacific 02-01-08 6.63 450,000 494,480 01-15-11 6.65 1,100,000 1,208,779 04-15-12 6.50 990,000 1,083,280 --------------- Total 8,093,976 - --------------------------------------------------------------------------------------------- INSURANCE (0.4%) Allstate 06-01-33 5.35 560,000 490,151 Sr Nts 02-15-12 6.13 380,000 408,398 ASIF Global Financing 01-17-13 4.90 4,880,000(d) 4,754,682 MassMutual Global Funding II 07-15-08 2.55 1,580,000(d) 1,480,185 Met Life Global Funding I 06-19-08 2.60 2,280,000(d) 2,133,738 Travelers Property Casualty Sr Nts 03-15-13 5.00 1,020,000 998,835 --------------- Total 10,265,989 - --------------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (0.4%) AOL Time Warner 05-01-12 6.88 4,735,000 5,146,315 05-01-32 7.70 915,000 1,003,694 Viacom 05-15-11 6.63 2,950,000 3,261,523 --------------- Total 9,411,532 - --------------------------------------------------------------------------------------------- LODGING & GAMING (0.1%) Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 250,000 267,813 Coast Hotels & Casino 04-01-09 9.50 175,000 186,375 Hilton Hotels 12-01-12 7.63 150,000 158,625 Mohegan Tribal Gaming Sr Sub Nts 07-15-09 6.38% $ 225,000(d) $ 224,438 Park Place Entertainment Sr Sub Nts 05-15-11 8.13 375,000 404,999 --------------- Total 1,242,250 - --------------------------------------------------------------------------------------------- MACHINERY (--%) Joy Global Series B 03-15-12 8.75 150,000 162,000 - --------------------------------------------------------------------------------------------- MEDIA (0.3%) Belo (AH) 11-01-08 8.00 1,900,000 2,189,047 CanWest Media (U.S. Dollar) Sr Sub Nts 05-15-11 10.63 250,000(c) 278,750 CBD Media/Finance Sr Sub Nts 06-01-11 8.63 350,000(d) 367,500 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 150,000(c) 158,625 Dex Media West/Finance Sr Nts 08-15-10 8.50 100,000(d) 108,750 Sr Sub Nts 08-15-13 9.88 85,000(d) 94,775 Hollinger Intl Publishing Sr Nts 12-15-10 9.00 160,000 166,000 Lamar Media 01-01-13 7.25 500,000(d) 518,750 09-15-07 8.63 240,000 247,800 Morris Publishing Sr Sub Nts 08-01-13 7.00 155,000(d) 155,000 Nexstar Finance LLC 04-01-08 12.00 200,000 224,000 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 125,000(c) 138,125 Radio One Series B 07-01-11 8.88 300,000 327,750 Sinclair Broadcast Group 12-15-11 8.75 205,000 220,888 Sun Media (U.S. Dollar) Sr Nts 02-15-13 7.63 250,000(c) 258,125 Susquehanna Media Sr Sub Nts 04-15-13 7.38% $ 80,000 $ 81,500 United Artists Theatre 07-01-15 9.30 1,500,042 1,462,541 --------------- Total 6,997,926 - --------------------------------------------------------------------------------------------- METALS (--%) Euramax Intl Sr Sub Nts 08-15-11 8.50 120,000(d) 121,200 Jorgensen Earle M. 06-01-12 9.75 100,000 105,500 Peabody Energy Series B 03-15-13 6.88 400,000 400,000 --------------- Total 626,700 - --------------------------------------------------------------------------------------------- MULTI-INDUSTRY (0.4%) General Electric 02-01-13 5.00 10,000,000 9,808,800 SPX Sr Nts 06-15-11 6.25 200,000 196,000 Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 470,000(c) 478,225 Vivendi Universal (U.S. Dollar) Sr Nts 07-15-08 6.25 225,000(c),(d) 225,000 --------------- Total 10,708,025 - --------------------------------------------------------------------------------------------- PAPER & PACKAGING (0.6%) Ball 12-15-12 6.88 305,000 308,050 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 655,000(c),(d) 646,813 Crown Euro Holdings (U.S. Dollar) 03-01-13 10.88 65,000(c),(d) 71,175 Crown Paper Sr Sub Nts 09-01-05 11.00 1,000,000(b) 100 Domtar (U.S. Dollar) 10-15-11 7.88 260,000(c) 298,490 Georgia-Pacific Sr Nts 02-01-10 8.88 150,000(d) 157,500 Graphic Packaging Intl Sr Nts 08-15-11 8.50 210,000(d) 219,450 Intl Paper 07-08-05 8.13 4,500,000 4,945,995 10-30-12 5.85 100,000 101,907 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 260,000(c),(d) 256,750
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 137 AXP VP - MANAGED FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - --------------------------------------------------------------------------------------------- BONDS (CONTINUED) PAPER & PACKAGING (CONT.) Packaging Corp of America 08-01-13 5.75% $ 935,000(d) $ 906,810 Stone Container Sr Nts 02-01-08 9.25 175,000 189,000 Weyerhaeuser 03-15-07 6.13 5,250,000 5,662,234 --------------- Total 13,764,274 - --------------------------------------------------------------------------------------------- RETAIL -- GENERAL (0.1%) Flooring America 10-15-07 9.25 1,849,000(b) 185 Sonic Automotive Sr Sub Nts 08-15-13 8.63 70,000(d) 70,700 Wal-Mart CRAVE 401 07-17-06 7.00 1,887,151(d) 2,041,369 William Carter Series B 08-15-11 10.88 150,000 165,000 --------------- Total 2,277,254 - --------------------------------------------------------------------------------------------- RETAIL -- GROCERY (0.1%) Kroger 03-01-08 7.45 2,575,000 2,886,369 - --------------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (0.3%) NATG Holdings LLC/Orius Capital Series B 02-01-10 12.75 825,000(b) 1,650 Qwest 11-01-04 7.20 835,000 847,525 Sprint Capital 03-15-12 8.38 1,790,000 2,032,935 Telus (U.S. Dollar) 06-01-07 7.50 1,690,000(c) 1,844,706 Verizon Maryland 03-01-12 6.13 1,260,000 1,338,831 Vodafone Group (U.S. Dollar) 02-15-10 7.75 880,000(c) 1,018,943 --------------- Total 7,084,590 - --------------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (1.4%) American Electric Power Sr Nts 06-01-15 5.25 1,130,000 1,046,109 Carolina Power & Light 07-15-12 6.50 220,000 236,744 Cincinnati Gas & Electric 09-15-12 5.70 360,000 371,797 Cleveland Electric Illuminating 1st Mtge Series B 05-15-05 9.50 6,000,000 6,039,971 Columbus Southern Power 03-01-13 5.50 890,000(d) 886,097 Commonwealth Edison 02-01-08 3.70 1,560,000 1,547,629 Consolidated Natural Gas Sr Nts 04-15-11 6.85% $ 380,000 $ 423,537 Consumers Energy 1st Mtge 04-15-08 4.25 4,170,000(d) 4,118,834 Dominion Resources Sr Nts Series B 06-30-12 6.25 2,400,000 2,532,151 Sr Nts Series F 08-01-33 5.25 400,000 377,828 Duke Energy 03-05-08 3.75 2,780,000(d) 2,765,544 01-15-12 6.25 3,000,000 3,152,265 Exelon Sr Nts 05-01-11 6.75 340,000 372,698 FirstEnergy Series B 11-15-11 6.45 2,270,000 2,219,061 Florida Power 1st Mtge 03-01-13 4.80 2,460,000 2,410,505 FPL Group Capital 04-11-06 3.25 450,000 452,007 Indianapolis Power & Light 07-01-13 6.30 670,000(d) 666,637 IPALCO Enterprises 11-14-08 8.38 300,000 315,000 11-14-11 8.63 300,000 315,000 Midamerican Energy 01-15-13 5.13 1,250,000 1,241,210 Northern States Power 1st Mtge 08-01-10 4.75 700,000 691,908 Northern States Power - Minnesota 1st Mtge Series B 08-29-12 8.00 730,000 865,965 Ohio Power 02-15-13 5.50 250,000(d) 248,900 PG&E 07-15-08 6.88 250,000(d) 254,368 Public Service Colorado 1st Mtge 03-01-13 4.88 360,000(d) 345,865 Tampa Electric 08-15-07 5.38 210,000 215,151 Teco Energy Sr Nts 06-15-10 7.50 125,000 121,875 Xcel Energy Sr Nts 07-01-08 3.40 560,000(d) 532,426 --------------- Total 34,767,082 - --------------------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (0.4%) ANR Pipeline 03-15-10 8.88% $ 425,000 $ 448,375 Columbia Energy Group Series E 11-28-10 7.32 5,000,000 5,373,970 El Paso Production Holding 06-01-13 7.75 270,000(d) 259,200 NiSource Finance 07-15-14 5.40 770,000 729,960 Northwest Pipeline 03-01-10 8.13 115,000 119,600 Panhandle Eastern Pipeline 08-15-08 4.80 600,000(d) 597,462 Southern Natural Gas 03-15-10 8.88 525,000 553,875 Transcontinental Gas Pipeline Series B 08-15-11 7.00 425,000 417,031 --------------- Total 8,499,473 - --------------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (0.9%) AT&T Sr Nts 11-15-06 7.00 2,000,000(g) 2,217,940 British Telecom (U.S. Dollar) 12-15-10 8.38 2,840,000(c) 3,370,162 Citizens Communications 05-15-06 8.50 850,000 962,587 05-15-11 9.25 240,000 295,761 Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 2,640,000(c) 2,531,839 France Telecom (U.S. Dollar) 03-01-11 9.25 370,000(c),(g) 441,665 03-01-31 10.00 330,000(c),(g) 425,369 SBC Communcations 03-15-11 6.25 920,000 994,167 08-15-12 5.88 1,060,000 1,119,985 Verizon Global Funding 06-15-07 6.13 3,270,000 3,544,908 06-15-12 6.88 1,960,000 2,159,250 06-15-32 7.75 400,000 455,996 Verizon New England Sr Nts 09-15-11 6.50 210,000 227,594 Verizon Pennsylvania Cl A 11-15-11 5.65 2,250,000 2,315,228 --------------- Total 21,062,451 - --------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $798,531,564) $ 787,534,345 - ---------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 138 AXP VP - MANAGED FUND
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ------------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (11.8%)(m) U.S. GOVERNMENT AGENCY (2.9%) Federal Natl Mtge Assn Disc Nts 11-12-03 1.07% $ 25,000,000 $ 24,948,725 11-17-03 1.00 14,600,000 14,567,938 12-01-03 1.07 30,000,000 29,921,250 ---------------- Total 69,437,913 - ------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (8.9%) AEGON Funding 10-06-03 1.03 19,900,000(j) 19,877,945 12-01-03 1.09 13,700,000(j) 13,659,935 Amsterdam Funding 11-06-03 1.06 5,000,000(j) 4,989,746 Bank of Ireland 10-20-03 1.06 36,100,000(j) 36,044,726 BASF 11-24-03 1.07 4,700,000(j) 4,687,847 Charta LLC 09-19-03 1.04% $ 15,000,000(j) $ 14,990,901 Ciesco LLC 11-04-03 1.07 5,000,000(j) 4,990,043 Citigroup 09-02-03 1.10 8,100,000 8,099,010 Citigroup Global Markets 09-15-03 1.03 18,700,000 18,690,905 CRC Funding LLC 09-15-03 1.05 5,100,000(j) 5,097,471 10-10-03 1.04 9,400,000(j) 9,387,994 Delaware Funding 09-02-03 1.03 15,000,000(j) 14,998,283 09-04-03 1.06 8,400,000(j) 8,398,516 Greyhawk Funding LLC 09-08-03 1.05 4,900,000(j) 4,898,571 HBOS Treasury Services 09-18-03 1.03% $ 6,600,000 $ 6,596,199 Receivables Capital 09-18-03 1.06 25,000,000(j) 24,985,277 Windmill Funding 11-07-03 1.06 15,000,000(j) 14,968,792 ---------------- Total 215,362,161 - ------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $284,801,021) $ 284,800,074 - ------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $2,487,789,953)(n) $ 2,556,266,332 =================================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 139 AXP VP - MANAGED FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Aug. 31, 2003, the value of foreign securities represented 3.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) 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. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (h) Negligible market value. (i) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 7 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT -------------------------------------------------------------------------------------------- PURCHASE CONTRACTS Eurodollar, Sept. 2003, 90-day $ 44,000,000 Eurodollar, Sept. 2007, 90-day 40,750,000 U.S. Treasury Bonds, Dec. 2003, 20-year 20,500,000 SALE CONTRACTS U.S. Treasury Notes, Sept. 2003, 5-year 600,000 U.S. Treasury Notes, Sept. 2003, 10-year 9,400,000 U.S. Treasury Notes, Dec. 2003, 5-year 11,400,000 U.S. Treasury Notes, Dec. 2003, 10-year 24,600,000
(j) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (k) At Aug. 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $76,764,966 (l) 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 Aug. 31, 2003. (m) At Aug. 31, 2003, cash or short-term securities were designated to cover open call options on futures written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) --------------------------------------------------------------------------------------------- U.S Treasury Notes Dec. 2003, 10-year $ 8,900,000 $ 110 Nov. 2003 $ 165,484
At Aug. 31, 2003, cash or short-term securities were designated to cover open put options on futures written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) --------------------------------------------------------------------------------------------- U.S Treasury Notes Dec. 2003, 10-year $ 8,900,000 $ 110 Nov. 2003 $ 190,515
(n) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $2,514,683,229 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 138,578,688 Unrealized depreciation (96,995,585) -------------------------------------------------------------------------------------------- Net unrealized appreciation $ 41,583,103 --------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 140 INVESTMENTS IN SECURITIES AXP VP - NEW DIMENSIONS FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (97.4%) AEROSPACE & DEFENSE (0.7%) Northrop Grumman 80,600 $ 7,695,688 United Technologies 186,000 14,926,500 --------------- Total 22,622,188 - ----------------------------------------------------------------------------------------- AIRLINES (1.2%) Southwest Airlines 2,213,225 37,824,015 - ----------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (5.4%) Bank of America 1,500,000 118,875,000 Fifth Third Bancorp 219,600 12,868,560 Wells Fargo 738,300 37,018,362 --------------- Total 168,761,922 - ----------------------------------------------------------------------------------------- BEVERAGES & TOBACCO (3.7%) Altria Group 1,559,900 64,299,078 Anheuser-Busch 363,200 18,719,328 PepsiCo 728,400 32,442,936 --------------- Total 115,461,342 - ----------------------------------------------------------------------------------------- BROKER DEALERS (0.7%) Morgan Stanley 454,180 22,159,442 - ----------------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.5%) Vodafone Group ADR 818,900(c) 14,985,870 - ----------------------------------------------------------------------------------------- CHEMICALS (0.5%) Air Products & Chemicals 348,700 16,500,484 - ----------------------------------------------------------------------------------------- COMPUTER HARDWARE (3.5%) Cisco Systems 2,186,500(b) 41,871,475 Dell 1,664,900(b) 54,325,687 Hewlett-Packard 695,500 13,854,360 --------------- Total 110,051,522 - ----------------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (8.7%) Electronic Arts 36,400(b) 3,266,900 Intl Business Machines 546,400 44,810,264 Microsoft 4,315,500 114,447,060 Oracle 1,453,200(b) 18,571,896 Paychex 364,200 13,111,200 State Street 551,800 24,251,610 Symantec 368,500(b) 21,162,955 VERITAS Software 910,700(b) 31,400,936 --------------- Total 271,022,821 - ----------------------------------------------------------------------------------------- ELECTRONICS (5.6%) Analog Devices 368,000(b) 15,088,000 Applied Materials 1,470,500(b) 31,762,800 Intel 2,116,100 60,562,782 Maxim Integrated Products 474,200 21,296,322 Texas Instruments 1,876,000 44,742,600 --------------- Total 173,452,504 - ----------------------------------------------------------------------------------------- ENERGY (5.4%) Burlington Resources 141,600 $ 6,856,272 ChevronTexaco 914,600 66,646,902 ConocoPhillips 728,900 40,701,776 Exxon Mobil 1,456,096 54,894,819 --------------- Total 169,099,769 - ----------------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.5%) Schlumberger 785,500 38,890,105 Weatherford Intl 183,800(b) 6,907,204 --------------- Total 45,797,309 - ----------------------------------------------------------------------------------------- FINANCE COMPANIES (3.2%) Citigroup 2,275,933 98,661,696 - ----------------------------------------------------------------------------------------- FINANCIAL SERVICES (2.8%) MBNA 819,225 19,120,712 SLM 1,680,900 67,538,562 --------------- Total 86,659,274 - ----------------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (9.6%) Amgen 1,542,900(b) 101,677,109 Genzyme 158,100(b) 7,454,415 Johnson & Johnson 736,550 36,518,149 Medtronic 1,286,500 63,784,670 Pfizer 2,209,550 66,109,736 Stryker 127,400 9,656,920 Teva Pharmaceutical Inds ADR 238,900(c) 14,026,297 --------------- Total 299,227,296 - ----------------------------------------------------------------------------------------- HEALTH CARE SERVICES (2.6%) UnitedHealth Group 1,639,800 81,055,314 - ----------------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (0.6%) Procter & Gamble 221,100 19,299,819 - ----------------------------------------------------------------------------------------- INDEXES (1.6%) Nasdaq-100 Index Tracking 1,470,800(b) 49,051,180 - ----------------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.3%) Union Pacific 552,100 33,644,974 United Parcel Service Cl B 128,500 8,064,660 --------------- Total 41,709,634 - ----------------------------------------------------------------------------------------- INSURANCE (2.9%) American Intl Group 729,360 43,447,975 Marsh & McLennan 911,200 45,560,000 --------------- Total 89,007,975 - ----------------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (3.4%) Viacom Cl B 2,379,917 107,096,265 - ----------------------------------------------------------------------------------------- LODGING & GAMING (2.3%) Intl Game Technology 1,238,400 $ 32,000,256 Marriott Intl Cl A 962,700 39,307,041 --------------- Total 71,307,297 - ----------------------------------------------------------------------------------------- MACHINERY (4.6%) Caterpillar 1,097,000 78,797,510 Deere & Co 460,500 26,022,855 Illinois Tool Works 551,500 39,867,935 --------------- Total 144,688,300 - ----------------------------------------------------------------------------------------- MEDIA (5.8%) Amazon.com 645,200(b) 29,963,088 Cendant 1,650,300(b) 29,672,394 eBay 653,400(b) 36,283,302 Gannett 364,386 28,575,150 InterActiveCorp 1,493,100(b) 55,252,231 --------------- Total 179,746,165 - ----------------------------------------------------------------------------------------- METALS (0.6%) Nucor 364,400 18,733,804 - ----------------------------------------------------------------------------------------- MULTI-INDUSTRY (5.6%) 3M 543,900 77,489,433 General Electric 2,735,400 80,885,778 Tyco Intl 731,700(c) 15,058,386 --------------- Total 173,433,597 - ----------------------------------------------------------------------------------------- PAPER & PACKAGING (0.7%) Intl Paper 552,900 22,420,095 - ----------------------------------------------------------------------------------------- RESTAURANTS (0.8%) McDonald's 1,088,200 24,397,444 - ----------------------------------------------------------------------------------------- RETAIL -- GENERAL (8.6%) Best Buy 441,700(b) 22,972,817 Costco Wholesale 367,200(b) 11,783,448 Home Depot 799,050 25,697,448 Target 1,950,200 79,178,120 Wal-Mart Stores 2,174,700 128,676,999 --------------- Total 268,308,832 - ----------------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (0.4%) Nokia ADR 737,600(c) 12,015,504 - ----------------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (2.1%) Dominion Resources 1,086,000 65,789,880 - ----------------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (0.4%) Verizon Communications 368,700 13,022,484 - ----------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $2,845,305,711) $ 3,033,371,043 - -----------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 141 AXP VP - NEW DIMENSIONS FUND
ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ------------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (4.0%) U.S. GOVERNMENT AGENCY (2.1%) Federal Natl Mtge Assn Disc Nts 09-17-03 1.02% $ 23,600,000 $ 23,587,295 10-15-03 1.00 15,000,000 14,980,630 10-15-03 1.06 7,800,000 7,789,928 11-26-03 1.06 3,500,000 3,490,828 12-01-03 1.07 15,600,000 15,559,050 ---------------- Total 65,407,731 - ------------------------------------------------------------------------------------------------- COMMERCIAL PAPER (1.9%) BASF AG 11-24-03 1.07% $ 1,000,000(d) $ 997,414 CAFCO LLC 10-02-03 1.07 9,400,000(d) 9,390,500 CRC Funding LLC 10-06-03 1.08 3,600,000(d) 3,596,010 Credit Suisse First Boston 10-21-03 1.06 8,600,000(d) 8,586,579 Edison Asset Securitization 11-03-03 1.07% $ 8,200,000(d) $ 8,183,914 Greyhawk Funding LLC 09-02-03 1.04 9,000,000(d) 8,998,960 10-24-03 1.07 7,800,000(d) 7,786,592 Societe Generale North America 09-02-03 1.05 12,300,000 12,298,566 ---------------- Total 59,838,535 - ------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $125,246,704) $ 125,246,266 - -------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $2,970,552,415)(e) $ 3,158,617,309 =================================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 1.8% of net assets. (d) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (e) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $2,972,796,237 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 376,432,210 Unrealized depreciation (190,611,138) -------------------------------------------------------------------------------------------- Net unrealized appreciation $ 185,821,072 --------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 142 INVESTMENTS IN SECURITIES AXP VP - PARTNERS SMALL CAP VALUE FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (86.3%) AEROSPACE & DEFENSE (1.0%) Curtiss-Wright 7,000 $ 476,000 Ducommun 12,261(b) 208,314 EDO 4,031 82,716 Herley Inds 5,837(b) 115,281 MTC Technologies 15,154(b) 347,178 REMEC 15,800(b) 143,148 --------------- Total 1,372,637 - --------------------------------------------------------------------------------- AIRLINES (0.2%) AirTran Holdings 24,435(b) 328,162 - --------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (1.2%) American Axle & Mfg Holdings 9,054(b) 294,255 Spartan Motors 8,600 70,004 Strattec Security 7,700(b) 399,630 Superior Inds Intl 2,235 96,708 Wescast Inds Cl A 15,600(c) 440,388 Winnebago Inds 7,500 369,375 --------------- Total 1,670,360 - --------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (2.7%) Bank of Hawaii 2,757 93,462 BankUnited Financial Cl A 10,382(b) 225,705 Berkshire Hills Bancorp 2,382 77,177 Brookline Bancorp 15,639 239,120 Community First Bankshares 7,646 216,000 Corus Bankshares 2,574 133,333 Fidelity Bankshares 6,155 146,181 First Community Bancorp 2,848 96,974 First Niagara Financial Group 16,271 244,553 Fulton Financial 7,138 144,188 Greater Bay Bancorp 20,047 412,368 IBERIABANK 4,439 213,072 IndyMac Bancorp 11,019 254,098 Main Street Banks 6,704 164,449 NetBank 4,811 58,165 PFF Bancorp 6,160 247,078 Republic Bancorp 7,112 97,719 Republic Bancshares 4,073 110,500 United Community Banks 2,142 58,905 Washington Federal 5,662 143,588 Westamerica Bancorporation 1,806 79,608 Wintrust Financial 3,926 138,823 --------------- Total 3,595,066 - --------------------------------------------------------------------------------- BROKER DEALERS (1.1%) Affiliated Managers Group 4,204(b) 285,031 E*TRADE Group 41,400(b) 382,122 Instinet Group 184,500 747,225 --------------- Total 1,414,378 - --------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (2.5%) ElkCorp 1,229 $ 29,619 Florida Rock Inds 15,200 789,640 Hughes Supply 10,236 363,378 LNR Property 26,500 1,060,000 Simpson Mfg 17,800(b) 847,280 Standard Pacific 8,502 302,161 --------------- Total 3,392,078 - --------------------------------------------------------------------------------- CHEMICALS (2.0%) Agrium 88,922(c) 1,080,401 Albemarle 22,164 619,484 Cytec Inds 4,081(b) 152,997 Minerals Technologies 3,913 197,802 TETRA Technologies 30,225(b) 680,063 --------------- Total 2,730,747 - --------------------------------------------------------------------------------- COMPUTER HARDWARE (1.0%) Black Box 10,600 499,260 Hutchinson Technology 12,011(b) 379,908 Komag 6,474(b) 93,549 Qualstar 6,800(b) 38,080 Synaptics 10,628(b) 127,536 Varian 4,199(b) 142,766 --------------- Total 1,281,099 - --------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (5.4%) American Management Systems 17,700(b) 253,995 Brooktrout 43,500(b) 326,250 Comverse Technology 39,500(b) 651,355 Digimarc 1,068(b) 17,622 eFunds 53,800(b) 687,026 Enterasys Networks 38,350(b) 221,280 First Consulting Group 41,000(b) 192,700 Geac Computer 27,900(b),(c) 105,795 Informatica 16,109(b) 143,209 Lionbridge Technologies 29,250(b) 247,163 MAXIMUS 15,900(b) 569,538 Natl Processing 22,200(b) 459,096 NDCHealth 5,344 113,186 NetIQ 11,006(b) 148,141 OPNET Technologies 8,638(b) 103,656 PC-Tel 6,700(b) 76,112 Perot Systems Cl A 50,400(b) 517,104 Pervasive Software 41,600(b) 282,506 Pinnacle Systems 12,915(b) 117,139 PLATO Learning 13,600(b) 96,832 Plumtree Software 15,500(b) 63,550 PRG-Schultz Intl 23,931(b) 150,765 Rimage 7,400(b) 97,680 SeeBeyond Technology 682(b) 1,582 SPSS 8,000(b) 155,120 Sybase 26,600(b) 449,806 Transaction Systems Architects Cl A 37,000(b) $ 526,880 Ulticom 20,200(b) 210,080 VitalWorks 38,700(b) 193,887 --------------- Total 7,179,055 - --------------------------------------------------------------------------------- ELECTRONICS (9.0%) Actel 4,544(b) 133,094 Advanced Power Technology 50,900(b) 410,000 American Power Conversion 12,100 216,832 Analogic 7,500 386,325 Anaren 13,400(b) 160,666 AVX 49,200 687,816 Bel Fuse Cl B 35,100 937,521 Belden 5,326 97,679 C&D Technologies 12,400 247,256 Cable Design Technologies 27,100(b) 203,250 Credence Systems 78,203(b) 898,552 CyberOptics 27,400(b) 271,808 Electro Scientific Inds 50,500(b) 1,024,645 Entegris 31,594(b) 465,064 ESS Technology 22,800(b) 238,488 Fairchild Semiconductor Intl Cl A 15,100(b) 267,270 Fargo Electronics 11,370(b) 131,778 Franklin Electric 2,632 162,000 GrafTech Intl 24,384(b) 195,072 KEMET 99,000(b) 1,213,739 LoJack 2,050(b) 14,412 Nu Horizons Electronics 70,200(b) 520,182 Park Electrochemical 37,400 857,208 ParthusCeva 13,100(b) 104,276 Power Integrations 5,246(b) 168,816 ScanSource 6,445(b) 244,846 Tektronix 22,200(b) 524,808 TriQuint Semiconductor 104,500(b) 581,020 TTM Technologies 60,800(b) 525,920 Universal Electronics 11,400(b) 151,381 --------------- Total 12,041,724 - --------------------------------------------------------------------------------- ENERGY (2.1%) Brown (Tom) 16,400(b) 450,836 Fording Canadian Coal Trust 25,000(c) 504,500 Frontier Oil 8,558 131,879 Houston Exploration 15,300(b) 524,637 Patina Oil & Gas 9,003 333,561 Remington Oil & Gas 19,700(b) 366,223 South Jersey Inds 312 11,965 St. Mary Land & Exploration 16,000 452,800 --------------- Total 2,776,401 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 143 AXP VP - PARTNERS SMALL CAP VALUE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) ENERGY EQUIPMENT & SERVICES (2.8%) Cimarex Energy 21,826(b) $ 474,716 Evergreen Resources 5,668(b) 316,671 Hydril 7,227(b) 169,112 Oil States Intl 21,000(b) 253,890 Patterson-UTI Energy 6,200(b) 185,008 Precision Drilling 20,300(b,c) 810,172 Range Resources 9,034(b) 60,528 RPC 7,300 87,965 Spinnaker Exploration 6,900(b) 153,318 Unit Corp 27,700(b) 597,212 Willbros Group 61,200(b,c) 615,060 --------------- Total 3,723,652 - --------------------------------------------------------------------------------- ENGINEERING & CONSTRUCTION (0.8%) Avatar Holdings 3,300(b) 102,924 Keith Companies 24,700(b) 280,098 Modtech Holdings 36,400(b) 289,744 Quanta Services 38,900(b) 369,939 --------------- Total 1,042,705 - --------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (0.2%) TRC Companies 4,568(b) 88,756 Waste Connections 4,075(b) 143,562 --------------- Total 232,318 - --------------------------------------------------------------------------------- FINANCE COMPANIES (0.2%) Financial Federal 8,867(b) 284,985 - --------------------------------------------------------------------------------- FINANCIAL SERVICES (1.4%) American Capital Strategies 4,714 117,001 BOK Financial 5,712 226,309 Irwin Financial 7,941 178,752 Jones Lang LaSalle 24,200(b) 438,020 Sky Financial Group 8,325 194,972 SWS Group 15,000 283,500 Westwood Holdings Group 22,850 422,497 --------------- Total 1,861,051 - --------------------------------------------------------------------------------- FOOD (0.2%) American Italian Pasta Cl A 4,405(b) 183,776 Corn Products Intl 1,915 60,380 Sensient Technologies 2,382 49,546 --------------- Total 293,702 - --------------------------------------------------------------------------------- FURNITURE & APPLIANCES (1.0%) Aaron Rents 12,356 259,229 American Woodmark 3,994 203,454 Natuzzi ADR 49,600(c) 479,136 Thomas Inds 16,600 461,480 --------------- Total 1,403,299 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (3.4%) Antigenics 35,800(b) $ 506,212 Coherent 27,300(b) 715,260 Datascope 8,500 252,450 Endo Pharmaceuticals Holdings 29,800(b) 505,110 Kos Pharmaceuticals 5,161(b) 194,570 Lexicon Genetics 32,600(b) 170,824 Ocular Sciences 17,200(b) 388,892 Perrigo 48,017 674,639 Serologicals 21,800(b) 303,020 Sybron Dental Specialists 4,381(b) 104,881 Theragenics 84,000(b) 373,800 United Therapeutics 5,451(b) 124,937 Viasys Healthcare 7,900(b) 174,590 Vital Signs 4,500 123,795 --------------- Total 4,612,980 - --------------------------------------------------------------------------------- HEALTH CARE SERVICES (3.9%) Applera - Cerera Genomics Group 33,400(b) 340,012 Centene 16,650(b) 466,200 Covance 25,042(b) 522,126 Cross Country Healthcare 50,900(b) 794,040 Curative Health Services 15,700(b) 269,255 Healthcare Services Group 14,300(b) 236,665 Horizon Health 25,400(b) 477,520 Molina Healthcare 9,100(b) 216,125 Option Care 26,200(b) 305,230 PAREXEL Intl 44,400(b) 748,584 Priority Healthcare Cl B 6,152(b) 129,930 Radiologix 37,123(b) 135,499 RehabCare Group 10,700(b) 169,060 U.S. Physical Therapy 13,200(b) 198,660 United Surgical Partners Intl 8,544(b) 221,802 --------------- Total 5,230,708 - --------------------------------------------------------------------------------- HOME BUILDING (0.8%) Alexander & Baldwin 28,900 846,192 Beazer Homes USA 2,911(b) 241,962 --------------- Total 1,088,154 - --------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (1.6%) Elizabeth Arden 16,108(b) 271,903 Helen of Troy 668(b) 14,495 JAKKS Pacific 43,400(b) 520,800 Jarden 9,413(b) 309,405 Nu Skin Enterprises Cl A 38,200 431,660 Oneida 13,605 75,644 Tupperware 6,215 101,491 Yankee Candle 19,600(b) 459,620 --------------- Total 2,185,018 - --------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.1%) ArvinMeritor 8,420 $ 158,464 Heartland Express 9,365(b) 239,276 Landstar System 3,262(b) 201,298 OMI 32,567(b) 232,854 SCS Transportation 5,480(b) 82,200 Wabash Natl 34,990(b) 624,572 --------------- Total 1,538,664 - --------------------------------------------------------------------------------- INSURANCE (7.1%) AMERIGROUP 7,500(b) 305,400 AmerUs Group 15,265 491,991 Arch Capital Group 8,000(b,c) 272,000 Argonaut Group 13,500 183,600 CNA Surety 43,200 412,560 E-L Financial 3,400(c) 692,427 Erie Indemnity Cl A 7,700 313,621 FBL Financial Group Cl A 23,200 562,832 Hooper Holmes 24,800 168,392 Horace Mann Educators 7,153 107,867 Hub Intl 7,998 140,605 Leucadia Natl 15,100 576,065 MONY Group 29,200 818,768 Ohio Casualty 15,700(b) 216,660 Phoenix Companies 69,283 735,785 PMA Capital Cl A 10,500 131,565 ProAssurance 29,159(b) 750,553 Protective Life 6,600 191,994 Reinsurance Group of America 9,000 340,380 RLI 11,532 380,095 Scottish Annuity & Life Holdings 22,800(c) 523,944 Selective Insurance Group 2,664 78,375 StanCorp Financial Group 3,469 196,658 U.S.I. Holdings 9,443(b) 111,900 United Fire & Casualty 7,400 291,856 Universal American Financial 69,700(b) 526,235 --------------- Total 9,522,128 - --------------------------------------------------------------------------------- INVESTMENT COMPANIES (1.7%) iShares Russell 2000 Value Index Fund 7,338(b) 1,032,897 SFK Pulp Fund 200,000(c) 1,304,834 --------------- Total 2,337,731 - --------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (2.3%) Arctic Cat 22,000 480,480 Argosy Gaming 7,248(b) 175,039 Callaway Golf 40,500 608,715 Concord Camera 16,305(b) 195,334 Multimedia Games 17,000(b) 460,530 Radica Games 8,900(b,c) 64,436 RC2 28,600(b) 489,060 Thor Inds 5,300 287,207 Topps 33,594 300,330 --------------- Total 3,061,131 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 144 AXP VP - PARTNERS SMALL CAP VALUE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) LODGING & GAMING (0.7%) Dover Downs Gaming & Entertainment 42,500 $ 398,650 GTECH Holdings 5,684 240,888 Station Casinos 9,820 292,145 --------------- Total 931,683 - --------------------------------------------------------------------------------- MACHINERY (3.9%) Alamo Group 45,100 654,852 Blyth 13,700 384,696 Denison Intl ADR 24,000(b,c) 528,000 FLIR Systems 2,566(b) 67,383 Harsco 6,948 270,903 IDEX 3,247 125,919 Lincoln Electric Holdings 25,300 574,715 Lydall 24,307(b) 279,531 Semitool 71,000(b) 632,468 SureBeam Cl A 12,656(b) 17,465 Terex 12,253(b) 283,044 Trinity Inds 53,300 1,402,855 --------------- Total 5,221,831 - --------------------------------------------------------------------------------- MEDIA (0.7%) ADVO 4,213(b) 186,004 Courier 2,400 125,400 Harland (John H) 2,702 68,063 Journal Register 8,497(b) 152,351 Macrovision 8,000(b) 148,960 Regent Communications 28,450(b) 169,278 Saga Communications Cl A 3,763(b) 71,309 --------------- Total 921,365 - --------------------------------------------------------------------------------- METALS (2.2%) Apex Silver Mines 28,700(b,c) 453,460 ASA 8,800(c) 381,920 Commercial Metals 21,318 421,670 Eldorado Gold 61,400(c) 161,482 Gibraltar Steel 1,700 37,910 Goldcorp 45,200(c) 588,504 Kinross Gold 40,650(b,c) 304,875 Maverick Tube 7,602(b) 129,158 Mueller Inds 8,759(b) 252,960 Schnitzer Steel Inds Cl A 9,231 228,929 --------------- Total 2,960,868 - --------------------------------------------------------------------------------- MULTI-INDUSTRY (3.0%) Actuant Cl A 4,729(b) $ 243,496 AMN Healthcare Services 67,300(b) 1,110,450 Baldor Electric 5,867 130,365 Brascan Cl A 30,800(c) 799,876 Cornell Companies 8,800(b) 140,008 Imation 2,232 80,240 Lancaster Colony 4,500 178,965 Medical Staffing Network Holdings 21,550(b) 183,175 On Assignment 57,100(b) 274,080 SOURCECORP 4,700(b) 123,986 Wesco Financial 280 88,483 Woodward Governor 12,800 625,664 --------------- Total 3,978,788 - --------------------------------------------------------------------------------- PAPER & PACKAGING (0.9%) Caraustar Inds 47,015(b) 401,038 TimberWest Forest 89,400(b,c) 759,435 --------------- Total 1,160,473 - --------------------------------------------------------------------------------- PRECIOUS METALS (1.9%) Glamis Gold 48,700(b) 687,157 Gold Fields ADR 25,000(c) 335,500 Golden Star Resources 62,000(b) 236,220 Hecla Mining 100,100(b) 670,670 Meridian Gold 35,700(b) 466,242 Minefinders 21,600(b,c) 155,952 --------------- Total 2,551,741 - --------------------------------------------------------------------------------- REAL ESTATE (3.0%) American Financial Realty Trust 10,579 152,338 Catellus Development 37,200(b) 872,340 Forest City Enterprises Cl A 31,500 1,341,900 Trammell Crow 83,100(b) 976,425 Wellsford Real Properties 41,000(b) 680,600 --------------- Total 4,023,603 - --------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (1.8%) Brandywine Realty Trust 5,982 145,961 Commercial Net Lease Realty 11,340 190,852 Correctional Properties Trust 10,708 272,947 Entertainment Properties Trust 6,739 210,594 Healthcare Realty Trust 6,193 196,070 Highwoods Properties 3,517 80,715 Lexington Corporate Properties Trust 7,183 132,598 MFA Mtge Investments 8,577 89,973 Parkway Properties 5,746 257,708 Post Properties 2,977 83,951 Prentiss Properties Trust 9,395 282,320 RAIT Investment Trust 8,550 202,464 Summit Properties 14,693 323,540 --------------- Total 2,469,693 - --------------------------------------------------------------------------------- RESTAURANTS (1.0%) Buca 24,066(b) $ 163,143 CEC Entertainment 6,500(b) 254,930 Jack in the Box 16,700(b) 353,873 Ryan's Family Steak Houses 32,500(b) 434,850 Total Entertainment Restaurant 7,207(b) 78,917 --------------- Total 1,285,713 - --------------------------------------------------------------------------------- RETAIL -- GENERAL (3.3%) AnnTaylor Stores 15,016(b) 510,544 Big Lots 23,700(b) 433,710 Brookstone 6,563(b) 185,405 Buckle 21,000(b) 419,790 Cato Cl A 16,600 394,250 Department 56 12,100(b) 168,190 Dress Barn 48,900(b) 630,810 Electronics Boutique Holdings 6,600(b) 219,318 Fossil 16,420(b) 460,745 Galyan's Trading 4,800(b) 51,989 Gymboree 4,987(b) 81,238 Linens 'N Things 5,227(b) 151,060 Pier 1 Imports 4,179 85,962 School Specialty 4,948(b) 139,286 Too 8,637(b) 140,092 Tuesday Morning 4,261(b) 147,516 Wilsons The Leather Experts 6,525(b) 52,331 Zale 2,391(b) 121,821 --------------- Total 4,394,057 - --------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (2.6%) Andrew Corp 9,731(b) 120,470 Catapult Communications 33,500(b) 445,885 CIENA 30,000(b) 195,000 CommScope 120,400(b) 1,237,711 ECtel 50,700(b),(c) 308,307 Scientific-Atlanta 7,500 255,000 Somera Communications 92,400(b) 154,308 Sycamore Networks 22,000(b) 92,840 West 24,662(b) 611,618 --------------- Total 3,421,139 - --------------------------------------------------------------------------------- TEXTILES & APPAREL (2.8%) Charlotte Russe Holdings 7,011(b) 86,235 Cutter & Buck 37,300(b) 235,363 Kellwood 7,283 265,902 Madden (Steven) 20,300(b) 424,270 Maxwell Shoes Cl A 97,850(b) 1,456,008 Oakley 27,700(b) 301,653 Oshkosh B'Gosh Cl A 11,829 284,961 Polo Ralph Lauren 18,000 527,400 Tropical Sportswear Intl 23,620(b) 95,189 Unifi 7,997(b) 55,099 --------------- Total 3,732,080 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 145 AXP VP - PARTNERS SMALL CAP VALUE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) UTILITIES -- ELECTRIC (0.5%) Avista 2,561 $ 39,875 Central Vermont Public Service 882 19,034 CH Energy Group 1,365 60,401 El Paso Electric 23,057(b) 257,085 Empire District Electric 2,653 57,199 MGE Energy 299 9,500 PNM Resources 7,835 214,679 --------------- Total 657,773 - --------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (0.8%) AGL Resources 4,162 115,828 Atmos Energy 4,037 98,301 Energen 2,225 79,388 Northwest Natural Gas 9,870 281,196 Piedmont Natural Gas 1,894 73,298 Syntel 12,100 308,176 WGL Holdings 5,090 136,870 --------------- Total 1,093,057 - --------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (0.3%) Lightbridge 40,900(b) 425,769 - --------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $102,126,965) $ 115,429,566 - --------------------------------------------------------------------------------- PREFERRED STOCK (0.1%) United Fire & Casualty Insurance 6.38% Cv Series A 4,500 $ 132,750 - --------------------------------------------------------------------------------- TOTAL PREFERRED STOCK (Cost: $113,500) $ 132,750 - --------------------------------------------------------------------------------- ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (14.1%) COMMERCIAL PAPER Citigroup 09-02-03 1.10% $ 46,700,000 $ 6,699,181 General Electric Capital 09-02-03 1.09 6,100,000 6,099,261 Fairway Finance 09-02-03 1.10 2,000,000(d) 1,999,756 Morgan Stanley 09-02-03 1.10 4,100,000 4,099,499 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $18,898,273) $ 18,897,697 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $121,138,738)(e) $ 134,460,013 ==============================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 8.7% of net assets. (d) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (e) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $121,632,986 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 15,637,098 Unrealized depreciation (2,810,071) -------------------------------------------------------------------------- Net unrealized appreciation $ 12,827,027 --------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 146 INVESTMENTS IN SECURITIES AXP VP - S&P 500 INDEX FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (98.3%) AEROSPACE & DEFENSE (1.9%) Boeing 15,226 $ 569,300 General Dynamics 3,576 307,929 Goodrich 2,118 55,132 Honeywell Intl 15,527 450,128 Lockheed Martin 8,154 417,729 Northrop Grumman 3,310 316,039 Raytheon 7,438 238,462 Rockwell Automation 3,354 91,296 Rockwell Collins 3,222 87,155 United Technologies 8,471 679,798 --------------- Total 3,212,968 - ---------------------------------------------------------------------------------- AIRLINES (0.2%) Delta Air Lines 2,224 28,623 Southwest Airlines 14,104 241,037 --------------- Total 269,660 - ---------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (1.0%) AutoNation 5,090(b) 95,641 Cooper Tire & Rubber 1,324 23,832 Cummins 743 37,031 Dana 2,689 41,464 Delphi 10,133 91,805 Eaton 1,351 126,508 Ford Motor 33,137 383,064 General Motors 10,152 417,247 Genuine Parts 3,146 100,735 Goodyear Tire & Rubber 3,165 22,535 Johnson Controls 1,618 160,182 Navistar Intl 1,229(b) 54,973 PACCAR 2,100 178,920 Snap-On 1,051 31,005 Visteon 2,359 15,923 --------------- Total 1,780,865 - ---------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (7.0%) AmSouth Bancorporation 6,358 136,951 Bank of America 27,118 2,149,101 Bank of New York 13,964 410,821 Bank One 20,678 816,161 BB&T 10,095 368,669 Charter One Financial 4,068 126,108 Comerica 3,167 156,260 Fifth Third Bancorp 10,396 609,206 First Tennessee Natl 2,286 94,526 FleetBoston Financial 19,040 563,394 Golden West Financial 2,768 238,795 Huntington Bancshares 4,132 82,640 KeyCorp 7,655 208,063 Marshall & Ilsley 4,100 127,100 Mellon Financial 7,810 244,844 Natl City 11,075 350,856 North Fork Bancorporation 2,831 95,603 Northern Trust 3,987 168,411 PNC Financial Services Group 5,124 243,902 Regions Financial 4,020 $ 141,745 SouthTrust 6,158 178,520 SunTrust Banks 5,069 309,868 Synovus Financial 5,497 134,402 U.S. Bancorp 34,749 830,501 Union Planters 3,596 114,712 Wachovia 24,350 1,026,353 Washington Mutual 16,843 656,540 Wells Fargo 30,323 1,520,394 Zions Bancorp 1,628 90,680 --------------- Total 12,195,126 - ---------------------------------------------------------------------------------- BEVERAGES & TOBACCO (3.7%) Altria Group 36,651 1,510,754 Anheuser-Busch 15,107 778,615 Brown-Forman Cl B 1,087 85,916 Coca-Cola 44,594 1,940,731 Coca-Cola Enterprises 8,180 151,248 Coors (Adolph) Cl B 650 35,848 Fortune Brands 2,629 148,276 Pepsi Bottling Group 4,964 119,732 PepsiCo 31,108 1,385,550 RJ Reynolds Tobacco Holdings 1,520 51,908 UST 3,025 101,035 --------------- Total 6,309,613 - ---------------------------------------------------------------------------------- BROKER DEALERS (2.3%) Bear Stearns Companies 1,792 125,404 Franklin Resources 4,585 198,026 J.P. Morgan Chase 36,767 1,258,166 Lehman Brothers Holdings 4,389 288,489 Merrill Lynch 16,847 906,032 Morgan Stanley 19,687 960,529 Schwab (Charles) 24,446 265,484 --------------- Total 4,002,130 - ---------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (0.4%) American Standard 1,299(b) 104,167 Fluor 1,469 54,118 Louisiana-Pacific 1,890(b) 24,854 Masco 8,629 213,912 Plum Creek Timber 3,309 86,530 Sherwin-Williams 2,657 79,923 Temple-Inland 975 48,536 --------------- Total 612,040 - ---------------------------------------------------------------------------------- CABLE (0.7%) Comcast Cl A 40,708(b) 1,211,063 - ---------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (0.5%) AT&T Wireless Services 49,087(b) 423,130 Nextel Communications Cl A 18,614(b) 358,878 --------------- Total 782,008 - ---------------------------------------------------------------------------------- CHEMICALS (1.4%) Air Products & Chemicals 4,115 $ 194,722 Dow Chemical 16,573 572,266 du Pont (EI) de Nemours 18,032 806,751 Eastman Chemical 1,397 50,027 Ecolab 4,754 122,606 Engelhard 2,277 63,915 Great Lakes Chemical 905 19,177 Hercules 1,985(b) 22,232 Pall 2,217 55,425 PPG Inds 3,073 168,738 Praxair 2,944 187,886 Rohm & Haas 4,019 146,010 Sigma-Aldrich 1,278 69,971 --------------- Total 2,479,726 - ---------------------------------------------------------------------------------- COMPUTER HARDWARE (3.7%) Apple Computer 6,617(b) 149,743 Cisco Systems 127,046(b) 2,432,931 Dell 46,491(b) 1,517,001 EMC 39,586(b) 504,722 Gateway 5,857(b) 33,795 Hewlett-Packard 55,253 1,100,640 Lexmark Intl Cl A 2,311(b) 154,929 Network Appliance 6,139(b) 137,575 NVIDIA 2,871(b) 52,137 Sun Microsystems 58,461(b) 225,659 --------------- Total 6,309,132 - ---------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (7.7%) Adobe Systems 4,193 162,814 Autodesk 2,016 36,086 Automatic Data Processing 10,832 432,305 BMC Software 4,221(b) 61,964 Citrix Systems 2,985(b) 61,461 Computer Associates Intl 10,462 268,141 Computer Sciences 3,384(b) 144,057 Compuware 6,834(b) 40,662 Comverse Technology 3,398(b) 56,033 Concord EFS 8,804(b) 121,935 Convergys 2,677(b) 48,186 Deluxe 998 42,615 Electronic Arts 2,637(b) 236,671 Electronic Data Systems 8,660 189,048 Equifax 2,550 58,497 First Data 13,538 519,859 Fiserv 3,501(b) 136,014 Intl Business Machines 31,278(d) 2,565,109 Intuit 3,716(b) 168,409 Mercury Interactive 1,537(b) 67,459 Microsoft 194,334 5,153,738 NCR 1,722(b) 49,955 Novell 6,664(b) 33,520 Oracle 94,910(b) 1,212,950 Parametric Technology 4,783(b) 15,927 Paychex 6,819 245,484 PeopleSoft 6,675(b) 120,818
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 147 AXP VP - S&P 500 INDEX FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) COMPUTER SOFTWARE & SERVICES (CONT.) QLogic 1,694(b) $ 83,040 SABRE Holdings Cl A 2,586 58,495 Siebel Systems 8,854(b) 89,248 State Street 6,022 264,667 SunGard Data Systems 5,152(b) 145,286 Symantec 2,670(b) 153,338 Unisys 5,923(b) 76,881 VERITAS Software 7,508(b) 258,876 --------------- Total 13,379,548 - ---------------------------------------------------------------------------------- ELECTRONICS (4.6%) Advanced Micro Devices 6,250(b) 70,563 Agilent Technologies 8,533(b) 207,523 Altera 6,929(b) 155,487 American Power Conversion 3,557 63,741 Analog Devices 6,613(b) 271,133 Applied Materials 30,006(b) 648,130 Applied Micro Circuits 5,498(b) 31,943 Broadcom Cl A 5,069(b) 139,296 Intel 118,277 3,385,087 Jabil Circuit 3,595(b) 101,199 KLA-Tencor 3,443(b) 204,376 Linear Technology 5,668 233,635 LSI Logic 6,789(b) 78,345 Maxim Integrated Products 5,875 263,846 Micron Technology 11,019(b) 158,233 Millipore 870(b) 39,498 Molex 3,453 101,587 Natl Semiconductor 3,304(b) 96,279 Novellus Systems 2,710(b) 108,292 PMC-Sierra 3,054(b) 43,550 Power-One 1,493(b) 17,632 Sanmina-SCI 9,228(b) 82,867 Solectron 15,015(b) 89,039 Symbol Technologies 4,172 56,489 Tektronix 1,533(b) 36,240 Teradyne 3,344(b) 59,624 Texas Instruments 31,303 746,577 Thomas & Betts 1,049(b) 17,917 Xerox 14,150(b) 152,537 Xilinx 6,111(b) 188,463 --------------- Total 7,849,128 - ---------------------------------------------------------------------------------- ENERGY (4.9%) Amerada Hess 1,624 76,572 Anadarko Petroleum 4,517 196,490 Apache 2,927 201,904 Ashland 1,229 40,631 Burlington Resources 3,631 175,813 ChevronTexaco 19,342 1,409,451 ConocoPhillips 12,289 686,218 Devon Energy 4,183 216,470 EOG Resources 2,074 87,938 Exxon Mobil 120,908 4,558,231 Kerr-McGee 1,821 80,033 Marathon Oil 5,610 156,463 Occidental Petroleum 6,871 235,881 Sunoco 1,383 56,191 Unocal 4,667 142,904 --------------- Total 8,321,190 - ---------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (0.8%) Baker Hughes 6,091 $ 203,805 BJ Services 2,854(b) 106,654 Halliburton 7,917 191,433 Nabors Inds 2,635(b),(c) 105,795 Noble 2,412(b) 87,266 Rowan Companies 1,685(b) 42,192 Schlumberger 10,546 522,133 Transocean 5,789(b) 122,264 --------------- Total 1,381,542 - ---------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (0.2%) Allied Waste Inds 3,782(b) 41,829 Waste Management 10,710 284,993 --------------- Total 326,822 - ---------------------------------------------------------------------------------- FINANCE COMPANIES (2.4%) Citigroup 93,191 4,039,830 MGIC Investment 1,783 100,508 --------------- Total 4,140,338 - ---------------------------------------------------------------------------------- FINANCIAL SERVICES (3.2%) American Express 23,484 1,057,954 Capital One Financial 4,100 218,940 Countrywide Financial 2,367 160,601 Fannie Mae 17,743 1,149,569 Federated Investors Cl B 1,970 57,839 Freddie Mac 12,444 661,399 Goldman Sachs Group 8,505 752,607 H&R Block 3,241 142,928 Janus Capital Group 4,323 74,658 MBNA 23,128 539,808 Moody's 2,685 139,244 Providian Financial 5,244(b) 53,751 SLM 8,187 328,954 T. Rowe Price Group 2,210 93,925 --------------- Total 5,432,177 - ---------------------------------------------------------------------------------- FOOD (1.4%) Archer-Daniels-Midland 11,665 161,794 Campbell Soup 7,434 179,903 ConAgra Foods 9,722 213,884 General Mills 6,694 310,333 Heinz (HJ) 6,357(d) 205,713 Hershey Foods 2,375 166,013 Kellogg 7,361 246,814 McCormick 2,510 67,017 Sara Lee 14,065 266,954 Sysco 11,757 369,874 Wrigley (Wm) Jr 4,079 216,391 --------------- Total 2,404,690 - ---------------------------------------------------------------------------------- FURNITURE & APPLIANCES (0.2%) Black & Decker 1,402 59,978 Leggett & Platt 3,487(d) 80,759 Maytag 1,417 38,401 Stanley Works 1,541 46,646 Whirlpool 1,239 86,209 --------------- Total 311,993 - ---------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (11.6%) Abbott Laboratories 28,254 $ 1,138,636 Allergan 2,360 187,526 Amgen 22,800(b) 1,502,520 Applera-Applied Biosystems Group 3,782 82,296 Bard (CR) 936 62,712 Bausch & Lomb 958 40,389 Baxter Intl 10,814 303,873 Becton, Dickinson & Co 4,610 168,449 Biogen 2,686(b) 105,990 Biomet 4,673 138,928 Boston Scientific 7,426(b) 446,303 Bristol-Myers Squibb 35,091 890,259 Chiron 3,376(b) 171,568 Forest Laboratories 6,570(b) 308,790 Genzyme 3,907(b) 184,215 Guidant 5,599 281,070 Johnson & Johnson 53,745 2,664,677 King Pharmaceuticals 4,355(b) 61,188 Lilly (Eli) 20,338 1,353,087 Medco Health Solutions 4,896(b) 130,711 MedImmune 4,560(b) 159,007 Medtronic 22,079 1,094,677 Merck & Co 40,589 2,042,438 PerkinElmer 2,276 37,645 Pfizer 142,908 4,275,808 Schering-Plough 26,595 403,978 St. Jude Medical 3,092(b) 161,000 Stryker 3,594 272,425 Waters 2,246(b) 68,503 Watson Pharmaceuticals 1,932(b) 79,405 Wyeth 24,043 1,030,243 Zimmer Holdings 3,553(b) 183,832 --------------- Total 20,032,148 - ---------------------------------------------------------------------------------- HEALTH CARE SERVICES (1.6%) Aetna 2,747 156,579 AmerisourceBergen 1,999 116,362 Anthem 2,499(b) 182,927 Cardinal Health 8,083 460,165 HCA 9,267 352,053 Health Management Associates Cl A 4,322 96,294 Humana 2,921(b) 51,380 IMS Health 4,395 85,571 Manor Care 1,624 44,822 McKesson 5,244 171,689 Quest Diagnostics 1,900(b) 114,000 Quintiles Transnational 2,135(b) 30,402 Tenet Healthcare 8,449(b) 135,606 UnitedHealth Group 10,734 530,583 WellPoint Health Networks 2,632(b) 205,296 --------------- Total 2,733,729 - ---------------------------------------------------------------------------------- HOME BUILDING (0.1%) Centex 1,126 84,923 KB HOME 853 48,809 Pulte Homes 1,100 73,216 --------------- Total 206,948 - ----------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 148 AXP VP - S&P 500 INDEX FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) HOUSEHOLD PRODUCTS (2.5%) Alberto-Culver Cl B 1,057 $ 60,334 Avon Products 4,248 272,297 Clorox 3,924 168,143 Colgate-Palmolive 9,740 538,427 Gillette 18,486 600,056 Intl Flavors/Fragrances 1,696 53,424 Kimberly-Clark 9,214 470,928 Newell Rubbermaid 4,960 117,800 Procter & Gamble 23,442 2,046,251 Tupperware 1,050 17,147 --------------- Total 4,344,807 - ---------------------------------------------------------------------------------- INDUSTRIAL SERVICES (0.1%) Cintas 3,083 123,104 - ---------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.4%) Burlington Northern Santa Fe 6,749 191,334 CSX 3,866 124,794 FedEx 5,404 362,608 Norfolk Southern 7,056 134,346 Ryder System 1,127 33,844 Union Pacific 4,602 280,446 United Parcel Service Cl B 20,373 1,278,610 --------------- Total 2,405,982 - ---------------------------------------------------------------------------------- INSURANCE (4.6%) ACE 4,794(c) 154,367 AFLAC 9,299 297,661 Allstate 12,746 455,670 Ambac Financial Group 1,920 124,646 American Intl Group 47,215 2,812,599 Aon 5,646 125,341 Chubb 3,356 228,007 CIGNA 2,540 121,107 Cincinnati Financial 2,911 117,459 Hartford Financial Services Group 5,063 269,453 Jefferson-Pilot 2,568 113,685 John Hancock Financial Services 5,232 159,733 Lincoln Natl 3,210 113,698 Loews 3,358 138,215 Marsh & McLennan 9,693 484,650 MBIA 2,601 146,852 MetLife 13,763 391,144 Principal Financial Group 5,928 186,495 Progressive 3,943 278,928 Prudential Financial 9,952 362,352 SAFECO 2,503 90,258 St. Paul Companies 4,115 143,037 Torchmark 2,095 84,554 Travelers Property Casualty Cl B 18,215 282,150 UnumProvident 5,201 73,334 XL Capital Cl A 2,470(c) 187,103 --------------- Total 7,942,498 - ---------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (2.2%) AOL Time Warner 81,403(b) 1,331,753 Brunswick 1,627 43,896 Carnival 11,377 393,530 Harley-Davidson 5,476 $ 272,814 Hasbro 3,135 57,998 Mattel 7,959 153,768 Viacom Cl B 31,786 1,430,371 --------------- Total 3,684,130 - ---------------------------------------------------------------------------------- LODGING & GAMING (0.3%) Harrah's Entertainment 1,982 82,094 Hilton Hotels 6,822 104,240 Intl Game Technology 6,186 159,846 Marriott Intl Cl A 4,194 171,242 --------------- Total 517,422 - ---------------------------------------------------------------------------------- MACHINERY (0.8%) Caterpillar 6,240 448,220 Deere & Co 4,336 245,027 Illinois Tool Works 5,570 402,655 Ingersoll-Rand Cl A 3,069(c) 182,667 Parker-Hannifin 2,140 105,973 Thermo Electron 2,919(b) 66,524 --------------- Total 1,451,066 - ---------------------------------------------------------------------------------- MEDIA (2.6%) American Greetings Cl A 1,185(b) 21,923 Cendant 18,436(b) 331,479 Clear Channel Communications 11,117(b) 501,599 Disney (Walt) 36,989 758,275 Donnelley (RR) & Sons 2,043 51,361 Dow Jones 1,469 62,388 eBay 11,504(b) 638,817 Gannett 4,869 381,827 Interpublic Group of Companies 7,053 106,853 Knight-Ridder 1,478 100,297 McGraw-Hill Companies 3,456 210,816 Meredith 897 42,536 Monster Worldwide 2,023(b) 55,268 New York Times Cl A 2,730 121,185 Omnicom Group 3,415 266,712 Tribune 5,596 258,815 Univision Communications Cl A 4,152(b) 155,658 Yahoo! 10,920(b) 364,728 --------------- Total 4,430,537 - ---------------------------------------------------------------------------------- METALS (0.4%) Alcoa 15,303 437,053 Allegheny Technologies 1,463 10,899 Freeport McMoRan Cooper & Gold Cl B 3,027 90,810 Nucor 1,409 72,437 Phelps Dodge 1,610(b) 77,264 United States Steel 1,858 34,206 Worthington Inds 1,555 23,481 --------------- Total 746,150 - ---------------------------------------------------------------------------------- MULTI-INDUSTRY (5.3%) 3M 7,078 1,008,403 Apollo Group Cl A 3,173(b) 203,294 Cooper Inds Cl A 1,685 85,750 Crane 1,067 27,305 Danaher 2,763 213,442 Dover 3,665 139,343 Eastman Kodak 5,183 $ 144,554 Emerson Electric 7,622 425,003 General Electric 180,911 5,349,538 Grainger (WW) 1,656 82,518 ITT Inds 1,661 108,098 Monsanto 4,726(d) 121,505 Pitney Bowes 4,236 165,204 Robert Half Intl 3,077(b) 68,432 Textron 2,443 109,935 Tyco Intl 36,148(c) 743,926 Vulcan Materials 1,837 76,070 --------------- Total 9,072,320 - ---------------------------------------------------------------------------------- PAPER & PACKAGING (0.7%) Avery Dennison 1,994 109,172 Ball 1,029 54,331 Bemis 954 43,188 Boise Cascade 1,049 28,585 Georgia-Pacific 4,526 104,867 Intl Paper 8,676 351,812 MeadWestvaco 3,623 91,843 Pactiv 2,878(b) 57,790 Sealed Air 1,520(b) 73,963 Weyerhaueser 3,969 236,156 --------------- Total 1,151,707 - ---------------------------------------------------------------------------------- PRECIOUS METALS (0.2%) Newmont Mining 7,279 285,774 - ---------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (0.5%) Apartment Investment & Management Cl A 1,690 65,150 Equity Office Properties Trust 7,289 202,780 Equity Residential 4,929 143,335 ProLogis 3,235 91,195 Simon Property Group 3,419 146,025 Starwood Hotels & Resorts Worldwide 3,635 122,972 --------------- Total 771,457 - ---------------------------------------------------------------------------------- RESTAURANTS (0.6%) Darden Restaurants 3,043 66,337 McDonald's 23,030 516,333 Starbucks 7,071(b) 201,099 Wendy's Intl 2,052(d) 64,741 Yum! Brands 5,296(b) 157,026 --------------- Total 1,005,536 - ---------------------------------------------------------------------------------- RETAIL -- DRUGSTORES (0.5%) CVS 7,136 232,634 Walgreen 18,554 604,303 --------------- Total 836,937 - ---------------------------------------------------------------------------------- RETAIL -- GENERAL (6.5%) AutoZone 1,616(b) 148,349 Bed Bath & Beyond 5,345(b) 229,995 Best Buy 5,832(b) 303,322 Big Lots 2,112(b) 38,650 Circuit City Stores 3,744 39,050 Costco Wholesale 8,259(b) 265,031 Dillard's Cl A 1,530 23,149
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 149 AXP VP - S&P 500 INDEX FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) RETAIL -- GENERAL (CONT.) Dollar General 6,036 $ 138,405 Family Dollar Stores 3,112 124,853 Federated Dept Stores 3,388 148,056 Gap 16,120 336,747 Home Depot 41,597 1,337,760 Kohl's 6,132(b) 387,849 Limited Brands 9,453 160,323 Lowe's Companies 14,115 774,349 May Dept Stores 5,224 144,078 Nordstrom 2,454 63,976 Office Depot 5,589(b),(d) 101,943 Penney (JC) 4,868 103,299 RadioShack 3,048 92,659 Sears, Roebuck & Co 5,123 225,514 Staples 8,818(b) 217,187 Target 16,485 669,291 Tiffany 2,625 102,165 TJX Companies 9,238 200,095 Toys "R" Us 3,847(b) 52,396 Wal-Mart Stores 79,263(d) 4,689,993 --------------- Total 11,118,484 - ---------------------------------------------------------------------------------- RETAIL -- GROCERY (0.4%) Albertson's 6,642 139,615 Kroger 13,654(b) 262,293 Safeway 7,993(b) 195,109 SUPERVALU 2,419 58,298 Winn-Dixie Stores 2,539 25,517 --------------- Total 680,832 - ---------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (1.1%) ADC Telecommunications 14,511(b) 36,858 Andrew Corp 2,759(b) 34,156 Avaya 6,899(b) 72,095 CIENA 8,525(b) 55,413 Corning 22,914(b) 189,041 JDS Uniphase 25,883(b) 89,038 Lucent Technologies 74,878(b) 143,017 Motorola 41,919 449,791 QUALCOMM 14,291 589,931 Scientific-Atlanta 2,690 91,460 Tellabs 7,453(b) 48,668 --------------- Total 1,799,468 - ---------------------------------------------------------------------------------- TEXTILES & APPAREL (0.3%) Jones Apparel Group 2,312 $ 71,418 Liz Claiborne 1,942 66,941 Nike Cl B 4,781 272,421 Reebok Intl 1,063 35,557 VF 1,948 78,115 --------------- Total 524,452 - ---------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (2.3%) AES 11,083(b) 71,818 Allegheny Energy 2,267 21,015 Ameren 2,920 124,100 American Electric Power 7,155 202,558 Calpine 6,895(b) 38,888 CenterPoint Energy 5,526 46,916 Cinergy 3,187 109,059 CMS Energy 2,606 17,382 Consolidated Edison 4,044 159,859 Constellation Energy Group 2,986 108,661 Dominion Resources 5,631 341,126 DTE Energy 3,035 105,952 Duke Energy 16,309 278,558 Edison Intl 5,891(b) 111,104 Entergy 4,092 214,625 Exelon 5,872(d) 345,860 FirstEnergy 5,386 157,594 FPL Group 3,317 205,190 PG&E 7,411(b) 164,302 Pinnacle West Capital 1,642 56,321 PPL 3,053 121,113 Progress Energy 4,361 176,577 Public Service Enterprise Group 4,088 173,086 Southern Co 13,064 370,755 TECO Energy 3,190 37,738 TXU 5,830 128,260 Xcel Energy 7,217 105,729 --------------- Total 3,994,146 - ---------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (0.4%) Dynegy Cl A 6,742(b) 20,833 El Paso 10,843 79,588 KeySpan 2,842 95,918 Kinder Morgan 2,211 117,736 Nicor 788 26,784 NiSource 4,753 $ 91,923 Peoples Energy 648 26,017 Sempra Energy 3,751 111,592 Williams Companies 9,365 85,502 --------------- Total 655,893 - ---------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (3.0%) ALLTEL 5,634 258,037 AT&T 14,234 317,418 BellSouth 33,437 842,612 CenturyTel 2,585 89,855 Citizens Communications 5,128(b) 58,459 Qwest Communications Intl 30,682(b) 136,535 SBC Communications 60,142 1,352,594 Sprint (FON Group) 16,280 240,456 Sprint (PCS Group) 18,520(b) 96,119 Verizon Communications 49,783 1,758,335 --------------- Total 5,150,420 - ---------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $181,098,340) $ 168,377,706 - ---------------------------------------------------------------------------------- ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (1.6%) U.S. GOVERNMENT AGENCY (1.1%) Federal Natl Mtge Assn Disc Nts 09-24-03 0.98% $ 500,000 $ 499,667 10-09-03 1.04 500,000 499,398 10-15-03 1.00 500,000 499,354 11-19-03 1.05 500,000 498,874 -------------- Total 1,997,293 - ---------------------------------------------------------------------------------------------- COMMERCIAL PAPER (0.5%) Danske 11-12-03 1.07 800,000 798,217 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $2,795,502) $ 2,795,510 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $183,893,842)(e) $ 171,173,216 ==============================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 0.8% of net assets. (d) Partially pledged as initial margin deposit on the following open stock index futures contracts (see Note 7 to the financial statements):
TYPE OF SECURITY CONTRACTS ------------------------------------------------------------ PURCHASE CONTRACTS E-Mini S&P 500 Index, Sept. 2003 63
(e) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $184,166,312 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 8,222,891 Unrealized depreciation (21,215,987) ------------------------------------------------------------------ Net unrealized depreciation $ (12,993,096) ------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 150 INVESTMENTS IN SECURITIES AXP VP - SHORT DURATION U.S. GOVERNMENT FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - -------------------------------------------------------------------------------------------- BONDS (100.5%) MORTGAGE-BACKED SECURITIES (48.3%)(f) Federal Home Loan Mtge Corp 08-01-10 7.50% $ 2,066,348 $ 2,198,429 03-01-12 7.50 1,630,651 1,736,654 09-27-12 3.61 1,900,000 1,881,809 06-01-13 4.50 1,221,653 1,210,033 06-01-14 6.50 273,110 286,601 06-01-15 7.50 3,734,094 3,976,803 04-01-17 6.00 879,566 909,771 04-01-17 6.50 3,568,799 3,767,487 07-01-17 6.50 3,946,829 4,140,098 03-01-18 6.00 1,056,516 1,098,819 11-01-32 7.00 972,645 1,023,538 Collateralized Mtge Obligation 12-15-08 2.00 2,880,417 2,814,955 12-15-08 6.00 687,309 724,287 04-15-12 5.00 4,646,930 4,786,988 02-15-14 5.50 2,000,000 2,035,732 03-15-15 5.50 5,000,000 5,165,553 01-15-16 5.00 1,500,000 1,554,375 02-15-16 5.00 1,500,000 1,546,875 08-15-16 4.00 2,300,000 2,271,250 10-15-16 4.00 1,491,961 1,466,129 04-15-22 5.50 4,000,000 4,071,764 02-25-42 6.00 2,000,000 2,092,578 Interest Only 02-15-14 9.85 1,900,000(e) 221,053 06-15-18 22.32 1,835,006(e) 111,657 11-15-25 0.95 29,538(e) 21 Federal Natl Mtge Assn 10-01-09 7.11 483,380 533,574 08-01-10 7.50 1,302,064 1,390,135 01-01-13 5.00 2,490,887 2,545,366 04-01-13 5.50 2,630,385 2,732,480 05-01-13 5.00 2,332,351 2,363,698 05-01-13 5.50 2,157,763 2,224,071 08-01-13 4.50 2,379,697 2,392,711 10-01-13 4.50 3,500,000(b) 3,457,335 04-01-14 6.00 729,610 757,740 06-01-14 6.50 55,713 58,654 07-01-14 6.00 334,477 347,111 08-01-14 5.50 5,500,000(b) 5,616,874 12-01-14 5.50 441,047 452,230 01-01-17 6.00 1,389,172 1,439,605 03-01-17 6.50 590,999 625,799 06-01-17 6.00 2,862,103 2,965,891 06-01-17 6.50 7,847,690 8,256,635 06-01-17 7.00 1,290,373 1,371,665 07-01-17 6.00 3,135,682 3,270,477 08-01-17 5.50 4,051,086 4,180,785 08-01-17 6.00 5,479,435 5,698,773 11-01-17 5.50 6,458,201 6,621,425 02-01-18 5.50 5,532,907 5,665,062 02-01-18 6.00 922,834 956,299 03-01-18 5.50% $ 2,054,255 $ 2,098,964 05-01-18 5.50 2,735,925 2,808,444 03-01-29 6.50 4,885,392 5,108,895 09-01-31 7.00 1,566,457 1,669,306 09-01-31 7.50 1,492,805 1,589,742 10-01-31 7.00 365,651 385,507 09-01-32 6.00 881,513 896,695 09-01-32 6.50 1,631,239 1,688,501 09-01-32 7.00 767,469 808,239 11-01-32 7.00 2,256,508 2,376,380 02-01-33 4.66 975,537(b),(i) 979,349 02-01-33 4.87 3,724,292(i) 3,838,453 02-01-33 7.00 911,294 966,538 03-01-33 4.93 1,866,555(i) 1,916,099 04-01-33 4.38 2,453,858(i) 2,437,761 04-01-33 4.59 2,942,879(i) 3,031,135 04-01-33 4.65 3,880,662(i) 3,948,574 07-01-33 4.46 3,984,381 4,025,907 07-01-33 4.97 976,004(i) 1,006,185 09-01-33 4.24 3,600,000(b),(i) 3,526,875 Collateralized Mtge Obligation 01-25-12 5.50 966,733 979,353 03-25-13 4.50 1,906,716 1,932,281 10-25-13 5.00 4,650,606 4,801,198 08-25-22 5.00 3,000,000 3,062,308 11-25-32 5.00 3,677,435 3,741,796 06-25-33 5.35 987,025(i) 1,021,879 05-25-42 5.30 5,000,000 5,158,836 07-25-42 5.50 5,000,000 5,192,308 08-25-42 4.70 3,485,000 3,505,923 10-25-42 7.50 1,373,685 1,484,010 12-25-42 4.75 3,000,000 2,993,867 Interest Only 12-25-12 12.05 1,900,000(e) 180,530 Govt Natl Mtge Assn 04-15-13 7.00 618,098 659,500 08-15-13 6.00 4,000,000 4,174,989 09-15-14 6.00 2,777,534 2,896,071 05-15-16 6.00 2,801,444 2,916,078 03-15-18 7.00 2,002,282 2,135,902 07-15-32 7.50 861,663 916,739 03-15-33 6.00 1,326,884 1,355,721 03-15-33 7.00 3,276,084 3,464,183 06-15-33 7.00 1,940,808 2,070,599 Collateralized Mtge Obligation 10-16-13 4.54 864,438 900,088 10-16-17 2.21 1,984,454 1,906,687 07-16-18 2.58 1,965,852 1,924,371 10-16-20 2.93 2,820,813 2,777,805 06-16-21 2.75 2,469,727 2,431,888 04-16-31 6.00 4,000,000 4,247,966 --------------- Total 230,958,079 - -------------------------------------------------------------------------------------------- GOVERNMENT OBLIGATIONS & AGENCIES (47.0%) Federal Farm Credit Bank 10-01-04 2.38% $ 4,000,000 $ 4,037,360 12-15-04 3.88 2,000,000 2,055,170 03-15-06 2.50 12,000,000 12,008,352 06-19-07 6.75 2,440,000 2,738,478 Federal Home Loan Bank 02-15-05 4.38 5,000,000 5,188,005 08-15-05 3.00 5,000,000 5,089,185 08-15-05 6.88 3,000,000 3,279,711 11-25-05 2.00 3,000,000 2,963,537 Federal Home Loan Mtge Corp 04-15-06 2.38 15,000,000 14,899,875 Housing Urban Development 08-01-05 2.99 3,000,000 3,052,101 Student Loan Mtge Assn 09-30-04 3.63 5,000,000 5,115,850 03-15-05 2.00 4,500,000 4,507,425 03-15-06 5.25 4,000,000 4,271,568 12-15-32 2.25 5,000,000 4,990,350 03-15-33 2.16 5,200,000 5,192,689 U.S. Treasury 11-15-04 5.88 4,000,000(g) 4,211,092 12-31-04 1.75 5,000,000 5,016,795 02-15-05 7.50 10,000,000 10,847,660 05-15-05 6.75 32,350,000(g) 35,054,266 05-31-05 1.25 2,200,000 2,180,750 06-30-05 1.13 4,400,000(g) 4,345,172 08-15-05 10.75 13,560,000 15,847,721 11-15-05 5.75 5,000,000 5,395,115 02-15-06 5.63 15,500,000(g) 16,772,085 05-15-06 2.00 9,540,000 9,468,450 05-15-06 6.88 7,850,000 8,775,444 08-15-06 2.38 9,450,000 9,421,206 11-15-06 3.50 15,700,000 16,115,799 11-15-09 10.38 2,000,000(g) 2,208,516 --------------- Total 225,049,727 - -------------------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (1.5%) Intl Bank for Reconstruction & Development (U.S. Dollar) 11-04-05 5.00 5,000,000(c) 5,280,420 Washington Mutual Series 2002-AR15 Cl A5 12-25-32 4.38 2,000,000 2,019,180 --------------- Total 7,299,600 - --------------------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 151 AXP VP - SHORT DURATION U.S. GOVERNMENT FUND
COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) - ------------------------------------------------------------------------------------------ BONDS (CONTINUED) FINANCIAL SERVICES (3.2%) First Franklin Mtge Loan Series 2002-FF4 Cl 2A2 02-25-33 2.80% $ 1,500,000 $ 1,525,320 KFW Intl Finance 10-01-04 3.75 5,700,000 5,839,450 LB-UBS Commercial Mtge Trust Series 2003-C3 Cl A1 05-15-27 2.60 1,171,380 1,141,424 Residential Asset Securities Series 2002-KS1 Cl A14 11-25-29 5.86 3,500,000 3,626,595 Series 2003-KS5 Cl AI2 09-25-22 1.88 1,200,000 1,182,972 Vende Mtge Trust Series 2003-1 Cl D 12-15-25 5.75 2,000,000 2,071,160 --------------- Total 15,386,921 - ------------------------------------------------------------------------------------------ INSURANCE (0.3%) Conseco Finance Series 2000-D Cl A4 12-15-25 8.17% $ 1,518,365 $ 1,583,788 - ------------------------------------------------------------------------------------------ LEISURE TIME & ENTERTAINMENT (0.2%) KSL Resorts Series 2003-1A Cl A 05-15-13 1.69 1,000,000(d) 999,922 - ------------------------------------------------------------------------------------------ TOTAL BONDS (Cost: $481,641,613) $ 481,278,037 - ------------------------------------------------------------------------------------------ ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (1.9%)(h) U.S. GOVERNMENT AGENCY (--%) Federal Natl Mtge Assn Disc Nt 09-24-03 0.88% $ 200,000 $ 199,867 - ---------------------------------------------------------------------------------------------- COMMERCIAL PAPER(1.9%) Fleet Funding 10-02-03 1.08 500,000(j) 499,491 HBOS Treasury Services 09-18-03 1.03 8,500,000 8,495,105 -------------- Total 8,994,596 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $9,194,764) $ 9,194,463 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $490,836,377)(k) $ 490,472,500 ==============================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 152 AXP VP - SHORT DURATION U.S. GOVERNMENT FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At Aug. 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $13,580,449. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Aug. 31, 2003, the value of foreign securities represented 1.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) 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 Aug. 31, 2003. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 7 to the financial statements):
TYPE OF SECURITY NOTIONAL AMOUNT ---------------------------------------------------------------------------------- PURCHASE CONTRACTS Eurodollar, March 2005, 90-day $ 6,000,000 Eurodollar, June 2005, 90-day 6,000,000 Eurodollar, Sept. 2004, 90-day 1,250,000 Eurodollar, Sept. 2005, 90-day 4,750,000 Eurodollar, Sept. 2007, 90-day 16,000,000 Eurodollar, Sept. 2013, 90-day 13,500,000 Eurodollar, Dec. 2004, 90-day 1,250,000 Eurodollar, Dec. 2005, 90-day 4,750,000 U.S. Treasury Notes, Sept. 2003, 2-year 3,000,000 U.S. Treasury Notes, Dec. 2003, 2-year 27,600,000 SALE CONTRACTS U.S. Treasury Bonds, Dec. 2003, 20-year 1,400,000 U.S. Treasury Notes, Sept. 2003, 5-year 1,800,000 U.S. Treasury Notes, Sept. 2003, 10-year 6,800,000 U.S. Treasury Notes, Dec. 2003, 5-year 54,900,000 U.S. Treasury Notes, Dec. 2003, 10-year 21,500,000
(h) At Aug. 31, 2003, cash or short-term securities were designated to cover open call options written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) ----------------------------------------------------------------------------------------------------- U.S. Treasury Notes Dec. 2003, 10-year $ 5,000,000 $ 113 Nov. 2003 $ 37,500
At Aug. 31, 2003, cash or short-term securities were designated to cover open put options written as follows (see Note 8 to the financial statements):
NOTIONAL EXERCISE EXPIRATION ISSUER AMOUNT PRICE DATE VALUE(a) ----------------------------------------------------------------------------------------------------- U.S. Treasury Notes Dec. 2003, 10-year $ 6,000,000 $ 114 Nov. 2003 $ 286,875
(i) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (j) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (k) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $490,854,175 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 2,872,319 Unrealized depreciation (3,253,994) ------------------------------------------------------------------------------------- Net unrealized depreciation $ (381,675) -------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 153 INVESTMENTS IN SECURITIES AXP VP - SMALL CAP ADVANTAGE FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (98.0%) AEROSPACE & DEFENSE (0.6%) Aviall 17,700(b) $ 224,790 MTC Technologies 7,200(b) 164,952 REMEC 28,633(b) 259,415 --------------- Total 649,157 - --------------------------------------------------------------------------------- AIRLINES (1.2%) AirTran Holdings 32,750(b) 439,833 America West Holdings Cl B 17,500(b) 148,750 Northwest Airlines Cl A 44,300(b) 397,371 SkyWest 12,300 215,004 --------------- Total 1,200,958 - --------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (1.6%) Aftermarket Technology 17,600(b) 211,024 Asbury Automotive Group 19,500(b) 337,545 Bandag 5,700 199,386 Dura Automotive Systems Cl A 19,900(b) 209,746 Modine Mfg 8,800 217,360 Tenneco Automotive 23,100(b) 136,983 Tower Automotive 62,800(b) 273,808 --------------- Total 1,585,852 - --------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (9.3%) Anchor BanCorp Wisconsin 14,100 338,400 Bank of the Ozarks 11,200 473,760 BankUnited Financial Cl A 14,000(b) 304,360 Capital Bancorp 6,900 189,750 Central Pacific Financial 10,450 277,134 City Holding 6,800 233,172 Commercial Capital Bancorp 19,300(b) 406,265 Commercial Federal 5,300 131,440 Community Bank System 7,200 315,360 Dime Community Bancshares 9,783 232,835 First BanCorp 16,500 506,714 First Federal Capital 14,400 297,072 First Republic Bank 11,200 350,896 FirstFed Financial 12,443(b) 493,987 Greater Bay Bancorp 17,100 351,747 Hawthorne Financial 5,800(b) 226,780 IBERIABANK 7,300 350,400 Independent Bank 12,961 371,333 MAF Bancorp 8,243 314,883 New Century Financial 14,850 361,895 Oak Hill Financial 3,200 93,216 Quaker City Bancorp 7,625 303,094 R & G Financial Cl B 13,231(c) 394,284 South Financial Group 17,300 425,407 Sterling Financial 18,088(b) 522,561 Texas Regional Bancshares Cl A 12,400 417,880 TierOne 10,900(b) 242,525 Wintrust Financial 5,900 208,624 WSFS Financial 7,000 305,900 --------------- Total 9,441,674 - --------------------------------------------------------------------------------- BEVERAGES & TOBACCO (0.4%) Standard Commercial 24,050 $ 432,900 - --------------------------------------------------------------------------------- BROKER DEALERS (0.4%) Affiliated Managers Group 5,500(b) 372,900 - --------------------------------------------------------------------------------- BUILDING MATERIALS & CONSTRUCTION (2.1%) Building Materials Holding 14,100 170,046 Griffon 19,750(b) 372,288 Hughes Supply 7,500 266,250 M/I Schottenstein Homes 8,800 381,744 NCI Building Systems 13,300(b) 255,360 Potlatch 14,400 424,656 Trex 5,500(b) 199,100 USG 6,200(b) 103,292 --------------- Total 2,172,736 - --------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (1.0%) NII Holdings Cl B 8,500(b) 535,415 Western Wireless Cl A 24,600(b) 454,608 --------------- Total 990,023 - --------------------------------------------------------------------------------- CHEMICALS (1.8%) Aceto 10,500 199,815 FMC 16,100(b) 400,729 Hercules 29,000(b) 324,800 Immucor 9,100(b) 227,500 MacDermid 14,400 411,696 OM Group 18,800 253,424 --------------- Total 1,817,964 - --------------------------------------------------------------------------------- COMPUTER HARDWARE (1.8%) Artesyn Technologies 39,700(b) 319,585 Electronics for Imaging 6,600(b) 141,372 Gateway 24,800(b) 143,096 Hutchinson Technology 7,000(b) 221,410 Iomega 12,200(b) 141,276 RadiSys 16,200(b) 287,550 Rainbow Technologies 23,950(b) 190,403 Synaptics 17,600(b) 211,200 Western Digital 19,300(b) 221,757 --------------- Total 1,877,649 - --------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (10.9%) ANSYS 12,100(b) 428,340 Ascential Software 6,250(b) 109,375 Avid Technology 3,900(b) 193,635 Avocent 7,100(b) 207,320 Centillium Communications 17,000(b) 163,370 Ciber 26,100(b) 278,226 CompuCom Systems 36,400(b) 176,176 Dendrite Intl 29,000(b) 421,950 Digitas 24,600(b) 168,510 Documentum 8,500(b) 174,420 Dot Hill Systems 12,100(b) 200,860 eSpeed Cl A 15,300(b) 348,840 F5 Networks 8,300(b) 162,763 FactSet Research Systems 3,400 165,070 Foundry Networks 15,500(b) $ 301,475 Hypercom 32,200(b) 159,390 Hyperion Solutions 7,800(b) 257,244 Informatica 22,600(b) 200,914 Inter-Tel 8,500 214,200 Intergraph 7,400(b) 176,046 Ixia 15,400(b) 123,200 j2 Global Communications 4,700(b) 294,784 Kronos 2,400(b) 138,703 Lawson Software 30,500(b) 215,025 Legato Systems 39,600(b) 448,272 Lexar Media 21,700(b) 361,956 ManTech Intl Cl A 10,100(b) 230,583 McDATA Cl A 19,100(b) 193,865 Mentor Graphics 9,500(b) 192,375 Micromuse 14,900(b) 121,882 NDCHealth 6,900 146,142 NetIQ 17,000(b) 228,820 OPNET Technologies 7,900(b) 94,800 Pinnacle Systems 13,400(b) 121,538 Quest Software 8,400(b) 89,124 Red Hat 18,000(b) 131,040 RSA Security 19,600(b) 236,768 SafeNet 6,300(b) 227,052 SeaChange Intl 28,200(b) 288,486 SM&A 10,300 97,139 SupportSoft 34,900(b) 310,610 Take-Two Interactive Software 14,700(b) 437,619 Tyler Technologies 33,200(b) 210,156 United Online 7,100(b) 270,581 ValueClick 26,100(b) 241,425 Vastera 14,100(b) 76,563 VitalWorks 40,000(b) 200,400 WebMethods 18,100(b) 163,262 Websense 10,600(b) 252,280 Wireless Facilities 33,600(b) 462,336 --------------- Total 11,114,910 - --------------------------------------------------------------------------------- ELECTRONICS (7.7%) Actel 7,651(b) 224,098 Aeroflex 22,974(b) 209,063 Artisan Components 4,100(b) 87,125 Axcelis Technologies 22,900(b) 199,230 Benchmark Electronics 7,250(b) 321,754 Brooks Automation 10,400(b) 254,280 Cabot Microelectronics 2,000(b) 130,380 Daktronics 16,700(b) 270,874 DSP Group 6,500(b) 176,930 Emerson Radio 63,900(b) 212,787 Entegris 19,373(b) 285,171 ESCO Technologies 6,800(b) 319,940 Exar 15,500(b) 253,425 Gerber Scientific 12,400(b) 90,768 GlobespanVirata 28,100(b) 213,841 GrafTech Intl 38,100(b) 304,800
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 154 AXP VP - SMALL CAP ADVANTAGE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) ELECTRONICS (CONT.) Helix Technology 9,034 $ 165,864 II-VI 7,800(b) 192,894 Integrated Circuit Systems 5,500(b) 189,860 Integrated Electrical Services 32,900(b) 205,625 Kopin 29,000(b) 252,590 Micrel 15,000(b) 204,000 Moog Cl A 8,514(b) 320,978 Newport 15,250(b) 272,518 Photronics 9,800(b) 238,042 Pioneer-Standard Electronics 11,600 112,404 Pixelworks 13,300(b) 125,951 Plexus 10,200(b) 168,300 Power Integrations 6,500(b) 209,170 Rambus 9,900(b) 164,934 Rofin-Sinar Technologies 13,000(b) 270,790 Rudolph Technologies 8,226(b) 182,206 Skyworks Solutions 48,840(b) 553,845 Varian Semiconductor Equipment Associates 5,800(b) 235,306 Zoran 9,656(b) 241,014 --------------- Total 7,860,757 - --------------------------------------------------------------------------------- ENERGY (1.0%) Brown (Tom) 7,300(b) 200,677 Chesapeake Energy 18,800 203,792 Patina Oil & Gas 8,325 308,441 St. Mary Land & Exploration 11,700 331,110 --------------- Total 1,044,020 - --------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.9%) CARBO Ceramics 7,900 306,125 Cimarex Energy 13,300(b) 289,275 Grey Wolf 81,600(b) 309,264 Offshore Logistics 4,500(b) 96,120 Oil States Intl 23,400(b) 282,906 Ultra Petroleum 33,900(b) 491,889 Unit Corp 9,100(b) 196,196 --------------- Total 1,971,775 - --------------------------------------------------------------------------------- ENGINEERING & CONSTRUCTION (0.5%) Dycom Inds 8,400(b) 190,260 URS 13,800(b) 315,054 --------------- Total 505,314 - --------------------------------------------------------------------------------- ENVIRONMENTAL SERVICES (0.2%) Stericycle 4,900(b) 235,151 - --------------------------------------------------------------------------------- FINANCE COMPANIES (0.3%) ITLA Capital 6,900(b) 310,500 - --------------------------------------------------------------------------------- FINANCIAL SERVICES (2.4%) AmeriCredit 34,200(b) 366,966 Charles River Associates 8,600(b) 289,304 Delphi Financial Group Cl A 11,300 543,078 Irwin Financial 15,494 348,770 Jefferies Group 8,800 261,360 Saxon Capital 17,500(b) 287,700 WFS Financial 7,700(b) 300,454 --------------- Total 2,397,632 - --------------------------------------------------------------------------------- FOOD (1.1%) Corn Products Intl 7,000 $ 220,710 Del Monte Foods 16,500(b) 148,170 J & J Snack Foods 4,300(b) 150,973 Ralcorp Holdings 10,800(b) 306,936 Sensient Technologies 13,300 276,640 --------------- Total 1,103,429 - --------------------------------------------------------------------------------- FURNITURE & APPLIANCES (0.7%) Briggs & Stratton 8,100 476,280 Select Comfort 9,975(b) 232,318 --------------- Total 708,598 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (8.7%) Abgenix 13,000(b) 169,000 Adolor 9,700(b) 138,128 ALARIS Medical Systems 19,300(b) 330,995 Alpharma Cl A 7,700 161,469 Amylin Pharmaceuticals 10,700(b) 305,485 AtheroGenics 21,800(b) 296,698 Bio-Rad Laboratories Cl A 2,000(b) 102,300 BioMarin Pharmaceutical 31,100(b) 293,895 Biosite 4,400(b) 204,160 Cantel Medical 6,950(b) 88,265 Coherent 8,000(b) 209,600 Conmed 7,300(b) 155,271 Cooper Companies 8,086 299,910 CV Therapeutics 9,000(b) 230,850 DeCODE genetics 48,200(b),(c) 152,312 Endo Pharmaceuticals Holdings 19,900(b) 337,305 EPIX Medical 9,200(b) 175,076 Esperion Therapeutics 13,600(b) 246,024 Exact Sciences 13,000(b) 218,920 Gen-Probe 6,000(b) 379,439 Kos Pharmaceuticals 7,000(b) 263,900 Kyphon 4,600(b) 108,790 Martek Biosciences 6,500(b) 335,335 Mentor 4,600 106,306 MIM 12,900(b) 90,300 Myriad Genetics 7,800(b) 97,656 Nabi Biopharmaceuticals 25,500(b) 163,455 Neurocrine Biosciences 3,800(b) 203,338 OSI Pharmaceuticals 7,000(b) 266,700 Perrigo 13,400 188,270 Pharmaceutical Resources 4,300(b) 240,542 Pharmacopeia 9,700(b) 118,825 PSS World Medical 32,800(b) 304,384 Respironics 4,150(b) 172,889 SciClone Pharmaceuticals 9,500(b) 75,620 Serologicals 9,060(b) 125,934 Tanox 10,000(b) 221,900 Techne 5,400(b) 181,116 Telik 14,000(b) 268,520 Therasense 17,600(b) 250,800 United Therapeutics 14,400(b) 330,048 Wilson Greatbatch Technologies 5,300(b) 209,721 --------------- Total 8,819,451 - --------------------------------------------------------------------------------- HEALTH CARE SERVICES (3.8%) aaiPharma 19,000(b) $ 341,430 Beverly Enterprises 35,000(b) 227,500 Cell Genesys 17,100(b) 205,713 Connetics 18,100(b) 339,194 Discovery Partners Intl 35,500(b) 169,868 Hanger Orthopedic Group 13,900(b) 193,905 Molina Healthcare 9,550(b) 226,813 Option Care 9,000(b) 104,850 Owens & Minor 14,200 330,860 Pediatrix Medical Group 6,700(b) 299,624 Select Medical 10,500(b) 302,400 Sierra Health Services 12,700(b) 247,777 Stewart Enterprises Cl A 38,600(b) 159,032 SurModics 3,000(b) 100,680 VCA Antech 25,400(b) 585,215 --------------- Total 3,834,861 - --------------------------------------------------------------------------------- HOME BUILDING (0.2%) Beazer Homes USA 3,000(b) 249,360 - --------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (0.4%) Helen of Troy 10,200(b) 221,330 Jarden 4,300(b) 141,341 --------------- Total 362,671 - --------------------------------------------------------------------------------- INDUSTRIAL SERVICES (0.6%) United Rentals 18,300(b) 308,904 UNOVA 17,850(b) 284,708 --------------- Total 593,612 - --------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.8%) Forward Air 6,400(b) 194,304 Genesee & Wyoming Cl A 9,600(b) 232,512 Heartland Express 9,200(b) 235,060 Overseas Shipbuilding Group 4,000 103,640 P.A.M. Transportation Services 4,000(b) 91,000 Pacer Intl 16,700(b) 332,330 RailAmerica 13,800(b) 131,100 Wabash Natl 15,600(b) 278,460 Yellow Corp 8,100(b) 227,124 --------------- Total 1,825,530 - --------------------------------------------------------------------------------- INSURANCE (2.8%) AMERIGROUP 6,400(b) 260,608 IPC Holdings 7,700(c) 269,962 Navigators Group 6,800(b) 236,708 Odyssey Re Holdings 17,800 366,324 Penn-America Group 22,000 275,220 ProAssurance 14,900(b) 383,526 RLI 13,300 438,368 StanCorp Financial Group 3,200 181,408 Triad Guaranty 7,417(b) 344,668 United Fire & Casualty 3,400 134,096 --------------- Total 2,890,888 - --------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (0.3%) Argosy Gaming 7,700(b) 185,955 Johnson Outdoors Cl A 10,400(b) 145,808 --------------- Total 331,763 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 155 AXP VP - SMALL CAP ADVANTAGE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) LODGING & GAMING (1.0%) Alliance Gaming 16,200(b) $ 364,986 Aztar 17,764(b) 306,429 Scientific Games Cl A 35,800(b) 317,904 --------------- Total 989,319 - --------------------------------------------------------------------------------- MACHINERY (2.8%) Albany Intl Cl A 12,610 385,362 Clarcor 8,300 355,572 Gardner Denver 16,800(b) 395,472 Global Power Equipment Group 27,800(b) 152,066 Joy Global 24,900(b) 427,782 Kadant 10,100(b) 190,890 Terex 19,000(b) 438,900 Toro 10,200 479,196 --------------- Total 2,825,240 - --------------------------------------------------------------------------------- MEDIA (3.3%) ADVO 3,900(b) 172,185 Banta 6,500 225,745 Consolidated Graphics 6,114(b) 151,199 Courier 4,100 214,225 Donnelley (RH) 11,300(b) 467,820 DoubleClick 22,700(b) 255,829 Journal Register 16,300(b) 292,259 Lin TV 7,450(b) 174,330 Regent Communications 23,950(b) 142,503 Sinclair Broadcast Group Cl A 22,800(b) 253,764 Spanish Broadcasting System Cl A 33,100(b) 256,525 TiVo 20,800(b) 226,096 XM Satellite Radio Holdings Cl A 14,400(b) 197,280 Young Broadcasting Cl A 12,000(b) 291,840 --------------- Total 3,321,600 - --------------------------------------------------------------------------------- METALS (1.2%) AMCOL Intl 8,300 90,138 Century Aluminum 20,100 185,925 Maverick Tube 12,100(b) 205,579 Reliance Steel & Aluminum 15,400 355,278 RTI Intl Metals 14,600(b) 153,300 United States Steel 11,200 206,192 --------------- Total 1,196,412 - --------------------------------------------------------------------------------- MISCELLANEOUS (0.5%) Gevity HR 14,100 220,947 SCP Pool 8,100(b) 332,100 --------------- Total 553,047 - --------------------------------------------------------------------------------- MULTI-INDUSTRY (3.1%) Acuity Brands 19,050 $ 341,186 Anixter Intl 5,300(b) 120,469 Applied Films 6,900(b) 215,970 Corinthian Colleges 2,500(b) 143,875 Cornell Companies 17,300(b) 275,243 Global Imaging Systems 9,400(b) 241,674 IKON Office Solutions 23,300 167,993 Imation 100 3,595 Jacuzzi Brands 55,000(b) 312,950 Labor Ready 31,800(b) 294,786 MPS Group 34,000(b) 324,700 NCO Group 14,600(b) 309,666 YORK Intl 11,200 361,536 --------------- Total 3,113,643 - --------------------------------------------------------------------------------- PAPER & PACKAGING (0.8%) Buckeye Technologies 23,600(b) 185,260 Crown Holdings 40,400(b) 299,768 Silgan Holdings 10,300(b) 328,570 --------------- Total 813,598 - --------------------------------------------------------------------------------- PRECIOUS METALS (--%) Coeur d'Alene Mines 16,000(b) 50,400 - --------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUST (2.7%) CBL & Associates Properties 5,100 249,747 Gables Residential Trust 9,400 304,372 Impac Mtge Holdings 27,700 416,608 Pan Pacific Retail Properties 7,900 332,590 Redwood Trust 9,400 406,080 SL Green Realty 8,500 298,945 Town & Country Trust 9,400 216,200 Universal Health Realty Income Trust 5,600 150,808 Ventas 22,100 373,711 --------------- Total 2,749,061 - --------------------------------------------------------------------------------- RESTAURANTS (1.2%) Bob Evans Farms 7,700 208,131 Jack in the Box 4,500(b) 95,355 Lone Star Steakhouse & Saloon 6,800 147,288 Panera Bread Cl A 6,600(b) 291,390 RARE Hospitality Intl 7,334(b) 279,279 Ryan's Family Steak Houses 13,950(b) 186,651 --------------- Total 1,208,094 - --------------------------------------------------------------------------------- RETAIL -- GENERAL (6.3%) 7-Eleven 25,400(b) $ 312,166 American Eagle Outfitters 23,600(b) 404,976 AnnTaylor Stores 8,100(b) 275,400 BJ's Wholesale Club 14,100(b) 307,944 Clarie's Stores 9,900 342,045 Department 56 15,600(b) 216,840 Dick's Sporting Goods 9,800(b) 370,636 Finish Line Cl A 15,700(b) 425,627 Guitar Center 9,000(b) 301,860 Hollywood Entertainment 18,100(b) 314,397 Jo-Ann Stores Cl A 14,100(b) 425,820 NBTY 16,900(b) 447,005 Pacific Sunwear of California 13,200(b) 446,160 Phillips-Van Heusen 11,400 173,280 School Specialty 10,100(b) 284,315 Sharper Image 16,600(b) 469,115 Sports Authority 12,049(b) 390,147 Tuesday Morning 9,700(b) 335,814 World Fuel Services 5,600 152,600 --------------- Total 6,396,147 - --------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (3.5%) Aether Systems 18,200(b) 98,462 Andrew Corp 23,270(b) 288,083 Applied Signal Technology 15,250 283,955 Arris Group 27,928(b) 137,126 Boston Communications Group 15,100(b) 203,095 CommScope 13,200(b) 135,696 Crown Castle Intl 24,600(b) 264,450 Digi Intl 31,200(b) 198,744 Ditech Communications 17,200(b) 114,896 Interdigital Communications 11,900(b) 211,225 Nextel Partners Cl A 42,300(b) 348,129 Orbital Sciences 30,900(b) 270,993 Plantronics 6,390(b) 161,475 Sonus Networks 20,000(b) 142,000 Stratex Networks 30,100(b) 112,875 Sycamore Networks 41,100(b) 173,442 Tekelec 20,700(b) 361,836 --------------- Total 3,506,482 - --------------------------------------------------------------------------------- TEXTILES & APPAREL (2.0%) K-Swiss Cl A 7,400 294,076 Kellwood 12,100 441,771 Maxwell Shoes Cl A 22,775(b) 338,892 Mossimo 12,000(b) 76,200 Oakley 14,600(b) 158,994 Quiksilver 25,100(b) 455,565 Urban Outfitters 4,900(b) 240,247 --------------- Total 2,005,745 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 156 AXP VP - SMALL CAP ADVANTAGE FUND
ISSUER SHARES VALUE(a) COMMON STOCKS (CONTINUED) UTILITIES -- ELECTRIC (1.3%) Black Hills 16,000 $ 518,560 PNM Resources 18,800 515,120 Unisource Energy 16,868 316,106 --------------- Total 1,349,786 - --------------------------------------------------------------------------------- UTILITIES -- NATURAL GAS (1.9%) Energen 15,786 563,244 New Jersey Resources 7,639 275,768 ONEOK 20,400 428,196 San Juan Basin Royalty Trust 900 16,110 UGI 13,389 409,034 Western Gas Resources 5,600 219,744 --------------- Total 1,912,096 - --------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (0.8%) Cincinnati Bell 28,700(b) $ 162,155 Commonwealth Telephone Enterprise 4,400(b) 173,624 General Communication Cl A 37,370(b) 319,514 PTEK Holdings 25,100(b) 180,971 --------------- Total 836,264 - --------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $81,628,898) $ 99,528,969 - --------------------------------------------------------------------------------- ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (2.5%) U.S. GOVERNMENT AGENCY Federal Natl Mtge Assn Disc Nts 11-12-03 1.07% $ 1,000,000 $ 997,950 11-19-03 1.01 1,500,000 1,496,620 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $2,494,392) $ 2,494,570 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $84,123,290)(d) $ 102,023,539 ==============================================================================================
NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 0.8% of net assets. (d) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $84,747,837 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 18,244,155 Unrealized depreciation (968,453) --------------------------------------------------------------------------------------- Net unrealized appreciation $ 17,275,702 ---------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 157 INVESTMENTS IN SECURITIES AXP VP - STOCK FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (88.5%) AEROSPACE & DEFENSE (4.4%) Lockheed Martin 2,844 $ 145,698 Northrop Grumman 1,921 183,417 Rockwell Automation 6,648 180,959 --------------- Total 510,074 - --------------------------------------------------------------------------------- AIRLINES (0.9%) Southwest Airlines 6,165 105,360 - --------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (4.4%) Bank of America 1,920 152,160 Bank of New York 3,318 97,616 Bank One 2,370 93,544 U.S. Bancorp 6,681 159,675 --------------- Total 502,995 - --------------------------------------------------------------------------------- BEVERAGES & TOBACCO (1.1%) Coca-Cola 2,856 124,293 - --------------------------------------------------------------------------------- CELLULAR TELECOMMUNICATIONS (1.2%) Vodafone Group ADR 7,559(c) 138,330 - --------------------------------------------------------------------------------- CHEMICALS (3.9%) Dow Chemical 5,736 198,064 Ecolab 4,787 123,457 Praxair 1,920 122,534 --------------- Total 444,055 - --------------------------------------------------------------------------------- COMPUTER HARDWARE (3.4%) Cisco Systems 7,153(b) 136,980 EMC 11,398(b) 145,325 Hewlett-Packard 5,685 113,245 --------------- Total 395,550 - --------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (4.9%) Intl Business Machines 1,917 157,213 Microsoft 15,182 402,627 --------------- Total 559,840 - --------------------------------------------------------------------------------- ELECTRONICS (6.4%) Flextronics Intl 11,900(b),(c) 160,531 Intel 9,976 285,513 KLA-Tencor 2,393(b) 142,048 Texas Instruments 6,189 147,608 --------------- Total 735,700 - --------------------------------------------------------------------------------- ENERGY (4.7%) Apache 2,481 171,139 BP ADR 4,726(c) 197,169 ConocoPhillips 2,205 123,127 EnCana 1,440(c) 53,928 --------------- Total 545,363 - --------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (1.4%) GlobalSantaFe 2,857 $ 70,854 Schlumberger 1,888 93,474 --------------- Total 164,328 - --------------------------------------------------------------------------------- FINANCE COMPANIES (3.4%) Citigroup 6,646 288,105 MGIC Investment 1,920 108,230 --------------- Total 396,335 - --------------------------------------------------------------------------------- FOOD (1.5%) ConAgra Foods 4,788 105,336 Sara Lee 3,841 72,902 --------------- Total 178,238 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (10.4%) Abbott Laboratories 2,850 114,855 Amgen 1,920(b) 126,528 Baxter Intl 7,163 201,280 MedImmune 2,847(b) 99,275 Medtronic 4,742 235,108 Pfizer 11,412 341,448 St. Jude Medical 1,425(b) 74,200 --------------- Total 1,192,694 - --------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (1.1%) Procter & Gamble 1,421 124,039 - --------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (1.2%) Union Pacific 2,363 144,001 - --------------------------------------------------------------------------------- INSURANCE (0.7%) American Intl Group 1,418 84,470 - --------------------------------------------------------------------------------- LEISURE TIME & ENTERTAINMENT (1.5%) Mattel 4,781 92,369 Viacom Cl B 1,885 84,825 --------------- Total 177,194 - --------------------------------------------------------------------------------- LODGING & GAMING (0.9%) MGM Mirage 2,857(b) 103,595 - --------------------------------------------------------------------------------- MACHINERY (3.2%) Caterpillar 2,844 204,284 Deere & Co 2,870 162,184 --------------- Total 366,468 - --------------------------------------------------------------------------------- MEDIA (5.0%) Disney (Walt) 9,485 194,443 InterActiveCorp 10,432(b) 386,088 --------------- Total 580,531 - --------------------------------------------------------------------------------- METALS (1.7%) Alcoa 4,739 $ 135,346 Freeport McMoRan Cooper & Gold Cl B 1,920 57,600 --------------- Total 192,946 - --------------------------------------------------------------------------------- MULTI-INDUSTRY (6.7%) 3M 1,422 202,592 Danaher 2,521 194,747 General Electric 12,315 364,155 --------------- Total 761,494 - --------------------------------------------------------------------------------- PAPER & PACKAGING (4.0%) Intl Paper 5,687 230,608 Weyerhaeuser 3,842 228,599 --------------- Total 459,207 - --------------------------------------------------------------------------------- RETAIL -- GENERAL (4.3%) Home Depot 3,318 106,707 Wal-Mart Stores 6,637 392,711 --------------- Total 499,418 - --------------------------------------------------------------------------------- TELECOM EQUIPMENT & SERVICES (1.0%) Corning 14,240(b) 117,480 - --------------------------------------------------------------------------------- UTILITIES -- ELECTRIC (4.2%) Dominion Resources 3,319 201,065 FPL Group 2,371 146,670 Public Service Enterprise Group 3,104 131,423 --------------- Total 479,158 - --------------------------------------------------------------------------------- UTILITIES -- TELEPHONE (1.0%) Verizon Communications 3,315 117,086 - --------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $9,367,156) $ 10,200,242 - --------------------------------------------------------------------------------- ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (8.7%) U.S. GOVERNMENT AGENCY Federal Natl Mtge Assn Disc Nts 10-01-03 0.97% $ 500,000 $ 499,546 11-19-03 1.05 500,000 498,874 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $998,390) $ 998,420 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $10,365,546)(d) $ 11,198,662 ==============================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 158 AXP VP - STOCK FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 4.8% of net assets. (d) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $10,420,939 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 882,693 Unrealized depreciation (104,970) --------------------------------------------------------------------------------------- Net unrealized appreciation $ 777,723 ---------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 159 INVESTMENTS IN SECURITIES AXP VP - STRATEGY AGGRESSIVE FUND AUG. 31, 2003 (PERCENTAGES REPRESENT VALUE OF INVESTMENTS COMPARED TO NET ASSETS)
ISSUER SHARES VALUE(a) COMMON STOCKS (97.0%) AIRLINES (0.7%) Ryanair Holdings ADR 165,000(b),(c) $ 6,977,850 - --------------------------------------------------------------------------------- AUTOMOTIVE & RELATED (1.6%) Gentex 425,000(b) 15,941,750 - --------------------------------------------------------------------------------- BANKS AND SAVINGS & LOANS (1.2%) New York Community Bancorp 215,000 6,613,400 TCF Financial 115,000 5,288,850 --------------- Total 11,902,250 - --------------------------------------------------------------------------------- CHEMICALS (2.0%) Rohm & Haas 325,000 11,807,250 Sigma-Aldrich 132,000 7,227,000 --------------- Total 19,034,250 - --------------------------------------------------------------------------------- COMPUTER HARDWARE (3.1%) Lexmark Intl Cl A 78,000(b) 5,229,120 Network Appliance 800,000(b) 17,928,000 SanDisk 110,000(b) 6,650,600 --------------- Total 29,807,720 - --------------------------------------------------------------------------------- COMPUTER SOFTWARE & SERVICES (14.2%) Affiliated Computer Services Cl A 245,000(b) 12,154,450 BISYS Group 515,000(b) 9,450,250 DST Systems 217,000(b) 8,593,200 Electronic Arts 193,000(b) 17,321,750 Fiserv 414,000(b) 16,083,900 Intuit 220,000(b) 9,970,400 iPass 130,000(b) 2,730,000 Knowledge Mechanics Group 1,436,310(b),(g) 144 Mercury Interactive 326,000(b) 14,308,140 NetScreen Technologies 480,000(b) 11,486,400 Paychex 327,000 11,772,000 SRA Intl Cl A 220,000(b) 8,001,400 SunGard Data Systems 550,000(b) 15,510,000 --------------- Total 137,382,034 - --------------------------------------------------------------------------------- ELECTRONICS (9.3%) Analog Devices 190,000(b) 7,790,000 Integrated Circuit Systems 490,000(b) 16,914,800 KLA-Tencor 245,000(b) 14,543,200 Maxim Integrated Products 110,000 4,940,100 Microchip Technology 760,000 21,287,600 Novellus Systems 215,000(b) 8,591,400 Teradyne 275,000(b) 4,903,250 Xilinx 355,000(b) 10,948,200 --------------- Total 89,918,550 - --------------------------------------------------------------------------------- ENERGY (2.0%) Apache 110,000 7,587,800 Devon Energy 225,630 11,676,353 --------------- Total 19,264,153 - --------------------------------------------------------------------------------- ENERGY EQUIPMENT & SERVICES (5.2%) BJ Services 265,000(b) $ 9,903,050 ENSCO Intl 185,000 5,170,750 Grant Prideco 439,000(b) 5,092,400 Nabors Inds 262,000(b),(c) 10,519,300 Noble 163,000(b) 5,897,340 Varco Intl 268,000(b) 4,623,000 Weatherford Intl 244,000(b) 9,169,520 --------------- Total 50,375,360 - --------------------------------------------------------------------------------- FINANCIAL SERVICES (1.3%) Alliance Data Systems 325,000(b) 9,620,000 CapitalSource 145,000(b) 2,552,000 --------------- Total 12,172,000 - --------------------------------------------------------------------------------- HEALTH CARE PRODUCTS (13.6%) Alcon 160,000(c) 8,360,000 Amylin Pharmaceuticals 550,000(b) 15,702,500 Barr Laboratories 251,500(b) 17,019,016 Biomet 330,000 9,810,900 Genzyme 163,000(b) 7,685,450 Gilead Sciences 432,000(b) 28,814,400 IDEC Pharmaceuticals 235,000(b) 8,166,250 MedImmune 594,000(b) 20,712,780 St. Jude Medical 107,000(b) 5,571,490 Zimmer Holdings 200,000(b) 10,348,000 --------------- Total 132,190,786 - --------------------------------------------------------------------------------- HEALTH CARE SERVICES (10.3%) Anthem 165,000(b) 12,078,000 Caremark Rx 634,000(b) 15,932,420 Charles River Laboratories Intl 380,000(b) 13,585,000 Community Health Systems 523,000(b) 12,023,770 Express Scripts Cl A 105,000(b) 6,805,050 First Health Group 330,000(b) 8,652,600 Lincare Holdings 285,000(b) 9,869,550 Mid Atlantic Medical Services 160,000(b) 7,849,600 Pharmaceutical Product Development 155,300(b) 3,961,703 WebMD 860,000(b) 8,858,000 --------------- Total 99,615,693 - --------------------------------------------------------------------------------- HOUSEHOLD PRODUCTS (0.8%) Church & Dwight 248,000 7,923,600 - --------------------------------------------------------------------------------- INDUSTRIAL SERVICES (0.9%) Cintas 47,500 1,896,675 Fastenal 170,000 6,873,100 --------------- Total 8,769,775 - --------------------------------------------------------------------------------- INDUSTRIAL TRANSPORTATION (3.1%) C.H. Robinson Worldwide 175,000 6,644,750 Hunt (JB) Transport Services 400,000(b) 19,880,000 Pacer Intl 185,600(b) 3,693,440 --------------- Total 30,218,190 - --------------------------------------------------------------------------------- INSURANCE (2.9%) Axis Capital Holdings 234,950(b),(c) $ 5,768,023 Everest Re Group 65,000(c) 4,764,500 IPC Holdings 125,000(c) 4,382,500 WellChoice 110,000(b) 3,192,200 Willis Group Holdings 355,000(c) 10,291,450 --------------- Total 28,398,673 - --------------------------------------------------------------------------------- LODGING & GAMING (0.7%) Hilton Hotels 433,000 6,616,240 - --------------------------------------------------------------------------------- MEDIA (7.8%) Amazon.com 325,000(b) 15,093,000 Citadel Broadcasting 225,000(b) 4,968,000 Cox Radio Cl A 323,000(b) 7,797,220 Lin TV 375,000(b) 8,775,000 Scripps (EW) Cl A 80,000 6,927,200 Univision Communications Cl A 570,000(b) 21,369,300 Westwood One 317,000(b) 10,175,700 --------------- Total 75,105,420 - --------------------------------------------------------------------------------- MULTI-INDUSTRY (7.0%) Apollo Group Cl A 270,000(b) 17,298,900 Corporate Executive Board 248,000(b) 10,949,200 Danaher 138,000 10,660,500 Harman Intl Inds 85,000 8,470,250 Hewitt Associates Cl A 163,000(b) 4,066,850 Manpower 410,000 15,953,100 --------------- Total 67,398,800 - --------------------------------------------------------------------------------- PAPER & PACKAGING (0.7%) Smurfit-Stone Container 430,000(b) 6,785,400 - --------------------------------------------------------------------------------- RESTAURANTS (2.2%) Brinker Intl 218,000(b) 7,455,600 Krispy Kreme Doughnuts 164,000(b) 7,237,320 Starbucks 245,000(b) 6,967,800 --------------- Total 21,660,720 - --------------------------------------------------------------------------------- RETAIL -- GENERAL (4.6%) AutoZone 50,000(b) 4,590,000 Bed Bath & Beyond 320,000(b) 13,769,600 Dollar Tree Stores 218,000(b) 8,552,140 Family Dollar Stores 268,000 10,752,160 Talbots 177,000 6,490,590 --------------- Total 44,154,490 - --------------------------------------------------------------------------------- TEXTILES & APPAREL (1.8%) Chico's FAS 542,000(b) 17,609,580 - --------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost: $822,797,716) $ 939,223,284 - ---------------------------------------------------------------------------------
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 160 AXP VP - STRATEGY AGGRESSIVE FUND
ISSUER SHARES VALUE(a) PREFERRED STOCKS (1.8%)(B) Aurgin Systems 2,440,000(d),(e) $ -- Bluestream Ventures LP 5,225,000(e),(h) 1,773,187 Calient Network 2,076,124(e) 1,192,484 Dia Dexus Cv Series C 1,113,979(e) 4,316,669 Fibrogen Cv Series E 1,559,020(e) 4,200,000 Knowledge Mechanics Group Series B 287,262(d) -- Marketsoft Cv 762,295(e) 381,148 Mars Cv Series D 2,619,048(d),(e) -- Cv Series G 3,332,000(d),(e) -- Nobex Series E 2,800,000(e) 1,960,000 Paxonet Communications Series C 921,985(d),(e) -- Portera Series G 1,616,419(d),(e) -- Sun Hill Software Cv Series C 353,648(e) 17,682 Therox Cv Series H 921,580(e) 3,686,319 - --------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (Cost: $81,189,429) $ 17,527,489 - --------------------------------------------------------------------------------- COUPON PRINCIPAL ISSUER RATE AMOUNT VALUE(a) BONDS (0.2%) Federal Farm Credit Bank 03-15-06 2.50% $ 2,000,000 $ 2,001,392 Mars Cv 04-30-05 12.00 550,000(b),(d),(e) -- - ------------------------------------------------------------------------------------------------- TOTAL BONDS (Cost: $2,549,422) $ 2,001,392 - ------------------------------------------------------------------------------------------------- EXERCISE EXPIRATION ISSUER CONTRACTS PRICE DATE VALUE(a) OPTIONS PURCHASED (--%) CALLS Micron Tech 4,300 $ 15 Sept. 2003 $ 182,750 Micron Tech 2,970 14 Sept. 2003 267,300 - ------------------------------------------------------------------------------------- TOTAL OPTIONS PURCHASED (Cost: $842,295) $ 450,050 - ------------------------------------------------------------------------------------- ANNUALIZED AMOUNT YIELD ON DATE PAYABLE AT ISSUER OF PURCHASE MATURITY VALUE(a) - ---------------------------------------------------------------------------------------------- SHORT-TERM SECURITIES (1.7%) U.S. GOVERNMENT AGENCY (0.1%) Federal Natl Mtge Assn Disc Nt 09-10-03 1.02% $ 1,200,000 $ 1,199,592 - ---------------------------------------------------------------------------------------------- COMMERCIAL PAPER (1.6%) Sheffield Receivables 09-02-03 1.06 15,000,000(f) 14,998,233 - ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM SECURITIES (Cost: $16,198,301) $ 16,197,825 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost: $923,577,163)(i) $ 975,400,040 ==============================================================================================
See accompanying notes to investments in securities. AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 161 AXP VP - STRATEGY AGGRESSIVE FUND NOTES TO INVESTMENTS IN SECURITIES (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of Aug. 31, 2003, the value of foreign securities represented 5.3% of net assets. (d) Negligible market value. (e) 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 board. Information concerning such security holdings at Aug. 31, 2003, is as follows:
ACQUISITION SECURITY DATES COST --------------------------------------------------------------------------------------------------------- Aurgin Systems 12-16-99 $ 6,002,400 Bluestream Ventures LP 06-28-00 thru 02-18-03 4,959,427 Calient Network 12-06-00 14,999,996 Dia Dexus Cv Series C 04-03-00 8,633,337 Fibrogen Cv Series E 05-17-00 7,000,000 Marketsoft Cv 12-11-00 3,720,000 Mars 12.00% Cv 2005 08-22-01 thru 08-24-02 550,000 Cv Series D 06-16-00 5,500,001 Cv Series G 12-01-99 7,000,000 Nobex Series E 05-04-99 7,000,000 Paxonet Communications Series C 04-04-01 thru 04-23-01 2,599,998 Portera Series G 11-10-00 5,415,004 Sun Hill Software (formerly Vcommerce) CV Series C 07-21-00 4,119,999 Therox Cv Series H 09-05-00 4,239,268
(f) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (g) 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 Aug. 31, 2003 are as follows:
BEGINNING PURCHASE SALES ENDING DIVIDEND ISSUER COST COST COST COST INCOME VALUE(a) ------------------------------------------------------------------------------------------------------------------- Knowledge Mechanics Group $ 3,300,002 $ -- $ -- $ 3,300,002 $ -- $ 144
(h) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. At Aug. 31, 2003, the amount of capital committed to the LLC or LP for future investment was $4,275,000. (i) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $923,590,541 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 149,983,385 Unrealized depreciation (98,173,886) --------------------------------------------------------------------------------------------- Net unrealized appreciation $ 51,809,499 ---------------------------------------------------------------------------------------------
AMERICAN EXPRESS VARIABLE PORTFOLIO FUNDS -- ANNUAL REPORT 162 PART C. OTHER INFORMATION Item 23. Exhibits (a)(1) Articles of Incorporation as amended Nov. 10, 1994, filed electronically as Exhibit 1 to Registrant's Post-Effective Amendment No. 34 to Registration Statement No. 2-73115, are incorporated by reference. (a)(2) Articles of Amendment to the Articles of Incorporation, dated June 16, 1999, filed electronically herewith. (a)(3) Articles of Amendment to the Articles of Incorporation, dated November 14, 2002, filed electronically herewith. (b) By-Laws as amended January 11, 2001, filed electronically herewith. (c) Stock certificate for common shares, is on file at the Registrant's headquarters. (d)(1) Investment Management Services Agreement between Registrant, on behalf of IDS Life Aggressive Growth Fund, IDS Life Capital Resource Fund and IDS Life International Equity Fund, and IDS Life Insurance Company dated March 20, 1995, filed electronically as Exhibit No. 5(a) to Registrant's Post-Effective Amendment No. 30, is incorporated by reference. (d)(2) Amendment to Investment Management Services Agreement between Registrant, on behalf of AXP Variable Portfolio - Capital Resources Fund, AXP Variable Portfolio - International Fund and AXP Variable Portfolio - Strategy Aggressive Fund, and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(2) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(3) Investment Management Services Agreement between Registrant, on behalf of IDS Life Growth Dimensions Fund and IDS Life Insurance Company dated April 11, 1996, filed electronically as Exhibit 5(b) to Registrant's Post-Effective Amendment No. 33, is incorporated by reference. (d)(4) Amendment to Investment Management Services Agreement between Registrant, on behalf of AXP Variable Portfolio - New Dimensions Fund and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(4) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(5) Investment Management Services Agreement dated Sept. 13, 1999, between Registrant, on behalf of AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable Portfolio - Small Cap Advantage Fund and IDS Life Insurance Company, filed electronically as Exhibit (d)(3) to Registrant's Post-Effective Amendment No. 40 filed on or about Oct. 29, 1999, is incorporated by reference. (d)(6) Amendment to Investment Management Services Agreement between Registrant, on behalf of AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable Portfolio - Small Cap Advantage Fund, and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(6) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(7) Investment Management Services Agreement dated May 1, 2000, between Registrant, on behalf of AXP Variable Portfolio - Emerging Markets Fund and AXP Variable Portfolio - S&P 500 Index Fund, and IDS Life Insurance Company, filed electronically as Exhibit (d)(4) to Registrant's Post-Effective Amendment No. 43, filed on or about Oct. 26, 2000, is incorporated by reference. (d)(8) Amendment to Investment Management Services Agreement between Registrant, on behalf of AXP Variable Portfolio - Emerging Markets Fund, and AXP Variable Portfolio - S&P 500 Index Fund, and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(8) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(9) Investment Management Services Agreement dated April 11, 2001, between Registrant, on behalf of AXP Variable Portfolio - Equity Select Fund, and IDS Life Insurance Company, filed electronically as Exhibit (d)(5) to Registrant's Post-Effective Amendment No. 45 filed on or about May 16, 2001, is incorporated by reference. (d)(10) Amendment to Investment Management Services Agreement between Registrant, on behalf of AXP Variable Portfolio - Equity Select Fund, and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(10) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(11) Investment Management Services Agreement dated May 9, 2001, between Registrant on behalf of AXP Variable Portfolio - Stock Fund, and IDS Life Insurance Company filed electronically as Exhibit (d)(6) to Registrant's Post-Effective Amendment No. 47 to Registration Statement No. 2-73115 is incorporated by reference. (d)(12) Amendment to Investment Management Services Agreement between Registrant, on behalf of AXP Variable Portfolio - Stock Fund, and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(12) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(13) Investment Management Services Agreement between Registrant on behalf of its underlying series AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Capital Resource Fund, AXP Variable Portfolio - Emerging Markets Fund, AXP Variable Portfolio - Equity Select Fund, AXP Variable Portfolio - Growth Fund, AXP Variable Portfolio - International Fund, AXP Variable Portfolio - New Dimensions Fund, AXP Variable Portfolio - S&P 500 Index Fund, AXP Variable Portfolio - Small Cap Advantage Fund, AXP Variable Portfolio - Stock Fund and AXP Variable Portfolio - Strategy Aggressive Fund, and American Express Financial Corporation dated December 1, 2002 is filed electronically herewith. (d)(14) Investment Management Services Agreement between Registrant on behalf of its underlying series AXP Variable Portfolio - Large Cap Value Fund and American Express Financial Corporation dated September 10, 2003 is filed electronically herewith. (d)(15) Investment Advisory Agreement between IDS Life Insurance Company and American Express Financial Corporation dated Oct. 14, 1998, filed electronically as Exhibit 5(c) to Registrant's Post-Effective Amendment No. 36 filed on or about Oct. 30, 1998, is incorporated by reference. (d)(16) Addendum to Investment Advisory Agreement between IDS Life Insurance Company and American Express Financial Corporation dated Sept. 13, 1999, filed electronically as Exhibit (d)(14) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(17) Addendum to Investment Advisory Agreement between IDS Life Insurance Company and American Express Financial Corporation dated April 11, 2001, filed electronically as Exhibit (d)(15) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(18) Addendum to Investment Advisory Agreement dated May 9, 2001, between IDS Life Insurance Company and American Express Financial Company, filed electronically as Exhibit (d)(8) to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-73115 is incorporated by reference. (d)(19) Amendment to Investment Advisory Agreement between IDS Life Insurance Company and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(17) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(20) Investment Advisory Agreement between American Express Financial Corporation and American Express Asset Management International Inc. for AXP(SM) Variable Portfolio - International Equity Fund (formerly IDS Life International Equity Fund) dated February 11, 1999, filed electronically as Exhibit (d)(6) to Registrant's Post-Effective Amendment No. 37 filed on or about May 28, 1999, is incorporated by reference. (d)(21) Addendum to Investment Advisory Agreement dated May 1, 2000, between American Express Financial Corporation and American Express Asset Management International Inc. for AXP Variable Portfolio - Emerging Markets Fund, filed electronically as Exhibit (d)(8) to Registrant's Post-Effective Amendment No. 43, filed on or about Oct. 26, 2000, is incorporated by reference. (d)(22) Termination Agreement between American Express Financial Corporation and American Express Asset Management Group Inc. on behalf of AXP Variable Portfolio-Strategy Aggressive Fund effective June 30, 2000, filed electronically as Exhibit (d)(11) to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-73115 is incorporated by reference. (d)(23) Subadvisory Agreement between American Express Financial Corporation and Kenwood Capital Management LLC on behalf of AXP Variable Portfolio - Small Cap Advantage Fund dated Sept. 13, 1999, filed electronically as Exhibit (d)(9) to Registrant's Post-Effective Amendment No. 40 filed on or about Oct. 29, 1999, is incorporated by reference. (d)(24) Administrative Services Agreement, dated March 20, 1995, between IDS Life Investment Series, Inc., on behalf of IDS Life Aggressive Growth Fund, IDS Life Capital Resource Fund and IDS Life International Equity Fund, and American Express Financial Corporation, filed electronically as Exhibit No. 5(d) to Registrant's Post-Effective Amendment No. 30, is incorporated by reference. (d)(25) Amendment to Administrative Services Agreement between Registrant on behalf of AXP Variable Portfolio - Capital Resource Fund, AXP Variable Portfolio - Strategy Aggressive Fund and AXP Variable Portfolio - International Fund, and American Express Financial Corporation, dated June 3, 2002, filed electronically as Exhibit (d)(23) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(26) Administrative Services Agreement, dated April 11, 1996, between IDS Life Investment Series, Inc. on behalf of IDS Life Growth Dimensions Fund and American Express Financial Corporation, filed electronically as Exhibit 5(f) to Registrant's Post-Effective Amendment No. 34, is incorporated by reference. (d)(27) Amendment to Administrative Services Agreement between Registrant on behalf of AXP Variable Portfolio - New Dimensions Fund, and American Express Financial Corporation, dated June 3, 2002, filed electronically as Exhibit (d)(25) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(28) Administrative Services Agreement dated Sept. 13, 1999, between AXP Variable Portfolio Investment Series, Inc. on behalf of AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable Portfolio - Small Cap Advantage Fund and American Express Financial Corporation filed electronically as Exhibit (d)(12) to Registrant's Post-Effective Amendment No. 40 filed on or about May 28, 1999, is incorporated by reference. (d)(29) Amendment to Administrative Services Agreement between Registrant on behalf of AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund, and AXP Variable Portfolio - Small Cap Advantage Fund, and American Express Financial Corporation dated June 3, 2002, filed electronically as Exhibit (d)(27) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(30) Administrative Services Agreement dated May 1, 2000, between Registrant, on behalf of AXP Variable Portfolio - Emerging Markets Fund and AXP Variable Portfolio - S&P 500 Index Fund, and American Express Financial Corporation, filed electronically as Exhibit (d)(14) to Registrant's Post - Effective Amendment No. 43 filed on or about Oct. 26, 2000, is incorporated by reference. (d)(31) Amendment to Administrative Services Agreement between Registrant on behalf of AXP Variable Portfolio - Emerging Markets Fund and AXP Variable Portfolio - S&P 500 Index Fund, and American Express Financial Corporation, dated June 3, 2002, filed electronically as Exhibit (d)(29) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(32) Administrative Service Agreement dated April 11, 2001, between Registrant, on behalf of AXP Variable Portfolio - Equity Select Fund, and American Express Financial Corporation, filed electronically as Exhibit (d)(19) to Registrant's Post-Effective Amendment No. 45 filed on or about May 16, 2001, is incorporated by reference. (d)(33) Amendment to Administrative Services Agreement between Registrant on behalf of AXP Variable Portfolio - Equity Select Fund, and American Express Financial Corporation, dated June 3, 2002, filed electronically as Exhibit (d)(31) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(34) Administrative Service Agreement dated May 9, 2001, between Registrant, on behalf of AXP Variable Portfolio - Stock Fund, and American Express Financial Corporation, filed electronically as Exhibit (d)(18) to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-73115 is incorporated by reference. (d)(35) Amendment to Administrative Services Agreement between Registrant on behalf of AXP Variable Portfolio - Stock Fund, and American Express Financial Corporation, dated June 3, 2002, filed electronically as Exhibit (d)(33) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (d)(36) Administrative Service Agreement between Registrant on behalf of AXP Variable Portfolio - Large Cap Value Fund and American Express Financial Corporation, dated September 10, 2003 is filed electronically herewith. (e) Underwriting contracts: Not Applicable. (f) All employees are eligible to participate in a profit sharing plan. Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year an amount up to 15 percent of their annual salaries, the maximum deductible amount permitted under Section 404(a) of the Internal Revenue Code. (g)(1) Custodian Agreement dated March 20, 1995, between IDS Life Investment Series, Inc., on behalf of IDS Life Aggressive Growth Fund, IDS Life Capital Resource Fund and IDS Life International Equity Fund, and American Express Trust Company, filed electronically as Exhibit No. 8(a) to Registrant's Post-Effective Amendment No. 30, is incorporated by reference. (g)(2) Custodian Agreement dated April 11, 1996, between IDS Life Investment Series, Inc. on behalf of IDS Life Growth Dimensions Fund and American Express Trust Company, filed electronically as Exhibit 8(b) to Registrant's Post-Effective Amendment No. 34, is incorporated by reference. (g)(3) Custodian Agreement dated Sept. 13, 1999, between AXP Variable Portfolio - Investment Series, Inc. on behalf of AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable Portfolio - Small Cap Advantage Fund and American Express Trust Company filed electronically as Exhibit (g)(3) to Registrant's Post-Effective Amendment No. 40 filed on or about Oct. 29, 1999, is incorporated by reference. (g)(4) Custodian Agreement dated May 1, 2000, between Registrant, on behalf of AXP Variable Portfolio - Emerging Markets Fund and AXP Variable Portfolio - S&P 500 Index Fund, and American Express Trust Company, filed electronically as Exhibit (g)(4) to Registrant's Post-Effective Amendment No. 43, filed on or about Oct. 26, 2000, is incorporated by reference. (g)(5) Custodian Agreement dated April 11, 2001, between Registrant, on behalf of AXP Variable Portfolio - Equity Select Fund, and American Express Trust Company, filed electronically as Exhibit (g)(5) to Registrant's Post-Effective Amendment No. 45, filed on or about May 16, 2001, is incorporated by reference. (g)(6) Custodian Agreement dated May 9, 2001, between Registrant, on behalf of AXP Variable Portfolio - Stock Fund, and American Express Trust Company, filed electronically as Exhibit (g)(6) to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-73115, is incorporated by reference. (g)(7) Custodian Agreement dated May 13, 1999 between American Express Trust Company and The Bank of New York filed electronically as Exhibit (g)(3) to IDS Precious Metal Fund, Inc. Post-Effective Amendment No. 33 to Registration Statement No. 2-93745 filed on or about May 24, 1999, is incorporated by reference. (g)(8) Custodian Agreement First Amendment between American Express Trust Company and The Bank of New York, dated December 1, 2000, filed electronically as Exhibit (g)(4) to AXP Precious Metals Fund, Inc. Post-Effective Amendment No. 37 to Registration Statement No. 2-93745, filed on or about May 28, 2002 is incorporated by reference. (g)(9) Custodian Agreement Second Amendment between American Express Trust Company and The Bank of New York, dated June 7, 2001, filed electronically as Exhibit (g)(5) to AXP Precious Metals Fund, Inc. Post-Effective Amendment No. 37 to Registration Statement No. 2-93745, filed on or about May 28, 2002 is incorporated by reference. (g)(10) Custodian Agreement Amendment between American Express Trust Company and The Bank of New York, dated January 31, 2002, filed electronically as Exhibit (g)(6) to AXP Precious Metals Fund, Inc. Post-Effective Amendment No. 37 to Registration Statement No. 2-93745, filed on or about May 28, 2002 is incorporated by reference. (g)(11) Custodian Agreement Amendment between American Express Trust Company and The Bank of New York, dated April 29, 2003, filed electronically as Exhibit (g)(8) to AXP Partners Series, Inc. Post-Effective Amendment No. 7 to Registration Statement No. 333-57852, filed on or about May 22, 2003 is incorporated by reference. (g)(12) Custodian Agreement between Registrant, on behalf of AXP Variable Portfolio - Large Cap Value Fund, and American Express Trust Company, dated September 10, 2003 is filed electronically herewith. (h)(1) Plan and Agreement of Merger between IDS Life Capital Resource Minnesota, Inc. and IDS Life Capital Resource Fund, Inc. dated April 10, 1986, filed electronically as Exhibit No. 9(a) to Registrant's Post-Effective Amendment No. 25 to Registration Statement No. 2-73115, is incorporated by reference. (h)(2) License Agreement between Registrant and IDS Financial Corporation, dated Jan. 25, 1988, filed electronically as Exhibit No. 9(b) to Registrant's Post-Effective Amendment No. 25 to Registration Statement No. 2-73115, is incorporated by reference. (h)(3) License Agreement dated June 17, 1999 between the American Express Funds and American Express Company, filed electronically on or about Sept. 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc. Post-Effective Amendment No. 98 to Registration Statement No. 2-11358, is incorporated by reference. (h)(4) Addendum to Schedule A and Schedule B of the License Agreement dated June 15, 2001, between the American Express Company and American Express Funds, filed electronically as Exhibit (h)(4) to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-73115, is incorporated by reference. (i) Opinion and consent of counsel as to the legality of the securities being registered, is filed electronically herewith. (j) Independent Auditors' Consent, is filed electronically herewith. (k) Omitted Financial Statements: Not Applicable. (l) Investment Letter of IDS Life Insurance Company dated Oct. 13, 1981, filed electronically as Exhibit 13 to Registrant's Post-Effective Amendment No. 25, is incorporated by reference. (m)(1) Plan and Agreement of Distribution dated Sept. 13, 1999, between Registrant on behalf of AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable Portfolio - Small Cap Advantage Fund and IDS Life Insurance Company, filed electronically as Exhibit (m) to Registrant's Post-Effective Amendment No. 40 filed on or about Oct. 29, 1999, is incorporated by reference (m)(2) Plan and Agreement of Distribution dated Sept. 20, 1999, between Registrant (on behalf of AXP(SM) Variable Portfolio - Capital Resource Fund, AXP(SM) Variable Portfolio - International Fund, AXP(SM) Variable Portfolio - New Dimensions Fund and AXP(SM) Variable Portfolio - Strategy Aggressive Fund) and IDS Life Insurance Company, filed electronically as Exhibit (m)(2) to Registrant's Post-Effective Amendment No. 43, filed on or about Oct. 26, 2000, is incorporated by reference. (m)(3) Plan and Agreement of Distribution dated May 1, 2000, between Registrant, on behalf of AXP Variable Portfolio - Emerging Markets Fund and AXP Variable Portfolio - S&P 500 Index Fund, and IDS Life Insurance Company, filed electronically as Exhibit (m)(3) to Registrant's Post-Effective Amendment No. 43, filed on or about Oct. 26, 2000, is incorporated by reference. (m)(4) Plan and Agreement of Distribution dated April 11, 2001, between Registrant, on behalf of AXP Variable Portfolio - Equity Select Fund, and IDS Life Insurance Company, filed electronically as Exhibit (m)(4) to Registrant's Post-Effective Amendment No. 45, filed on or about May 16, 2001, is incorporated by reference. (m)(5) Plan and Agreement of Distribution dated May 9, 2001, between Registrant, on behalf of AXP Variable Portfolio - Stock Fund, and IDS Life Insurance Company, filed electronically as Exhibit (m)(5) to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-73115, is incorporated by reference. (m)(6) Plan and Agreement of Distribution dated September 10, 2003, between Registrant, on behalf of AXP Variable Portfolio - Large Cap Value Fund, and IDS Life Insurance Company is filed electronically herewith. (n) Rule 18f-3 Plan: Not Applicable. (o) Reserved (p)(1) Code of Ethics adopted under Rule 17j-1 for Registrant filed electronically on or about March 30, 2000 as Exhibit (p)(1) to AXP Market Advantage Series, Inc.'s Post-Effective Amendment No. 24 to Registration Statement No. 33-30770, is incorporated by reference. (p)(2) Code of Ethics adopted under Rule 17j-1 for Registrant's investment advisor and principal underwriter, dated May 2003, filed electronically on or about August 15, 2003 as Exhibit (p)(2) to AXP Fixed Income Series, Inc.'s Post-Effective Amendment No. 55 to Registration Statement No. 2-51586, is incorporated by reference. (q)(1) Directors' Power of Attorney to sign Amendments to this Registration Statement dated Jan. 8, 2003 filed electronically as Exhibit (q)(1) to Registrant's Post-Effective Amendment No. 49 to Registration Statement No. 2-73115, filed on or about August 15, 2003 is incorporated by reference. (q)(2) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 9, 2002 filed electronically as Exhibit (q)(2) to Registrant's Post-Effective Amendment No. 47, filed on or about Aug. 29, 2002, is incorporated by reference. (q)(3) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated September 17, 2002, filed electronically as Exhibit (q)(3) to Registrant's Post-Effective Amendment No. 48 is incorporated by reference. Item 24. Persons Controlled by or under Common Control with Registrant IDS Life and its subsidiaries are the record holders of all outstanding shares of AXP Variable Portfolio - Investment Series, Inc., AXP Variable Portfolio - Income Series, Inc., AXP Variable Portfolio - Money Market Series, Inc. and AXP Variable Portfolio - Managed Series, Inc. All of such shares were purchased and are held by IDS Life and its subsidiaries pursuant to instructions from owners of variable annuity contracts issued by IDS Life and its subsidiaries. Accordingly, IDS Life disclaims beneficial ownership of all shares of each fund. Item 25. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940. Item 26. Business and Other Connections of Investment Advisor (IDS Life Insurance Company). Directors and officers of IDS Life Insurance Company who are directors and/or officers of one or more other companies:
- ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Name and Title Other company(s) Address* Title within other company(s) - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Gumer C. Alvero American Centurion Life 20 Madison Ave. Extension Director and Vice President - Annuities Director and Executive Assurance Company P.O. Box 5555 Vice President - Annuities Albany, NY 12205-0555 American Enterprise Life Director, Chairman of the Board and Insurance Company Executive Vice President - Annuities American Express Financial Vice President - General Manager Advisors Inc. Annuities American Express Insurance Director and Vice President Agency of Alabama Inc. American Express Insurance Director and Vice President Agency of Arizona Inc. American Express Insurance Director and Vice President Agency of Idaho Inc. American Express Insurance Director and Vice President Agency of Maryland Inc. American Express Insurance Director and Vice President Agency of Massachusetts Inc. American Express Insurance Director and Vice President Agency of Nevada Inc. American Express Insurance Director and Vice President Agency of New Mexico Inc. American Express Insurance Director and Vice President Agency of Oklahoma Inc. American Express Insurance Director and Vice President Agency of Wyoming Inc. American Partners Life 1751 AXP Financial Center Director, President Insurance Company Minneapolis MN 55474 and Chief Executive Officer IDS Insurance Agency of Director and Vice President Arkansas Inc. IDS Life Insurance Company Director and Executive Vice President - Annuities IDS Life Insurance Company P.O. Box 5144 Director and Vice President - Annuities of New York Albany, NY 12205 IDS Life Series Fund, Inc. Director and Chairman of the Board IDS Life Variable Annuity Manager and Chairman of the Board Funds A & B - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Timothy V. Bechtold American Centurion Life 20 Madison Ave. Extension Director, President and Chief Director and President Assurance Company P.O. Box 5555 Executive Officer Albany, NY 12205-0555 American Express Financial Vice President - Insurance Advisors Inc. Products American Express Insurance Director, President and Chief Agency of Alabama Inc. Executive Officer American Express Insurance Director, President and Chief Agency of Arizona Inc. Executive Officer American Express Insurance Director, President and Chief Agency of Idaho Inc. Executive Officer American Express Insurance Director, President and Chief Agency of Maryland Inc. Executive Officer American Express Insurance Director, President and Chief Agency of Massachusetts Inc. Executive Officer American Express Insurance Director, President and Chief Agency of Nevada Inc. Executive Officer American Express Insurance Director, President and Chief Agency of New Mexico Inc. Executive Officer American Express Insurance Director and President and Chief Agency of Oklahoma Inc. Executive Officer American Express Insurance Director, President and Chief Agency of Wyoming Inc. Executive Officer American Partners Life Director and Chairman of the Board Insurance Company and Vice President-Insurance Products IDS Insurance Agency of Director, President and Chief Arkansas Inc. Executive Officer IDS Life Insurance Company Director and President IDS Life Insurance Company P.O. Box 5144 Director, President and Chief of New York Albany, NY 12205 Executive Officer IDS Life Series Fund, Inc. Director, President and Chief Executive Officer IDS Life Variable Annuity Manager, President and Chief Funds A & B Executive Officer IDS REO 1, LLC President IDS REO 2, LLC President - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Walter S. Berman Advisory Capital Partners LLC Treasurer Vice President and Treasurer Advisory Capital Strategies Treasurer Group Inc. Advisory Convertible Arbitrage LLC Treasurer Advisory Credit Opportunities Treasurer GP LLC Advisory Quantitative Treasurer Equity (General Partner) LLC Advisory Select LLC Treasurer American Centurion Life Treasurer Assurance Company American Enterprise Life Vice Pesident and Treasurer Insurance Company American Enterprise REO 1, LLC Treasurer American Express Asset Management Treasurer Group, Inc. American Express Director and Treasurer Certificate Company American Express Client Treasurer Service Corporation American Express Corporation Treasurer American Express Financial Director, Senior Vice President Advisors Inc. and Treasurer American Express Financial Treasurer Advisors Japan Inc. American Express Insurance Treasurer Agency of Alabama Inc. American Express Insurance Treasurer Agency of Arizona Inc. American Express Insurance Treasurer Agency of Idaho Inc. American Express Insurance Treasurer Agency of Maryland Inc. American Express Insurance Treasurer Agency of Massachusetts Inc. American Express Insurance Treasurer Agency of Nevada Inc. American Express Insurance Treasurer Agency of New Mexico Inc. American Express Insurance Treasurer Agency of Oklahoma Inc. American Express Insurance Treasurer Agency of Wyoming Inc. American Partners Life Vice Pesident and Treasurer Insurance Company American Express Property Treasurer Casualty Insurance Agency American Express Property Treasurer Casualty Insurance Agency of Kentucky, Inc. American Express Property Treasurer Casualty Insurance Agency of Maryland, Inc. American Express Property Treasurer Casualty Insurance Agency of Pennsylvania, Inc. American Express Personal Treasurer Trust Services, FSB AMEX Assurance Company Treasurer IDS Cable Corporation Treasurer IDS Cable II Corporation Treasurer IDS Capital Holdings Inc. Treasurer IDS Insurance Agency of Treasurer Arkansas, Inc. IDS Life Insurance Company Vice Pesident and Treasurer IDS Life Insurance Company Vice Pesident and Treasurer of New York IDS Management Corporation Treasurer IDS Partnership Services Treasurer Corporation IDS Property Casualty Treasurer Insurance Company IDS Realty Corporation Treasurer IDS REO 1, LLC Treasurer IDS REO 2, LLC Treasurer - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Barbara H. Fraser American Express Financial Executive Vice President - Director, Chairman of the Advisors Inc. Chief Marketing Officer Board and Chief Executive Officer IDS Life Insurance Company Director, Chairman of the Board and Chief Executive Officer American Express Trust Company Vice President - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Lorraine R. Hart AMEX Assurance Company Vice President - Vice President - Investments Investments American Centurion Life 20 Madison Ave. Extension Vice President - Investments Assurance Company P.O. Box 5555 Albany, NY 12205-0555 American Enterprise Life 829 AXP Financial Center Vice President - Investments Insurance Company Minneapolis, MN 55474 American Enterprise 829 AXP Financial Center Vice President REO 1, LLC Minneapolis, MN 55474 American Express Vice President - Investments Certificate Company American Express Director, President and Chief Corporation Executive Officer American Express International Vice President - Investments Deposit Company American Express Financial Vice President - Administration Advisors Inc. Officer American Express Vice President - Investments International Deposit Company American Partners Life 1751 AXP Financial Center Director and Vice Insurance Company Minneapolis, MN 55474 President - Investments IDS Life Insurance Company Vice President - Investments IDS Life Insurance Company P.O. Box 5144 Vice President - Investments of New York Albany, NY 12205 IDS Life Series Fund, Inc. Vice President - Investments IDS Life Variable Annuity Vice President - Investments Funds A and B IDS Property Casualty 1 WEG Blvd. Vice President - Investment Officer Insurance Company DePere, WI 54115 IDS REO 1, LLC Vice President IDS REO 2, LLC Vice President Investors Syndicate Director and Vice Development Corp. President - Investments - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Eric L. Marhoun American Centurion Life 20 Madison Ave. Extension Director, General Counsel Vice President, Assistant Assurance Company P.O. Box 5555 and Secretary General Counsel and Assistant Albany, NY 12205-0555 Secretary American Enterprise Life 829 AXP Financial Center Vice President, Group Insurance Company Minneapolis, MN 55474 Counsel and Secretary American Partners Life 1751 AXP Financial Center Director, Vice President, Group Insurance Company Minneapolis, MN 55474 Counsel and Assistant Secretary AMEX Assurance Company Director IDS Life Insurance Company Vice President, Group Counsel and Assistant Secretary IDS Life Insurance Company P.O. Box 5144 Director, General Counsel and of New York Albany, NY 12205 Secretary IDS Property Casualty Director Insurance Company - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Timothy S. Meehan American Express Secretary Secretary Financial Advisors Inc. American Enterprise Investment Services Secretary American Enterprise REO 1, LLC Secretary American Express Asset Secretary Management Group Inc. American Express Asset Secretary Management International Inc. American Express Client Service Secretary Corporation American Express Financial Secretary Advisors Inc. Japan American Express Insurance Secretary Agency of Alabama Inc. American Express Insurance Secretary Agency of Arizona Inc. American Express Insurance Secretary Agency of Idaho Inc. American Express Insurance Secretary Agency of Maryland Inc. American Express Insurance Secretary Agency of Massachusetts Inc. American Express Insurance Secretary Agency of Nevada Inc. American Express Insurance Secretary Agency of New Mexico Inc. American Express Insurance Secretary Agency of Oklahoma Inc. American Express Insurance Secretary Agency of Wyoming Inc. American Express Personal Secretary Trust Services, FSB American Express Property Secretary Casualty Insurance Agency American Express Property Casualty Secretary Insurance Agency of Kentucky Inc. American Express Property Casualty Secretary Insurance Agency of Maryland Inc. American Express Property Casualty Secretary Insurance Agency of Pennslyvania Inc. Amex Assurance Company Secretary IDS Cable Corporation Secretary IDS Cable II Corporation Secretary IDS Capital Holdings Inc. Secretary IDS Life Insurance Company Secretary IDS Insurance Agency of Secretary Arkansas Inc. IDS Management Corporation Secretary IDS Partnership Services Corporation Secretary IDS Property Casualty Secretary Insurance Company IDS Realty Company Secretary IDS REO 1, LLC Secretary IDS REO 2, LLC Secretary Investors Syndicate Development Corp. Secretary - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Jeryl A. Millner American Express Financial Vice President - LFO, Insurance, Vice President and Controller Advisors Inc. Annuities and Certificates American Centurion Life Controller Assurance Company American Enterprise Life Vice President and Controller Insurance Company American Express Certificate Vice President and Controller Company American Partners Life Vice President and Controller Insurance Company IDS Life Insurance Company Vice President and Controller IDS Life Insurance Company Controller of New York - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Mary Ellyn Minenko American Enterprise Life 829 AXP Financial Center Vice President, Group Vice President, Assistant Insurance Company Minneapolis, MN 55474 Counsel and Assistant General Counsel and Assistant Secretary Secretary American Centurion Life Counsel and Assistant Secretary Assurance Company American Partners Life 1751 AXP Financial Center Vice President, Group Insurance Company Minneapolis, MN 55474 Counsel and Assistant Secretary IDS Life Insurance Company Vice President, Group Counsel and Assistant Secretary IDS Life Insurance Company Assistant General Counsel of New York and Assistant Secretary IDS Life Series Fund, Inc. General Counsel and Assistant Secretary IDS Life Variable Annuity General Counsel and Funds A & B Assistant Secretary - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Barry J. Murphy American Express Client Director, Chairman of the Board, Director Service Corporation President and Chief Executive Officer American Express Financial Executive Vice President - Advisors Inc. U.S. Retail Group IDS Life Insurance Company Director - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Teresa J. Rasmussen American Express Financial Vice President and Vice President and General Advisors Inc. Assistant General Counsel Counsel and Assistant Secretary American Centurion Life Counsel and Secretary Assurance Company American Enterprise Life Director Insurance Company American Express Corporation Director, Vice President and Secretary IDS Life Insurance Company Vice President, General Counsel and Assistant Secretary IDS Life Insurance Company 20 Madison Ave. Extension Assistant General Counsel and of New York Albany, NY 12205-0555 Assistant Secretary American Partners Director, Vice President, Life Insurance Company General Counsel and Secretary - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Stephen W. Roszell Advisory Capital Director Director Strategies Group Inc. Advisory Select LLC Director American Express Asset Director and Chief Executive Management Group Inc. Officer American Express Asset Director and Executive Vice President Management International, Inc. American Express Asset Director Management International, (Japan) Ltd. American Express Asset Director Management Ltd. American Express Financial Senior Vice President - Advisors Inc. Institutional Group American Express Financial Director Advisors Japan Inc. American Express Trust Director Company IDS Life Insurance Company Director Northwinds Marketing Manager Group LLC - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Bridget Sperl American Enterprise Director, President and Chief Executive Vice President - Investment Services Inc. Executive Officer Client Service Organization American Express Client Director and Senior Vice President Service Corporation American Express Financial Senior Vice President - Advisors Inc. Client Service Organization IDS Life Insurance Company Executive Vice President - Client Service Organization IDS Property Casualty Director Insurance Company - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- John T. Sweeney American Express Financial Vice President - Lead Director and Executive Advisors Inc. Financial Officer, Products Group Vice President - Finance AMEX Assurance Company Director American Centurion Life Vice President - Finance Assurance Company American Enterprise Vice President - Finance Life Insurance Company American Express Insurance Director and Vice President Agency of Alabama Inc. American Express Insurance Director and Vice President Agency of Arizona Inc. American Express Insurance Director and Vice President Agency of Idaho Inc. American Express Insurance Director and Vice President Agency of Maryland Inc. American Express Insurance Director and Vice President Agency of Massachusetts Inc. American Express Insurance Director and Vice President Agency of Nevada Inc. American Express Insurance Director and Vice President Agency of New Mexico Inc. American Express Insurance Director and Vice President Agency of Oklahoma Inc. American Express Insurance Director and Vice President Agency of Wyoming Inc. American Express Certificate Vice President - Finance Company American Partners Vice President - Finance Life Insurance Company IDS Cable Corporation Director IDS Cable II Corporation Director IDS Insurance Agency of Director and Vice President Arkansas Inc. IDS Life Insurance Company Director and Executive IDS Life Insurance Company Vice President - Finance New York IDS Partnership Director Services Corporation IDS Property Casualty Director Insurance Company IDS Realty Corporation Director - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- Beth E. Weimer American Express Vice President - Chief Chief Compliance Officer Financial Advisors Inc. Compliance Officer American Enterprise Chief Compliance Officer Investment Services Inc. American Express Asset Chief Compliance Officer Management Group Inc. American Express Asset Chief Compliance Officer Management International Inc. IDS Life Insurance Company Chief Compliance Officer - ------------------------------- ---------------------------- ---------------------------- -------------------------------------- * Unless otherwise noted, address is 70100 AXP Financial Center, Minneapolis, MN 55474. - ------------------------------- ---------------------------- ---------------------------- ----------------------------
Item 27. Principal Underwriters The Fund has no principal underwriter. Item 28. Location of Accounts and Records American Express Financial Corporation 70100 AXP Financial Center Minneapolis, MN 55474 Item 29. Management Services Not Applicable. Item 30. Undertakings Not Applicable. SIGNATURES Pursuant to the requirements of the Securities Act and the Investment Company Act, the Registrant, AXP Variable Portfolio - Investment Series, Inc, certifies that it meets all of the requirements for effectiveness of this registration statement under Rule 485(b) under the Securities Act and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of Minneapolis and State of Minnesota on the 28th day of October, 2003. AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. By /s/ Paula R. Meyer ---------------------------------------------- Paula R. Meyer, President By /s/ Jeffrey P. Fox ---------------------------------------------- Jeffrey P. Fox, Treasurer Pursuant to the requirements of the Securities Act, this Amendment to its Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of October, 2003. Signature Capacity /s/ Arne H. Carlson* Chair of the Board - --------------------- Arne H. Carlson Director - --------------------------- Philip J. Carroll, Jr. /s/ Livio D. DeSimone* Director - ----------------------- Livio D. DeSimone /s/ Barbara H. Fraser* Director - ------------------------ Barbara H. Fraser /s/ Heinz F. Hutter* Director - ---------------------- Heinz F. Hutter /s/ Anne P. Jones* Director - ------------------- Anne P. Jones /s/ Stephen R. Lewis, Jr.* Director - ----------------------------- Stephen R. Lewis, Jr. Signature Capacity /s/ Alan G. Quasha* - ---------------------- Director Alan G. Quasha /s/ Stephen W. Roszell* Director - ------------------------- Stephen W. Roszell /s/ Alan K. Simpson* Director - --------------------- Alan K. Simpson /s/ Alison Taunton-Rigby* Director - --------------------------- Alison Taunton-Rigby /s/ William F. Truscott* Director - ------------------------- William F. Truscott * Signed pursuant to Directors' Power of Attorney, dated Jan. 8, 2003, filed electronically as Exhibit (q)(1) to Registrant's Post-Effective Amendment No. 49 to Registration Statement No. 2-73115, by: /s/ Leslie L. Ogg ------------- Leslie L. Ogg CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 50 TO REGISTRATION STATEMENT NO. 2-73115 This post-effective amendment contains the following papers and documents: The facing sheet. Part A. The prospectus. Part B. Statement of Additional Information. Financial Statements. Part C. Other information. The signatures. Exhibits. EX-99 3 ex-index.txt EXHIBIT INDEX EXHIBIT INDEX (a)(2) Articles of Amendment to the Articles of Incorporation, dated June 16, 1999. (a)(3) Articles of Amendment to the Articles of Incorporation, dated November 14, 2002. (b) By-Laws as amended January 11, 2001. (d)(13) Investment Management Services Agreement between Registrant on behalf of its underlying series AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Capital Resource Fund, AXP Variable Portfolio - Emerging Markets Fund, AXP Variable Portfolio - Equity Select Fund, AXP Variable Portfolio - Growth Fund, AXP Variable Portfolio - International Fund, AXP Variable Portfolio - New Dimensions Fund, AXP Variable Portfolio - S&P 500 Index Fund, AXP Variable Portfolio - Small Cap Advantage Fund, AXP Variable Portfolio - Stock Fund and AXP Variable Portfolio - Strategy Aggressive Fund, and American Express Financial Corporation dated December 1, 2002. (d)(14) Investment Management Services Agreement between Registrant on behalf of its underlying series AXP Variable Portfolio - Large Cap Value Fund and American Express Financial Corporation dated September 10, 2003. (d)(36) Administrative Service Agreement between Registrant on behalf of AXP Variable Portfolio Large Cap Value Fund and American Express Financial Corporation, dated September 10, 2003. (g)(12) Custodian Agreement between Registrant, on behalf of AXP Variable Portfolio - Large Cap Value Fund, and American Express Trust Company, dated September 10, 2003. (i) Opinion and consent of counsel as to the legality of the securities being registered. (j) Independent Auditors' Consent. (m)(6) Plan and Agreement of Distribution dated September 10, 2003, between Registrant, on behalf of AXP Variable Portfolio - Large Cap Value Fund, and IDS Life Insurance Company. EX-99.A2 ARTICLES 4 a2-articles.txt ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF IDS Life Investment Series, Inc. Pursuant to Section 302A.135 of the Minnesota Business Corporation Act, IDS Life Investment Series, Inc., incorporated under the laws of the State of Minnesota on April 8, 1986, amends its Articles of Incorporation to change the name of the corporation to AXP Variable Portfolio - Investment Series, Inc. The new Article I shall be: ARTICLE I - NAME The name of this corporation (hereinafter called the "Fund") is: AXP Variable Portfolio - Investment Series, Inc. The resolution to amend the Articles of Incorporation was approved by the affirmative vote of a majority of the shares present and entitled to vote at a regular meeting of shareholders on June 16, 1999, held pursuant to a written notice given to each shareholder in the manner provided in Section 302A.435. Dated this 16th day of June, 1999. AXP Variable Portfolio - Investment Series, Inc. By /s/ Leslie L. Ogg ----------------- Leslie L. Ogg Vice President and Secretary STATE OF MINNESOTA) )ss. COUNTY OF DAKOTA) The foregoing instrument was acknowledge before me this 16th day of June, 1999. By /s/ Diane R. Kepp ------------------ Diane R. Kepp Notary Public EX-99.A3 ARTICLES 5 a3-articles.txt ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF AXP Variable Portfolio-Investment Series, Inc. Pursuant to Section 302A.135 of the Minnesota Business Corporation Act, AXP Variable Portfolio-Investment Series, Inc., incorporated under the laws of the State of Minnesota on April 8, 1986, amends its Articles of Incorporation to change shareholder voting from share-based to dollar-based. New Article III shall be: ARTICLE III - CAPITALIZATION Section 2. At all meetings of the shareholders, each shareholder of record entitled to vote thereat shall be entitled to one vote for each dollar of net asset value (number of shares owned times net asset value per share) and each fractional dollar amount shall be entitled to a proportionate fractional vote. At all elections of directors, each shareholder shall be entitled to as many votes as shall equal the dollars of net asset value multiplied by the number of directors to be elected and may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them. The resolution to amend the Articles of Incorporation was approved by the affirmative vote of a majority of the shares present and entitled to vote a regular meeting of shareholders on November 13, 2002, held pursuant to a written notice given to each shareholder in the manner provided in Section 302A.435. Dated this 14th day of November, 2002. AXP Variable Portfolio-Investment Series, Inc. By /s/ Leslie L. Ogg ------------------ Leslie L. Ogg Vice President and Secretary STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing instrument was acknowledged before me this 14th day of November, 2002. By /s/ Diane R. Kepp ----------------- Diane R. Kepp Notary EX-99.B BYLAWS 6 b-bylaws.txt BY-LAWS AS AMENDED JANUARY 11, 2001 Effective: June 13, 1986 Amended: 5/14/87, 1/12/89, 11/10/94, 9/8/99, 1/11/01 BY-LAWS OF AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. ARTICLE I Corporate Seal The corporate seal shall bear the inscription "Seal." ARTICLE II Meeting of Shareholders Section 1. No regular meeting of shareholders need be held, however, a majority of directors present at a duly held meeting may call a regular meeting of shareholders by fixing the date, time and place for a meeting. A regular meeting of the shareholders shall include an election of directors. No meeting shall be considered a regular meeting unless specifically designated as such in the notice of meeting. Regular meetings may be held no more frequently than once per year. If a regular meeting of shareholders has not been held during the immediately preceding 15 months, a shareholder or shareholders holding three percent or more of the voting power of all shares entitled to vote may demand a regular meeting of shareholders by written notice of demand given to the chief executive officer or chief financial officer of the Fund. Within 30 days after receipt of the demand by one of those officers, the Board of Directors shall cause a regular meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, all at the expense of the Fund. If the Board fails to cause a regular meeting to be called, the shareholder or shareholders making the demand may call the regular meeting by giving notice as required by the laws of Minnesota at the expense of the Fund. Section 2. The holders of at least ten percent (10%) of the shares outstanding and entitled to vote, present in person or by proxy, shall constitute a quorum, but the holders of a smaller amount may adjourn from time to time without further notice, other than by notice at the time, until a quorum is secured at any such adjourned meeting. In case a quorum is not present, the meeting may be adjourned from time to time without notice other than by notice at the meeting. At any adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Section 3. At each meeting of the shareholders, the polls may be opened and closed, the proxies and ballots may be received and taken in charge, and all questions touching the qualification of voters, the validity of proxies, and acceptances or rejections of votes may be decided by two (2) inspectors of election. Inspectors may be appointed by the Board of Directors before or at the meeting. If no such appointment shall have been made or if any inspector be absent or fails to act, the presiding officer at the meeting shall appoint a person or persons to fill such vacancy. Inspectors shall take charge of the polls and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law. Section 4. Special meetings of the shareholders may be called at any time as provided for by the laws of the State of Minnesota. Section 5. Shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of the shares present and entitled to vote except where a larger portion is otherwise required. ARTICLE III Directors Section 1. An organizational meeting of the Board of Directors shall be held as soon as convenient to a majority of the directors, after the final adjournment of each regular meeting of the shareholders, and no notice shall be required. Other meetings of the Board of Directors may be previously scheduled or called by the Chair of the Board and Chief Executive Officer or any two directors. Notice of specially called meetings shall be sufficient if given to each director at least five days prior thereto by mail or one day prior thereto by telephone, telegraph or in person, unless such notice period is waived by each director. Section 2. The Board of Directors shall fix and change, as it may from time to time determine, by majority vote, the compensation to be paid the directors, officers and all employees appointed by the Board of Directors. Section 3. A director may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes of the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 4. A majority of the directors shall constitute a quorum, but a smaller number may adjourn from time to time without notice, other than by announcement at the meeting, until a quorum is secured; and, likewise, in case a quorum is present, the meeting may be adjourned from time to time without notice other than by announcement at the meeting. At any adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Section 5. The Board of Directors may, by resolution passed by a majority of the whole Board, designate an Executive Committee of two or more directors, which may meet at stated times or on notice to all by any of their number during intervals between meetings of the Board. The Executive Committee shall advise with and aid the officers of the Fund in all matters concerning its interests and the management of its business, and generally perform such duties and exercise such powers as may be delegated to it from time to time by the Board of Directors. Vacancies in the membership of such Executive Committee shall be filled by the Board of Directors. Section 6. From time to time the Board of Directors may, by resolution passed by a majority of the whole Board, appoint any other committee or committees for any purpose or purposes, which committee or committees shall have such powers as shall be specified in the resolution of appointment. Section 7. The quorum for such committee established by the Board of Directors is two members regardless of the number of members serving on the committee. Section 8. Any action required or permitted to be taken at any meeting of the Board of Directors or of a duly appointed committee of the Board of Directors may be taken in any manner permitted by law. Section 9. The Board of Directors shall elect one independent member to serve a Chair of the Board whose duties shall include serving as the lead independent director. ARTICLE IV Officers Section 1. The Fund shall have a President, a Treasurer and may have such other officers as the Board of Directors may choose from time to time. Section 2. The Treasurer shall be the chief financial officer of the Fund, shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the Fund, and shall perform such other duties as the Board of Directors may from time to time prescribe or require. Section 3. Any person designated by the Board of Directors as President or Vice President shall be vested with all the powers and required to perform all the duties of the Chair of the Board and Chief Executive Officer in the Chair's absence or disability, shall at all times be vested with the same power as the Chair to sign and deliver in the name of the Fund any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Fund, and shall perform such other duties as may be prescribed by the Board of Directors. Section 4. Any person designated by the Board of Directors as Secretary shall attend all meetings of the shareholders of the Fund, the Board of Directors, and such other meetings as may be designated by the Board of Directors. The Secretary shall record all of the proceedings of such meetings in a book or books to be kept for that purpose; shall have custody of the seal, stock certificate books and minute books of the Fund; may affix the seal of the Fund to any instrument and perform such additional duties as shall be assigned by the Board of Directors. Section 5. The officers of the Fund shall hold office until their successors are chosen and qualify in their stead. Any officer chosen and appointed by the Board of Directors may be removed either with or without cause at any time by the Board of Directors. ARTICLE V Capital Stock Shares of capital stock shall be uncertificated. ARTICLE VI Transfers Section 1. Shares of stock of the Fund shall be transferred on the books of the Fund at the request of the holder thereof in person or of her or his duly authorized attorney upon surrender of the certificate or certificates therefor, if any, or in their absence by a request for transfer in a form acceptable to the Fund that may include the request be in writing, and be signed by the registered holder or by his duly authorized attorney in the manner specified by the Fund. No transfer or assignment of shares shall affect the right of the Fund to pay any dividend due upon the shares, or to treat the holder of record as the holder in fact, until such transfer or assignment is registered on the books of the Fund and the Fund shall be entitled to treat the holder of record of any of its shares as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such shares on the part of any person whether or not it shall have express or other notice thereof, save as may be expressly provided by law. Section 2. The Board of Directors shall have power and authority from time to time to appoint one or more transfer agents and/or clerks and registrars for the securities issued by the Fund and to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of such securities. Section 3. If any security issued by the Fund be lost, stolen, mutilated or destroyed, the security may be transferred upon giving of a satisfactory bond of indemnity in an amount which, in the judgment of the Board of Directors, is sufficient to indemnify the Fund against any claim that may result therefrom. ARTICLE VII Definitions For all purposes of the Articles of Incorporation and these By-Laws, the term "business day" shall be defined as a day with respect to which the New York Stock Exchange is open for business. ARTICLE VIII Custodian or Trustee Agreements The Fund shall enter into a custodian or trustee agreement with a bank or trust company having aggregate capital, surplus and undivided profits of not less than $2,000,000 for the custody of the Fund's securities and other assets. All securities and cash assets owned or acquired by the Fund shall be held by such custodian or trustee pursuant to the terms of such agreement and the Fund shall deposit or cause to be deposited with such custodian or trustee all such securities and cash assets. The agreement between the Fund and the custodian or trustee may be terminated at any time by a vote of a majority of the outstanding shares of the Fund. ARTICLE IX Miscellaneous Section 1. The fiscal year of the Fund shall begin on the first day of September in each year and end on the thirty-first day of August following. Section 2. If the sale of shares issued by the Fund shall at any time be discontinued, the Board of Directors may in its discretion, pursuant to resolution, deduct from the value of the assets an amount equal to the brokerage commissions, transfer taxes, and charges, if any, which would be payable on the sale of such securities if they were then being sold. ARTICLE X Indemnification Section 1. Each person made or threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding whether civil, criminal, administrative, arbitration, or investigative, including a proceeding by or in the right of the Fund by reason of the former or present capacity as a director or officer of the Fund or who, while a director or officer of the Fund, is or was serving at the request of the Fund or whose duties as a director or officer involve or involved service as a director, officer, partner, trustee or agent of another organization or employee benefit plan, whether the basis of any proceeding is alleged action in an official capacity or in any capacity while serving as a director, officer, partner, trustee or agent, shall be indemnified and held harmless by the Fund to the full extent authorized by the Minnesota Business Corporation Act, as the same or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Fund to provide broader indemnification rights than the law permitted the Fund to provide prior to such amendment, or by any other applicable law as then in effect, against judgments, penalties, fines including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys' fees and disbursements, incurred in connection therewith and such indemnification shall continue as to any person who has ceased to be a director or officer and shall inure to the benefit of the person's heirs, executors and administrators provided, however, in an action brought against the Fund to enforce rights to indemnification, the director or officer shall be indemnified only if the action was authorized by the Board of Directors of the Fund. The right to indemnification conferred by this Section shall be a contract right and shall include the right to be paid by the Fund in advance of the final disposition of a proceeding for expenses incurred in connection therewith provided, however, such payment of expenses shall be made only upon receipt of a written undertaking by the director or officer to repay all amounts so paid if it is ultimately determined that the director or officer is not entitled to indemnification. Section 2. Each person who upon written request to the Fund has not received payment within thirty days may at any time thereafter bring suit against the Fund to recover any unpaid amount and, to the extent successful, in whole or in part, shall be entitled to be paid the expenses of prosecuting such suit. Each person shall be presumed to be entitled to indemnification upon filing a written request for payment and the Fund shall have the burden of proof to overcome the presumption that the director or officer is not so entitled. Neither the determination by the Fund, whether by the Board of Directors, special legal counsel or by shareholder, nor the failure of the Fund to have made any determination shall be a defense or create the presumption that the director or officer is not entitled to indemnification. Section 3. The right to indemnification and to the payment of expenses prior to any final determination shall not be exclusive of any other right which any person may have or hereinafter acquire under any statute, provision of the Articles of Incorporation, by-law, agreement, vote of shareholders or otherwise and notwithstanding any provisions in this Article X, the Fund is not obligated to make any payment with respect to any claim for which payment is required to be made to or on behalf of the director or officer under any insurance policy, except with respect to any excess beyond the amount of required payment under such insurance and no indemnification will be made in violation of the provisions of the Investment Company Act of 1940. EX-99.D13 IMS AGMT 7 d13-imsagmt.txt INVESTMENT MANAGEMENT SERVICES AGREEMENT INVESTMENT MANAGEMENT SERVICES AGREEMENT This Agreement dated as of December 1, 2002, is by and between AXP Variable Portfolio - Investment Series, Inc., (the "Corporation"), a Minnesota corporation, on behalf of its underlying series AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Capital Resource Fund, AXP Variable Portfolio - Emerging Markets Fund, AXP Variable Portfolio - Equity Select Fund, AXP Variable Portfolio - Growth Fund, AXP Variable Portfolio - International Fund, AXP Variable Portfolio - New Dimensions Fund, AXP Variable Portfolio - S&P 500 Index Fund, AXP Variable Portfolio - Small Cap Advantage Fund, AXP Variable Portfolio - Stock Fund and AXP Variable Portfolio - Strategy Aggressive Fund, (individually the "Fund" collectively the "Funds") and American Express Financial Corporation ("AEFC"), a Delaware corporation. Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES (1) The Corporation hereby retains AEFC, and AEFC hereby agrees, for the period of this Agreement and under the terms and conditions hereinafter set forth, to furnish the Corporation continuously with suggested investment planning; to determine, consistent with the Funds' investment objectives and policies, which securities in AEFC's discretion shall be purchased, held or sold, and to execute or cause the execution of purchase or sell orders; to prepare and make available to the Funds all necessary research and statistical data in connection therewith; to furnish all other services of whatever nature required in connection with the management of the Funds including transfer agent and dividend-disbursing agent services; to furnish or pay for all supplies, printed material, office equipment, furniture and office space as the Funds may require; and to pay or reimburse such expenses of the Funds as provided for in Part Three under this Agreement; subject always to the direction and control of the Board of Directors (the "Board"), the Executive Committee and the authorized officers of the Corporation. AEFC agrees to maintain an adequate organization of competent persons to provide the services and to perform the functions herein mentioned. AEFC agrees to meet with any persons at such times as the Board deems appropriate for the purpose of reviewing AEFC's performance under this Agreement. (2) AEFC agrees that the investment planning and investment decisions will be in accordance with general investment policies of the Funds as disclosed to AEFC from time to time by the Funds and as set forth in its prospectus and registration statement filed with the United States Securities and Exchange Commission (the "SEC"). (3) AEFC agrees that it will maintain all required records, memoranda, instructions or authorizations relating to the acquisition or disposition of securities for the Funds. (4) The Corporation agrees that it will furnish to AEFC any information that the latter may reasonably request with respect to the services performed or to be performed by AEFC under this Agreement. (5) AEFC is authorized to select the brokers or dealers that will execute the purchases and sales of portfolio securities for the Funds and is directed to use its best efforts to obtain the best available price and most favorable execution, except as prescribed herein. Subject to prior authorization by the Board of appropriate policies and procedures, and subject to termination at any time by the Board, AEFC may also be authorized to effect individual securities transactions at commission rates in excess of the minimum commission rates available, to the extent authorized by law, if AEFC determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or AEFC's overall responsibilities with respect to the Funds and other funds for which it acts as investment adviser. (6) It is understood and agreed that in furnishing the Funds with the services as herein provided, neither AEFC, nor any officer, director or agent thereof shall be held liable to the Funds, shareholders, the Corporation or its creditors for errors of judgment or for anything except willful misfeasance, bad faith, or gross negligence in the performance of its duties, or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that AEFC may rely upon information furnished to it reasonably believed to be accurate and reliable. Part Two: COMPENSATION TO INVESTMENT MANAGER (1) The Corporation agrees to pay to AEFC on behalf of each Fund, and AEFC covenants and agrees to accept from the Corporation in full payment for the services furnished, a fee composed of an asset charge and a performance incentive adjustment. (a) The Asset Charge (i) The asset charge for each calendar day of each year shall be equal to the total of 1/365th (1/366th in each leap year) of the amount computed in accordance with paragraph (ii) below. The computation shall be made for each calendar day on the basis of net assets as of the close of the preceding business day. In the case of the suspension of the computation of net asset value, the fee for each calendar day during such suspension shall be computed as of the close of business on the last full business day on which the net assets were computed. Net assets as of the close of a full business day shall include all transactions in shares of a Fund recorded on the books of the Fund for that day. (ii) The asset charge shall be based on the net assets of the Funds as set forth in the following tables. AXP Variable Portfolio - Blue Chip Advantage Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.25 0.540% Next 0.25 0.515 Next 0.25 0.490 Next 0.25 0.465 Next 1.00 0.440 Next 1.00 0.410 Next 3.00 0.380 Over 6.00 0.350 AXP Variable Portfolio - Capital Resource Fund AXP Variable Portfolio - Growth Fund AXP Variable Portfolio - New Dimensions Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $1.00 0.630% Next 1.00 0.615 Next 1.00 0.600 Next 3.00 0.585 Over 6.00 0.570 AXP Variable Portfolio - Emerging Markets Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.25 1.170% Next 0.25 1.155 Next 0.25 1.140 Next 0.25 1.125 Next 1.00 1.110 Over 2.00 1.095 AXP Variable Portfolio - Equity Select Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.25 0.650% Next 0.25 0.635 Next 0.25 0.620 Next 0.25 0.605 Next 1.00 0.590 Next 1.00 0.575 Over 3.00 0.560 AXP Variable Portfolio - International Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.25 0.870% Next 0.25 0.855 Next 0.25 0.840 Next 0.25 0.825 Next 1.00 0.810 Over 2.00 0.795 AXP Variable Portfolio - Small Cap Advantage Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.25 0.790% Next 0.25 0.770 Next 0.25 0.750 Next 0.25 0.730 Next 1.00 0.710 Over 2.00 0.650 AXP Variable Portfolio - S &P 500 Index Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $1.00 0.290% Next 1.00 0.280 Next 3.00 0.270 Over 5.00 0.260 AXP Variable Portfolio - Stock Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.50 0.560% Next 0.50 0.545 Next 1.00 0.530 Next 1.00 0.515 Next 3.00 0.500 Over 6.00 0.470 AXP Variable Portfolio - Strategy Aggressive Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $0.25 0.650% Next 0.25 0.635 Next 0.25 0.620 Next 0.25 0.605 Next 1.00 0.590 Over 2.00 0.575 (b) The Performance Incentive Adjustment (i) Calculating the Performance Incentive Adjustment. The performance incentive adjustment for all Funds except AXP Variable Portfolio - S&P 500 Index Fund hall be calculated monthly by: (A) Determining the difference in performance (the "Performance Difference") between the Fund and an index of similar funds (the "Index"), as described in paragraph (b)(ii). The Fund and Index are set forth below: ------------------------------ ------------------------------------ Fund Index ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Large-Cap Core Funds Index Blue Chip Advantage Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Large-Cap Core Funds Index Capital Resource Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Emerging Markets Funds Index Emerging Markets Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Mid-Cap Growth Funds Index Equity Select Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Large-Cap Growth Funds Index Growth Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper International Funds Index International Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Large-Cap Growth Funds Index New Dimensions Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Small-Cap Core Funds Index Small Cap Advantage Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Large-Cap Core Funds Index Stock Fund ------------------------------ ------------------------------------ AXP Variable Portfolio - Lipper Mid-Cap Growth Funds Index Strategy Aggressive Fund ------------------------------ ------------------------------------ (B) Using the Performance Difference calculated under paragraph (b)(ii) to determine the Adjustment Rate, as illustrated in paragraph (b)(iii). (C) Multiplying the current month's Adjustment Rate by the Fund's average net assets for the comparison period, then dividing the result by the number of months in the comparison period to determine the monthly adjustment. Where the performance of the Fund exceeds the Index, the amount so determined shall be an increase in fees as computed under paragraph (1)(a). Where Fund performance is exceeded by the Index, the amount so determined shall be a decrease in such fees. (ii) Computing the Performance Difference. The Performance Difference, calculated monthly, is determined by measuring the percentage difference between the performance of one Class A share of the Fund and the performance of the Index. The performance of one Class A share of the Fund shall be measured by computing the percentage difference, carried to two decimal places, between the net asset value as of the last business day of the period selected for comparison and the net asset value of such share as of the last business day of the prior period, adjusted for dividends or capital gain distributions treated as reinvested immediately. The performance of the Index will be established by measuring the percentage difference, carried to two decimal places, between the ending and beginning Index for the comparison period, with dividends or capital gain distributions on the securities that comprise the Index being treated as reinvested immediately. (iii) Determining the Adjustment Rate. The Adjustment Rate is computed to five decimal places, is determined in accordance with the following table: --------------------- ---------------------------------------------------- Performance Adjustment Rate Difference --------------------- ---------------------------------------------------- 0.00%-0.50% 0 --------------------- ---------------------------------------------------- 0.50%-1.00% 6 basis points times the performance difference over 0.50% (maximum of 3 basis points if a 1% performance difference) --------------------- ---------------------------------------------------- 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference over 1.00% (maximum 6 basis points if a 2% performance difference) --------------------- ---------------------------------------------------- 2.00%-4.00% 6 basis points, plus 2 basis points times the performance difference over 2.00% (maximum 10 basis points if a 4% performance difference) --------------------- ---------------------------------------------------- 4.00%-6.00% 10 basis points, plus 1 basis point times the performance difference over 4.00% (maximum 12 basis points if a 6% performance difference) --------------------- ---------------------------------------------------- 6.00% or more 12 basis points --------------------- ---------------------------------------------------- For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002[2 basis points] x 100 (0.000076)). Rounded to five decimal places, the Adjustment Rate is 0.00068. (iv) The maximum adjustment rate is 0.00120 per year. (v) For AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Emerging Markets Fund, AXP Variable Portfolio - Equity Select Fund, AXP Variable Portfolio - Growth Fund, AXP Variable Portfolio - Small Cap Advantage Fund and AXP Variable Portfolio - Stock Fund, for a period of six months beginning Dec. 1, 2002, the adjustment will be calculated based on the lesser of the amount due under the adjustment described above or under the adjustment used prior to Dec. 1, 2002. For AXP Variable Portfolio - Capital Resource Fund, AXP Variable Portfolio - International Fund, AXP Variable Portfolio - New Dimensions Fund and AXP Variable Portfolio - Strategy Aggressive Fund, the first adjustment will be made on June 1, 2003 and will cover the six-month period beginning December 1, 2002. The 12 month comparison period will roll over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance incentive adjustment is being computed. (vi) If an Index ceases to be published for a period of more than 90 days, changes in any material respect or otherwise becomes impracticable to use for purposes of the adjustment, no adjustment will be made under (b) until such time as the Board approves a substitute index. (2) The fee shall be paid on a monthly basis and, in the event of the termination of this Agreement, the fee accrued shall be prorated on the basis of the number of days that this Agreement is in effect during the month with respect to which such payment is made. (3) The fee provided for hereunder shall be paid in cash by the Corporation to AEFC within five business days after the last day of each month. Part Three: ALLOCATION OF EXPENSES (1) The Corporation agrees to pay: a) Fees payable to AEFC for its services under the terms of this Agreement. b) All fees, costs, expenses and allowances payable to any person, firm or corporation for services under any agreement entered into by the Corporation on behalf of the Fund covering the offering for sale, sale and distribution of the Fund's shares. c) All taxes of any kind payable by the Corporation on behalf of the Fund other than federal original issuance taxes on shares issued by the Fund. d) All brokerage commissions and charges in the purchase and sale of assets. e) All custodian or trustee fees, costs and expenses. f) Costs and expenses in connection with the auditing and certification of the records and accounts of the Fund by independent certified public accountants. g) Costs of obtaining and printing of dividend checks, reports to shareholders, notices, proxies, proxy statements and tax notices to shareholders, and also the cost of envelopes in which such are to be mailed. h) Postage on all communications, notices and statements to brokers, dealers, and the Fund's shareholders. i) All fees and expenses paid to directors of the Corporation, except that the Corporation will not pay any fees or expenses of any person who is an officer or employee of AEFC or its affiliates. j) Costs of fidelity and surety bonds covering officers, directors and employees of the Corporation. k) All fees and expenses of attorneys who are not officers or employees of AEFC or any of its affiliates. l) All fees paid for the qualification and registration for public sales of the securities of the Fund under the laws of the United States and of the several states of the United States in which the securities of the Fund shall be offered for sale. m) Cost of printing prospectuses, statements of additional information and application forms for existing shareholders, and any supplements thereto. n) Any losses due to theft and defalcation of the assets of the Fund, or due to judgments or adjustments not covered by surety or fidelity bonds, and not covered by agreement or obligation. o) Expenses incurred in connection with lending portfolio securities of the Fund. p) Expenses properly payable by the Corporation on behalf of the Fund, approved by the Board. (2) AEFC agrees to pay all expenses associated with the services it provides under the terms of this Agreement. Part Four: MISCELLANEOUS (1) AEFC shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Corporation. (2) A "full business day" shall be as defined in the By-laws of the Corporation. (3) The Corporation recognizes that AEFC now renders and may continue to render investment advice and other services to other investment companies and persons which may or may not have investment policies and investments similar to those of the Funds and that AEFC manages its own investments and/or those of its subsidiaries. AEFC shall be free to render such investment advice and other services and the Corporation hereby consents thereto. (4) Neither this Agreement nor any transaction had pursuant hereto shall be invalidated or in any way affected by the fact that directors, officers, agents and/or shareholders of the Corporation are or may be interested in AEFC or any successor or assignee thereof, as directors, officers, stockholders or otherwise; that directors, officers, stockholders or agents of AEFC are or may be interested in the Funds or the Corporation as directors, officers, shareholders, or otherwise; or that AEFC or any successor or assignee, is or may be interested in the Funds as shareholder or otherwise, provided, however, that neither AEFC, nor any officer, director or employee thereof or of the Corporation, shall sell to or buy from the Funds any property or security other than shares issued by the Funds, except in accordance with applicable regulations or orders of the SEC. (5) Any notice under this Agreement shall be given in writing, addressed, and delivered, or mailed postpaid, to the party to this Agreement entitled to receive such, at such party's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) AEFC agrees that no officer, director or employee of AEFC will deal for or on behalf of the Funds with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit: (a) Officers, directors or employees of AEFC from having a financial interest in the Funds or in AEFC. (b) The purchase of securities for the Funds, or the sale of securities owned by the Funds, through a security broker or dealer, one or more of whose partners, officers, directors or employees is an officer, director or employee of AEFC, provided such transactions are handled in the capacity of broker only and provided commissions charged do not exceed customary brokerage charges for such services. (c) Transactions with the Funds by a broker-dealer affiliate of AEFC as may be allowed by rule or order of the SEC and if made pursuant to procedures adopted by the Board. (7) AEFC agrees that, except as herein otherwise expressly provided or as may be permitted consistent with the use of a broker-dealer affiliate of AEFC under applicable provisions of the federal securities laws, neither it nor any of its officers, directors or employees shall at any time during the period of this Agreement, make, accept or receive, directly or indirectly, any fees, profits or emoluments of any character in connection with the purchase or sale of securities (except shares issued by the Funds) or other assets by or for the Funds. (8) This Agreement shall be governed by the laws of the State of Minnesota. Part Five: RENEWAL AND TERMINATION (1) This Agreement shall continue in effect until November 30, 2004 or until a new agreement is approved by a vote of the majority of the outstanding shares of the Funds and by vote of the Funds' Board, including the vote required by (b) of this paragraph, and if no new agreement is so approved, this Agreement shall continue from year to year thereafter unless and until terminated by either party as hereinafter provided, except that such continuance shall be specifically approved at least annually (a) by the Board or by a vote of the majority of the outstanding shares of the Funds and (b) by the vote of a majority of the directors who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. As used in this paragraph, the term "interested person" shall have the same meaning as set forth in the Investment Company Act of 1940, as amended (the "1940 Act"). (2) This Agreement may be terminated by either the Corporation on behalf of a Fund or AEFC at any time by giving the other party 60 days' written notice of such intention to terminate, provided that any termination shall be made without the payment of any penalty, and provided further that termination may be effected either by the Board or by a vote of the majority of the outstanding voting shares of the Fund. The vote of the majority of the outstanding voting shares of the Fund for the purpose of this Part Five shall be the vote at a shareholders' regular meeting, or a special meeting duly called for the purpose, of 67% or more of the Fund's shares present at such meeting if the holders of more than 50% of the outstanding voting shares are present or represented by proxy, or more than 50% of the outstanding voting shares of the Fund, whichever is less. (3) This Agreement shall terminate in the event of its assignment, the term "assignment" for this purpose having the same meaning as set forth in the 1940 Act. IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement as of the day and year first above written. AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. AXP Variable Portfolio - Blue Chip Advantage Fund AXP Variable Portfolio - Capital Resource Fund AXP Variable Portfolio - Emerging Markets Fund AXP Variable Portfolio - Equity Select Fund AXP Variable Portfolio - Growth Fund AXP Variable Portfolio - International Fund AXP Variable Portfolio - New Dimensions Fund AXP Variable Portfolio - S&P 500 Index Fund AXP Variable Portfolio - Small Cap Advantage Fund AXP Variable Portfolio - Stock Fund AXP Variable Portfolio - Strategy Aggressive Fund By /s/ Leslie L. Ogg ---------------------- Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By /s/ Paula R. Meyer ----------------------- Paula R. Meyer Senior Vice President and General Manager- Mutual Funds EX-99.D14 IMS AGMT 8 d14-imsagmt.txt INVESTMENT MANAGEMENT SERVICES AGREEMENT INVESTMENT MANAGEMENT SERVICES AGREEMENT This Agreement dated as of September 10, 2003 is by and between AXP Variable Portfolio - Investment Series, Inc., (the "Corporation"), a Minnesota corporation, on behalf of its underlying series AXP Variable Portfolio - Large Cap Value Fund (the "Fund") and American Express Financial Corporation ("AEFC"), a Delaware corporation. Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES (1) The Corporation hereby retains AEFC, and AEFC hereby agrees, for the period of this Agreement and under the terms and conditions hereinafter set forth, to furnish the Corporation continuously with suggested investment planning; to determine, consistent with the Fund's investment objectives and policies, which securities in AEFC's discretion shall be purchased, held or sold, and to execute or cause the execution of purchase or sell orders; to prepare and make available to the Fund all necessary research and statistical data in connection therewith; to furnish all other services of whatever nature required in connection with the management of the Fund including transfer agent and dividend-disbursing agent services; to furnish or pay for all supplies, printed material, office equipment, furniture and office space as the Fund may require; and to pay or reimburse such expenses of the Fund as provided for in Part Three under this Agreement; subject always to the direction and control of the Board of Directors (the "Board"), the Executive Committee and the authorized officers of the Corporation. AEFC agrees to maintain an adequate organization of competent persons to provide the services and to perform the functions herein mentioned. AEFC agrees to meet with any persons at such times as the Board deems appropriate for the purpose of reviewing AEFC's performance under this Agreement. (2) AEFC agrees that the investment planning and investment decisions will be in accordance with general investment policies of the Fund as disclosed to AEFC from time to time by the Fund and as set forth in its prospectus and registration statement filed with the United States Securities and Exchange Commission (the "SEC"). (3) AEFC agrees that it will maintain all required records, memoranda, instructions or authorizations relating to the acquisition or disposition of securities for the Fund. (4) The Corporation agrees that it will furnish to AEFC any information that the latter may reasonably request with respect to the services performed or to be performed by AEFC under this Agreement. (5) AEFC is authorized to select the brokers or dealers that will execute the purchases and sales of portfolio securities for the Fund and is directed to use its best efforts to obtain the best available price and most favorable execution, except as prescribed herein. Subject to prior authorization by the Board of appropriate policies and procedures, and subject to termination at any time by the Board, AEFC may also be authorized to effect individual securities transactions at commission rates in excess of the minimum commission rates available, to the extent authorized by law, if AEFC determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or AEFC's overall responsibilities with respect to the Fund and other funds for which it acts as investment adviser. (6) It is understood and agreed that in furnishing the Fund with the services as herein provided, neither AEFC, nor any officer, director or agent thereof shall be held liable to the Fund, shareholders, the Corporation or its creditors for errors of judgment or for anything except willful misfeasance, bad faith, or gross negligence in the performance of its duties, or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that AEFC may rely upon information furnished to it reasonably believed to be accurate and reliable. Part Two: COMPENSATION TO INVESTMENT MANAGER (1) The Corporation agrees to pay to AEFC on behalf of the Fund, and AEFC covenants and agrees to accept from the Corporation in full payment for the services furnished, a fee composed of an asset charge and a performance incentive adjustment. (a) The Asset Charge (i) The asset charge for each calendar day of each year shall be equal to the total of 1/365th (1/366th in each leap year) of the amount computed in accordance with paragraph (ii) below. The computation shall be made for each calendar day on the basis of net assets as of the close of the preceding business day. In the case of the suspension of the computation of net asset value, the fee for each calendar day during such suspension shall be computed as of the close of business on the last full business day on which the net assets were computed. Net assets as of the close of a full business day shall include all transactions in shares of the Fund recorded on the books of the Fund for that day. (ii) The asset charge shall be based on the net assets of the Fund as set forth in the following table. AXP Variable Portfolio - Large Cap Value Fund Asset Charge Assets Annual Rate At (Billions) Each Asset Level First $1.0 0.630% Next 1.0 0.615 Next 1.0 0.600 Next 3.0 0.585 Over 6.0 0.570 (b) The Performance Incentive Adjustment (i) Calculating the Performance Incentive Adjustment. The performance incentive adjustment shall be calculated monthly by: (A) Determining the difference in performance (the "Performance Difference") between the Fund and an index of similar funds (the "Index"), as described in paragraph (b)(ii). --------------------------- ------------------------------------ Fund Index --------------------------- ------------------------------------ AXP Variable Portfolio - Lipper Large Cap Value Funds Index Large Cap Value Fund --------------------------- ------------------------------------ (B) Using the Performance Difference calculated under paragraph (b)(ii) to determine the Adjustment Rate, as illustrated in paragraph (b)(iii). (C) Multiplying the current month's Adjustment Rate by the Fund's average net assets for the comparison period, then dividing the result by the number of months in the comparison period to determine the monthly adjustment. Where the performance of the Fund exceeds the Index, the amount so determined shall be an increase in fees as computed under paragraph (1)(a). Where the Fund's performance is exceeded by the Index, the amount so determined shall be a decrease in such fees. (iii) Determining the Adjustment Rate. The Adjustment Rate, computed to five decimal places, is determined in accordance with the following table: --------------- ---------------------------------------------------------- Performance Adjustment Rate Difference --------------- ---------------------------------------------------------- 0.00%-0.50% 0 --------------- ---------------------------------------------------------- 0.50%-1.00% 6 basis points times the performance difference over 0.50% (maximum of 3 basis points if a 1% performance difference) --------------- ---------------------------------------------------------- 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference over 1.00% (maximum 6 basis points if a 2% performance difference) --------------- ---------------------------------------------------------- 2.00%-4.00% 6 basis points, plus 2 basis points times the performance difference over 2.00% (maximum 10 basis points if a 4% performance difference) --------------- ---------------------------------------------------------- 4.00%-6.00% 10 basis points, plus 1 basis point times the performance difference over 4.00% (maximum 12 basis points if a 6% performance difference) --------------- ---------------------------------------------------------- 6.00% or more 12 basis points --------------- ---------------------------------------------------------- For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002[2 basis points] x 100 (0.000076)). Rounded to five decimal places, the Adjustment Rate is 0.00068. (iv) The maximum adjustment rate is 0.00120 per year. (v) The first adjustment will be made on May 2004 and will cover a six-month period beginning October 2003. The comparison period will increase by one month until it reaches 12 months. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. (2) The fee shall be paid on a monthly basis and, in the event of the termination of this Agreement, the fee accrued shall be prorated on the basis of the number of days that this Agreement is in effect during the month with respect to which such payment is made. (3) The fee provided for hereunder shall be paid in cash by the Corporation to AEFC within five business days after the last day of each month. Part Three: ALLOCATION OF EXPENSES (1) The Corporation agrees to pay: a) Fees payable to AEFC for its services under the terms of this Agreement. b) All fees, costs, expenses and allowances payable to any person, firm or corporation for services under any agreement entered into by the Corporation on behalf of the Fund covering the offering for sale, sale and distribution of the Fund's shares. c) All taxes of any kind payable by the Corporation on behalf of the Fund other than federal original issuance taxes on shares issued by the Fund. d) All brokerage commissions and charges in the purchase and sale of assets. e) All custodian or trustee fees, costs and expenses. f) Costs and expenses in connection with the auditing and certification of the records and accounts of the Fund by independent certified public accountants. g) Costs of obtaining and printing of dividend checks, reports to shareholders, notices, proxies, proxy statements and tax notices to shareholders, and also the cost of envelopes in which such are to be mailed. h) Postage on all communications, notices and statements to brokers, dealers, and the Fund's shareholders. i) All fees and expenses paid to directors of the Corporation, except that the Corporation will not pay any fees or expenses of any person who is an officer or employee of AEFC or its affiliates. j) Costs of fidelity and surety bonds covering officers, directors and employees of the Corporation. k) All fees and expenses of attorneys who are not officers or employees of AEFC or any of its affiliates. l) All fees paid for the qualification and registration for public sales of the securities of the Fund under the laws of the United States and of the several states of the United States in which the securities of aFund shall be offered for sale. m) Cost of printing prospectuses, statements of additional information and application forms for existing shareholders, and any supplements thereto. n) Any losses due to theft and defalcation of the assets of the Fund, or due to judgments or adjustments not covered by surety or fidelity bonds, and not covered by agreement or obligation. o) Expenses incurred in connection with lending portfolio securities of the Fund. p) Expenses properly payable by the Corporation on behalf of the Fund, approved by the Board. (2) AEFC agrees to pay all expenses associated with the services it provides under the terms of this Agreement. Part Four: MISCELLANEOUS (1) AEFC shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Corporation. (2) A "full business day" shall be as defined in the By-laws of the Corporation. (3) The Corporation recognizes that AEFC now renders and may continue to render investment advice and other services to other investment companies and persons which may or may not have investment policies and investments similar to those of the Fund and that AEFC manages its own investments and/or those of its subsidiaries. AEFC shall be free to render such investment advice and other services and the Corporation hereby consents thereto. (4) Neither this Agreement nor any transaction had pursuant hereto shall be invalidated or in any way affected by the fact that directors, officers, agents and/or shareholders of the Corporation are or may be interested in AEFC or any successor or assignee thereof, as directors, officers, stockholders or otherwise; that directors, officers, stockholders or agents of AEFC are or may be interested in the Fund or the Corporation as directors, officers, shareholders, or otherwise; or that AEFC or any successor or assignee, is or may be interested in the Fund as shareholder or otherwise, provided, however, that neither AEFC, nor any officer, director or employee thereof or of the Corporation, shall sell to or buy from the Fund any property or security other than shares issued by the Fund, except in accordance with applicable regulations or orders of the SEC. (5) Any notice under this Agreement shall be given in writing, addressed, and delivered, or mailed postpaid, to the party to this Agreement entitled to receive such, at such party's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) AEFC agrees that no officer, director or employee of AEFC will deal for or on behalf of the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit: (a) Officers, directors or employees of AEFC from having a financial interest in the Fund or in AEFC. (b) The purchase of securities for the Fund, or the sale of securities owned by the Fund, through a security broker or dealer, one or more of whose partners, officers, directors or employees is an officer, director or employee of AEFC, provided such transactions are handled in the capacity of broker only and provided commissions charged do not exceed customary brokerage charges for such services. (c) Transactions with the Fund by a broker-dealer affiliate of AEFC as may be allowed by rule or order of the SEC and if made pursuant to procedures adopted by the Board. (7) AEFC agrees that, except as herein otherwise expressly provided or as may be permitted consistent with the use of a broker-dealer affiliate of AEFC under applicable provisions of the federal securities laws, neither it nor any of its officers, directors or employees shall at any time during the period of this Agreement, make, accept or receive, directly or indirectly, any fees, profits or emoluments of any character in connection with the purchase or sale of securities (except shares issued by the Fund) or other assets by or for the Fund. (8) This Agreement shall be governed by the laws of the State of Minnesota. Part Five: RENEWAL AND TERMINATION (1) This Agreement shall continue in effect until September 10, 2005 or until a new agreement is approved by a vote of the majority of the outstanding shares of the Fund and by vote of the Fund's Board, including the vote required by (b) of this paragraph, and if no new agreement is so approved, this Agreement shall continue from year to year thereafter unless and until terminated by either party as hereinafter provided, except that such continuance shall be specifically approved at least annually (a) by the Board or by a vote of the majority of the outstanding shares of the Fund and (b) by the vote of a majority of the directors who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. As used in this paragraph, the term "interested person" shall have the same meaning as set forth in the Investment Company Act of 1940, as amended (the "1940 Act"). (2) This Agreement may be terminated by either the Corporation on behalf of the Fund or AEFC at any time by giving the other party 60 days' written notice of such intention to terminate, provided that any termination shall be made without the payment of any penalty, and provided further that termination may be effected either by the Board or by a vote of the majority of the outstanding voting shares of the Fund. The vote of the majority of the outstanding voting shares of the Fund for the purpose of this Part Five shall be the vote at a shareholders' regular meeting, or a special meeting duly called for the purpose, of 67% or more of the Fund's shares present at such meeting if the holders of more than 50% of the outstanding voting shares are present or represented by proxy, or more than 50% of the outstanding voting shares of the Fund, whichever is less. (3) This Agreement shall terminate in the event of its assignment, the term "assignment" for this purpose having the same meaning as set forth in the 1940 Act. IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement as of the day and year first above written. AXP(R)VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. AXP Variable Portfolio - Large Cap Value Fund By /s/ Leslie L. Ogg ---------------------- Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By /s/ Paula R. Meyer ----------------------- Paula R. Meyer Senior Vice President and General Manager- Mutual Funds EX-99.D36 ADMIN AGMT 9 d36-adminagmt.txt ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT AGREEMENT made on the 10th day of September, 2003, by and between AXP(R) Variable Portfolio - Investment Series, Inc., a Minnesota corporation (the "Corporation"), on behalf of its underlying series fund, AXP(R) Variable Portfolio - Large Cap Value Fund (the "Fund"), and American Express Financial Corporation, ("AEFC"), a Delaware corporation. Part One: SERVICES (1) The Corporation hereby retains AEFC, and AEFC hereby agrees, for the period of this Agreement and under the terms and conditions hereinafter set forth, to furnish the Corporation continuously with all administrative, accounting, clerical, statistical, correspondence, corporate and all other services of whatever nature required in connection with the administration of the Fund as provided under this Agreement; and to pay such expenses as may be provided for in Part Three hereof; subject always to the direction and control of the Board of Directors, the Executive Committee and the authorized officers of the Fund. AEFC agrees to maintain an adequate organization of competent persons to provide the services and to perform the functions herein mentioned. AEFC agrees to meet with any persons at such times as the Board of Directors deems appropriate for the purpose of reviewing AEFC's performance under this Agreement. (2) The Corporation agrees that it will furnish to AEFC any information that the latter may reasonably request with respect to the services performed or to be performed by AEFC under this Agreement. (3) It is understood and agreed that in furnishing the Fund with the services as herein provided, neither AEFC, nor any officer, director or agent thereof shall be held liable to the Corporation and/or the Fund or its creditors or shareholders for errors of judgment or for anything except willful misfeasance, bad faith, or gross negligence in the performance of its duties, or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that AEFC may rely upon information furnished to it reasonably believed to be accurate and reliable. Part Two: COMPENSATION FOR SERVICES (1) The Corporation agrees to pay to AEFC, on behalf of the Fund, and AEFC covenants and agrees to accept from the Corporation in full payment for the services furnished, based on the net assets of the Fund as set forth in the following table: AXP(R) Variable Portfolio - Large Cap Value Fund ----------------------------- -------------------------- Assets Annual Rate At (Billions) Each Asset Level ----------------------------- -------------------------- First $1.0 0.050% ----------------------------- -------------------------- Next 1.0 0.045 ----------------------------- -------------------------- Next 1.0 0.040 ----------------------------- -------------------------- Next 3.0 0.035 ----------------------------- -------------------------- Over 6.0 0.030 ----------------------------- -------------------------- The administrative fee for each calendar day of each year shall be equal to 1/365th (1/366th in each leap year) of the total amount computed. The computation shall be made for each day on the basis of net assets as of the close of business. In the case of the suspension of the computation of net asset value, the administrative fee for each day during such suspension shall be computed as of the close of business on the last full business day on which the net assets were computed. As used herein "net assets" as of the close of a full business day shall include all transactions in shares of the Fund recorded on the books of the Fund for that day. (2) The administrative fee shall be paid on a monthly basis and, in the event of the termination of this Agreement, the administrative fee accrued shall be prorated on the basis of the number of days that this Agreement is in effect during the month with respect to which such payment is made. (3) The administrative fee provided for hereunder shall be paid in cash by the Corporation to AEFC within five (5) business days after the last day of each month. Part Three: ALLOCATION OF EXPENSES (1) The Corporation, on behalf of the Fund, agrees to pay: (a) Administrative fees payable to AEFC for its services under the terms of this Agreement. (b) Taxes. (c) Fees and charges of its independent certified public accountants for services the Corporation requests. (d) Fees and expenses of attorneys (i) it employs in matters not involving the assertion of a claim by a third party against the Corporation and/or the Fund, its directors and officers, (ii) it employs in conjunction with a claim asserted by the Board of Directors against AEFC, except that AEFC shall reimburse the Corporation and/or the Fund for such fees and expenses if it is ultimately determined by a court of competent jurisdiction, or AEFC agrees, that it is liable in whole or in part to the Corporation and/or the Fund, and (iii) it employs to assert a claim against a third party. (e) Fees paid for the qualification and registration for public sale of the securities of the Fundunder the laws of the United States and of the several states in which such securities shall be offered for sale. (f) Office expenses which shall include a charge for occupancy, insurance on the premises, furniture and equipment, telephone, telegraph, electronic information services, books, periodicals, published services, and office supplies used by the Fund, equal to the cost of such incurred by AEFC. (g) Fees of consultants employed by the Corporation. (h) Directors, officers and employees expenses which shall include fees, salaries, memberships, dues, travel, seminars, pension, profit sharing, and all other benefits paid to or provided for directors, officers and employees, directors and officers liability insurance, errors and omissions liability insurance, worker's compensation insurance and other expenses applicable to the directors, officers and employees, except the Corporation will not pay any fees or expenses of any person who is an officer or employee of AEFC or its affiliates. (i) Filing fees and charges incurred by the Corporation in connection with filing any amendment to its articles of incorporation, or incurred in filing any other document with the State of Minnesota or its political subdivisions. (j) Organizational expenses of the Fund. (k) One-half of the Investment Company Institute membership dues charged jointly to the AMERICAN EXPRESS(R) FUNDS and AEFC. (l) Expenses properly payable by the Corporation, approved by the Board of Directors. (2) AEFC agrees to pay all expenses associated with the services it provides under the terms of this Agreement. Part Four: MISCELLANEOUS (1) AEFC shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Corporation and/or the Fund. (2) A "full business day" shall be as defined in the By-laws of the Corporation. (3) The Corporation recognizes that AEFC now renders and may continue to render investment advice and other services to other investment companies and persons which may or may not have investment policies and investments similar to those of the Fund and that AEFC manages its own investments and/or those of its subsidiaries. AEFC shall be free to render such investment advice and other services and the Corporation hereby consents thereto. (4) Neither this Agreement nor any transaction had pursuant hereto shall be invalidated or in anyway affected by the fact that directors, officers, agents and/or shareholders of the Corporation and/or the Fund are or may be interested in AEFC or any successor or assignee thereof, as directors, officers, stockholders or otherwise; that directors, officers, stockholders or agents of AEFC are or may be interested in the Corporation and/or the Fund as directors, officers, shareholders, or otherwise; or that AEFC or any successor or assignee, is or may be interested in the Corporation and/or the Fund as shareholder or otherwise, provided, however, that neither AEFC, nor any officer, director or employee thereof or of the Corporation and/or the Fund, shall sell to or buy from the Fund any property or security other than shares issued by the Fund, except in accordance with applicable regulations or orders of the United States Securities and Exchange Commission. (5) Any notice under this Agreement shall be given in writing, addressed, and delivered, or mailed postpaid, to the party to this Agreement entitled to receive such, at such party's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) AEFC agrees that no officer, director or employee of AEFC will deal for or on behalf of the Corporation and/or the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit officers, directors or employees of AEFC from having a financial interest in the Fund or in AEFC. (7) The Corporation agrees that AEFC may subcontract for certain of the services described under this Agreement with the understanding that there shall be no diminution in the quality or level of the services and that AEFC remains fully responsible for the services. (8) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party. This Agreement shall be governed by the laws of the State of Minnesota. Part Five: RENEWAL AND TERMINATION (1) This Agreement shall become effective on the date first set forth above and shall continue in effect from year to year thereafter as the parties may mutually agree; provided that either party may terminate this Agreement by giving the other party notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. (2) This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement as of the day and year first above written. AXP(R) VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. AXP Variable Portfolio - Large Cap Value Fund By: /s/ Leslie L. Ogg ------------------- Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By: /s/ Paula R. Meyer -------------------- Paula R. Meyer Senior Vice President and General Manager- Mutual Funds EX-99.G12 CUST AGMT 10 g12-custagmt.txt CUSTODIAN AGREEMENT CUSTODIAN AGREEMENT THIS CUSTODIAN AGREEMENT dated as of September 10, 2003, is between AXP(R) Variable Portfolio - Investment Series, Inc., a Minnesota corporation, (the "Corporation"), on behalf of its underlying series: AXP(R) Variable Portfolio - Large Cap Value Fund (the "Fund") and American Express Trust Company, a corporation organized under the laws of the State of Minnesota with its principal place of business at Minneapolis, Minnesota (the "Custodian"). WHEREAS, the Corporation desires that its securities and cash be hereafter held and administered by Custodian pursuant to the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein made, the Corporation and the Custodian agree as follows: Section 1. Definitions The word "securities" as used herein shall be construed to include, without being limited to, shares, stocks, treasury stocks, including any stocks of the Fund, notes, bonds, debentures, evidences of indebtedness, options to buy or sell stocks or stock indexes, certificates of interest or participation in any profit-sharing agreements, collateral trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, fractional or undivided interests in oil, gas or other mineral rights, or any certificates of interest or participation in, temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing, acceptances and other obligations and any evidence of any right or interest in or to any cash, property or assets and any interest or instrument commonly known as a security. In addition, for the purpose of this Custodian Agreement, the word "securities" also shall include other instruments in which the Fund may invest including currency forward contracts and commodities such as interest rate or index futures contracts, margin deposits on such contracts or options on such contracts. The words "custodian order" shall mean a request for direction, including a computer printout directed to the Custodian and signed in the name of the Corporation on behalf of the Fund by any two individuals designated in the current certified list referred to in Section 2. The word "facsimile" shall mean an exact copy or likeness, which is electronically transmitted for instant reproduction. Section 2. Names, Titles and Signatures of Authorized Persons The Corporation will certify to the Custodian the names and signatures of its present officers and other designated persons authorized on behalf of the Corporation to direct the Custodian by custodian order as herein before defined. The Corporation agrees that whenever any change occurs in this list it will file with the Custodian a copy of a resolution certified by the Secretary or an Assistant Secretary of the Corporation as having been duly adopted by the Corporation's board of directors (the "Board") or the Executive Committee of the Board designating those persons currently authorized on behalf of the Corporation to direct the Custodian by custodian order and upon such filing (to be accompanied by the filing of specimen signatures of the designated persons) the persons so designated in such resolution shall constitute the current certified list. The Custodian is authorized to rely and act upon the names and signatures of the individuals as they appear in the most recent certified list from the Corporation which has been delivered to the Custodian as herein above provided. Section 3. Use of Subcustodians The Custodian may make arrangements, where appropriate, with other banks having not less than two million dollars aggregate capital, surplus and undivided profits for the custody of securities. Any such bank selected by the Custodian to act as subcustodian shall be deemed to be the agent of the Custodian. The Custodian also may enter into arrangements for the custody of securities entrusted to its care through foreign branches of U.S. banks; through foreign banks, banking institutions or trust companies; through foreign subsidiaries of U.S. banks or bank holding companies; or through foreign securities depositories or clearing agencies (hereinafter also called, collectively, the "Foreign Subcustodian") or indirectly through an agent, established under the first paragraph of this section, if and to the extent permitted by Section 17(f) of the Investment Company Act of 1940 (the "1940 Act") and the rules promulgated by the Securities and Exchange Commission (the "SEC") thereunder, or any "no-action" letter received from the staff of the SEC. To the extent the existing provisions of the Custodian Agreement are consistent with the requirements of such Section, rules, order or no-action letter, they shall apply to all such foreign custodianships. To the extent such provisions are inconsistent with or additional requirements are established by such section, rules, order or no-action letter, the requirements of such section, rules, order or no-action letter will prevail and the parties will adhere to such requirements; provided, however, in the absence of notification from the Corporation of any changes or additions to such requirements, the Custodian shall have no duty or responsibility to inquire as to any such changes or additions. Section 4. Receipt and Disbursement of Money (1) The Custodian shall open and maintain a separate account or accounts in the name of the Fund or cause its agent to open and maintain such account or accounts subject only to checks, drafts or directives by the Custodian pursuant to the terms of this Agreement. The Custodian or its agent shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund. The Custodian or its agent shall make payments of cash to or for the account of the Fund from such cash only: (a) for the purchase of securities for the portfolio of the Fund upon the receipt of such securities by the Custodian or its agent unless otherwise instructed on behalf of the Fund; (b) for the purchase or redemption of shares of capital stock of the Fund; (c) for the payment of interest, dividends, taxes, management fees, or operating expenses (including, without limitation thereto, fees for legal, accounting and auditing services); (d) for payment of distribution fees, commissions, or redemption fees, if any; (e) for payments in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Fund held by, or to be delivered to, the Custodian; (f) for payments in connection with the return of securities loaned by the Fund upon receipt of such securities or the reduction of collateral upon receipt of proper notice; (g) for payments for other proper corporate purposes; or (h) upon the termination of this Agreement. Before making any such payment for the purposes permitted under these items (a), (b), (c), (d), (e), (f) or (g) of paragraph (1) of this section, the Custodian shall receive and may rely upon a custodian order directing such payment and stating that the payment is for such a purpose permitted under these items (a), (b), (c), (d), (e), (f) or (g) or, where appropriate, a trade affirmation report, and that in respect to item (g), a copy of a resolution of the Board or of the Executive Committee signed by an officer of the Corporation and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose to be a proper corporate purpose, and naming the person or persons to whom such payment is made. Notwithstanding the above, for the purposes permitted under items (a) or (f) of paragraph (1) of this section, the Custodian may rely upon a facsimile order. (2) The Custodian is hereby appointed the attorney-in-fact of the Corporation to endorse and collect all checks, drafts or other orders for the payment of money received by the Custodian for the account of the Fund and drawn on or to the order of the Fund and to deposit same to the account of the Fund pursuant to this Agreement. Section 5. Receipt of Securities Except as permitted by the second paragraph of this section, the Custodian or its agent shall hold in a separate account or accounts, and physically segregated at all times from those of any other persons, firms or corporations, pursuant to the provisions hereof, all securities received by it for the account of the Fund. The Custodian shall record and maintain a record of all certificate numbers. Securities so received shall be held in the name of the Fund, in the name of an exclusive nominee duly appointed by the Custodian or in bearer form, as appropriate. Subject to such rules, regulations or guidelines as the SEC may adopt, the Custodian may deposit all or any part of the securities owned by the Fund in a "securities depository" which includes any system for the central handling of securities established by a national securities exchange or a national securities association registered with the SEC under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities. All securities are to be held or disposed of by the Custodian for, and subject at all times to the instructions of, the Corporation pursuant to the terms of this Agreement. The Custodian shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities, except pursuant to the directive of the Fund and only for the account of the Fund as set forth in Section 6 of this Agreement. Section 6. Transfer, Exchange, and Delivery of Securities The Custodian shall have sole power to release or deliver any securities of the Fund held by it pursuant to this Agreement. The Custodian agrees to transfer, exchange or deliver securities held by it or its agent hereunder only: (a) for sales of such securities for the account of the Fund, upon receipt of payment therefore; (b) when such securities are called, redeemed, retired or otherwise become payable; (c) for examination upon the sale of any such securities in accordance with "street delivery" custom which would include delivery against interim receipts or other proper delivery receipts; (d) in exchange for or upon conversion into other securities alone or other securities and cash whether pursuant to any plan of; (e) merger, consolidation, reorganization, recapitalization or readjustment, or otherwise; (f) for the purpose of exchanging interim receipts or temporary certificates for permanent certificates; (g) upon conversion of such securities pursuant to their terms into other securities; (h) upon exercise of subscription, purchase or other similar rights represented by such securities; for loans of such securities by the Fund upon receipt of collateral; or (i) for other proper corporate purposes. As to any deliveries made by the Custodian pursuant to items (a), (b), (c), (d), (e), (f), (g) and (h), securities or cash received in exchange therefore shall be delivered to the Custodian, its agent, or to a securities depository. Before making any such transfer, exchange or delivery, the Custodian shall receive a custodian order or a facsimile from the Corporation requesting such transfer, exchange or delivery and stating that it is for a purpose permitted under Section 6, or, where appropriate, a trade affirmation report, (whenever a facsimile is utilized, the Fund will also deliver an original signed custodian order) and, in respect to item (i), a copy of a resolution of the Board or of the Executive Committee of the Board of Directors signed by an officer of the Corporation and certified by its Secretary or an Assistant Secretary, specifying the securities, setting forth the purpose for which such payment, transfer, exchange or delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom such transfer, exchange or delivery of such securities shall be made. Section 7. Custodian's Acts Without Instructions Unless and until the Custodian receives a contrary custodian order from the Fund, the Custodian shall or shall cause its agent to: (a) present for payment all coupons and other income items held by the Custodian or its agent for the account of the Fund which call for payment upon presentation and hold all cash received by it upon such payment for the account of the Fund; (b) present for payment all securities held by it or its agent which mature or when called, redeemed, retired or otherwise become payable; (c) ascertain all stock dividends, rights and similar securities to be issued with respect to any securities held by the Custodian or its agent hereunder, and to collect and hold for the account of the Fund all such securities; and (d) ascertain all interest and cash dividends to be paid to security holders with respect to any securities held by the Custodian or its agent, and to collect and hold such interest and cash dividends for the account of the Fund. Section 8. Voting and Other Action Neither the Custodian nor any nominee of the Custodian shall vote any of the securities held hereunder by or for the account of the Fund. The Custodian shall promptly deliver to the Corporation all notices, proxies and proxy soliciting materials with relation to such securities such proxies to be executed by the registered holder of such securities (if registered otherwise than in the name of the Corporation) but without indicating the manner in which such proxies are to be voted. Custodian shall transmit promptly to the Corporation all written information (including, without limitation, pendency of calls and maturities of securities and expirations of rights in connection therewith) received by the Custodian from issuers of the securities being held for the Fund. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Corporation all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. Section 9. Transfer Taxes The Corporation shall, on behalf of the Fund, pay or reimburse the Custodian for any transfer taxes payable upon transfers of securities made hereunder, including transfers resulting from the termination of this Agreement. The Custodian shall execute such certificates in connection with securities delivered to it under this Agreement as may be required, under any applicable law or regulation, to exempt from taxation any transfers and/or deliveries of any such securities which may be entitled to such exemption. Section 10. Custodian's Reports The Custodian shall, on behalf of the Fund, furnish the Corporation as of the close of business each day a statement showing all transactions and entries for the account of the Fund. The books and records of the Custodian pertaining to its actions as Custodian under this Agreement and securities held hereunder by the Custodian shall be open to inspection and audit by officers of the Corporation, internal auditors employed by the Corporation's investment adviser, and independent auditors employed by the Corporation. The Custodian shall furnish the Corporation in such form as may reasonably be requested by the Corporation a report, including a list of the securities held by it in custody for the account of the Fund, and identification of any subcustodian and identification of such securities held by such subcustodian, as of the close of business of the last business day of each month, which shall be certified by a duly authorized officer of the Custodian. It is further understood that additional reports may from time to time be requested by the Corporation. Should any report ever be filed with any governmental authority pertaining to lost or stolen securities, the Custodian will concurrently provide the Corporation with a copy of that report. The Custodian also shall furnish such reports on its systems of internal accounting control as the Corporation may reasonably request from time to time. Section 11. Concerning Custodian For its services hereunder the Custodian shall be paid such compensation at such times as may from time to time be agreed on in writing by the parties hereto in a Custodian Fee Agreement. The Custodian shall not be liable for any action taken in good faith upon any custodian order or facsimile herein described, trade affirmation report, or certified copy of any resolution of the Board or of the Executive Committee of the Board, and may rely on the genuineness of any such document which it may, in good faith, believe to have been validly prepared or executed. The Corporation, on behalf of the Fund, agrees to indemnify and hold harmless the Custodian and its nominee from all taxes, charges, expenses, assessments, claims and liabilities (including counsel fees) incurred or assessed against it or its nominee in connection with the performance of this Agreement, except such as may arise from the Custodian's or its nominee's own negligent action, negligent failure to act or willful misconduct. The Custodian is authorized to charge any account of the Corporation for such items. In the event of any advance of cash for any purpose made by the Custodian resulting from orders or instructions of the Corporation, or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefore. The Custodian shall maintain a standard of care equivalent to that which would be required of a bailee for hire and shall not be liable for any loss or damage to the Corporation resulting from participation in a securities depository unless such loss or damage arises by reason of any negligence, misfeasance, or willful misconduct of officers or employees of the Custodian, or from its failure to enforce effectively such rights as it may have against any securities depository or from use of an agent, unless such loss or damage arises by reason of any negligence, misfeasance, or willful misconduct of officers or employees of the Custodian, or from its failure to enforce effectively such rights as it may have against any agent. Section 12. Termination and Amendment of Agreement The Corporation and the Custodian mutually may agree from time to time in writing to amend, to add to, or to delete from, any provision of this Agreement. The Custodian may terminate this Agreement by giving the Corporation ninety days' written notice of such termination by registered mail addressed to the Corporation at its principal place of business. The Corporation may terminate this Agreement at any time by written notice thereof delivered, together with a copy of the resolution of the Board authorizing such termination and certified by the Secretary of the Corporation, by registered mail to the Custodian. Upon such termination of this Agreement, assets of the Fund held by the Custodian shall be delivered by the Custodian to a successor custodian, if one has been appointed by the Corporation, upon receipt by the Custodian of a copy of the resolution of the Board certified by the Secretary, showing appointment of the successor custodian, and provided that such successor custodian is a bank or trust company, organized under the laws of the United States or of any State of the United States, having not less than two million dollars aggregate capital, surplus and undivided profits. Upon the termination of this Agreement as a part of the transfer of assets, either to a successor custodian or otherwise, the Custodian will deliver Securities held by it hereunder, when so authorized and directed by resolution of the Board, to a duly appointed agent of the successor custodian or to the appropriate transfer agents for transfer of registration and delivery as directed. Delivery of assets on termination of this Agreement shall be effected in a reasonable, expeditious and orderly manner; and in order to accomplish an orderly transition from the Custodian to the successor custodian, the Custodian shall continue to act as such under this Agreement as to assets in its possession or control. Termination as to each security shall become effective upon delivery to the successor custodian, its agent, or to a transfer agent for a specific security for the account of the successor custodian, and such delivery shall constitute effective delivery by the Custodian to the successor under this Agreement. In addition to the means of termination herein before authorized, this Agreement may be terminated at any time by the vote of a majority of the outstanding shares of the Fund and after written notice of such action to the Custodian. Section 13. General Nothing expressed or mentioned in or to be implied from any provision of this Agreement is intended to, or shall be construed to give any person or corporation other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement, or any covenant, condition or provision herein contained, this Agreement and all of the covenants, conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective successors and assigns. This Agreement shall be governed by the laws of the State of Minnesota. This Agreement supersedes all prior agreements between the parties. IN WITNESS WHEREOF, the Corporation and the Custodian have caused this agreement to be executed as of the date first above written by their respective officers thereunto duly authorized. AXP(R) VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. AXP Variable Portfolio - Large Cap Value Fund By: /s/ Leslie L. Ogg --------------------- Leslie L. Ogg Vice President AMERICAN EXPRESS TRUST COMPANY By: /s/ Chandrakant A. Patel --------------------------- Chandrakant A. Patel Vice President EX-99.I OPIN COUNSEL 11 i-opin.txt OPINION AND CONSENT OF COUNSEL October 28, 2003 AXP Variable Portfolio - Investment Series, Inc. 200 AXP Financial Center Minneapolis, Minnesota 55474 Gentlemen: I have examined the Articles of Incorporation and the By-Laws of AXP Variable Portfolio Investment Series, Inc. (the Company) and all necessary certificates, permits, minute books, documents and records of the Company, and the applicable statutes of the State of Minnesota, and it is my opinion that the shares sold in accordance with applicable federal and state securities laws will be legally issued, fully paid, and nonassessable. This opinion may be used in connection with the Post-Effective Amendment. Sincerely, /s/ Leslie L. Ogg - --------------------------------- Leslie L. Ogg Attorney at Law 901 S. Marquette Ave., Suite 2810 Minneapolis, Minnesota 55402-3268 EX-99.J AUD CONSENT 12 j-audcon.txt INDEPENDENT AUDITORS' CONSENT Independent auditors' consent - ---------------------------------------------------------------------- The board and shareholders AXP Variable Portfolio - Income Series, Inc.: AXP Variable Portfolio - Diversified Bond Fund AXP Variable Portfolio - Global Bond Fund AXP Variable Portfolio - High Yield Bond Fund AXP Variable Portfolio - Short Duration U.S. Government Fund AXP Variable Portfolio - Investment Series, Inc.: AXP Variable Portfolio - Blue Chip Advantage Fund AXP Variable Portfolio - Capital Resource Fund AXP Variable Portfolio - Emerging Markets Fund AXP Variable Portfolio - Equity Select Fund AXP Variable Portfolio - Growth Fund AXP Variable Portfolio - International Fund AXP Variable Portfolio - New Dimensions Fund AXP Variable Portfolio - S&P 500 Index Fund AXP Variable Portfolio - Small Cap Advantage Fund AXP Variable Portfolio - Stock Fund AXP Variable Portfolio - Strategy Aggressive Fund AXP Variable Portfolio - Managed Series, Inc.: AXP Variable Portfolio - Diversified Equity Income Fund AXP Variable Portfolio - Managed Fund AXP Variable Portfolio - Money Market Series, Inc.: AXP Variable Portfolio - Cash Management Fund AXP Variable Portfolio - Partners Series, Inc.: AXP Variable Portfolio - Partners Small Cap Value Fund: We consent to the use of our reports incorporated herein by reference and to the references to our Firm under the headings "Financial Highlights" in Part A and "Independent Auditors" in Part B of the Registration Statement. /s/ KPMG LLP - ------------- KPMG LLP Minneapolis, Minnesota October 28, 2003 EX-99.M6 DIST AGMT 13 m6-plandistagmt.txt PLAN AND AGREEMENT OF DISTRIBUTION PLAN AND AGREEMENT OF DISTRIBUTION This Plan and Agreement of Distribution ("Plan") is between AXP(R) Variable Portfolio - Investment Series, Inc., on behalf of its series of capital stock, AXP(R) Variable Portfolio - Large Cap Value Fund, a registered management investment company, (the "Fund"), and IDS Life Insurance Company ("IDS Life"). It is effective September 10, 2003. The Plan provides that: 1. IDS Life will purchase the Fund's shares on behalf of its separate accounts and the separate accounts of its affiliated life insurance companies established for the purpose of funding variable life insurance, annuity contracts or both (collectively referred to as "Variable Contracts"). Additionally, IDS Life may offer the Fund's shares to one or more unaffiliated life insurance companies ("Unaffiliated Life Companies") for purchase on behalf of certain of their separate accounts established for the purpose of funding Variable Contracts. 2. The Fund will reimburse IDS Life up to 0.125% of its daily net assets for various costs paid and accrued in connection with the distribution of the Fund's shares and for services provided to existing and prospective Variable Contract owners. Payments under the Plan are based on budgeted expenses and shall be made within five (5) business days after the last day of each month. At the end of each calendar year, IDS Life shall furnish a declaration setting out the actual expenses it has paid and accrued. Any money that has been paid in excess of the amount of these expenses shall be returned to the Fund. 3. IDS LIFE represents that the money paid by the Fund will benefit the Variable Contract owners and not the separate accounts that legally own the shares and be for the following: (a) Printing and mailing prospectuses, Statements of Additional Information, supplements, and reports to existing and prospective Variable Contract owners; (b) Preparation and distribution of advertisement, sales literature, brokers' materials and promotional materials relating to the Fund; (c) Presentation of seminars and sales meetings describing or relating to the Fund; (d) Training sales personnel regarding the Fund; (e) Compensation of sales personnel for sale of the Fund's shares; (f) Compensation of sales personnel for assisting Variable Contract owners with respect to the Fund shares; (g) Overhead of IDS Life and its affiliates appropriately allocated to the promotion of sale of the Fund's shares; and (h) Any activity primarily intended to result in the sale of the Fund's shares, including payments to Unaffiliated Life Companies. 4. IDS Life shall provide all information relevant and necessary for the Board to make informed determinations about whether the Plan should be continued and shall: (a) Submit quarterly a report that sets out the expenses paid or accrued by it, the names of the Unaffiliated Life Companies to whom the Fund's shares are sold, and the payments made to each Unaffiliated Life Company that has been reimbursed; (b) monitor the level and quality of services provided by it and all affiliated companies and will use its best efforts to assure that in each case legitimate services are rendered in return for the reimbursement pursuant to the Plan; and (c) meet with the Fund's representatives, as reasonably requested, to provide additional information. 5. IDS Life represents that it and all affiliated insurance company sponsors will provide full disclosure of the Fund's 12b-1 Plan in the prospectus for any separate account investing in the Fund and will clearly communicate the combined effect of all fees and costs, including the reimbursement under the 12b-1 Plan, imposed by the separate account and the Fund in accordance with applicable laws. 6. All payments by IDS Life to Unaffiliated Life Companies shall be made pursuant to a written agreement (Related Agreement). All such written agreements will be in a form approved by a majority of the Fund's independent members of the board and the board as a whole before it shall be used. The Related Agreement shall: (a) Require full disclosure of the combined effect of all fees and charges in accordance with applicable laws; (b) provide for termination at any time without penalty as required by Rule 12b-1; and (c) continue so long as its continuance is done in accordance with the requirements of Rule 12b-1. 7. The Fund represents that the Plan has been approved as required by Rule 12b-1 and may continue for more than one year so long as it is continued as required by Rule 12b-1 and shall terminate automatically in the event of an assignment. 8. The Plan may not be amended to materially increase the amount of the payments without the approval of the outstanding voting securities. AXP(R) VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. AXP(R) Variable Portfolio - Large Cap Value Fund /s/ Leslie L. Ogg - --------------------------- Leslie L. Ogg Vice President IDS LIFE INSURANCE COMPANY /s/ Gumer C. Alvero - -------------------------- Gumer C. Alvero Director and Executive Vice President - Annuities -----END PRIVACY-ENHANCED MESSAGE-----