-----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, VYjjS9Xkm9tXP0sfuQ0W4kclbP+znB3uW0HRThBJBGONy/OaUYj4OuoSi4IJXbt7 Z3ylhVQszwYr7xcQElym1g== 0000820027-03-000597.txt : 20030815 0000820027-03-000597.hdr.sgml : 20030815 20030815090734 ACCESSION NUMBER: 0000820027-03-000597 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20030815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP FIXED INCOME SERIES INC CENTRAL INDEX KEY: 0000049697 IRS NUMBER: 411237361 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-51586 FILM NUMBER: 03849519 BUSINESS ADDRESS: STREET 1: IDS TOWER 10 STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126712772 MAIL ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: AXP BOND FUND INC DATE OF NAME CHANGE: 20000829 FORMER COMPANY: FORMER CONFORMED NAME: IDS BOND FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP FIXED INCOME SERIES INC CENTRAL INDEX KEY: 0000049697 IRS NUMBER: 411237361 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02503 FILM NUMBER: 03849520 BUSINESS ADDRESS: STREET 1: IDS TOWER 10 STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126712772 MAIL ADDRESS: STREET 1: 80 SOUTH 8TH STREET STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: AXP BOND FUND INC DATE OF NAME CHANGE: 20000829 FORMER COMPANY: FORMER CONFORMED NAME: IDS BOND FUND INC DATE OF NAME CHANGE: 19920703 485APOS 1 partabc.txt AXP FIXED INCOME SERIES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 55 (File Number 2-51586) [X] -------- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 40 (File Number 811-2503) [X] ------------- AXP FIXED INCOME SERIES, INC. (formerly AXP Bond Fund, Inc.) 200 AXP Financial Center Minneapolis, Minnesota 55474 Leslie L. Ogg, 901 Marquette Ave. S., Suite 2810 Minneapolis, Minnesota 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) [ ] on (date) pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [X] on October 30, 2003 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. AXP(R) Diversified Bond Fund AXP Diversified Bond Fund seeks to provide shareholders with a high level of current income while conserving the value of the investment for the longest period of time. PROSPECTUS OCT. 30, 2003 Please note that this Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o 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 of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- Table of Contents TAKE A CLOSER LOOK AT: The Fund 3p Goal 3p Principal Investment Strategies 3p Principal Risks 4p Past Performance 5p Fees and Expenses 7p Investment Manager 8p Other Securities and Investment Strategies 9p Buying and Selling Shares 9p Valuing Fund Shares 9p Investment Options 10p Purchasing Shares 11p Transactions Through American Express Brokerage or Third Parties 14p Sales Charges 14p Exchanging/Selling Shares 17p Distributions and Taxes 20p Financial Highlights 22p - -------------------------------------------------------------------------------- 2p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS The Fund GOAL AXP Diversified Bond Fund (the Fund) seeks to provide shareholders with a high level of current income while conserving 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 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, American Express Financial Corporation (AEFC), the Fund's investment manager, chooses investments by: o Evaluating the portfolio's total exposure to the sector, industry and security relative to the Index. o Analyzing factors such as credit quality, interest rate outlook and price to select securities within each sector. o Investing in lower-quality (junk) bonds and foreign investments as opportunities permit. o Targeting an average portfolio duration of 4-6 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%. In evaluating whether to sell a security, AEFC considers, among other factors: o The portfolio's total exposure to the sector, industry and security relative to the Index. o A security's rating has changed or is vulnerable to a change. o A sector or industry is experiencing change. o The interest rate or economic outlook changes. o AEFC identifies a more attractive opportunity. - -------------------------------------------------------------------------------- 3p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS 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 cause the Fund to lose the opportunity to participate in market improvement. During these times, AEFC may make frequent securities trades that could result in increased fees, expenses, and taxes. 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 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. 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. - -------------------------------------------------------------------------------- 4p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: o how the Fund's performance has varied for each full calendar year shown on the chart below, and o how the Fund's average annual total returns compare to recognized indexes. How the Fund has performed in the past does not indicate how the Fund will perform in the future. Class A Performance (based on calendar year) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 During the period shown in the bar chart, the highest return for a calendar quarter was ___% (quarter ending ___ ___) and the lowest return for a calendar quarter was ___% (quarter ending ___ ___). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in expenses. The Fund's Class A year to date return as of September 30, 2003 was _____%. - -------------------------------------------------------------------------------- 5p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS
Average Annual Total Returns (as of Dec. 31, 2002) Since Since 1 year 5 years 10 years inception (B&Y) inception (C) Diversified Bond: Class A Return before taxes % % % N/A N/A Return after taxes on distributions % % % N/A N/A Return after taxes on distributions and sale of fund shares % % % N/A N/A Class B Return before taxes % % N/A %(a) N/A Class C Return before taxes % N/A N/A N/A %(c) Class Y Return before taxes % % N/A %(a) N/A Lehman Brothers Aggregate Bond Index % % % %(b) %(d) Lipper Intermediate Investment Grade Index % % % %(b) %(d)
(a) Inception date was March 20, 1995. (b) Measurement period started April 1, 1995. (c) Inception date was June 26, 2000. (d) Measurement period started July 1, 2000. Before-Tax Returns This table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. These returns are compared to the indexes shown for the same periods. The performance of different classes varies because of differences in sales charges and fees. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, although not for other differences in expenses. After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. [The Return After Taxes on Distributions for a period may be the same as the Return Before Taxes for the same period if there are no distributions or if the distributions are small. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return Before Taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return.] - -------------------------------------------------------------------------------- 6p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor 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. FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 4.75%(b) none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none 5% 1%(c) none
Annual Fund operating expenses (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees % % % % Distribution (12b-1) fees % % % % Other expenses(d) % % % % Total % % % % (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. See "Sales Charges." (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. Effective May 2003, the Fund's transfer agency fee increased. The percentages above reflect the increase. - -------------------------------------------------------------------------------- 7p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Examples These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return each year. The operating expenses remain the same each year. You would pay the following expenses if you redeem all of your shares at the end of the time periods indicated: 1 year 3 years 5 years 10 years Class A(a) $ $ $ $ Class B $ $ $ $(b) Class C $ $ $ $ Class Y $ $ $ $ (a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares: 1 year 3 years 5 years 10 years Class A(a) $ $ $ $ Class B $ $ $ $(b) Class C $ $ $ $ Class Y $ $ $ $ (a) Includes a 4.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. These examples do not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. INVESTMENT MANAGER The team that manages the Fund's portfolio is led by: Tom Murphy, CFA, Portfolio Manager o Managed the Fund since 2003. o Leader of the investment grade corporate bond sector team. o Joined AEFC in 2002. o 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. o Began investment career in 1986. o 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. The Fund pays AEFC a fee for managing its assets. Under the Investment Management Services Agreement, the fee for the most recent fiscal year was ___% of the Fund's average daily net assets. Under the agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. AEFC or an affiliate may make payments from its own resources, which include profits from management fees paid by the Fund, to compensate broker-dealers - -------------------------------------------------------------------------------- 8p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS or other persons for providing distribution assistance. AEFC, located at 200 AXP Financial Center, Minneapolis, Minnesota 55474, is a wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, New York 10285. The Fund has 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 Fund without first obtaining shareholder approval. Before the Fund may rely on the order, a majority of the Fund's outstanding voting securities will need to approve operating the Fund in this manner. If shareholder approval is received, the Fund 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. 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 Statement of Additional Information (SAI) and its annual and semiannual reports. Buying and Selling Shares The public offering price for Class A shares of the Fund is the net asset value (NAV) plus a sales charge, and for Class B, C, and Y shares, the NAV. In addition to buying and selling shares through the Fund's distributor, American Express Financial Advisors Inc., you may buy or sell shares through third parties, including 401(k) plans, banks, brokers, and investment advisers. Where authorized by the Fund, orders in good form are priced using the NAV next determined after your order is placed with the third party. If you buy or redeem shares through a third party, consult that firm to determine whether your order will be priced at the time it is placed with the third party or at the time it is placed with the Fund. The third party may charge a fee for its services. VALUING FUND SHARES The NAV is the value of a single share of the Fund. The NAV is determined by dividing the value of the Fund's assets, minus any liabilities, by the number of shares outstanding. AEFC calculates the NAV as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The Fund's assets are valued primarily on the basis of market quotations. Certain short-term securities are valued at amortized cost. Foreign investments are valued in U.S. dollars. - -------------------------------------------------------------------------------- 9p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS 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. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution fee of 1.00% (may be subject to a CDSC). 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee. Please see the SAI for information on eligibility to purchase Class Y shares. Investment options summary The Fund offers four different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision. The following table shows the key features of each class: Class A Class B Class C Class Y - --------------- ------------------ -------------- --------------- -------------- Availability Available to Available to Available to Limited to all investors. all all investors. qualifying investors. institutional investors. - --------------- ------------------ -------------- --------------- -------------- Initial Sales Yes. Payable No. Entire No. Entire No. Entire Charge at time of purchase purchase purchase price purchase. price is price is is invested in Lower sales invested in invested in shares of the charge for shares of shares of the Fund. larger the Fund. Fund. investments. - --------------- ------------------ -------------- --------------- -------------- Deferred Sales On purchases Maximum 5% 1% CDSC None. Charge over $1,000,000, CDSC during applies if 1% CDSC the first you sell your applies if you year shares less sell your decreasing than one year shares less to 0% after after than one year six years. purchase. after purchase. - --------------- ------------------ -------------- --------------- -------------- Distribution Yes.* 0.25% Yes.* 1.00% Yes.* 1.00% Yes. 0.10% and/or Shareholder Service Fee - --------------- ------------------ -------------- --------------- -------------- Conversion to N/A Yes, No. No. Class A automatically in ninth calendar year of ownership. - --------------- ------------------ -------------- --------------- -------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. - -------------------------------------------------------------------------------- 10p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $250,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $250,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. PURCHASING SHARES To purchase shares through an American Express Brokerage Account or entities other than American Express Financial Advisors Inc., please refer to the American Express Brokerage Web site or consult your selling agent. The following section explains how you can purchase shares from American Express Financial Advisors (the Distributor). If you do not have a mutual fund account, you need to establish one. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase shares for a new or existing account, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. - -------------------------------------------------------------------------------- 11p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - --------------------------------------------- ---------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - --------------------------------------------- ---------------------------------- Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - --------------------------------------------- ---------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - --------------------------------------------- ---------------------------------- An irrevocable trust, pension trust or The legal entity (not the personal estate representative or trustee, unless no legal entity is designated in the account title) - --------------------------------------------- ---------------------------------- Sole proprietorship or single-owner LLC The owner - --------------------------------------------- ---------------------------------- Partnership or multi-member LLC The partnership - --------------------------------------------- ---------------------------------- Corporate or LLC electing corporate status The corporation on Form 8837 - --------------------------------------------- ---------------------------------- Association, club or tax-exempt organization The organization - --------------------------------------------- ---------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (www.irs.gov). Three ways to invest 1 By mail Once your account has been established, send your check with the account number on it to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000 Additional investments: $100 Account balances: $300 Qualified accounts: none If your account balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. - -------------------------------------------------------------------------------- 12p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS 2 By scheduled investment plan Contact your financial advisor for assistance in setting up one of the following scheduled plans: o automatic payroll deduction, o bank authorization, o direct deposit of Social Security check, or o other plan approved by the Fund. Minimum amounts Initial investment: $100 Additional investments: $50 per payment for qualified accounts; $100 per payment for nonqualified accounts Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. 3 By wire or electronic funds transfer If you have an established account, you may wire money to: Wells Fargo Bank Minnesota, N.A. Minneapolis, MN 55479 Routing Transit No. 091000019 Give these instructions: Credit American Express Financial Advisors Account #0000030015 for personal account # (your account number) for (your name). Please be sure to include all 10 digits of the American Express Financial Advisors account number, including the zeros. If this information is not included, the order may be rejected, and all money received by the Fund, less any costs the Fund or American Express Client Service Corporation (AECSC) incurs, will be returned promptly. Minimum amounts Each wire investment: $1,000 - -------------------------------------------------------------------------------- 13p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS TRANSACTIONS THROUGH AMERICAN EXPRESS BROKERAGE OR THIRD PARTIES You may buy or sell shares through American Express Brokerage, certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through American Express Brokerage or third parties or to determine if there are policy differences, please consult the American Express Brokerage Web site or your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. SALES CHARGES Class A -- initial sales charge alternative When you purchase Class A shares, you pay a sales charge as shown in the following table: Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 4.75% 4.99% $50,000-$99,999 4.25 4.44 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 * Offering price includes the sales charge. The sales charge on Class A shares may be lower than 4.75%, based on the combined market value of: o your current investment in this Fund, o your previous investment in this Fund, and o investments you and your primary household group have made in other American Express mutual funds that have a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. For purposes of this policy, domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do not have sales charges. - -------------------------------------------------------------------------------- 14p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Other Class A sales charge policies o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, and o if you intend to invest more than $50,000 over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. If purchasing shares in a brokerage account or through a third party, you must request the reduced sales charge when you buy shares. For more details, please contact your financial advisor or see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired American Express financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. o registered representatives and other employees of brokers, dealers or other financial institutions having a sales agreement with the Distributor, including their spouses, domestic partners, children and parents. o investors who have a business relationship with a newly associated financial advisor who joined the Distributor from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with the Distributor, (2) the purchase is made with proceeds of shares sold that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds are the result of a sale of an equal or greater value where a sales load was assessed. o qualified employee benefit plans offering participants daily access to American Express mutual funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. o shareholders who have at least $1 million in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived only in the circumstances described for waivers for Class B and Class C shares. o purchases made within 90 days after a sale of American Express Fund shares (up to the amount sold). Send the Fund a written request along with your payment, indicating the date and the amount of the sale. - -------------------------------------------------------------------------------- 15p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS o purchases made: o with dividend or capital gain distributions from this Fund or from the same class of another American Express mutual fund, o through or under a wrap fee product or other investment product sponsored by the Distributor or another authorized broker-dealer, investment advisor, bank or investment professional, o within the University of Texas System ORP, o within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, o within the University of Massachusetts After-Tax Savings Program, or o through or under a subsidiary of AEFC offering Personal Trust Services' Asset-Based pricing alternative. o shareholders whose original purchase was in a Strategist fund merged into an American Express fund in 2000. Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of calendar years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline after a purchase: If the sale is made during the: The CDSC percentage rate is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% For Class C, a 1% CDSC is charged if you sell your shares less than one year after purchase. For both Class B and Class C, if the amount you are selling causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC is based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you never have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. - -------------------------------------------------------------------------------- 16p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Example Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. Waivers of the sales charge for Class B and Class C shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if American Express Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: o at least 59 1/2 years old AND o taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR o selling under an approved substantially equal periodic payment arrangement. EXCHANGING/SELLING SHARES Exchanges You can exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. The Fund does not permit market-timing. Do not invest in the Fund if you are a market timer. Excessive trading (market-timing) or other abusive short-term trading practices may disrupt portfolio management strategies, harm performance and increase fund expenses. To prevent abuse or adverse effects on the Fund and its shareholders, AECSC and the Fund reserve the right to reject any purchase orders, including exchanges, limit the amount, modify or discontinue the exchange privilege, or charge a fee to any investor we believe has a history of abusive trading or whose trading, in our judgement has been disruptive to the Fund. For example, we may exercise these rights if exchanges are too numerous or too large. - -------------------------------------------------------------------------------- 17p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until AECSC receives written approval from the secured party. Selling Shares You can sell your shares at any time. The payment will be mailed within seven days after accepting your request. When you sell shares, 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 in good form by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. To sell or exchange shares held through an American Express Brokerage Account or with entities other than American Express Financial Advisors, please consult your selling agent. The following section explains how you can exchange or sell shares held with American Express Financial Advisors. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. Payment may be made earlier if your bank provides evidence satisfactory to the Fund and AECSC that your check has cleared. - -------------------------------------------------------------------------------- 18p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Two ways to request an exchange or sale of shares 1 By letter Include in your letter: o the name of the fund(s), o the class of shares to be exchanged or sold, o your mutual fund account number(s) (for exchanges, both funds must be registered in the same ownership), o your Social Security number or Employer Identification number, o the dollar amount or number of shares you want to exchange or sell, o signature(s) of registered account owner(s) (All signatures may be required. Contact AECSC for more information.), o for sales, indicate how you want your money delivered to you, and o any paper certificates of shares you hold. Regular or express mail: American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 2 By telephone American Express Client Service Corporation Telephone Transaction Service (800) 437-3133 o The Fund and AECSC will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing AECSC. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- 19p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS Four ways to receive payment when you sell shares 1 By regular or express mail o Mailed to the address on record. o Payable to names listed on the account. o The express mail delivery charges you pay will vary depending on the courier you select. 2 By electronic funds transfer (EFT or ACH) o Minimum redemption: $100. o Funds are deposited electronically into your bank account. o No charge. o Bank account must be in the same ownership as the American Express mutual fund account. o Allow two to five business days from request to deposit. o Pre-authorization required. For instructions, contact your financial advisor or AECSC. 3 By wire o Minimum redemption: $1,000. o Funds are wired electronically into your bank account. o Applicable wire charges will vary depending on service provided. o Bank account must be in the same ownership as the American Express mutual fund account. o Allow one to two business days from request to deposit for domestic wires. o Pre-authorization required. For instructions, contact your financial advisor or AECSC. 4 By scheduled payout plan o Minimum payment: $50. o Contact your financial advisor or AECSC to set up regular payments on a monthly, bimonthly, quarterly, semiannual or annual basis. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. - -------------------------------------------------------------------------------- 20p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you 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 long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and 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. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered American Express mutual fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. - -------------------------------------------------------------------------------- 21p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS 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 nvestment in the Fund (assuming reinvestment of all dividends and distributions). 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. [insert financial highlights here from Accounting] - -------------------------------------------------------------------------------- 22p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS [insert financial highlights here from Accounting] - -------------------------------------------------------------------------------- 23p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS [insert financial highlights here from Accounting] - -------------------------------------------------------------------------------- 24p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS [insert financial highlights here from Accounting] - -------------------------------------------------------------------------------- 25p -- AXP DIVERSIFIED BOND FUND -- 2003 PROSPECTUS This Fund, along with the other American Express mutual funds, is distributed by American Express Financial Advisors Inc. and can be purchased from an American Express financial advisor or from other authorized broker-dealers or third parties. The Funds can be found under the "Amer Express" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's Statement of Additional Information (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 its 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, contact your selling agent or American Express Client Service Corporation. American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 Web site address: americanexpress.com/funds 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 #811-2503 Ticker Symbol Class A: INBNX Class B:ININX Class C: AXBCX Class Y:IDBYX - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS(R) - -------------------------------------------------------------------------------- American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 S-6495-99 W (10/03) AXP(R) Diversified Bond Fund Supplement to the Oct. 30, 2003 Prospectus This supplement describes the Fund's Class I shares and it supplements certain information in the Fund's prospectus dated Oct. 30, 2003. The caption headings used in this Supplement correspond with the caption headings used in the prospectus. You may purchase Class I shares only if you are an eligible investor, as described under the caption "Buying and Selling Shares" below. PAST PERFORMANCE Class I is new as of the date of this supplement and therefore performance information is not available. The performance table is intended to indicate some of the risks of investing in the Fund by showing changes in the Fund's performance over time. Please note that you will find performance returns, after the deduction of certain taxes, for Class A shares of the Fund, together with returns of one or more broad measures of market performance, in the performance table of the prospectus. Past performance for Class I for the period prior to the date the class began operations may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, although not for other differences in expenses. The use of blended performance generally results in lower performance than Class I shares would have experienced had they been offered for the entire period. FEES AND EXPENSES Fund investors pay various expenses. The table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. The table is supplemented as follows: Shareholder Fees (fees paid directly from your investment) Class I Maximum sales charge (load) imposed on purchases (as a percentage of offering price) none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none Annual Fund operating expenses(a) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class I Management fees 0.49% Distribution (12b-1) fees 0.00% Other expenses(b) 0.06% Total 0.55% (a) Other expenses are based on estimated amounts for the current fiscal year. (b) Other expenses include an administrative services fee and other nonadvisory expenses. Example This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The table is supplemented as follows: 1 year 3 years Class I $56 $176 BUYING AND SELLING SHARES The description of Investment Options is supplemented as follows: If you are an eligible investor, you may purchase Class I shares at net asset value without an initial sales charge or CDSC on redemption. Class I shares do not have annual distribution and service fees, and do not convert to any other class of shares. The following eligible investors may purchase Class I shares: o Any fund distributed by AEFA, if the fund seeks to achieve its investment objective by investing primarily in shares of the Fund and other American Express Funds. The discussion of buying and selling shares is supplemented as follows: You may purchase, redeem or exchange Class I shares only through AEFA (see the back cover of the prospectus for address and telephone number). You may exchange your Class I shares only for Class I shares of another American Express Fund. AXP(R) FIXED INCOME SERIES, INC. STATEMENT OF ADDITIONAL INFORMATION FOR AXP(R) DIVERSIFIED BOND FUND (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 Client Service Corporation, 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 Mutual Fund Checklist p. 3 Fundamental Investment Policies p. 4 Investment Strategies and Types of Investments p. 5 Information Regarding Risks and Investment Strategies p. 6 Security Transactions p. 22 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation p. 24 Performance Information p. 24 Valuing Fund Shares p. 27 Proxy Voting p. 28 Investing in the Fund p. 29 Selling Shares p. 31 Pay-out Plans p. 31 [Capital Loss Carryover p. 32] Taxes p. 32 Agreements p. 33 Organizational Information p. 35 Board Members and Officers p. 39 [Principal Holders of Securities p. 42] Independent Auditors p. 42 Appendix: Description of Ratings p. 43 - -------------------------------------------------------------------------------- 2 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Mutual Fund Checklist [X] Mutual funds are NOT guaranteed or insured by any bank or government agency. You can lose money. [X] Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. [X] A higher rate of return typically involves a higher risk of loss. [X] Past performance is not a reliable indicator of future performance. [X] ALL mutual funds have costs that lower investment return. [X] You can buy some mutual funds by contacting them directly. Others, like this one, are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay a sales charge. [X] Shop around. Compare a mutual fund with others of the same type before you buy. OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING Develop a Financial Plan Have a plan -- even a simple plan can help you take control of your financial future. Review your plan with your advisor at least once a year or more frequently if your circumstances change. Dollar-Cost Averaging An investment technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing through changing market conditions to accumulate shares to meet long-term goals. Dollar-cost averaging Regular Market price Shares investment of a share acquired $100 $ 6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5) The average price you paid for each share: $4.84 ($500 divided by 103.4) Diversify Diversify your portfolio. By investing in different asset classes and different economic environments you help protect against poor performance in one type of investment while including investments most likely to help you achieve your important goals. Understand Your Investment Know what you are buying. Make sure you understand the potential risks, rewards, costs, and expenses associated with each of your investments. - -------------------------------------------------------------------------------- 3 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Fundamental Investment Policies 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: 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 Lend Fund securities in excess of 30% of its net assets. 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. - -------------------------------------------------------------------------------- 4 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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 attempt 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? Agency and Government Securities yes Borrowing yes Cash/Money Market Instruments yes Collateralized Bond Obligations yes Commercial Paper yes Common Stock yes Convertible Securities yes Corporate Bonds yes Debt Obligations yes Depositary Receipts yes Derivative Instruments (including Options and Futures) yes Foreign Currency Transactions yes Foreign Securities yes High-Yield (High-Risk) Securities (Junk Bonds) yes Illiquid and Restricted Securities yes Indexed Securities yes Inverse Floaters yes Investment Companies yes Lending of Portfolio Securities yes Loan Participations yes Mortgage- and Asset-Backed Securities yes Mortgage Dollar Rolls yes Municipal Obligations yes Preferred Stock yes Real Estate Investment Trusts yes Repurchase Agreements yes Reverse Repurchase Agreements yes Short Sales no Sovereign Debt yes Structured Products yes Swap Agreements no Variable- or Floating-Rate Securities yes Warrants yes When-Issued Securities and Forward Commitments yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes - -------------------------------------------------------------------------------- 5 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND The following are guidelines that may be changed by the board at any time: o Under normal market conditions, at least 80% of the Fund's net assets are invested in bonds. The Fund will provide shareholders with at least 60 days notice of any change in the 80% policy. o At least 50% of the Fund's net assets will be invested in bonds rated investment-grade, unrated corporate bonds that are believed to be at investment grade quality, and government bonds. 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. 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. - -------------------------------------------------------------------------------- 6 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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 higher its yield and 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. - -------------------------------------------------------------------------------- 7 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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, FHLMC, 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. - -------------------------------------------------------------------------------- 8 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 9 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 10 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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. - -------------------------------------------------------------------------------- 11 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 12 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 13 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 14 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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 delays or loss of certificates for portfolio - -------------------------------------------------------------------------------- 15 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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. 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. - -------------------------------------------------------------------------------- 16 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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. - -------------------------------------------------------------------------------- 17 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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." - -------------------------------------------------------------------------------- 18 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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. - -------------------------------------------------------------------------------- 19 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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. - -------------------------------------------------------------------------------- 20 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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. - -------------------------------------------------------------------------------- 21 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. 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, any subadviser and American Express Financial Advisors Inc. (the Distributor) 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 the other American Express mutual 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 - -------------------------------------------------------------------------------- 22 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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 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. The Fund paid total brokerage commissions of $________ for fiscal year ended Aug. 31, 2003, $146,984 for fiscal year 2002, and $103,643 for fiscal year 2001. Substantially all firms through whom transactions were executed provide research services. [In fiscal year 2003, transactions amounting to $____, on which $____ in commissions were imputed or paid, were specifically directed to firms in exchange for research services.] [No transactions were directed to brokers because of research services they provided to the Fund] [except for the affiliates as noted below.] [As of the end of the most recent fiscal year, the Fund 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, the Fund held 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 presented below: Value of securities Name of issuer owned at end of fiscal year The portfolio turnover rate was ____% in the most recent fiscal year, and 169% in the year before. Higher turnover rates may result in higher brokerage expenses and taxes. [The variation in turnover rates can be attributed to:] - -------------------------------------------------------------------------------- 23 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation Affiliates of American Express Company (of which AEFC is a wholly-owned 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. [No brokerage commissions were paid to brokers affiliated with AEFC for the three most recent fiscal years.] [Information about brokerage commissions paid by the Fund for the last three fiscal years to brokers affiliated with AEFC is contained in the following table:
As of the end of fiscal year 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 Broker affiliation paid to broker commissions commissions paid to broker paid to broker Wholly-owned $ * % % None None subsidiary of AEFC
* Represents brokerage clearing fees. 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 (both before and after taxes) for the one-, five-, and ten-year periods, or since inception, as applicable, ended Aug. 31, 2003, are set forth below:
Since Since 1 year 5 years 10 years inception (B&Y) inception (C) Class A Return before taxes % % % N/A N/A Return after taxes on distributions % % % N/A N/A Return after taxes on distributions and sale of fund shares % % % N/A N/A Class B Return before taxes % % N/A %(a) N/A Class C Return before taxes % N/A N/A N/A %(b) Class Y Return before taxes % % N/A %(a) N/A
(a) Inception date was March 20, 1995. (b) Inception date was June 26, 2000. Before-Tax Returns This table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. The performance of different classes varies because of differences in sales charges and fees. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, although not for other differences in expenses. - -------------------------------------------------------------------------------- 24 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. {The Return After Taxes on Distributions for a period may be the same as the Return Before Taxes for the same period if there are no distributions or if the distributions are small. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return Before Taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. ] For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. AVERAGE ANNUAL TOTAL RETURN The Fund may calculate average annual total return for a class 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) AFTER TAX RETURNS The Fund may calculate estimated after tax returns based on the highest historical individual federal marginal income tax rates, the estimates do not reflect the effect of state and local taxes, according to the following formulas: Average Annual Total Returns (after taxes on distributions) P(1 + T) (to the power of n) = ATVD where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATVD = ending after tax value on distributions of a hypothetical $1,000 payment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemptions. Average Annual Total Returns (after taxes on distributions and redemptions) P(1+T) (to the power of n) = ATVDR where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions and redemptions) n = number of years ATVDR = ending after tax value on distributions of a hypothetical $1,000 payment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions and redemptions. - -------------------------------------------------------------------------------- 25 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND AGGREGATE TOTAL RETURN The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the 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) ANNUALIZED YIELD The Fund may calculate an annualized yield for a class 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 The Fund's annualized yield was ___% for Class A, ___% for Class B, ___% for Class C and ___% for Class Y 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 shareholders are reflected in the distribution yield. DISTRIBUTION YIELD Distribution yield is calculated according to the following formula: D divided by POP(to the power of F) equals DY --- ----- 30 30 where: D = sum of dividends for 30-day period POP = sum of public offering price for 30-day period F = annualizing factor DY = distribution yield The Fund's distribution yield was ___% for Class A, ___% for Class B, ___% for Class C and ___% for Class Y for the 30-day period ended Aug. 30, 2003. 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. - -------------------------------------------------------------------------------- 26 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. Valuing Fund Shares As of the end of the most recent fiscal year, the computation looked like this: Net assets Shares outstanding Net asset value of one share Class A $ divided by equals $ Class B Class C Class Y 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 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. - -------------------------------------------------------------------------------- 27 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 28 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Investing in the Fund SALES CHARGE Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the CDSC and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of the Fund. Shares of the Fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C and Class Y, there is no initial sales charge so the public offering price is the same as the NAV. Using the sales charge schedule in the table below, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal year, was determined by dividing the NAV of one share, $______, by 0.9525 (1.00 - 0.0475) for a maximum 4.75% sales charge for a public offering price of $______. The sales charge is paid to the Distributor by the person buying the shares. Class A -- Calculation of the Sales Charge Sales charges are determined as follows: Sales charge as a percentage of: Total market value Public offering price Net amount invested Up to $49,999 4.75% 4.99% $50,000-$99,999 4.25 4.44 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 The initial sales charge is waived for certain qualified plans. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The Fund will waive the deferred sales charge on certain redemptions if the redemption is a result of a participant's death, disability, retirement, attaining age 591/2, loans, or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of participants Total plan assets 1-99 100 or more Less than $1 million 4% 0% $1 million or more 0% 0% Class A -- Reducing the Sales Charge The market value of your investments in the Fund determines your sales charge. For example, suppose you have made an investment that now has a value of $20,000 and you later decide to invest $40,000 more. The value of your investments would be $60,000. As a result, your $40,000 investment qualifies for the lower 4.25% sales charge that applies to investments of more than $50,000 and up to $100,000. If you qualify for a reduced sales charge and purchase shares through different channels (for example, in a brokerage account and also directly from the Fund), you must inform the Distributor of your total holdings when placing any purchase orders. Class A -- Letter of Intent (LOI) If you intend to invest more than $50,000 over a period of time, you can reduce the sales charge in Class A by filing a LOI and committing to invest a certain amount. The agreement can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days. Your holdings in American Express mutual funds acquired more than 90 days before receipt of your signed LOI in the home office will not be counted towards the completion of the LOI. Your investments will be charged the sales charge that applies to the amount you have committed to invest. Five percent of the commitment amount will be placed in escrow. If your commitment amount is reached within the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by the total value of the new investment combined with the market value of the existing American Express mutual fund investments. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of American Express mutual funds other than Class A; purchases in American Express mutual funds held within a wrap product; and - -------------------------------------------------------------------------------- 29 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND purchases of AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are subsequently exchanged to Class A shares of an American Express mutual fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares in an American Express brokerage account or through a third party, you must inform the Distributor about the LOI when placing any purchase orders during the period of the LOI. Class Y Shares Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: o uses a daily transfer recordkeeping service offering participants daily access to American Express mutual funds and has o at least $10 million in plan assets or o 500 or more participants; or o does not use daily transfer recordkeeping and has o at least $3 million invested in American Express mutual funds or o 500 or more participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These institutions must have at least $10 million in American Express mutual funds. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. o State sponsored college savings plans established under Section 529 of the Internal Revenue Code. * Eligibility must be determined in advance. To do so, contact your financial advisor. SYSTEMATIC INVESTMENT PROGRAMS After you make your initial investment of $100 or more, you must make additional payments of $100 or more on at least a monthly basis until your balance reaches $2,000. These minimums do not apply to all systematic investment programs. You decide how often to make payments -- monthly, quarterly, or semiannually. You are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. The Fund also can change the program or end it at any time. AUTOMATIC DIRECTED DIVIDENDS Dividends, including capital gain distributions, paid by another American Express mutual fund may be used to automatically purchase shares in the same class of this Fund. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to this Fund the following day. Dividends can be exchanged into the same class of another American Express mutual fund but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: o Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which American Express Trust Company acts as custodian; o Between two American Express Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); and o Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA or UTMA accounts with identical ownership. The Fund's investment goal is described in its prospectus along with other information, including fees and expense ratios. Before exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REJECTION OF BUSINESS The Fund or AECSC reserves the right to reject any business, in its sole discretion. - -------------------------------------------------------------------------------- 30 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Selling Shares You have a right to sell your shares at any time. For an explanation of sales procedures, please see the prospectus. During an emergency, the board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of the Fund to redeem 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 shareholders. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. Pay-out Plans You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which American Express Trust Company acts as custodian, you can elect to receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of the Fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your selling agent or write American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474, or call (800) 437-3133. Your authorization must be received at least five days before the date you want your payments to begin. The initial payment must be at least $50. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way AEFC can handle efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. The Fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $50 if the value of your account is $10,000 on the payment date. - -------------------------------------------------------------------------------- 31 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND [Capital Loss Carryover For federal income tax purposes, the Fund had total capital loss carryovers of $___________ at the end of the most recent fiscal year, that if not offset by subsequent capital gains will expire as follows: 20 20 20 20 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 For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For example You purchase 100 shares of one fund having a public offering price of $10.00 per share. With a sales load of 4.75%, you pay $47.50 in sales load. With a NAV of $9.525 per share, the value of your investment is $952.50. Within 91 days of purchasing that fund, you decide to exchange out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.525, and purchase into a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $47.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 - $1,000.00), you have a $147.50 gain ($1,100.00 - $952.50). You can include the $47.50 sales load in the calculation of your tax gain or loss when you sell shares in the second fund. If you have a nonqualified investment in the Fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the Fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged exceeds annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. For the most recent fiscal year, ____% of the Fund's net investment income dividends qualified for the corporate deduction. Under provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Act), the maximum tax paid on dividends by individuals is reduced to 15% (5% for low income taxpayers) for tax years 2003 through 2008. The Act also reduces the maximum capital gain rate for securities sold on or after May 6, 2003 from 20% to 15% (5% for low income taxpayers). The Act provides that only certain qualified dividend income (QDI) will be subject to the 15% tax rate. QDI is dividends earned from domestic corporations and qualified foreign corporations. Qualified foreign corporations are corporations incorporated in a U.S. possession, corporations whose stock is readily tradable on an established U.S. securities market (ADRs), and corporations eligible for relief under an income tax treaty with the U.S. that includes an exchange of information agreement (except Barbados). Excluded are passive foreign investment companies (PFICs), foreign investment companies and foreign personal holding companies. Holding periods for shares must also be met to be eligible for QDI treatment (60 days for stock and 90 days for preferreds). The QDI for individuals for the most recent fiscal year was ____%. 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. If more than 50% of the Fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the Fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the Fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the Fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. - -------------------------------------------------------------------------------- 32 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long shareholders owned their shares. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. Special rates on capital gains may apply to sales of precious metals, if any, owned directly by the Fund and to investments in REITs. Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of the Fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year the Fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. The Internal Revenue Code imposes two asset diversification rules that apply to the Fund as of the close of each quarter. First, as to 50% of its holdings, the Fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, the Fund cannot have more than 25% of its assets in any one issuer. For purposes of the excise tax distributions, "section 988" ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to the stock, the dividend will be included in gross income by the Fund as of the later of (1) the date the share became ex-dividend or (2) the date the Fund acquired the share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the Fund, this rule may cause the Fund to pay income to its shareholders that it has not actually received. To the extent that the dividend is never received, the Fund will take a loss at the time that a determination is made that the dividend will not be received. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to Fund distributions. 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 based on the following schedule. Each class of the Fund pays its proportionate share of the fee. Assets (billions) Annual rate at each asset level First $1.0 0.520% Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.___% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. The management fee is paid monthly. Under the agreement, the total amount paid was $________ for fiscal year 2003, $18,809,556 for fiscal year 2002, and $17,706,886 for fiscal year 2001. Under the agreement, the Fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; postage of confirmations except purchase confirmations; consultants' fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; and expenses properly payable by the Fund, approved by the board. Under the agreement, nonadvisory expenses, net of earnings credits, paid by the Fund were $________ for fiscal year 2003, $787,862 for fiscal year 2002, and $742,167 for fiscal year 2001. - -------------------------------------------------------------------------------- 33 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. ADMINISTRATIVE SERVICES AGREEMENT The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets (billions) Annual rate at each asset level First $1.0 0.050% Next 1.0 0.045 Next 1.0 0.040 Next 3.0 0.035 Next 3.0 0.030 Over 9.0 0.025 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.___% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. Under the agreement, the Fund paid fees of $________ for fiscal year 2003, $1,778,050 for fiscal year 2002, and $1,752,624 for fiscal year 2001. TRANSFER AGENCY AGREEMENT The Fund has a Transfer Agency Agreement with American Express Client Service Corporation (AECSC). This agreement governs AECSC's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the Fund's shares. Under the agreement, AECSC will earn a fee from the Fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The rate for Class A is $20.50 per year, for Class B is $21.50 per year, for Class C is $21.00 per year and for Class Y is $18.50 per year. In addition, there is an annual closed-account fee of $5.00 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system, generally within one year. The fees paid to AECSC may be changed by the board without shareholder approval. DISTRIBUTION AGREEMENT American Express Financial Advisors Inc. is the Fund's principal underwriter (the Distributor). The Fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to the Distributor daily. These charges amounted to $________ for fiscal year 2003. After paying commissions to personal financial advisors, and other expenses, the amount retained was $________. The amounts were $6,081,163 and $(949,704) for fiscal year 2002, and $4,876,465 and $(823,309) for fiscal year 2001. Part of the sales charge may be paid to selling dealers who have agreements with the Distributor. The Distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. - -------------------------------------------------------------------------------- 34 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND SHAREHOLDER SERVICE AGREEMENT With respect to Class Y shares, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of average daily net assets. PLAN AND AGREEMENT OF DISTRIBUTION For Class A, Class B and Class C shares, to help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, the Fund and the Distributor 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, the Fund pays a fee up to actual expenses incurred at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material change to expenses charged under the Class A plan. Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of Class A, Class B and Class C shares; and overhead appropriately allocated to the sale of Class A, Class B and Class C shares. These expenses also include costs of providing personal service to shareholders. A substantial portion of the costs are not specifically identified to any one of the American Express mutual 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 relevant class of shares or by the Distributor. 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. For the most recent fiscal year, the Fund paid fees of $________ for Class A shares, $________ for Class B shares and $_______ for Class C shares. 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 U.S. Bank National Association, 180 E. Fifth St., St. Paul, MN 55101-1631, 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 States 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 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 As a shareholder in the Fund, you have voting rights over the Fund's management and fundamental policies. You are 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 you have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. - -------------------------------------------------------------------------------- 35 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. AMERICAN EXPRESS FINANCIAL CORPORATION AEFC has been a provider of financial services since 1894. Its family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. In addition to managing assets of more than $__ billion for the publicly offered American Express Funds, AEFC manages investments for itself and its subsidiaries, American Express Certificate Company and IDS Life Insurance Company. Total assets owned and managed as of the end of the most recent fiscal year were more than $___ billion. The Distributor serves individuals and businesses through its nationwide network of more than ___ registered branch offices and more than _____ financial advisors.
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) California Tax-Exempt Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) California Tax-Exempt Fund No AXP(R) Dimensions Series, Inc.(4) 2/20/68, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Dimensions Fund Yes AXP(R) New Dimensions Fund Yes AXP(R) Discovery Series, Inc.(4) 4/29/81, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Core Bond Fund Yes AXP(R) Discovery Fund Yes AXP(R) Income Opportunities Fund Yes AXP(R) Limited Duration Bond Fund Yes AXP(R) Equity Series, Inc.(4) 3/18/57, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Equity Select Fund Yes AXP(R) Fixed Income Series, Inc.(4) 6/27/74, 6/31/86(1) Corporation NV/MN 8/31 AXP(R) Diversified Bond Fund (5) Yes AXP(R) Global Series, Inc. 10/28/88 Corporation MN 10/31 AXP(R) Emerging Markets Fund Yes AXP(R) Global Balanced Fund Yes AXP(R) Global Bond Fund No AXP(R) Global Growth Fund Yes AXP(R) Global Technology Fund(3) No AXP(R) Government Income Series, Inc.(4) 3/12/85 Corporation MN 5/31 AXP(R) Short Duration U.S. Government Fund (5) Yes AXP(R) U.S. Government Mortgage Fund Yes AXP(R) Growth Series, Inc. 5/21/70, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Fund Yes AXP(R) Large Cap Equity Fund Yes AXP(R) Large Cap Value Fund Yes AXP(R) Quantitative Large Cap Equity Fund Yes AXP(R) Research Opportunities Fund Yes AXP(R) High Yield Income Series, Inc.(4) 8/17/83 Corporation MN 5/31 AXP(R) High Yield Bond Fund (5) Yes AXP(R) High Yield Tax-Exempt Series, Inc.(4) 12/21/78, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) High Yield Tax-Exempt Fund Yes
- -------------------------------------------------------------------------------- 36 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS (continued) Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Income Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 5/31 AXP(R) Selective Fund Yes AXP(R) International Series, Inc.(4) 7/18/84 Corporation MN 10/31 AXP(R) European Equity Fund No AXP(R) International Fund Yes AXP(R) Investment Series, Inc. 1/18/40, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Diversified Equity Income Fund Yes AXP(R) Mid Cap Value Fund Yes AXP(R) Mutual Yes AXP(R) Managed Series, Inc. 10/9/84 Corporation MN 9/30 AXP(R) Managed Allocation Fund Yes AXP(R) Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31 AXP(R) Blue Chip Advantage Fund Yes AXP(R) Mid Cap Index Fund No AXP(R) S&P 500 Index Fund No AXP(R) Small Company Index Fund Yes AXP(R) Money Market Series, Inc. 8/22/75, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Cash Management Fund Yes AXP(R) Partners Series, Inc. 3/20/01 Corporation MN 5/31 AXP(R) Partners Aggressive Growth Fund Yes AXP(R) Partners Fundamental Value Fund Yes AXP(R) Partners Growth Fund Yes AXP(R) Partners Select Value Fund Yes AXP(R) Partners Small Cap Core Fund Yes AXP(R) Partners Small Cap Value Fund No AXP(R) Partners Value Fund Yes AXP(R) Partners International Series, Inc. 5/9/01 Corporation MN 10/31 AXP(R) Partners International Aggressive Growth Fund Yes AXP(R) Partners International Core Fund Yes AXP(R) Partners International Select Value Fund Yes AXP(R) Partners International Small Cap Fund Yes AXP(R) Progressive Series, Inc.(4) 4/23/68, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Progressive Fund Yes AXP(R) Sector Series, Inc.(3),(4) 3/25/88 Corporation MN 6/30 AXP(R) Utilities Fund Yes AXP(R) Selected Series, Inc.(4) 10/5/84 Corporation MN 3/31 AXP(R) Precious Metals Fund No AXP(R) Special Tax-Exempt Series Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) Insured Tax-Exempt Fund Yes AXP(R) Massachusetts Tax-Exempt Fund No AXP(R) Michigan Tax-Exempt Fund No AXP(R) Minnesota Tax-Exempt Fund No AXP(R) New York Tax-Exempt Fund No AXP(R) Ohio Tax-Exempt Fund No
- -------------------------------------------------------------------------------- 37 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS (continued) Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Stock Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Stock Fund Yes AXP(R) Strategy Series, Inc. 1/24/84 Corporation MN 3/31 AXP(R) Equity Value Fund Yes AXP(R) Focused Growth Fund(3) No AXP(R) Partners Small Cap Growth Fund(3) Yes AXP(R) Small Cap Advantage Fund Yes AXP(R) Strategy Aggressive Fund Yes AXP(R) Tax-Exempt Series, Inc. 9/30/76, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Intermediate Tax-Exempt Fund Yes AXP(R) Tax-Exempt Bond Fund Yes AXP(R) Tax-Free Money Series, Inc.(4) 2/29/80, 6/13/86(1) Corporation NV/MN 12/31 AXP(R) Tax-Free Money Fund Yes
(1) Date merged into a Minnesota corporation incorporated on April 7, 1986. (2) Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. (3) Effective Feb. 7, 2002, AXP(R) Focus 20 Fund changed its name to AXP(R) Focused Growth Fund, AXP(R) Innovations Fund changed its name to AXP(R) Global Technology Fund, AXP(R) Small Cap Growth Fund changed its name to AXP(R) Partners Small Cap Growth Fund and AXP(R) Utilities Income Fund, Inc. created a series, AXP(R) Utilities Fund. (4) Effective Nov. 13, 2002, AXP(R) Bond Fund, Inc. changed its name to AXP(R) Fixed Income Series, Inc. and created a series, AXP(R) Bond Fund, AXP(R) Discovery Fund, Inc. changed its name to AXP(R) Discovery Series, Inc. and created a series, AXP(R) Discovery Fund, AXP(R) Equity Select Fund, Inc. changed its name to AXP(R) Equity Series, Inc. and created a series, AXP(R) Equity Select Fund, AXP(R) Extra Income Fund, Inc. changed its name to AXP(R) High Yield Income Series, Inc. and created a series, AXP(R) Extra Income Fund, AXP(R) Federal Income Fund, Inc. changed its name to AXP(R) Government Income Series, Inc., AXP(R) High Yield Tax-Exempt Fund, Inc. changed its name to AXP(R) High Yield Tax-Exempt Series, Inc. and created a series, AXP(R) High Yield Tax-Exempt Fund, AXP(R) International Fund, Inc. changed its name to AXP(R) International Series, Inc., AXP(R) New Dimensions Fund, Inc. changed its name to AXP(R) Dimensions Series, Inc., AXP(R) Precious Metals Fund, Inc. changed its name to AXP(R) Selected Series, Inc. and created a series, AXP(R) Precious Metals Fund, AXP(R) Progressive Fund, Inc. changed its name to AXP(R) Progressive Series, Inc. and created a series, AXP(R) Progressive Fund, AXP(R) Selective Fund, Inc. changed its name to AXP(R) Income Series, Inc. and created a series, AXP(R) Selective Fund, AXP(R) Stock Fund, Inc. changed its name to AXP(R) Stock Series, Inc. and created a series, AXP(R) Stock Fund, AXP(R) Tax-Free Money Fund, Inc. changed its name to AXP(R) Tax-Free Money Series, Inc. and created a series, AXP(R) Tax-Free Money Fund, and AXP(R) Utilities Income Fund, Inc. changed its name to AXP(R) Sector Series, Inc. (5) Effective June 27, 2003, AXP(R) Bond Fund changed its name to AXP(R) Diversified Bond Fund, AXP(R) Federal Income Fund changed its name to AXP(R) Short Duration U.S. Government Fund and AXP(R) Extra Income Fund changed its name to AXP(R) High Yield Bond Fund. - -------------------------------------------------------------------------------- 38 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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 83 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held Principal Other directorships Committee with Fund and occupation during memberships length of service past five years - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Arne H. Carlson Board member Chair, Board Joint Audit, 901 S. Marquette Ave. since 1999 Services Contracts, Minneapolis, MN 55402 Corporation Executive, Age 68 (provides Investment administrative Review, Board services to Effectiveness boards). Former Governor of Minnesota - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Philip J. Carroll, Jr. Board member Retired Chairman Scottish Power PLC, 901 S. Marquette Ave. since 2002 and CEO, Fluor Vulcan Materials Minneapolis, MN 55402 Corporation Company, Inc. Age 65 (engineering and (construction construction) since materials/chemicals) 1998 - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Livio D. DeSimone Board member Retired Chair of Cargill, Joint Audit, 30 Seventh Street East since 2001 the Board and Chief Incorporated Contracts, Suite 3050 Executive Officer, (commodity Executive St. Paul, MN 55101-4901 Minnesota Mining merchants and Age 69 and Manufacturing processors), (3M) General Mills, Inc. (consumer foods), Vulcan Materials Company (construction materials/chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Heinz F. Hutter* Board member Retired President Board 901 S. Marquette Ave. since 1994 and Chief Operating Effectiveness, Minneapolis, MN 55402 Officer, Cargill, Executive, Age 74 Incorporated Investment (commodity Review merchants and processors) - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Anne P. Jones Board member Attorney and Joint Audit, 901 S. Marquette Ave. since 1985 Consultant Board Minneapolis, MN 55402 Effectiveness, Age 68 Executive - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Stephen R. Lewis, Jr.** Board member Retired President Valmont Industries, Contracts, 901 S. Marquette Ave. since 2002 and Professor of Inc. (manufactures Investment Minneapolis, MN 55402 Economics, Carleton irrigation systems) Review, Age 64 College Executive - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Alan G. Quasha Board member President, Quadrant Compagnie Joint Audit, 901 S. Marquette Ave. since 2002 Management, Inc. Financiere Board Minneapolis, MN 55402 (management of Richemont AG Effectiveness Age 53 private equities) (luxury goods), Harken Energy Corporation (oil and gas exploration) and SIRIT Inc. (radio frequency identification technology) - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Alan K. Simpson Board member Former three-term Biogen, Inc. Investment 1201 Sunshine Ave. since 1997 United States (biopharmaceuticals) Review, Board Cody, WY 82414 Senator for Wyoming Effectiveness Age 71 - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Alison Taunton-Rigby Board member President, Forester Investment 901 S. Marquette Ave. since 2002 Biotech since 2000. Review, Minneapolis, MN 55402 Former President Contracts Age 59 and 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. - -------------------------------------------------------------------------------- 39 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND
Board Members Affiliated with AEFC*** Name, address, age Position held Principal Other Committee with Fund and occupation directorships memberships length of service during past five years - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Barbara H. Fraser Board member Executive Vice 1546 AXP Financial Center since 2002 President - AEFA Minneapolis, MN 55474 Products and Age 53 Corporate 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 Senior Vice 50238 AXP Financial Center since 2002, Vice President - Minneapolis, MN 55474 President since Institutional Group Age 54 2002 of AEFC - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- William F. Truscott Board member Senior Vice 53600 AXP Financial Center since 2001, Vice President - Chief Minneapolis, MN 55474 President since Investment Officer Age 42 2002 of AEFC since 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 Principal Other directorships Committee with Fund and occupation during memberships length of service past five years - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Jeffrey P. Fox 5 Treasurer since Vice President - 0005 AXP Financial Center 2002 Investment Minneapolis, MN 55474 Accounting, AEFC, Age 48 since 2002; Vice President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Paula R. Meyer President since Senior Vice 596 AXP Financial Center 2002 President and Minneapolis, MN 55474 General Manager - Age 49 Mutual Funds, AEFC, since 2002; Vice President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - ------------------------------------ -------------------- ----------------------- ----------------------- ------------------- Leslie L. Ogg Vice President, President of Board 901 S. Marquette Ave. General Counsel, Services Corporation Minneapolis, MN 55402 and Secretary Age 64 since 1978 - ------------------------------------ -------------------- ----------------------- ----------------------- -------------------
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. - -------------------------------------------------------------------------------- 40 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Several committees facilitate its work Executive Committee -- Acts for the board between meetings of the board. The committee held _____ meetings 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 _____ 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 _____ 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 _____ 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 _____ meetings during the last fiscal year. BOARD MEMBERS' HOLDINGS The following table shows the Fund Board Members' ownership of American Express Funds. Dollar range of equity securities beneficially owned on Dec. 31, 2002 Based on net asset values as of Dec. 31, 2002 Aggregate dollar range of Dollar range of equity securities of all equity securities American Express Funds in the Fund overseen by Board Member Range Range Arne H. Carlson none over $100,000 Philip J. Carroll, Jr. none none Livio D. DeSimone none over $100,000 Heinz F. Hutter none over $100,000 Anne P. Jones $50,001-$100,000 over $100,000 Stephen R. Lewis, Jr. none $1-$10,000 Alan G. Quasha none none Alan K. Simpson none $50,001-$100,000 Alison Taunton-Rigby none none - -------------------------------------------------------------------------------- 41 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND COMPENSATION FOR BOARD MEMBERS During the most recent fiscal year, the independent members of the Fund board, for attending up to __ meetings, received the following compensation: Compensation Table Total cash compensation from Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. Livio D. DeSimone Heinz F. Hutter Anne P. Jones Stephen R. Lewis, Jr. Alan G. Quasha Alan K. Simpson Alison Taunton-Rigby * Arne H. Carlson, Chair of the Board, is compensated by Board Services 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. [Principal Holders of Securities As of 30 days prior to the date of this SAI, ______________________ held ____ % of Fund shares.] 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. - -------------------------------------------------------------------------------- 42 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND Appendix 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. - -------------------------------------------------------------------------------- 43 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 44 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 45 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 46 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND 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. - -------------------------------------------------------------------------------- 47 -- AXP(R) FIXED INCOME SERIES, INC. -- AXP(R) DIVERSIFIED BOND FUND S-6495-20 W (10/03) PART C. OTHER INFORMATION Item 23. Exhibits (a)(1) Articles of Incorporation, as amended Oct. 17, 1988, filed electronically as Exhibit 1 to Registrant's Post-Effective Amendment No. 28 to Registration Statement No. 2-51586, are incorporated by reference. (a)(2) Articles of Amendment, dated June 16, 1999, filed electronically as Exhibit (a)(2) to Registrant's Post-Effective Amendment No. 53 to Registration Statement No. 2-51586 filed on or about Oct. 25, 2001 is incorporated by reference. (a)(3) Articles of Amendment, dated Nov. 14, 2002, are filed electronically herewith. (b) By-laws, as amended Jan. 11, 2001, filed electronically as Exhibit (b) to Registrant's Post-Effective Amendment No. 53 to Registration Statement No. 2-51586 filed on or about Oct. 25, 2001 is incorporated by reference. (c) Stock certificate, filed as Exhibit 4 to Registrant's Amendment No. 1 to Registration Statement No. 2-51586, dated Oct. 29, 1974, is incorporated by reference. (d)(1) Investment Management Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, filed electronically as Exhibit 5 to Registrant's Post-Effective Amendment No. 47 to Registration Statement No. 2-51586 is incorporated by reference. (d)(2) Amendment to Investment Management Services Agreement between AXP Growth Series, Inc. and American Express Financial Corporation, dated June 3, 2002, filed electronically on or about June 12, 2002 as Exhibit (d)(7) to AXP Growth Series, Inc. Post-Effective Amendment No. 71 to Registration Statement No. 2-38355, is incorporated by reference. Registrant's Amendment to Investment Management Services Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (e) Distribution Agreement between AXP Utilities Income Fund, Inc. and American Express Financial Advisors Inc., dated July 8, 1999, is incorporated by reference to Exhibit (e) to AXP Utilities Income Fund, Inc. Post-Effective Amendment No. 22 to Registration Statement No. 33-20872 filed on or about August 27, 1999. Registrant's Distribution Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (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) Custodian Agreement between Registrant and First National Bank of Minneapolis, dated July 23, 1986, filed electronically as Exhibit 8 to Registrant's Post-Effective Amendment No. 46 to Registration Statement No. 2-51586 is incorporated by reference. (h)(1) Administrative Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, filed electronically as Exhibit 9(e) to Registrant's Post-Effective Amendment No. 47 to Registration Statement No. 2-51586 is incorporated by reference. (h)(2) Amendment to Administrative Services Agreement between AXP Growth Series, Inc. and American Express Financial Corporation, dated June 3, 2002, filed electronically on or about June 12, 2002 as Exhibit (h)(7) to AXP Growth Series, Inc. Post-Effective Amendment No. 71 to Registration Statement No. 2-38355, is incorporated by reference. Registrant's Amendment to Administrative Services Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (h)(3) License Agreement, dated Jan. 25, 1988, between IDS Financial Corporation and Registrant, filed as Exhibit 9(c) to Registrant's Post-Effective Amendment No. 35 to Registration Statement No. 2-51586, is incorporated by reference. (h)(4) License Agreement, dated June 17, 1999, between the American Express Funds and American Express Company, filed electronically on or about September 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc.'s Post-Effective Amendment No. 98 to Registration Statement No. 2-11358, is incorporated by reference. (h)(5) Plan and Agreement of Merger, dated April 10, 1986, filed electronically as Exhibit 9 to Registrant's Post-Effective Amendment No. 24 to Registration Statement No. 2-51586, is incorporated by reference. (h)(6) Agreement and Plan of Reorganization, dated September 8, 1994, between IDS Strategy Fund, Inc. and IDS Bond Fund, Inc., filed electronically as Exhibit 4 to Registrant's Pre-Effective Amendment No. 1, on Form N-14, is incorporated by reference. (h)(7) Class Y Shareholder Service Agreement between IDS Precious Metals Fund, Inc. and American Express Financial Advisors Inc., dated May 9, 1997, filed electronically on or about May 27, 1997 as Exhibit 9(e) to IDS Precious Metals Fund Inc.'s Post-Effective Amendment No. 30 to Registration Statement No. 2-93745, is incorporated by reference. Registrant's Class Y Shareholder Service Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (h)(8) Transfer Agency Agreement between Registrant and American Express Client Service Corporation, dated May 1, 2003, is filed electronically herewith. (i) Opinion and consent of counsel as to the legality of the securities being registered to be filed by amendment. (j) Independent Auditors' Consent to be filed by amendment. (k) Omitted Financial Statements: Not applicable. (l) Initial Capital Agreements: Not applicable. (m)(1) Plan and Agreement of Distribution, dated July 1, 1999, between AXP Discovery Fund, Inc. and American Express Financial Advisors Inc. is incorporated by reference to Exhibit (m) to AXP Discovery Fund, Inc. Post-Effective Amendment No. 36 to Registration Statement No. 2-72174 filed on or about July 30, 1999. Registrant's Plan and Agreement of Distribution differs from the one incorporated by reference only by the fact that Registrant is one executing party. (m)(2) Plan and Agreement of Distribution for Class C shares, dated March 9, 2000, between Registrant and American Express Financial Advisors Inc. filed electronically as Exhibit (m)(2) to Registrant's Post-Effective Amendment No. 51 to Registration Statement No. 2-51586 filed on or about June 14, 2000 is incorporated by reference. (n) Rule 18f-3 Plan, dated March 9, 2000, filed electronically as Exhibit (n) to Registrant's Post-Effective Amendment No. 51 to Registration Statement No. 2-51586 filed on or about June 14, 2000 is incorporated by reference. (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 adviser and principal underwriter, dated May 2003, is filed electronically herewith. (q)(1) Directors' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 8, 2003, is filed electronically herewith. (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. 54 to Registration Statement No. 2-51586, is incorporated by reference. (q)(3) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated Sept. 17, 2002, filed electronically as Exhibit (q)(3) to Registrant's Post-Effective Amendment No. 54 to Registration Statement No. 2-51586, is incorporated by reference. Item 24. Person Controlled by or Under Common Control with Registrant: None. 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 Adviser (American Express Financial Corporation) Directors and officers of American Express Financial Corporation who are directors and/or officers of one or more other companies: Name and Title Other company(s) Address* Title within other company(s) - ------------------------- ----------------------- ------------------------- ----------------------- Ruediger Adolf American Express Financial Senior Vice President Senior Vice President Advisors Inc. Gumer C. Alvero American Centurion Life 20 Madison Ave. Extension Director and Vice President - Annuities Vice President - General Assurance Company P.O. Box 5555 Manager 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 Ward D. Armstrong American Express Financial Senior Vice President - Senior Vice President - Advisors Inc. Retirement Services and Asset Retirement Services Management and Asset Management American Express Asset Director and President Management Group Inc. American Express Trust Director and Chairman of Company the Board Kenwood Capital Management LLC Manager Northwinds Marketing Manager Group LLC John M. Baker American Express Financial Vice President - Plan Vice President - Plan Sponsor Advisors Inc. Sponsor Services Services American Express Asset Vice President Management Group Inc. American Express Trust Director and Senior Vice President Company Dudley Barksdale American Express Financial Vice President - Service Vice President - Service Advisors Inc. Development Development Timothy V. Bechtold American Centurion Life 20 Madison Ave. Extension Director, President and Chief Vice President - Assurance Company P.O. Box 5555 Executive Officer Insurance Products 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 Arthur H. Berman American Express Senior Vice President - Finance Senior Vice President - Financial Advisors Inc. Finance American Express Director Trust Company Walter S. Berman American Express Director and Treasurer Director, Senior Vice President Certificate Company and Chief Financial Officer American Express Financial Director, Senior Vice President Advisors Inc. and Chief Financial Officer American Centurion Life Treasurer Assurance Company American Enterprise Life Vice Pesident and Treasurer Insurance Company American Express Personal Treasurer Trust Services, FSB American Partners Life Vice Pesident and Treasurer Insurance Company IDS Life Insurance Company Vice Pesident and Treasurer IDS Life Insurance Company Vice Pesident and Treasurer of New York Robert C. Bloomer American Express Vice President - Technologies Vice President - Financial Advisors Inc. Technologies Leslie H. Bodell American Express Vice President - Technologies Vice President - Financial Advisors Inc. Technologies Paul V. Bruce American Express Vice President - Compliance Vice President - Financial Advisors Inc. Compliance Kenneth I. Chenault American Express Company American Express Tower Chairman and Chief Director World Financial Center Operating Officer New York, NY 10285 Kenneth J. Ciak AMEX Assurance Company Director, President and Chief Vice President and General Executive Officer Manager - IDS Property Casualty American Express Financial Vice President and General Advisors Inc. Manager - IDS Property Casualty American Express Property Director, President and Chief Casualty Insurance Agency Executive Officer of Kentucky Inc. American Express Property Director, President and Chief Casualty Insurance Agency Executive Officer of Maryland Inc. American Express Property Director, President and Chief Casualty Insurance Agency Executive Officer of Pennsylvania Inc. IDS Property Casualty 1 WEG Blvd. Director, President and Chief Insurance Company DePere, WI 54115 Executive Officer Paul A. Connolly American Express Financial Vice President - Relationship Leader Vice President - Retail Advisors Inc. Retail Distribution Services Distribution Services James M. Cracchiolo American Express Financial Director, Chairman, President and Director, Chairman of Advisors Inc. Chief Executive Officer the Board, President and Chief Executive Officer Colleen Curran American Express Financial Vice President and Vice President and Assistant Advisors Inc. Assistant General Counsel General Counsel Luz Maria Davis American Express Financial Vice President - Vice President - Advisors Inc. Communications Communications William V. Elliott American Express Financial Vice President - Financial Vice President - Financial Advisors Inc. Planning and Advice Planning and Advice Benjamin R. Field American Express Vice President - Finance Education & Vice President - Finance Financial Advisors Inc. Planning Education & Planning Giunero Floro American Express Vice President - Creative Services Vice President - Creative Financial Advisors Inc. Services Terrence J. Flynn American Express Vice President - Brokerage Clearing Vice President - Brokerage Financial Advisors Inc. Operations Clearing Operations American Enterprise Senior Vice President Investment Services Inc. Jeffery P. Fox American Express Vice President - Investment Accounting Vice President - Financial Advisors Inc. Investment Accounting IDS Life Series, Inc. Chief Financial Officer IDS Life Variable Annuity Chief Financial Officer Funds A & B Brenda H. Fraser American Express Financial Executive Vice President - Executive Vice Advisors Inc. AEFA Products and Corporate Marketing President - AEFA Products and IDS Life Insurance Company Director, Chairman of the Board and Corporate Marketing Chief Executive Officer American Express Trust Company Vice President Gordon M. Fines American Express Asset Senior Vice President - Vice President - Mutual Fund Management Group Inc. Growth Spectrum Equity Investments American Express Financial Vice President - Mutual Advisors Inc. Fund Equity Investments Peter A. Gallus American Express Financial Vice President - Vice President - Investment Advisors Inc. Investment Administration Administration Kenwood Capital Management LLC Manager IDS Capital Holdings Inc. Vice President and Controller Steve Guida American Enterprise Vice President Vice President - New Investment Services Inc. Business and Service American Express Financial Vice President - New Advisors Inc. Business and Service Teresa A. Hanratty American Express Financial Senior Vice Senior Vice Advisors Inc. President - Field Management President - Field Management Lorraine R. Hart AMEX Assurance Company Vice President - Vice President - Insurance 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 - Insurance Advisors Inc. Investments 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 Janis K. Heaney American Express Financial Vice President - Incentive Vice President - Incentive Advisors Inc. Management Management Brian M. Heath American Express Financial Senior Vice President and Senior Vice President Advisors Inc. General Sales Manager and General Sales Manager Henry Heitman American Express Financial Vice President - Brokerage Vice President - Brokerage Advisors Inc. Product Development Product Development Carol A. Holton American Centurion Life 20 Madison Ave. Extension Director, Vice President - Third Vice President - Third Party Assurance Company Albany, NY 12205-0555 Party Distribution Distribution American Enterprise Life 829 AXP Financial Center Director, President and Insurance Company Minneapolis, MN 55474 Chief Executive Officer American Enterprise 829 AXP Financial Center President REO 1, LLC Minneapolis, MN 55474 American Express Financial Vice President - Third Advisors Inc. Party Distribution IDS Life Insurance Company 20 Madison Ave. Extension Director of New York P.O. Box 5555 Albany, NY 12205-0555 Debra A. Hutchinson American Express Financial Vice President - Technology Vice President - Technology Advisors Inc. Relationship Leader Relationship Leader James M. Jensen American Express Financial Vice President - Advice Vice President - Advice and Advisors Inc. and Retail Distribution Retail Distribution Group, Group Product, Product, Compensation and Compensation and Field Field Administration Administration Nancy E. Jones Vice President - Business Development William A. Jones American Express Vice President - Technologies Vice President - Financial Advisors Inc. Technologies John C. Junek American Express Financial Senior Vice President and Senior Vice President Advisors Inc. General Counsel and General Counsel American Express Financial Vice President Advisors Japan Inc. Investors Syndicate Director Development Corp. Ora J. Kaine American Express Financial Vice President - Retail Vice President - Retail Advisors Inc. Distribution Services and Distribution Services and Chief of Staff Chief of Staff Michelle M. Keeley American Express Senior Vice President - Fixed Income Senior Vice President - Financial Advisors Inc. Fixed Income American Express Asset Director Management Group, Inc. Claire Kolmodin American Express Financial Vice President - Service Vice President - Service Advisors Inc. Quality Quality Lori J. Larson American Express Financial Vice President - Brokerage Vice President - Brokerage Advisors Inc. and Direct Services and Direct Services Daniel E. Laufenberg American Express Financial Vice President and Chief Vice President and Chief Advisors Inc. U.S. Economist U.S. Economist Jane W. Lee American Express Financial Vice President - New Vice President - New Business Advisors Inc. Business Development and Development and Marketing Marketing Catherine M. Libbe American Express Vice President - Marketing & Product Vice President - Financial Advisors Inc. Services Marketing & Product Services Judd K. Lohmann American Express Treasurer Treasurer Financial Advisors Inc. American Express Property Treasurer Casualty Insurance Agency IDS Life Series Fund, Inc. Treasurer IDS Life Variable Annuity Treasurer Funds A & B Diane D. Lyngstad American Express Financial Vice President - Lead Vice President - Lead Advisors Inc. Financial Officer, Financial Officer, U.S. Retail Group U.S. Retail Group American Express Client Vice President and Chief Service Corporation Financial Officer Thomas A. Mahowald American Express Financial Vice President and Director of Vice President and Director of Advisors Inc. Equity Research Equity Research Timothy J. Masek American Express Financial Vice President and Director Vice President and Director Advisors Inc. of Fixed Income Research of Fixed Income Research Penny J. Mazal American Express Financial Vice President - Business Vice President - Business Advisors Inc. Transformation Transformation Mark T. McGannon American Express Financial Vice President and General Vice President and Advisors Inc. Sales Manager - AEFA Products General Sales Manager - AEFA Products Brian J. McGrane American Express Vice President - LFO Finance Vice President - Financial Advisors Inc. LFO Finance Advisory Capital Partners LLC Vice President and Chief Financial Officer Advisory Capital Vice President and Chief Financial Strategies Group Inc. Officer Advisory Convertible Vice President and Chief Financial Arbitrage LLC Officer Advisory Credit Vice President and Chief Financial Opportunities GP LLC Officer and Treasurer Advisory Quantitative Equity Vice President and Chief Financial (General Partner) LLC Officer Advisory Select LLC Vice President and Chief Financial Officer American Express Asset Vice President and Chief Financial Management Group Inc. Officer Boston Equity General Vice President and Chief Financial Partner LLC Officer Sarah M. McKenzie American Express Financial Vice President - Vice President - Advisors Inc. Managed and Brokerage Products Managed and Brokerage Products American Express Personal Director Trust Services, FSB 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 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 Paula R. Meyer American Express Financial Senior Vice President and General Senior Vice President Advisors Inc. Manager - Mutual Funds and General Manager - Mutual Funds American Express Certificate Director, President Chairman of the Company Board and Chief Executive Officer American Express Director and President International Deposit Company American Express Director Trust Company Investors Syndicate Director, President and Chief Development Corp. Executive Officer Jeryl A. Millner American Express Financial Vice President - LFO, Insurance, Vice President LFO, Advisors Inc. Annuities and Certificates Insurance, Annuities and Certificates American Centurion Life Vice President and 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 Vice President and Controller of New York Barry J. Murphy American Express Client Director, Chairman of the Board, Executive Vice President - Service Corporation President and Chief Executive Officer U.S. Retail Group American Express Financial Executive Vice President - Advisors Inc. U.S. Retail Group IDS Life Insurance Company Director Francois B. Odouard American Express Financial Vice President - Brokerage Vice President - Advisors Inc. Brokerage Michael J. O'Keefe American Express Financial Vice President - Advisory Vice President - Advisory Advisors Inc. Business Systems Business Systems Kristi L. Petersen American Express Financial Vice President - SPS and Vice President - SPS and Advisors Inc. External Products External Products IDS Cable Corporation Director, President and Chief Executive Officer IDS Cable II Corporation Director, President and Chief Executive Officer IDS Futures Corporation Director, President and Chief Executive Officer IDS Management Corporation Director, President and Chief Executive Officer IDS Partnership Services Director, President and Chief Executive Corporation Officer IDS Realty Corporation Director, President and Chief Executive Officer Ronald W. Powell American Express Financial Vice President and Vice President and Assistant Advisors Inc. Assistant General Counsel General Counsel Kenwood Capital Management LLC Chief Legal Officer Teresa J. Rasmussen American Express Financial Vice President and Vice President and Assistant Advisors Inc. Assistant General Counsel General Counsel 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 and General Counsel 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 Daniel J. Rivera American Express Vice President - Senior Portfolio Manager Vice President - Senior Financial Advisors Inc. Portfolio Manager ReBecca K. Roloff American Express Financial Senior Vice President - Senior Vice President - Advisors Inc. Field Management and Field Management Financial Advisory Services and Financial Advisory Services Stephen W. Roszell Advisory Capital Director Senior Vice President - Strategies Group Inc. Institutional Group Advisory Select LLC Director American Express Asset Director, President and Management Group Inc. Chief Executive 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 American Express Financial Director Advisors Japan Inc. American Express Trust Director Company IDS Life Insurance Company Director Northwinds Marketing Manager Group LLC Andrew C. Schell American Express Financial Vice President - Client Vice President - Client Advisors Inc. Development and Migration Development and Migration Peter B. Schofield American Express Vice President - Auditing Vice President - Auditing Financial Advisors Inc. Gary A. Scott American Express Vice President - Client Acquisition Vice President - Financial Advisors Inc. Marketing Client Acquisition Marketing Bridget Sperl American Enterprise Director, President and Chief Senior Vice President - Investment Services Inc. Executive Officer Client Service American Express Client Director and Senior Vice President Service Corporation American Express Financial Senior Vice President - Advisors Inc. Client Service IDS Life Insurance Company Executive Vice President - Client Service IDS Property Casualty Director Insurance Company Lisa A. Steffes American Express Financial Vice President - Marketing Vice President - Marketing Advisors Inc. Offer Development Offer Development AMEX Assurance Company Director IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 David K. Stewart American Express Vice President - AEFA Controller Vice President - Financial Advisors Inc. AEFA Controller Caroline Stockdale-Boon American Express Senior Vice President - Relationship Senior Vice President - Financial Advisors Inc. Leader of Human Resources Relationship Leader of Human Resources Jeffrey J. Stremcha American Express Financial Vice President - Vice President - Information Advisors Inc. Information Resource Resource Management/ISD Management/ISD John T. Sweeney American Express Financial Vice President - Lead Vice President - Lead Advisors Inc. Financial Officer, Products Group Financial Officer, Products Group 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 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 Vice President - Finance IDS Life Insurance Company Vice President - Finance New York IDS Partnership Director Services Corporation IDS Property Casualty Director Insurance Company IDS Realty Corporation Director William F. "Ted" Truscott Advisory Capital Strategies Director Senior Vice President - Group Inc. Chief Investment Officer American Express Asset Director and Chairman of the Board, Management Group Inc. Chief Investment Officer American Express Asset Director Management International Inc. American Express Financial Senior Vice President - Advisors Inc. Chief Investment Officer IDS Capital Holdings Inc. Director and President Kenwood Capital Management LLC Manager George F. Tsafaridis American Express Vice President - Quality & Service Support Vice President - Financial Advisors Inc. Quality & Service Support Peter S. Velardi American Express Senior Vice President - Field Management Senior Vice President - Financial Advisors Inc. Field Management Andrew O. Washburn American Express Vice President - Mutual Fund Marketing Vice President - Financial Advisors Inc. Mutual Fund Marketing Beth E. Weimer American Express Financial Vice President - Chief Compliance Officer Vice President Advisors Inc. Chief 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 Jeffery A. Williams American Express Financial Senior Vice President - Senior Vice President - Advisors Inc. Cross-Sell/Strategic Cross-Sell/Strategic Marketing Marketing William J. Williams American Express Senior Vice President - Field Management Senior Vice President - Financial Advisors Inc. Field Management Dianne L. Wilson American Express Vice President - Insurance Operations Vice President - Financial Advisors Inc. Insurance Operations Amex Assurance Company Director and Senior Vice President American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Property Casualty Company Director and Senior Vice President Michael D. Wolf American Express Asset Executive Vice President Vice President - Senior Management Group Inc. Portfolio Manager American Express Financial Vice President - Senior Advisors Inc. Portfolio Manager Michael R. Woodward American Express Financial Senior Vice President - Senior Vice President - Advisors Inc. Field Management Field Management American Centurion Life 20 Madison Ave. Extension Director Assurance Company Albany, NY 12205-0555 IDS Life Insurance Company P.O. Box 5144 Director of New York Albany, NY 12205 Doretta R. Wright American Express Financial Vice President - Brokerage Marketing Vice President - Brokerage Advisors Inc. Marketing David L. Yowan American Enterprise 829 AXP Financial Center Treasurer Vice President and Corporate REO 1, LLC Minneapolis, MN 55474 Treasurer American Express Asset Vice President and Management Group Inc. Treasurer American Express Asset Vice President and Management International Treasurer Inc. American Express Vice President and Financial Advisors Treasurer Japan Inc. American Express Vice President and Corporation Treasurer 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 Express Personal Treasurer Trust Services, FSB 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. AMEX Assurance Company Vice President, Treasurer and Assistant Secretary IDS Cable II Corporation Director, Vice President and Treasurer IDS Insurance Agency of Treasurer Arkansas Inc. IDS Management Corporation Director, Vice President and Treasurer IDS Partnership Services Vice President and Corporation Treasurer IDS REO 1, LLC Treasurer IDS REO 2, LLC Treasurer Investors Syndicate Vice President and Development Corporation Treasurer Kenwood Capital Management LLC Treasurer * Unless otherwise noted, address is 70100 AXP Financial Center, Minneapolis, MN 55474.
Item 27. Principal Underwriters. (a) American Express Financial Advisors acts as principal underwriter for the following investment companies: AXP California Tax-Exempt Trust; AXP Dimensions Series, Inc.; AXP Discovery Series, Inc.; AXP Equity Series, Inc.; AXP Fixed Income Series, Inc.; AXP Global Series, Inc.; AXP Government Income Series, Inc.; AXP Growth Series, Inc.; AXP High Yield Income Series, Inc.; AXP High Yield Tax-Exempt Series, Inc.; AXP Income Series, Inc.; AXP International Series, Inc.; AXP Investment Series, Inc.; AXP Managed Series, Inc.; AXP Market Advantage Series, Inc.; AXP Money Market Series, Inc.; AXP Partners Series, Inc.; AXP Partners International Series, Inc.; AXP Progressive Series, Inc.; AXP Sector Series, Inc.; AXP Selected Series, Inc.; AXP Special Tax-Exempt Series Trust; AXP Stock Series, Inc.; AXP Strategy Series, Inc.; AXP Tax-Exempt Series, Inc.; AXP Tax-Free Money Series, Inc.; Growth Trust; Growth and Income Trust; Income Trust; Tax-Free Income Trust; World Trust; American Express Certificate Company. (b) As to each director, officer or partner of the principal underwriter: Name and Principal Position and Offices with Offices with Registrant Business Address* Underwriter Ruediger Adolf Senior Vice President None Gumer C. Alvero Vice President - General None Manager Annuities Ward D. Armstrong Senior Vice President - None Retirement Services and Asset Management John M. Baker Vice President - Plan None Sponsor Services Dudley Barksdale Vice President - Service None Development Timothy V. Bechtold Vice President - None Insurance Products Arthur H. Berman Senior Vice President - Finance None Walter S. Berman Director, Senior Vice President - None and Chief Financial Officer Robert C. Bloomer Vice President - Technologies None Leslie H. Bodell Vice President - Technologies None Paul V. Bruce Vice President - Compliance None Rob Bohli Group Vice President - None 10375 Richmond Avenue #600 South Texas Houston, TX 77042 Walter K. Booker Group Vice President - None 61 South Paramus Road New Jersey Mack-Cali Office Center IV, 3rd Floor Paramus, NJ 07652 Bruce J. Bordelon Group Vice President - None 1333 N. California Blvd., Northern California Suite 200 Walnut Creek, CA 94596 Kenneth J. Ciak Vice President and None IDS Property Casualty General Manager - IDS 1400 Lombardi Avenue Property Casualty Green Bay, WI 54304 Paul A. Connolly Vice President - Relationship None Leader Retail Distribution Services James M. Cracchiolo Director, Chairman, President and None Chief Executive Officer Colleen Curran Vice President and None Assistant General Counsel Luz Maria Davis Vice President - None Communications Arthur E. DeLorenzo Group Vice President - None 4 Atrium Drive, #100 Upstate New York/Vermont Albany, NY 12205 Scott M. DiGiammarino Group Vice President - None Suite 500, 8045 Leesburg Washington D.C./Baltimore Pike Vienna, VA 22182 Kenneth Dykman Group Vice President - None 6000 28th Street South East Greater Michigan Suite 200 Grand Rapids, MI 49546 Bradford L. Drew Group Vice President - None 1000 S. Pine Island Road Southern Florida Suite 510 Plantation, FL 33324 William V. Elliot Vice President - Financial None Planning and Advice Benjamin R. Field Vice President - Finanace None Education and Planning Services Gordon M. Fines Vice President - Mutual None Fund Equity Investments Giunero Floro Vice President - Creative None Services Terrence J. Flynn Vice President - Brokerage None Clearing Operations Jeffrey P. Fox Vice President - Investment Treasurer Accounting Barbara H. Fraser Executive Vice President - None AEFA Products and Corporate Marketing Peter A. Gallus Vice President - None Investment Administration Gary W. Gassmann Group Vice President - None 2677 Central Park Boulevard Detroit Metro Suite 350 Southfield, MN 48076 Steven Guida Vice President - None New Business and Service Teresa A. Hanratty Senior Vice President - None Suites 6&7 Field Management 169 South River Road Bedford, NH 03110 Lorraine R. Hart Vice President - None Insurance Investments Janis K. Heaney Vice President - None Incentive Management Brian M. Heath Senior Vice President None Suite 150 and General Sales Manager 801 E. Campbell Road Richardson, TX 75081 Henry Heitman Vice President - Brokerage None Product Development Jon E. Hjelm Group Vice President - None 655 Metro Place South Ohio Valley Suite 570 Dublin, OH 43017 David X. Hockenberry Group Vice President - None 830 Crescent Centre Drive Mid South Suite 490 Franklin, TN 37067-7217 Carol A. Holton Vice President - Third None Party Distribution Debra A. Hutchinson Vice President - Technology None Relationship Leader Diana R. Iannarone Group Vice President - None 3030 N.W. Expressway Great Plains Suite 900 Oklahoma City, OK 73112 Theodore M. Jenkin Group Vice President - None 6000 Freedom Square Drive Steel Cities Suite 300 Cleveland, OH 44131 James M. Jensen Vice President - None Advice and Retail Distribution Group, Product, Compensation and Field Administration Jody M. Johnson Group Vice President - None Twin Cities Metro William A. Jones Vice President - Technologies None John C. Junek Senior Vice President, None General Counsel Ora J. Kaine Vice President - None Retail Distribution Services and Chief of Staff Michelle M. Keeley Senior Vice President - None Fixed Income Raymond G. Kelly Group Vice President - None Suite 250 Northern Texas 801 East Campbell Road Richardson, TX 75081 Claire Kolmodin Vice President - Service None Quality Mitre Kutanovski Group Vice President - None 125 South Wacker Drive Chicago Metro Suite 1550 Chicago, IL 60606 Lori J. Larson Vice President - None Brokerage and Direct Services Daniel E. Laufenberg Vice President and Chief None U.S. Economist Jane W. Lee Vice President - New None Business Development and Marketing Catherine M. Libbe Vice President - Marketing None & Product Services Judd K. Lohmann Treasurer None Diane D. Lyngstad Vice President - Lead Financial None Officer, U.S. Retail Group Thomas A. Mahowald Vice President and Director of None Equity Research Timothy J. Masek Vice President and None Director of Fixed Income Research Penny Mazal Vice President - Business None Transformation Mark T. McGannon Vice President and General None Sales Manager - AEFA Products Brian J. McGrane Vice President - LFO Finance None Dean O. McGill Group Vice President - None 11835 W. Olympic Blvd Los Angeles Metro Suite 900 East Los Angeles, CA 90064 Sarah M. McKenzie Vice President - Managed and None Brokerage Products Timothy S. Meehan Secretary None Paula R. Meyer Senior Vice President and President General Manager - Mutual Funds Jeryl A. Millner Vice President - LFO, Insurance, None Annuities and Certificates Barry J. Murphy Executive Vice President - None U.S. Retail Group Thomas V. Nicolosi Group Vice President - None Suite 220 New York Metro Area 500 Mamaroneck Ave. Harrison, NY 10528 Patrick H. O'Connell Group Vice President - None Commerce Center One Southern New England 333 East River Hartford, CT 06108-4200 Francois B. Odouard Vice President - Brokerage None Michael J. O'Keefe Vice President - None Advisory Business Systems Kristi L. Petersen Vice President - SPS and None External Products John G. Poole Group Vice President - None 14755 North Outer Forty Road Gateway/Springfield Suite 500 Chesterfield, MO 63017 Larry M. Post Group Vice President - None 2 Constitution Plaza New England Charlestown, MA 02129 Ronald W. Powell Vice President and None Assistant General Counsel Teresa J. Rasmussen Vice President and None Assistant General Counsel Ralph D. Richardson III Group Vice President - None Suite 800 Carolinas Arboretum Plaza One 9442 Capital of Texas Hyw. N. Austin, TX 78759 Daniel J. Rivera Vice President - Senior None Portfolio Manager ReBecca K. Roloff Senior Vice President - None Field Management and Financial Advisory Services Stephen W. Roszell Senior Vice President - Board member and Institutional Group Vice President Maximillian G. Roth Group Vice President - None 1400 Lombardi Avenue Wisconsin/Upper Michigan Suite 202 Green Bay, WI 54304 Russell L. Scalfano Group Vice President - None Suite 201 Illinois/Indiana/Kentucky 101 Plaza East Blvd. Evansville, IN 47715 Andrew C. Schell Vice President - Client Development None and Migration Peter B. Schofield Vice President - Auditing None Gary A. Scott Vice President - Client None Acquisition Marketing Albert L. Soule Group Vice President None 6925 Union Park Center Suite 200 Midvale, UT 84047 Bridget Sperl Senior Vice President - None Client Service Paul J. Stanislaw Group Vice President - None Suite 1100 Southern California/Hawaii Two Park Plaza Irvine, CA 92614 Lisa A. Steffes Vice President - None Marketing Offer Development David K. Stewart Vice President - AEFA Controller None Caroline Stockdale-Boon Senior Vice President - Relationship None Leader of Human Resources Jeffrey J. Stremcha Vice President - None Information Resource Management/ISD John T. Sweeney Vice President - Lead Financial None Officer, Products Craig P. Taucher Group Vice President - None Suite 150 Georgia/North Florida 4190 Belfort Rd. Jackonville, FL 32216 Neil G. Taylor Group Vice President - None 188 106th Avenue NE Pacific Northwest Suite 640 Bellevue, WA 98004-5902 William F. Truscott Senior Vice President - Board member and Chief Investment Officer Vice President George F. Tsafaridis Vice President - Quality & None Service Support Janet M. Vandenbark Group Vice President - None 3951 Westerre Parkway, Suite 250 Virginia Richmond, VA 23233 Peter S. Velardi Senior Vice President - None Field Management Andrew O. Washburn Vice President - None Mutual Fund Marketing Donald F. Weaver Group Vice President - None 3500 Market Street, Eastern Pennsylvania/ Suite 200 Delaware Camp Hill, PA 17011 Beth E. Weimer Vice President and None Chief Compliance Officer Jeffrey A. Williams Senior Vice President - None Cross-Sell/Strategic Marketing William J. Williams Senior Vice President - None Field Management Dianne Wilson Vice President - Insurance None Operations Michael D. Wolf Vice President - Senior None Portfolio Manager Michael R. Woodward Senior Vice President - None 32 Ellicott St Field Management Suite 100 Batavia, NY 14020 Doretta R. Wright Vice President - None Brokerage Marketing
* Business address is: 70100 AXP Financial Center, Minneapolis, MN 55474 unless otherwise noted. Item 27 (c). Not Applicable. 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 Fixed Income Series, Inc., 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 15th day of August, 2003. AXP FIXED INCOME 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 the Registration Statement has been signed below by the following persons in the capacities indicated on the 15th day of August, 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 herewith as Exhibit (q)(1), by: /s/ Leslie L. Ogg ------------- Leslie L. Ogg ** Signed pursuant to Officers' Power of Attorney, dated Sept. 17, 2002, filed electronically as Exhibit (q)(3) to Registrant's Post-Effective Amendment No. 54, by: /s/ Stephen W. Roszell - ----------------------- Stephen W. Roszell CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 55 TO REGISTRATION STATEMENT NO. 2-51586 This Post-Effective Amendment contains the following papers and documents: The facing sheet. Part A. The prospectus. Part B. Statement of Additional Information. Part C. Other information. The signatures. EX-99 3 ex-index.txt EXHIBIT INDEX EXHIBIT INDEX (a)(3) Articles of Amendment, dated Nov. 14, 2002. (h)(8) Transfer Agency Agreement between Registrant and American Express Client Service Corporation, dated May 1, 2003. (p)(2) Code of Ethics adopted under Rule 17j-1 for Registrant's investment adviser and principal underwriter, dated May 2003. (q)(1) Directors' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 8, 2003. EX-99.A3 ARTICLES 4 a3-articles.txt ARTICLES OF AMENDMENT ARTICLES OF AMENDMENT OF AXP Bond Fund, Inc. Pursuant to Section 302A.135 of the Minnesota Business Corporation Act, AXP Bond Fund, 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 Fixed Income Series, Inc. and to change shareholder voting from share-based to dollar-based. New Article I shall be: ARTICLE I - NAME The name of this corporation (hereinafter called the "Fund") is: AXP Fixed Income Series, Inc. 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 Fixed Income 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.H8 TRANS AGMNT 5 h8-transagmt.txt TRANSFER AGENCY AGREEMENT TRANSFER AGENCY AGREEMENT This Agreement, dated as of May 1, 2003, is between AXP Fixed Income Series, Inc. (the "Corporation"), a Minnesota corporation, on behalf of its underlying series AXP Bond Fund (the "Fund"), and American Express Client Service Corporation (the "Transfer Agent"), a Minnesota corporation. In consideration of the mutual promises set forth below, the Corporation and the Transfer Agent agree as follows: 1. Appointment of the Transfer Agent. The Corporation hereby appoints the Transfer Agent, as transfer agent for the shares of and as shareholder servicing agent for the Fund, and the Transfer Agent accepts such appointment and agrees to perform the duties set forth below. 2. Compensation. (a) The Corporation will compensate the Transfer Agent for the performance of its obligations as set forth in Schedule A. Schedule A does not include out-of-pocket disbursements of the Transfer Agent for which the Transfer Agent shall be entitled to bill the Corporation separately. (b) The Transfer Agent will bill the Corporation monthly. The fee shall be paid in cash by the Corporation to the Transfer Agent within five (5) business days after the last day of each month. (c) Out-of-pocket disbursements shall include, but shall not be limited to, the items specified in Schedule B. Reimbursement by the Corporation for expenses incurred by the Transfer Agent in any month shall be made as soon as practicable after the receipt of an itemized bill from the Transfer Agent. (d) Any compensation jointly agreed to hereunder may be adjusted from time to time by attaching to this Agreement a revised Schedule A, dated and signed by an officer of each party. 3. Documents. The Corporation will furnish from time to time such certificates, documents or opinions as the Transfer Agent deems to be appropriate or necessary for the proper performance of its duties. 4. Representations of the Corporation and the Transfer Agent. (a) The Corporation represents to the Transfer Agent that all outstanding shares are validly issued, fully paid and non-assessable by the Corporation. When shares are hereafter issued in accordance with the terms of the Corporation's Articles of Incorporation and its By-laws, such shares shall be validly issued, fully paid and non-assessable by the Corporation. (b) The Transfer Agent represents that it is registered under Section 17A(c) of the Securities Exchange Act of 1934. The Transfer Agent agrees to maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement and to comply with all applicable laws. 5. Duties of the Transfer Agent. The Transfer Agent shall be responsible, separately and through its subsidiaries or affiliates, for the following functions: (a) Sale of Fund Shares. (1) On receipt of an application and payment, wired instructions and payment, or payment identified as being for the account of a shareholder, the Transfer Agent will deposit the payment, prepare and present the necessary report to the Custodian and record the purchase of shares in a timely fashion in accordance with the terms of the Fund's prospectus. All shares shall be held in book entry form, and no certificate shall be issued unless the Fund is permitted to do so by the prospectus and the purchaser so requests. (2) On receipt of notice that payment was dishonored, the Transfer Agent shall stop redemptions of all shares owned by the purchaser related to that payment, place a stop payment on any checks that have been issued to redeem shares of the purchaser and take such other action as it deems appropriate. (b) Redemption of Fund Shares. On receipt of instructions to redeem shares in accordance with the terms of the Fund's prospectus, the Transfer Agent will record the redemption of shares of the Fund, prepare and present the necessary report to the Custodian and pay the proceeds of the redemption to the shareholder, an authorized agent or legal representative upon the receipt of the monies from the Custodian. (c) Transfer or Other Change Pertaining to Fund Shares. On receipt of instructions or forms acceptable to the Transfer Agent to transfer the shares to the name of a new owner, change the name or address of the present owner or take other legal action, the Transfer Agent will take such action as is requested. (d) Exchange of Fund Shares. On receipt of instructions to exchange the shares of the Fund for the shares of another American Express(R) Fund or other American Express Financial Corporation product in accordance with the terms of the prospectus, the Transfer Agent will process the exchange -2- in the same manner as a redemption and sale of shares. (e) Right to Seek Assurance. The Transfer Agent may refuse to transfer, exchange or redeem shares of the Fund or take any action requested by a shareholder until it is satisfied that the requested transaction or action is legally authorized or until it is satisfied there is no basis for any claims adverse to the transaction or action. It may rely on the provisions of the Uniform Act for the Simplification of Fiduciary Security Transfers or the Uniform Commercial Code. The Corporation shall indemnify the Transfer Agent for any act done or omitted to be done in reliance on such laws or for refusing to transfer, exchange or redeem shares or taking any requested action if it acts on a good faith belief that the transaction or action is illegal or unauthorized. (f) Shareholder Records, Reports and Services. (1) The Transfer Agent shall maintain all shareholder accounts, which shall contain all required tax, legally imposed and regulatory information; shall provide shareholders, and file with federal and state agencies, all required tax and other reports pertaining to shareholder accounts; shall prepare shareholder mailing lists; shall cause to be printed and mailed all required prospectuses, annual reports, semiannual reports, statements of additional information (upon request), proxies and other mailings to shareholders; and shall cause proxies to be tabulated. (2) The Transfer Agent shall respond to all valid inquiries related to its duties under this Agreement. (3) The Transfer Agent shall create and maintain all records in accordance with all applicable laws, rules and regulations, including, but not limited to, the records required by Section 31(a) of the Investment Company Act of 1940. (g) Dividends and Distributions. The Transfer Agent shall prepare and present the necessary report to the Custodian and shall cause to be prepared and transmitted the payment of income dividends and capital gains distributions or cause to be recorded the investment of such dividends and distributions in additional shares of the Fund or as directed by instructions or forms acceptable to the Transfer Agent. (h) Confirmations and Statements. The Transfer Agent shall confirm each transaction either at the time of the transaction or through periodic reports as may be legally permitted. (i) Lost or Stolen Checks. The Transfer Agent will replace lost or stolen -3- checks issued to shareholders upon receipt of proper notification and will maintain any stop payment orders against the lost or stolen checks as it is economically desirable to do. (j) Reports to Corporation. The Transfer Agent will provide reports pertaining to the services provided under this Agreement as the Corporation may request to ascertain the quality and level of services being provided or as required by law. (k) Other Duties. The Transfer Agent may perform other duties for additional compensation if agreed to in writing by the parties to this Agreement. 6. Ownership and Confidentiality of Records. (a) General. The Transfer Agent agrees that all records prepared or maintained by it relating to the services to be performed by it under the terms of this Agreement are the property of the Corporation and may be inspected by the Corporation or any person retained by the Corporation at reasonable times. The Corporation and Transfer Agent agree to protect the confidentiality of those records. (b) Regulation S-P. (1) In accordance with Regulation S-P of the Securities and Exchange Commission, "Nonpublic Personal Information" includes (1) all personally identifiable financial information; (2) any list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived using any personally identifiable financial information that is not publicly available information; and (3) any information derived therefrom. (2) The Transfer Agent must not use or disclose Nonpublic Personal Information for any purpose other than to carry out the purpose for which Nonpublic Personal Information was provided to the Transfer Agent as set forth in this Agreement, and agrees to cause the Transfer Agent, and its employees, agents, representatives, or any other party to whom the Transfer Agent may provide access to or disclose Nonpublic Personal Information to limit the use and disclosure of Nonpublic Personal Information to that purpose. (3) The Transfer Agent agrees to implement appropriate measures designed to ensure the security and confidentiality of Nonpublic Personal Information, to protect such information against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, Nonpublic Personal Information that could result in substantial -4- harm or inconvenience to any customer of the Fund; the Transfer Agent further agrees to cause all its agents, representatives, subcontractors, or any other party to whom the Transfer Agent may provide access to, or disclose, Nonpublic Personal Information to implement appropriate measures designed to meet the objectives set forth in this paragraph. (4) With respect only to the provisions of this Section 6(b), the Transfer Agent agrees to indemnify and hold harmless the Corporation and/or the Fund, and any officer or director of the Corporation, against losses, claims, damages, expenses, or liabilities to which the Corporation and/or the Fund, or any officer or director of the Corporation, may become subject as the result of (1) a material breach of the provisions of this section of the Agreement or (2) any acts or omissions of the Transfer Agent, or of any of its officers, directors, employees, or agents, that are not in substantial accordance with this Agreement, including, but not limited to, any violation of any federal statute or regulation. Notwithstanding the foregoing, no party shall be entitled to indemnification pursuant to this Section 6(b)(4) if such loss, claim, damage, expense, or liability is due to the willful misfeasance, bad faith, gross negligence, or reckless disregard of duty by the party seeking indemnification. 7. Action by Board and Opinion of Counsel. The Transfer Agent may rely on resolutions of the Board of Directors (the "Board") or the Executive Committee of the Board and on opinion of counsel for the Corporation. 8. Duty of Care. It is understood and agreed that, in furnishing the Fund with the services as herein provided, neither the Transfer Agent, nor any officer, director or agent thereof shall be held liable for any loss arising out of or in connection with their actions under this Agreement so long as they act in good faith and with due diligence, and are not negligent or guilty of any willful misconduct. It is further understood and agreed that the Transfer Agent may rely upon information furnished to it reasonably believed to be accurate and reliable. In the event the Transfer Agent is unable to perform its obligations under the terms of this Agreement because of an act of God, strike or equipment or transmission failure reasonably beyond its control, the Transfer Agent shall not be liable for any damages resulting from such failure. 9. Term and Termination. 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. In the event such notice is given by the Corporation, it shall be -5- accompanied by a vote of the Board, certified by the Secretary, electing to terminate this Agreement and designating a successor transfer agent or transfer agents. Upon such termination and at the expense of the Corporation, the Transfer Agent will deliver to such successor a certified list of shareholders of the Fund (with name, address and taxpayer identification or Social Security number), a historical record of the account of each shareholder and the status thereof, and all other relevant books, records, correspondence, and other data established or maintained by the Transfer Agent under this Agreement in the form reasonably acceptable to the Corporation, and will cooperate in the transfer of such duties and responsibilities, including provisions for assistance from the Transfer Agent's personnel in the establishment of books, records and other data by such successor or successors. 10. Amendment. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. 11. Subcontracting. The Corporation agrees that the Transfer Agent 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 the Transfer Agent remains fully responsible for the services. Except for out-of-pocket expenses identified in Schedule B, the Transfer Agent shall bear the cost of subcontracting such services, unless otherwise agreed by the parties. 12. Miscellaneous. (a) 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. (b) This Agreement shall be governed by the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers as of the day and year written above. AXP FIXED INCOME SERIES, INC. AXP Bond Fund By: /s/ Leslie L. Ogg ------------------ Leslie L. Ogg Vice President -6- AMERICAN EXPRESS CLIENT SERVICE CORPORATION By: /s/ Bridget Sperl -------------------- Bridget Sperl Senior Vice President -7- Schedule A AXP FIXED INCOME SERIES, INC. AXP Bond Fund FEE The annual per account fee for services under this Agreement, accrued daily and payable monthly, is as follows: Class A Class B Class C Class Y ------- ------- ------- ------- $20.50 $21.50 $21.00 $18.50 For purposes of this agreement, accounts that are part of a 529 college savings plan offering American Express Funds will be charged at a rate that is 50% of the rate shown above. In addition, there is an annual closed-account fee of $5.00 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system. -8- Schedule B OUT-OF-POCKET EXPENSES The Corporation shall reimburse the Transfer Agent monthly for the following out-of-pocket expenses: o typesetting, printing, paper, envelopes, postage and return postage for proxy soliciting material, and proxy tabulation costs o printing, paper, envelopes and postage for dividend notices, dividend checks, records of account, purchase confirmations, exchange confirmations and exchange prospectuses, redemption confirmations, redemption checks, confirmations on changes of address and any other communication required to be sent to shareholders o typesetting, printing, paper, envelopes and postage for prospectuses, annual and semiannual reports, statements of additional information, supplements for prospectuses and statements of additional information and other required mailings to shareholders o stop orders o outgoing wire charges o National Securities Clearing Corporation charges related to fund transactions o other expenses incurred at the request or with the consent of the Corporation -9- EX-99.P2 CODE ETHICS 6 p2-codeethics.txt CODE OF ETHICS Access Persons PERSONAL TRADING RULES AND PROCEDURES FOR ACCESS PERSONS AMERICAN EXPRESS FINANCIAL CORPORATION AND ITS AFFILIATES May 2003 -1- - ------------------------------------------------------------------- Personal Trading Rules and Procedures American Express Financial Corporation and its Affiliates - ------------------------------------------------------------------- Topic Page - ------------------------------------------------------------------ ------------ Personal Trading Rules Framework Applicability 3 General Personal Trading Rules 3-4 Basis For Rules 5 Fiduciary Principles 5 Definitions 6 Reporting Requirements for Access Persons Security Activities Which Must Be Reported 7 How To Comply 7 Inclusions and Exclusions to Limited Choice 8 Exceptions to Limited Choice 8 Additional Rules & Requirements for Access Persons Preclearance Of Security Trades 9 Exceptions 10 Preclearance Form 11 Reporting & Preclearance Chart 12-13 Private Placement Preclearance 14 Additional Reporting Requirements Initial Holdings Disclosure 15 Annual Certification and Annual Holdings Disclosure 15 Quarterly Reporting 15 Investment Clubs 16 Giving Securities 16 Sanctions 17 Unusual Trading Activity 17 Incremental Restrictions and Requirements for Investment Personnel 60-Day Holding Period 18-19 Research Analysts: Additional Rules 20-21 Incremental Portfolio Manager Restriction 7-Day Blackout Period 22 American Express' Insider Trading Policy 23-25 Forms & Completion Instructions Brokerage Account Instruction & Certification Form 26-27 Initial Personal Holdings Disclosure Form 28 Brokerage Account Notification Instructions & Form 29-30 Limited Choice Exception Request From 31 Quarterly Non-Brokerage Certification Form 32 -2- - ---------------------------------------------------------------------------- Personal Trading Rule Framework - ---------------------------------------------------------------------------- Applicability These rules apply to securities trading in which you have a beneficial ownership. This includes accounts held in the name of any of the following individuals: o You o Your spouse/partner o Financially dependent members of your household In addition, these rules apply to the following types of accounts if any of the individuals listed above: o Is a trustee or custodian for an account (e.g., for a child or parent) o Exercises discretion over an account via a power of attorney arrangement or as an executor of an estate after death o Owns an IRA o Participates in an investment club o Provide investment advice by reason of any contract, understanding, relationship, agreement or other arrangement substantially equivalent to direct or indirect ownership. (If you give investment advice or effect securities trading for others, notify Personal Trade Compliance.) General Personal Trading Rules These general rules, along with the procedures contained in the rest of this document, must always be followed: 1. No use of inside information (refer to Insider Trading Policy on page 23). 2. No purchasing of public offerings (initial or secondary issues) 3. No front-running. This involves an individual taking advantage of non-public information about imminent trading activity in our mutual funds or other advised accounts by trading in a security before the fund or advised account does. 4. No preferential treatment from other brokerage firms due to the purchaser's employment by American Express or its subsidiaries. 5. No direct trades with broker/dealers' trading desks. 6. No non-retail relationships with broker/dealers. 7. No use of American Express' name (or the name of any of its subsidiaries) to obtain a better price from a broker who is a market maker in the security being traded. -3- 8. No speculative trading of American Express stock, which is characterized by transactions in "put" or "call" options, or short sales or similar derivative transactions. As part of the American Express Company Code of Conduct, the Company discourages short-term trading in its own stock. 9. No stopping stock. This is defined as a guarantee by a specialist that an order placed by a Floor Broker will be executed at the best bid or offer price then in the Specialist's book unless it can be executed at a better price within a specified period of time. 10. If you decide what security to sell to meet a margin call you must request preclearance for that security. 11. All traders and trading assistants who trade in OTC securities must trade through American Express Brokerage. 12. No trading of brokerage firm stocks by all traders and trading assistants. -4- Basis for Rules The rules and procedures that apply to personal trading for access persons are derived from: Investment Company Institute (ICI) Guidelines to Industry on Personal Investing Securities and investment laws o Securities Act of 1933 o Securities Exchange Act of 1934 o Investment Company Act of 1940 o Investment Advisers Act of 1940 o Insider Trading and Securities Fraud Enforcement Act of 1988 Rules, regulations and corporate policies o Securities and Exchange Commission (SEC) o National Association of Securities Dealers (NASD) o American Express Financial Corporation (AEFC) Insider Trading Policy o American Express Company Code of Conduct Fiduciary Principles The following general fiduciary principles shall govern personal trading activities and the interpretation and administration of these rules: o The interests of Fund shareholders and other advised and sub-advised account clients must be placed first at all times o All personal trading transactions must be conducted consistent with these rules and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility o Company personnel should not take inappropriate advantage of their positions. These rules do not attempt to identify all possible conflicts of interest, and literal compliance with each of its specific provisions will not shield company personnel from liability for personal trading or other conduct that violates a fiduciary duty to Fund shareholders and other advised and sub-advised account clients. -5- Definitions Personal trading rules for access persons apply to three groups of personnel. Each successive group is a subset of the previous group, and is subject to incrementally restrictive procedures. Therefore: Investment Personnel are subject to Access Person rules, plus the additional specified rules. Portfolio Managers are subject to Investment Personnel and Access Person rules, plus additional specified rules. Access Persons are individuals who meet one or more of the following criteria: 1. Have access to information regarding impending purchases or sales of portfolio securities for any account owned or managed. 2. Obtain such information within 10 days after the trade. 3. Have access to the Investment Department's investment research and recommendations. 4. Work in the Investment Department or Asset Management Group, including but not limited to the following locations, Minneapolis, Boston, Cambridge, San Diego, Los Angeles, New York, New Jersey, London, Singapore, Sydney, and Tokyo. 5. Participate in the investment decision-making process. 6. Have a specific role which compels access person status, for example: - serving as a Board member of an AEFA investment company - providing direct, ongoing audit, compliance, or legal support to money management businesses. Investment Personnel are research analysts, traders and portfolio managers. Portfolio Managers are individuals with direct responsibility and authority over investment decisions affecting any account owned or managed. This includes associate portfolio managers. -6- - ---------------------------------------------------------------------------- Reporting Requirements for Access Persons - ---------------------------------------------------------------------------- Securities Activities Which Must Be Reported All personal securities activities (i.e., stocks, options, bonds, etc.), whether bought or sold, must be reported, with the exception of such things as mutual funds and certificates of deposit. A chart indicating which transactions must be reported is located on pages 12-13. You must report activity involving securities trading in which you have a beneficial ownership. This includes accounts held in the name of any of the following individuals: o You o Your spouse/partner o Financially dependent members of your household In addition, these rules apply to the following types of accounts if any of the individuals listed above: o Is a trustee or custodian for an account (e.g., for a child or parent) o Exercises discretion over an account via a power of attorney arrangement, as an executor of an estate after death o Owns an IRA o Participates in an investment club o Provide investment advice by reason of any contract, understanding, relationship, agreement or other arrangement substantially equivalent to direct or indirect ownership. (If you give investment advice or effect securities trading for others, notify Personal Trade Compliance.) Failure to disclose all brokerage accounts may result in a sanction, which includes possible termination. How To Comply Unless you have an exception approved by Personal Trade Compliance, your personal trading must be conducted through one of three limited choice brokers - American Express Brokerage, Schwab, or Merrill Lynch. Personal Trade Compliance has arranged to receive automated data feeds of transaction activity from American Express Brokerage, Schwab, and Merrill Lynch accounts. You must report any new accounts opened by immediately completing the following steps: o Complete the Brokerage Account Notification Form on page 30 and return it to Personal Trade Compliance, H26/1875. o Notify your broker of your association with American Express. You are responsible for notifying your broker that you work for American Express Financial Advisors, a broker/dealer, and ensuring that Personal Trade Compliance is provided with duplicate statements and confirmations for your account(s). -7- What types of investments must be transferred to or held at one of the limited choice firms? o Stocks -- common (including American Express), preferred, convertible preferred, short sales, rights or warrants o Corporate bonds (including convertibles and foreigns) o Derivatives, including futures, options and index securities o Limited partnerships (if purchased through a brokerage account) o Unit Investment Trusts (UITs), American Depository Receipts (ADRs) and Real Estate Investment Trusts (REITs), Exchange Traded Funds and closed-end funds. o Managed or wrap accounts in which individual securities are held and the investor has the ability to exercise trading discretion * This list may be subject to change in the future. What investments are not subject to this limited choice policy? Some investments are not subject to this policy, and therefore, do not need to be transferred. You may continue to hold the following investments in brokerage accounts at other firms: o Open-end mutual funds (funds that continually issue new shares, which are redeemable on any business day at the net asset value, e.g., American Express Funds) o American Express Stock Purchase Plan (purchased through payroll deduction) o Annuities o Certificates of Deposit, savings certificates, checking and savings accounts and money market accounts o Commercial paper o Dividend reinvestment plans o Employer sponsored incentive savings plans o Government bonds (U.S. Treasury notes, bills, bonds, STRIPS, state and local municipals, savings bonds) o Church bonds o Private placements (other disclosure may apply -- see personal trading rules) o Managed or wrap accounts that do not include individual securities Exceptions to Limited Choice Exceptions to the limited choice policy of conducting personal trading through one of the three authorized brokers - American Express Brokerage, Schwab, or Merrill Lynch - will be rare. If you believe your situation warrants an exception, print and complete the Exception Request Form found on page 31. If you are granted an exception you are responsible for ensuring that Personal Trade Compliance receives duplicate confirmations and statements. An exception to the limited choice policy does not eliminate the need to comply with the other personal trading rules. -8- - ---------------------------------------------------------------------------- Additional Rules & Requirements for Access Persons - ---------------------------------------------------------------------------- Preclearance of Security Trades You must obtain prior approval - known as preclearance - when trading in any of the investment vehicles indicated on the "Securities Reporting and Preclearance Chart" (see pages 12-13). When requesting preclearance, you must follow these procedures: Requesting preclearance - On the day you intend to purchase or sell a security requiring preclearance, complete Section A of the Preclearance Form (see form on page 11) and fax it to the equity trading desk on H17 at (612) 671-5101 between 8 AM and 3 PM. Central Time. Approval process - Before approving the transaction, the trading desk will verify that there are no managed or owned accounts trading in the security. For example, the trading desk verifies there is no same day or opposite way/previous day trading in that security. The trade desk will complete Section B of the preclearance form and fax it back to you. Preclearance is only effective for the day it is given. After Hours Trading (On-line) - When trading through an on line account you have until midnight the day you are granted preclearance to enter your trade. When routing your preclearance form to Personal Trade Compliance, please attach a copy of your electronic confirmation from your broker showing that the trade was entered on the day preclearance was given. The trade then needs to be executed no later than the next business day. We will not consider the trade in good form unless both documents are submitted. Execution of your trade - Complete Section C of the preclearance form upon execution of the trade and route it to Personal Trade Compliance immediately. The entire approval section must be complete in order for the preclearance form to be accepted in good order. If any portion of the form is incomplete, it may result in a preclearance violation. Even if the trade is not executed, you are still required to send the form to Personal Trade Compliance. Local approval process necessary for individuals in the Los Angeles office - An additional level of preclearance approval is required in Los Angeles before executing a trade because of unique considerations with the CDO/CLO business. See your local Compliance Officer for more information. Satellite Offices Using Team Management Approach For a special rule applying to all employees in the satellite offices using a team-based management approach, see page 21 under "Satellite Offices Using Team Management Approach". -9- Exceptions Exceptions may be granted if the individual has tried to preclear a trade at least three times in any five consecutive day period. In order to be granted this exception, you must request approval by sending your request via Lotus Notes addressed to: Personal Trading. Provide a written explanation of the circumstances, including: o The type of trade o The name of the security o The number of shares o Your position, such as trader, analyst, portfolio manager, other. o The three most recent dates you have tried to preclear You will receive a written response to your request within 24 hours. If you receive an exception, the exception is only for the preclearance portion of your trade. You are still responsible for ensuring compliance with the other personal trading rules, including the 60-day holding period and the 7-day black out period rules as they apply to you. -10- - ------------------------------------------------------------------- Request for Personal Trading Preclearance - ------------------------------------------------------------------- - -------------------------------------------------------------------------------- A. Request for Trade Approval (completed by employee): - -------------------------------------------------------------------------------- Employee's First Middle Last Name: ________________________ Name:__________________ Initial:__ Extension:_________________________ Fax Number:_______________________ Brokerage Firm: Approved [ ] AXP Brokerage [ ] Merrill Lynch [ ] Schwab [ ] Exception: _________ (specify firm name) Account Number:_______________________ Type of Trade: [ ] Buy [ ] Sell [ ] Short Sale Ticker:_________________ - -------------------------------------------------------------------------------- B. Trade Authorization (completed by trade desk - H17) - -------------------------------------------------------------------------------- Equity/option authorized? [ ] Yes [ ] No Equity/option traded same day? [ ] Yes [ ] No Equity traded previous day opposite way? [ ] Yes [ ] No Option traded previous day opposite way? [ ] Yes [ ] No Fixed income approved by: Request Approved? [ ] Yes [ ] No Approved by:________________________ Date/Time (EST):_______________________ Log Number:____________________________ - -------------------------------------------------------------------------------- C. Trade Execution (completed by employee) - -------------------------------------------------------------------------------- [ ] Trade Executed [ ] Trade Not Executed - ------------------------------------------------- ------------------------------ Quantity: Price: - ----------------------- ------------------------- ------------------------------ Three Step Preclearance Request Process 1. EMPLOYEE: Complete Section A - Request for Trade Approval and fax Request for Personal Trading Preclearance to the Equity Trade Desk at (612) 671-5101 between 8 AM and 3 PM Central Standard Time. 2. EQUITY TRADE DESK: Complete Section B - Trade Authorization and fax Request for Personal Trading Preclearance back to employee. 3. EMPLOYEE: Complete Section C - Trade Execution and fax (612) 678-0150 or route (H26/1875) a copy of the completed Request for Personal Trading Preclearance to the Personal Trade Team immediately, regardless of whether or not the trade is executed. Please refer to pages 9-10 of the Personal Trading Rules and Procedures for Access Persons for questions regarding preclearance requirements. -11- Reporting & Preclearance Reporting Preclearance Required? Chart required for these transactions? - --------------------------- ----------------- ---------------------------------- American Depository Yes Yes (against underlying Receipts/Shares/Units security and ADR/ADU) (ADRs/ADSs/ADUs) - --------------------------- ----------------- ---------------------------------- Annuities No No - --------------------------- ----------------- ---------------------------------- American Express Stock Yes The AXP Corporate secretary (other than shares requires all individuals in purchased in Incentive grade bands 50 and above to Savings Plan or stock preclear their trades through purchase plan - see *) the Secretary's office. The Corporate Secretary's office number is: 201-209-5852 - --------------------------- ----------------- ---------------------------------- (Options on) American Prohibited by Express Stock (i.e., puts American Express Prohibited by American Express and calls) Code of Conduct Code of Conduct - --------------------------- ----------------- ---------------------------------- American Express stock Yes No, except for SVPs and other options (obtained as a officers as described above part of an incentive plan) - --------------------------- ----------------- ---------------------------------- Bonds and other debt Yes No instruments: corporate - --------------------------- ----------------- ---------------------------------- Bonds and other debt Yes Yes (against both underlying instruments: convertible stock & convertible debt) - --------------------------- ----------------- ---------------------------------- Bonds and other debt No No instruments: Government (Treasury notes, bills, bonds or STRIPS) and Church Bonds - --------------------------- ----------------- ---------------------------------- Bonds and other debt Yes No instruments: U.S. Guaranteed or of federally sponsored enterprises (FHLMC, FNMA, GNMA, etc.) - --------------------------- ----------------- ---------------------------------- Bonds and other debt Yes No instruments: closely held - --------------------------- ----------------- ---------------------------------- Certificates of Deposit, No No Savings Certificates, checking and s avings accounts and money market accounts - --------------------------- ----------------- ---------------------------------- Closed-end funds Yes Yes - --------------------------- ----------------- ---------------------------------- Commercial Paper No No - --------------------------- ----------------- ---------------------------------- Derivatives (DECS, ELKS, Yes Yes (against both underlying PRIDES, etc.) stock & derivative) - --------------------------- ----------------- ---------------------------------- Dividend Reinvestment Yes, on No Plans quarterly reporting form - --------------------------- ----------------- ---------------------------------- Futures: commodity, Yes No currency, financial, or stock index - --------------------------- ----------------- ---------------------------------- Futures: single stock Yes Yes - --------------------------- ----------------- ---------------------------------- Index Securities - (S&P Yes No 500, SPDRS/SPY, Diamonds/DIA, Cubes/QQQ, etc.) Exchange Traded Funds, Holders Trusts - --------------------------- ----------------- ---------------------------------- Limited Partnerships Yes Yes - --------------------------- ----------------- ---------------------------------- Limit order Yes Yes, must renew daily - --------------------------- ----------------- ---------------------------------- -12- Reporting & Preclearance Reporting Preclearance Required? Chart required for these transactions? - --------------------------- ----------------- ---------------------------------- Managed or wrap accounts: o If individual securities held and investor has ability to exercise trading discretion Yes Yes o If individual securities not held No No - --------------------------- ----------------- ---------------------------------- Mutual Funds No No - --------------------------- ----------------- ---------------------------------- Options on stocks Yes Yes (except to close position in the last 5 business days before expiration) - --------------------------- ----------------- ---------------------------------- Options: exercise of Yes No option to buy or sell underlying stock - --------------------------- ----------------- ---------------------------------- Options on futures and Yes No indices (currency, financial, or stock index) - --------------------------- ----------------- ---------------------------------- Options on single stock Yes Yes futures - --------------------------- ----------------- ---------------------------------- REITS (Real Estate Yes Yes Investment Trusts) - --------------------------- ----------------- ---------------------------------- Private Placements Yes, on Yes, if Investment Personnel quarterly reporting form - --------------------------- ----------------- ---------------------------------- Stocks: common or Yes Yes preferred - --------------------------- ----------------- ---------------------------------- Stocks: convertible Yes Yes (both underlying stock and preferred convertible preferred) - --------------------------- ----------------- ---------------------------------- Stocks: short sales Yes Yes (short sales prohibited on American Express stock) - --------------------------- ----------------- ---------------------------------- Stocks (owned) - Yes No exchanges, swaps, mergers, tender offers - --------------------------- ----------------- ---------------------------------- Stocks - public offerings Prohibited Prohibited (initial OR secondary) - --------------------------- ----------------- ---------------------------------- Stocks - Rights or Yes Yes warrants acquired separately - --------------------------- ----------------- ---------------------------------- Stocks - Yes, on No employer-sponsored quarterly purchase plan (spouse or reporting form partner) - --------------------------- ----------------- ---------------------------------- Unit Investment Trusts Yes No (UITs) - --------------------------- ----------------- ---------------------------------- * - American Express Incentive Savings Plan and Stock Purchase Plan activities are not subject to reporting or preclearing -13- Private Placement Preclearance All access persons need to obtain approval to invest in any private placements, i.e., a security not offered to the public. Approvals must be obtained in writing from your immediate leader, the Chief Investment Officer (CIO), and Personal Trade Compliance prior to investing. How to obtain approval - Write an explanation of the investment and submit the request to your leader. Included in the request should be an explanation of: o the nature of the investment o how you were solicited o approximate dollar amount you are planning to invest o whether or not the opportunity was being offered to any of American Express's managed accounts o whether the security is likely to be purchased by an American Express managed account fund in the future. How private placements are approved - Your leader will approve or reject your request, and return the request to you. If approval is granted, send the request to the CIO for approval. If the CIO grants approval, send the request to Personal Trade Compliance. Personal Trade Compliance will respond to you requesting any additional information or further documentation needed to make a decision. Upon receipt of all necessary documentation, Personal Trade Compliance will then confirm in writing whether you can invest. If your investment is approved, you must report the investment on the quarterly reporting form (sample shown on page 32). If you have questions about how the private placement approval process applies to a transaction you are considering, please contact us by sending a lotus note to "Personal Trading" or call us at x 15196 before you invest. -14- - -------------------------------------------------------------------------------- Additional Reporting Requirements - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Failure to completely and accurately disclose brokerage accounts, holdings and quarterly non-brokerage activity by the time frames specified by Personal Trade Compliance may result in a sanction, which includes possible termination - -------------------------------------------------------------------------------- Initial Holdings Disclosure New Access Persons must disclose certain securities holdings in which they have a beneficial interest. All new Access Persons will receive a copy of the Access Person Trading rules, which includes a Holdings Disclosure form. This document along with the brokerage account certification form must be returned to Personal Trade Compliance H26/1875 within 5 days. An example of the holdings disclosure form is located on page 28. Additionally, new access persons must complete the brokerage account certification form shown on page 27. Annual Certification and Annual Holdings Disclosure In addition to reporting requirements already outlined, every Access Person must submit an annual certification form. If you are new to the company, you will receive a form and instructions when you attend your orientation session. If you do not attend this orientation session, please contact the Personal Trade area 612-671-5196 for the information. Access Persons must also disclose annually certain securities holdings in which they have a beneficial interest. Failure to disclose annual holdings by the time frames specified by Personal Trade Compliance may result in a sanction, which includes possible termination. All Access Persons will receive a form electronically on an annual basis from Personal Trade Compliance. You should document your account(s) certification and holdings disclosures on this form. Quarterly Reporting Personal Trade Compliance will send you a form each quarter to indicate whether, for a given calendar quarter, you executed securities transactions outside of a broker-dealer account. If so, you must return the quarterly reporting form to Personal Trade Compliance within 10 calendar days of the last day of the quarter. An example of the quarterly reporting form is located on page 32. This need for quarterly reporting is based upon Rule 204-2(a)(12) of the Investment Advisers Act; American Express is required to collect information on certain securities transactions quarterly. -15- Investment Clubs There is no prohibition against joining an investment club and the account needs to be held at one of the limited choice brokers, American Express Brokerage, Schwab or Merrill Lynch, unless the club has been granted an exception from Compliance. Access Persons who are members of investment clubs are required to preclear club transactions. Execution of non-precleared trades made by club members will result in a violation for the American Express Access Person. (This also applies to any other accounts which meet the criteria indicated under "security activities which need to be reported" on page 7) When forming or joining an investment club, provide the following to Personal Trade Compliance: o a copy of the Brokerage Account Notification Form (see page 30) o a copy of your investment club's bylaws o a listing of the members of the club and an indication of any employees or independent contractors of American Express in the club. Please include the individual's employee (or P2 advisor) identification number. o the contact person for the club in case of questions Giving Securities If you are giving securities to a non-profit organization, please provide the following information in writing prior to making the gift, to Personal Trade Compliance: o the name of the organization to which you are giving the securities o a description of the security o the number of shares being given o the day you intend to buy the security (if not already owned) o the day you intend to give the securities (if the gift was not actually given on the day intended, please inform Personal Trade Compliance) Preclearance is not necessary for a gift to a non-profit organization, and the 60-day and 7-day rules do not apply. For giving securities to a for-profit organization or to an individual or trust, the preclearance and 7-day rules do apply if you are purchasing the securities you intend to give. The 60-day rule does not apply. You will need to report the transaction on the quarterly reporting form described above. -16- Sanctions Sanctions will be imposed for violations of American Express, SEC, or NASD rules or policies. It is standard in the industry to impose sanctions when violations occur. These sanctions are communicated via violation letters and will vary depending on the severity of the violation and/or if a record of previous violations exists. Examples of potential sanctions include (but are not limited to): o notification to your broker to freeze your account. This is a typical sanction if you fail to move your account(s) or maintain your account purchase transactions to one of the three limited choice brokers - American Express Brokerage, Schwab, or Merrill Lynch. The account could then be used only for transfers and liquidations. o notification of your leader and department head o unwinding the trade and forfeiting any profits to a charity, which is the typical sanction for a 60-day holding period or 7-day blackout violation (see note below for forfeiture process) o prohibition against personal trading for a specific period of time o negative impact on the individual's bonus and or performance rating o termination A record of each violation and sanction is maintained by Personal Trade Compliance. Note: The process for forfeiture of profits is this: - -------------------------------------------------------------------------------- [X] Calculate the profit using the last in, first out (LIFO) method. [X] Send a check to a non-profit charity of your choice. (You may be able to take a charitable deduction on your tax return for contributions to a tax-qualified 501(C)(3) charity --- please consult with your tax advisor.) [X] Send a copy of the calculation, the receipt from the charity and both sides of the canceled check to Personal Trade Compliance. - -------------------------------------------------------------------------------- The Personal Trade Committee will work with your leader to impose sanctions when necessary. Unusual Trading Activity The Personal Trade Committee and your department head review your personal trading activity regularly. We may ask to review specific transactions with you or your broker if clarification is necessary. You may be asked to supply Personal Trade Compliance with an explanation of your personal trade(s). Examples of situations that may require a memo of explanation include, but are not limited to: o violations of personal trading rules o trades in a security shortly before our Investment Department trades in the same security on behalf of a client o significant changes in trading volume o patterns of short-term, in and out trading o significant positions in illiquid securities o a number of employees trading in the same security in the same time frame -17- - -------------------------------------------------------------------------------- Incremental Restrictions and Requirements for Investment Personnel (defined as research analysts, traders, and portfolio managers) - -------------------------------------------------------------------------------- 60-Day Holding Period Profiting from short-term trading is prohibited. You may not buy, then sell (or sell short, then cover the short) the same securities (or equivalent) within 60-calendar days, while realizing a gain. You must wait until calendar day 61 (Trade date + 60) to close out your position if you will be making a profit. When calculating the 60-day holding period, you must use the last-in, first-out (LIFO) method. We use LIFO for two main reasons: o the purpose of the rule is to discourage short-term trading. A first-in, first-out (FIFO) or specific identification method could encourage short-term trading. o application of a method other than LIFO could be very cumbersome and time-consuming. Exceptions The Firm grants three exceptions to this rule: o Small Trade - defined as $10,000 or less of S&P 500 securities or ten option contracts in S&P 500 securities. There is a limit of one small trade exception per calendar month. ***Please indicate on your preclearance form "small trade exception"***. The small trade exception still requires you to obtain preclearance. o Futures and Indices - due to the size and liquidity of certain markets, the following investment vehicles are exceptions to the 60-day holding period requirement and do not need to be precleared: - financial futures (e.g., Treasury bond futures) - stock index futures (e.g., S&P 500 index futures) - currency futures (e.g., futures on Japanese Yen) This exception also applies to options on futures and indices. Options on equities continue to be subject to the 60-day rule. -18- - -------------------------------------------------------------------------------- Incremental Restrictions and Requirements for Investment Personnel - -------------------------------------------------------------------------------- o Financial Hardship - a financial hardship must be an "immediate and heavy financial need" and must be a situation where funds are not readily available from other sources. Financial hardships must meet the criteria outlined in the American Express Incentive Savings Plan (ISP). See the ISP Summary Plan Description in the Total Compensation Guide for these guidelines. Hardships are further subject to the following stipulations: o The amount traded may not exceed the amount required to meet the financial hardship, though the trade amount may include an amount for anticipated income taxes and tax penalties. Please consult with your tax advisor for advice. o You must receive approval from Personal Trade Compliance before a hardship trade. Begin by calling x15196 for assistance. You will need to put your request in writing and to route it to Personal Trade Compliance. You will receive a response within two business days. o Your request may not be approved if the standards outlined above are not met. If you have questions about the 60-day holding period please contact us by sending a lotus note to "Personal Trading" or call us at x 15196 before you execute. -19- - -------------------------------------------------------------------------------- Incremental Restrictions and Requirements for Investment Personnel - -------------------------------------------------------------------------------- Research Analysts: Additional Rules Research Analysts must conduct their personal trading activities in a manner such that transactions for an analyst's customers, clients, and employer have priority over transactions in securities or other investments of which he or she is the beneficial owner. In order to clarify how Research Analysts at AEFA should comply with this requirement, please note the following: - -------------------------------------------------------------------------------- General Rules for all Analysts - -------------------------------------------------------------------------------- o For Minneapolis based analysts, all new investment recommendations or changes in recommendations should be communicated immediately in the Research Notes section of Lotus Notes. Other appropriate means of communication should be used in addition to Lotus Notes to facilitate broad and immediate dissemination of the recommendation. For Satellite offices not using Research Notes, the analyst must document their investment recommendations in writing in the form required by their leader. o Analysts should not trade a security in their own account if they anticipate issuing a new recommendation or changing an existing recommendation on the same security. o Analysts should not trade in a security for their own account contrary to their current recommendation with respect to the security or rating. o Analysts should not trade in their own account for a period of 2 business days after a written recommendation is disseminated through the Research Notes section of Lotus Notes. o Analysts who recommend a "paired trade" to a Hedge Fund will be held to the 7-day blackout rule. (See page 22 for definition of 7-day blackout rule.) o Dedicated analysts supporting one or more of the Hedge Funds are considered part of a "team management" group and are held to the 7-day blackout rule for all trades made in the funds. (See page 22 for definition of 7-day blackout rule.) -20- - -------------------------------------------------------------------------------- Satellite Offices Using Team Management Approach - -------------------------------------------------------------------------------- In an effort to remain consistent across satellite offices who use a team-based approach where research analysts and others are actively involved in portfolio management discussions and decisions, the 7-day blackout rule (see page 22 of the Personal Trading rules) will apply to all personnel in those offices. Note that this process does not take the place of the standard preclearance process but is in addition to preclearance. Looking Back 7 Days To avoid a potential violation, each time an employee wants to make a personal trade s/he should check with their local Compliance Officer, to make sure there has been no trading in the security for a portfolio advised account (for that particular office) in the past 7 days. If there has been a trade in the past 7 days and the employee proceeds to trade, this trade will be considered a violation. Looking Ahead 7 Days To avoid a potential violation, we recommend that the employee communicate with each of the Portfolio Managers about the potential trade to determine whether the Portfolio Manager anticipates any activity in that security in the next 7 days within the portfolio. When an employee's personal trade in a name occurs within the 7-day window before a trade in the same name for an advised account, this will be flagged as a potential violation. Compliance will then determine from the Portfolio Manager information about who was privy to the information about the impending trade. The accountability will be on the employee to explain why the personal trade should not be considered a violation. If you have any questions about the process, contact your local Compliance Officer. -21- - -------------------------------------------------------------------------------- Incremental Portfolio Manager Requirements and Restrictions - -------------------------------------------------------------------------------- 7-day Blackout Period Portfolio managers are not allowed to buy or sell a security during the seven-day blackout period, which is defined as: o trade date less seven calendar days before and trade date plus seven calendar days after a fund or account they manage trades in that same (or equivalent) security. This means a portfolio manager must wait until calendar day 8. For example, a portfolio manager's fund trades XYZ Co. on August 12. The last day for a personal trade of XYZ Co. is August 4 and the next day a personal trade can be made is August 20. This rule includes all individual portfolio trades as well as all program trades. Exceptions The Firm grants two exceptions to this rule: o Small trades - defined as $10,000 or less of S&P 500 securities or ten option contracts in S&P 500 securities. There is a limit of one small trade exception per calendar month. Please indicate on your preclearance form "small trade exception". The small trade exception still requires you to obtain preclearance. o Futures and Indices - due to the size and liquidity of certain markets, the following investment vehicles are exceptions to the 7-day blackout period rule and do not need to be precleared: o financial futures (e.g., Treasury bond futures) o stock index/futures (e.g., S&P 500 index/futures) o currency futures (e.g., futures on Japanese Yen) This exception also applies to options on futures and indices. Options on equities continue to be subject to the 7-day blackout rule. If you have questions about how the 7-day blackout rule applies to a trade you are considering, please contact us by sending a lotus note to "Personal Trading" or call our hotline at x 15196 before you execute your trade. -22- - -------------------------------------------------------------------------------- American Express' Statement of Policy and Procedures with Respect to Receipt and Use of Material, Inside (Non-Public) Information - -------------------------------------------------------------------------------- This statement represents the policy of American Express Financial Advisors (AEFA) and its subsidiaries with regard to the receipt and use of material inside (non-public) information. If you have any questions about this policy, contact the Law Department. 1. Court and SEC administrative decisions interpreting Rule 10b-5, promulgated under the Securities Exchange Act of 1934, make it unlawful for any person to trade or recommend trading in securities while in possession of material inside (non-public) information. In particular, trading by a corporate insider or by someone who is not a corporate insider, while in possession of material non-public information, is unlawful where the information was disclosed to the non-insider in violation of an insider's duty to keep it confidential, or the non-insider had a duty to keep the information confidential or the information was misappropriated (i.e., stolen). In addition, communicating material, non-public information to others is unlawful. 2. Material inside information is any information about a company or the market for the company's securities that has come directly or indirectly from the company and that has not been disclosed generally to the marketplace, and that the dissemination of which is likely to affect the market price of any of the company's securities or is likely to be considered important by reasonable investors, including reasonable speculative investors, in determining whether to trade in such securities. 3. Information should be presumed "material" if it relates to such matters as dividend increases or decreases, earnings estimates, changes in previously released earnings estimates, significant explanation or curtailment of operation, a significant increase or decline of orders, significant merger or acquisition proposals or agreements, significant new products or discoveries, extraordinary borrowing, major litigation, liquidity problems, extraordinary management developments, purchase or sale of substantial assets, etc. 4. "Inside" information is information that has not been publicly disclosed. Information received about a company under circumstances that indicate that it is not yet in general circulation and that such information may be attributable, directly or indirectly, to the company (or its insiders) should be deemed to be inside information. As a rule, one should be able to point to some fact to show that the information is generally available; for example, its announcement on the broad tape or by Reuters, The Wall Street Journal or trade publications. 5. In addition to the prohibition on trading on insider information, AEFA - associated persons are prohibited from front-running. Front-running is trading for a personal account with the expectation that an AEFA managed account will soon trade the same security. -23- 6. To supplement its own research and analysis, to corroborate data compiled by its staff, and to consider the views and information of others in arriving at its investment decisions, AEFA allocates brokerage business to broker-dealers who are in a position to provide such services. This policy is consistent with AEFA's efforts to secure best price and execution. However, it is AEFA's policy that brokerage not be allocated in consideration of the furnishing of material inside information. AEFA - associated persons, in recommending the allocation of brokerage to broker/dealers, should not give consideration to any material inside information furnished by any broker/dealer. 7. AEFA - associated persons have no obligation to investment companies or other clients advised by AEFA to trade or recommend trading on the basis of material, non-public information in their possession. AEFA - associated persons' fiduciary responsibility to their clients does not require that they disregard the limitations imposed by the federal securities laws, particularly Rule 10b-5. 8. Whenever an AEFA - associated person receives material information about a company that he or she knows or has reason to believe is directly or indirectly attributable to such company (or its insiders), he or she must determine that the information is public before trading or recommending trading on the basis of such information or before divulging such information to any person. If he or she has any question at all as to whether the information is material or whether it is inside and not public, he or she must resolve the question by contacting the Law Department before trading. He or she must not discuss the information with any AEFA - associated person of AEFA other than his/her direct supervisor, the director of trading or the vice president of investment services. In addition, care should be taken so that the information is secured. 9. If there are any unresolved questions whatsoever in an AEFA - associated person's mind as to the applicability or interpretation of the foregoing standards or the propriety of any desired action, he/she must discuss the matter with the law department prior to trading or recommending trading. 10. Penalties for trading on material, non-public information are severe, both for the individuals involved in such unlawful conduct and their firms. Penalties include civil injunctions; suspension or bar from working in the securities industry; triple damages; forfeiture of profits; jail terms of up to 10 years; criminal penalties of up to $1 million for individuals and $2.5 million for firms; and civil fines of up to three times the profit gained or loss avoided for individuals, or the greater of $1 million or three times the profit gained or loss avoided for firms. In addition, any violation of this policy can be expected to result in serious sanctions by AEFA, including dismissal of the person(s) involved. Violations may also result in a permanent bar from the securities industry. 11. All AEFA - associated persons will be subject to the following personal trading procedures. AEFA - associated persons will: o Employees and P1 Advisors must conduct all personal trades through one of three brokers - American Express Brokerage, Schwab, or Merrill Lynch, unless an exception has been granted -24- o Report any change in the above election promptly, in writing, to Personal Trade Compliance. o Complete an annual certification form about their personal securities activities (example attached). o Provide any additional information about personal trading activities at AEFA's request. Employees in the Investment Department and Asset Management Group will be required to preclear all personal trades. These rules apply to securities trading in which you have a beneficial ownership. This includes accounts held in the name of any of the following individuals: o You o Your spouse/partner o Financially dependent members of your household In addition, these rules apply to the following types of accounts if any of the individuals listed above: o Is a trustee or custodian for an account (e.g., for a child or parent) o Exercises discretion over an account via a power of attorney arrangement or as an executor of an estate after death o Owns an IRA o Participates in an investment club o Provide investment advice by reason of any contract, understanding, relationship, agreement or other arrangement substantially equivalent to direct or indirect ownership. (If you give investment advice or effect securities trading for others, notify Personal Trade Compliance The Chief Investment Officer and the Senior Vice President -Institutional are responsible for the implementation of this statement of policy with respect to individuals in the Investment Department and Asset Management Group. The Compliance Department is responsible for implementing this Statement of Policy with respect to all other corporate-office associated persons. The Senior Vice President and General Sales Manager - U.S. Advisor Group is responsible for implementing this Statement of Policy in the field. This statement will be distributed to all AEFA - associated persons and will be issued and explained to all new personnel at the time of their employment with AEFA. In addition, at least annually and at such other times as the Chief Compliance Officer may determine it is necessary or appropriate, representatives of the Compliance Department and/or General Counsel's Office will meet with Investment Department personnel to review this Statement of Policy. The Personal Trade Committee, consisting of representatives of the Compliance Department, the Investment Department, Corporate Audit and the General Counsel's Office, will review records maintained in connection with trading. The General Counsel's Office and Compliance will review this Statement of Policy on a periodic basis and may revise it in the light of developments in the law, questions or interpretation, and practical experience with the procedures contemplated by the Statement. -25- - -------------------------------------------------------------------------------- Forms and Completion Instructions - -------------------------------------------------------------------------------- Below are the steps for completing the brokerage account certification and disclosure form found on the following page: 1. Write your name, ID number, and routing in the upper right hand corner of the form. 2. Check the appropriate box in Section 1. Brokerage firm account - an account in which securities are bought and sold (i.e. stock, bonds, futures, options, etc.). Do NOT include mutual fund accounts, employer-sponsored incentive savings plans, or the American Express Stock Purchase Plan. o If you checked "YES" in Section 1, complete all requested information in Sections 2, 3 and 4. o If you checked "NO" in Section 1, complete Sections 3 and 4. 3. In Section 2, please be sure to state the brokerage firm name and the address, account number, and type of ownership (definitions listed below): o Direct (D): you are the owner of the account (i.e., joint or single ownership). o Indirect (I): accounts in which you have a beneficial interest, and that are registered in another person's name. This includes members of your household (e.g., spouse, partner, minor children, etc.). o Club (C): you are a member of an investment club. o Advised (A): you serve in an advisory capacity by making investment decisions or recommendations. o Managed (M): you have no discretion over the investments in the account. ------------------------------ --------------- -------------------- Brokerage Firm Name and Account Number Ownership Location of Branch Office (D, I, C, A, M) ------------------------------ --------------- -------------------- American Express Brokerage - JH-062588-PG D Minneapolis ------------------------------ --------------- -------------------- Schwab - Minneapolis AB-062588-LM I ------------------------------ --------------- -------------------- 4. Complete section 3 if you are a member of a board of directors of a for-profit company. 5. Sign and date the form in Section 4. -26- American Express Name:___________________________________ Brokerage Account Social Security #_______________________ Certification and Disclosure ID Number:______________________________ Access Persons Routing:________________________________ - -------------------------------------------------------------------------------- Section 1 - -------------------------------------------------------------------------------- Do you or any members of your household have any brokerage account(s) (including American Express Brokerage accounts) in which you own directly or indirectly, advise for others, have managed by another person(s), or participate in as a member of an investment club? [ ] YES (if yes, complete Section 2 listing all brokerage firm accounts including American Express Brokerage, Schwab or Merrill Lynch accounts. Then complete section 3 and 4). [ ] NO (if no, complete Section 4). - -------------------------------------------------------------------------------- Section 2 - -------------------------------------------------------------------------------- BROKERAGE ACCOUNT DETAIL - ------------------------ ----------- ---------------- -------------------------- ** Brokerage Firm Name Account Ownership* Name & SSN on account if & Address Number (D, I, C, A, M) different than your own - ------------------------ ----------- ---------------- -------------------------- - ------------------------ ----------- ---------------- -------------------------- - ------------------------ ----------- ---------------- -------------------------- - ------------------------ ----------- ---------------- -------------------------- *D = Direct I = Indirect C = Club A = Advised M=Managed If more space is needed, please attach the additional information on a separate page. Please sign and date any attached sheets. - -------------------------------------------------------------------------------- Section 3 - -------------------------------------------------------------------------------- List any for-profit companies for which you are a member of the Board of Directors (if none, please indicate): ________________________________________________________________________________ - -------------------------------------------------------------------------------- Section 4 - -------------------------------------------------------------------------------- By signing this document, I am certifying that: o I am certifying that the brokerage firms listed above are the only brokerage firms where I hold accounts (directly, indirectly, club, advised or managed) at this time. o I also certify that I have completely filled out this certification form so a letter authorizing duplicate confirmations and statements can be sent to my broker until my accounts have been transferred to one of the three limited choice brokerage firms. o I understand that failure to completely disclose all brokerage accounts and holdings to Personal Trade Compliance or failure to complete this form by the required due date may result in sanctions, which could include termination. o If I open any new brokerage accounts I will notify Personal Trade Compliance in writing by filling out a Brokerage Account Notification form before the first trade is conducted. o I also certify I have read and understand the American Express insider trading policy and personal trading rules document and will abide by them. _______________________________________________ ______________________ Signature Date Return to: Personal Trade Compliance--H26/1875 -27- - -------------------------------------------------------------------------------- Initial Personal Holdings Disclosure Form - -------------------------------------------------------------------------------- o Please complete all columns. o Please be sure to sign the form, or initial if submitting electronically. o If submitting electronically please send via lotus notes to Personal Trading. o If submitting hard copy please send form to Personal Trade Compliance, H26/1875. o This document must be received in Personal Trade Compliance within 5 days. PLEASE PRINT LEGIBLY OR TYPE
Quantity Security Description Brokerage Firm Name Account Number Ownership (shares/face amt.) (Name of Security) (If not held at a brokerage D-Direct I-Indirect firm, please indicate N/A) C-Club A- Advised M-Managed - ------------------- ---------------------------- ------------------------------ --------------------- ------------------------- - ------------------- ---------------------------- ------------------------------ --------------------- ------------------------- - ------------------- ---------------------------- ------------------------------ --------------------- ------------------------- - ------------------- ---------------------------- ------------------------------ --------------------- -------------------------
- -------------------------------------------------------------------------------- Name of Financial Institutions with whom you maintain securities in a (brokerage account but which are not reportable above, e.g., Mutual Fund Securities) _____________________________ ____________________________ _____________________________ ____________________________ - -------------------------------------------------------------------------------- If you need more space, please use another form. Be sure to sign and date any additional forms By signing this document, I am certifying that the securities listed above are the only holdings. I have at this time. I understand that failure to completely disclose all of my holdings to Personal Trade Compliance may result in sanctions, which could include termination. __________________________________ ______________________ Signature Date __________________________________ ______________________ ___________ Print Name Employee # # of pages -28- Brokerage Account Notification Form Process On the following page is the Employee Notification Form that is required to be completed if you--or an immediate family member--maintains an external brokerage account. The external brokers that are allowed are Schwab or Merrill Lynch only. Please be sure to: o Fill out the broker information section. o Fill out the access person information section. Be sure to include family members' information if applicable o Send the form to Personal Trade Compliance-H26/1875 no later than 5 days after receiving this packet. If you have questions, please send a Lotus Note addressed to: Personal Trading or contact the Personal Trade Hotline 612-671-5196. - -------------------------------------------------------------------------------- -29- - -------------------------------------------------------------------------------- *** This is not an account transfer form and will not cause your securities to move *** - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BROKERAGE ACCOUNT NOTIFICATION FORM When to use this form: AEFA personnel are required to complete this form when opening any new brokerage account (including new accounts opened to support an account transfer). - -------------------------------------------------------------------------------- STEP 1: COMPLETE EMPLOYEE INFORMATION SECTION
- -------------------------------------------- ------------------------------------------------------------------------- Name (First and Last) - -------------------------------------------- ------------------------------------------------------------------------- ID Number (eg., E12345)/Position / [ ] Corporate Office Employee [ ] P1 Advisor [ ] Field Employee - -------------------------------------------- ------------------------------------------------------------------------- Social Security Number - -------------------------------------------- ------------------------------------------------------------------------- Field or Corporate Office Routing - -------------------------------------------- -------------------------------------------------------------------------
STEP 2: COMPLETE BROKERAGE ACCOUNT INFORMATION SECTION - ------------ ----------- ------------ ----------- ------------------------------ Broker Dealer (choose one) ------------------------------ Name on Account Social Ownership* American Charles Merrill Account Number Security Express Schwab Lynch Number Brokerage ============ =========== ============ =========== =========== ========= ======== - ------------ ----------- ------------ ----------- ----------- --------- -------- - ------------ ----------- ------------ ----------- ----------- --------- -------- - ------------ ----------- ------------ ----------- ----------- --------- -------- - ------------ ----------- ------------ ----------- ----------- --------- -------- - ------------ ----------- ------------ ----------- ----------- --------- -------- - ------------ ----------- ------------ ----------- ----------- --------- -------- * E.g. Individual, Joint, IRA, UTMA/UGMA, spousal IRA, etc. STEP 3: SUBMIT COMPLETED FORM TO PERSONAL TRADE COMPLIANCE - -------------------------------------------------------------------------------- A. To submit via Interoffice mail, send to Personal Trade Compliance, H26/1874. - -------------------------------------------------------------------------------- B. To submit via Lotus Notes, attach completed form and send to Personal Trading. - -------------------------------------------------------------------------------- -30- - -------------------------------------------------------------------------------- Limited Choice Exception Request - -------------------------------------------------------------------------------- Complete this form if one of the situations described below applies to you and you wish to request an exception to the limited choice policy of conducting trading through one of the three authorized firms. Exception Policy - The typical kinds of situations for which Personal Trade Compliance expects exception requests include: A. spouse accounts where spouse of AEFA employee works for a broker/dealer firm that prohibits outside accounts (supporting documentation to include copy of other firm's policy) B. accounts for the express business purpose of gaining competitive intelligence about other firm's practices (supporting documentation to include leader approval and specific business purpose for request) C. non-transferable limited partnership interests held prior to implementation of limited choice policy (supporting documentation to include copies of statements reflecting these holdings) Note: Other holdings and trading would remain subject to limited choice. D. managed accounts where, e.g., employee has authorized broker to exercise investment discretion on employee's behalf and employee has no discretion over what specific securities are traded in account (supporting documentation to include: power of attorney document signed by employee and written representations from employee and from broker that employee has no trading discretion) - -------------------------------------------------------------------------------- Section 1. Request for Exception (completed by employee, please print) Employee Name:_________________________Employee ID:__________Routing:__________. [ ] CORPORATE OFFICE [ ] P1 ADVISOR [ ] FIELD EMPLOYEE - -------------------------------------------------------------------------------- Exception type described above (also attach supporting documentation): [ ] A [ ] B (leader approval - print leader's name _________________ leader signature_______________________) [ ] C [ ] D [ ] Other - explain in sufficient detail on an attachment Broker Name:________________________________________Account #___________________ Account Ownership:______________________________________________________________ ________________________________________________________________________________ Employee Signature Social Security # Date - -------------------------------------------------------------------------------- Section 2. Exception Review (completed by Personal Trade Compliance) - -------------------------------------------------------------------------------- [ ] Request on hold, more documentation needed - Please provide: [ ] Request Denied [ ] Request Approved _______________________________________________________________________________ 1st Level Approval Date _______________________________________________________________________________ 2nd Level Approval Date -31- Quarterly Non-Brokerage Certification Form Have you or any member of your household participated in any of the types of transactions listed below during the ___ quarter of _____? [X] if no, you do not need to return this form. [X] if yes, check the appropriate box below, provide the requested information and return to Personal Trade Compliance no later than __________________. Do NOT include any AEFA products or plans, such as the Incentive Savings Plan (ISP) or Direct U.S. Obligations (e.g. US Savings Bonds) Please check all that apply & fill in as necessary:
- ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- Non-Brokerage Activity Description and Date Buy or sell or any Price share/face amount of other acquisition or security disposition - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Non AXP 401K, If spousal 401(k) list NA NA NA Profit Sharing, or Co. only company name: Stock Plan (e.g.: spouse's __________________ contribution to 401k plan) - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Dividend Reinvestment Activity - -outside of a retail brokerage account (directly from the issuer or transfer agent, e.g. DRIPS) - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Merger Activity - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Tender Offer - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Private Placement Activity - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Limited Partnership - ---------------------------------------- --------------------------- -------------- ------------------------- ----------------- [ ] Other purchase or sales of securities not conducted through a broker, or securities given or received via a gift (e.g., inherited stock, stock given to charity) - ---------------------------------------- --------------------------- -------------- ------------------------- -----------------
______________________________ _______________________ Signature Date Return to Personal Trade Compliance at: H26/1875 no later than ________ -32- EX-99.Q1 PWR OF ATTY 7 q1-poa.txt DIRECTORS' POWER OF ATTORNEY DIRECTORS/TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as directors and trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission: 1933 Act 1940 Act Reg. Number Reg. Number AXP Fixed Income Series, Inc. 2-51586 811-2503 AXP California Tax-Exempt Trust 33-5103 811-4646 AXP Discovery Series, Inc. 2-72174 811-3178 AXP Equity Series, Inc. 2-13188 811-772 AXP High Yield Income Series, Inc. 2-86637 811-3848 AXP Government Income Series, Inc. 2-96512 811-4260 AXP Global Series, Inc. 33-25824 811-5696 AXP Growth Series, Inc. 2-38355 811-2111 AXP High Yield Tax-Exempt Series, Inc. 2-63552 811-2901 AXP International Series, Inc. 2-92309 811-4075 AXP Investment Series, Inc. 2-11328 811-54 AXP Managed Series, Inc. 2-93801 811-4133 AXP Market Advantage Series, Inc. 33-30770 811-5897 AXP Money Market Series, Inc. 2-54516 811-2591 AXP Dimensions Series, Inc. 2-28529 811-1629 AXP Selected Series, Inc. 2-93745 811-4132 AXP Progressive Series, Inc. 2-30059 811-1714 AXP Income Series, Inc. 2-10700 811-499 AXP Special Tax-Exempt Series Trust 33-5102 811-4647 AXP Stock Series, Inc. 2-11358 811-498 AXP Strategy Series, Inc. 2-89288 811-3956 AXP Tax-Exempt Series, Inc. 2-57328 811-2686 AXP Tax-Free Money Series, Inc. 2-66868 811-3003 AXP Sector Series, Inc. 33-20872 811-5522 AXP Partners Series, Inc. 333-57852 811-10321 AXP Partners International Series, Inc. 333-64010 811-10427 AXP Variable Portfolio-Partners Series, Inc 333-61346 811-10383 AXP Variable Portfolio-Investment Series, Inc. 2-73115 811-3218 AXP Variable Portfolio-Managed Series, Inc. 2-96367 811-4252 AXP Variable Portfolio-Money Market Series, Inc. 2-72584 811-3190 AXP Variable Portfolio-Income Series, Inc. 2-73113 811-3219 hereby constitutes and appoints Arne H. Carlson, any other member of the Boards who is not an interested person of the investment manager, and Leslie L. Ogg or any one of these persons individually, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 8th day of January, 2003. /s/ Arne H. Carlson /s/ Stephen R. Lewis, Jr. - ---------------------------- ---------------------------- Arne H. Carlson Stephen R. Lewis, Jr. /s/ Philip J. Carroll, Jr. /s/ Alan G. Quasha - ---------------------------- ---------------------------- Philip J. Carroll, Jr. Alan G. Quasha /s/ Livio D. DeSimone /s/ Stephen W. Roszell - ---------------------------- ---------------------------- Livio D. DeSimone Stephen W. Roszell /s/ Barbara H. Fraser /s/ Alan K. Simpson - ---------------------------- ---------------------------- Barbara H. Fraser Alan K. Simpson /s/ Heinz F. Hutter /s/ Alison Taunton-Rigby - ---------------------------- ---------------------------- Heinz F. Hutter Alison Taunton-Rigby /s/ Anne P. Jones /s/ William F. Truscott - ---------------------------- ---------------------------- Anne P. Jones William F. Truscott -----END PRIVACY-ENHANCED MESSAGE-----