-----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, D0XVTt3zxFcnEabQVtesIXbljWVqCLr+4OdclLbqZ1Dbf65EiET/OeTN471bB1vu Jt6MSHXuInUf1e+81oN1Fw== 0000820027-03-000787.txt : 20031105 0000820027-03-000787.hdr.sgml : 20031105 20031105140038 ACCESSION NUMBER: 0000820027-03-000787 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030831 FILED AS OF DATE: 20031105 EFFECTIVENESS DATE: 20031105 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: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02503 FILM NUMBER: 03978910 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 N-CSR 1 fixedincome-ncsr.txt AXP FIXED INCOME SERIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-2503 ------------ AXP FIXED INCOME SERIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 200 AXP Financial Center, Minneapolis, Minnesota 55474 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 8/31 -------------- Date of reporting period: 8/31 -------------- AXP(R) Diversified Bond Fund Annual Report for the Period Ended Aug. 31, 2003 (Prospectus Enclosed) 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. (This annual report includes a prospectus that describes in detail the Fund's objective, investment strategy, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- Table of Contents Fund Snapshot 3 Questions & Answers with Portfolio Management 4 The Fund's Long-term Performance 8 Investments in Securities 9 Financial Statements 21 Notes to Financial Statements 24 Independent Auditors' Report 34 Federal Income Tax Information 35 Board Members and Officers 37 (Dalbar Logo) American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Fund Snapshot AS OF AUG. 31, 2003 PORTFOLIO MANAGER Portfolio manager Tom Murphy, CFA* Since 2/03 Years in industry 17 * Team managed, led by Tom Murphy, CFA. FUND OBJECTIVE For investors seeking a high level of current income while conserving the value of the investment for the longest period of time. Inception dates A: 10/3/74 B: 3/20/95 C: 6/26/00 Y: 3/20/95 Ticker symbols A: INBNX B: ININX C: AXBCX Y: IDBYX Total net assets $3.476 billion Number of holdings 427 STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. STYLE VALUE BLEND GROWTH X LARGE X MEDIUM SIZE X SMALL SECTOR COMPOSITION Percentage of portfolio assets (pie chart) Mortgage-backed securities 36.8% U.S. government obligations & agencies 16.6% Financials 12.7% Short-term securities 12.2% Utilities 5.1% Consumer discretionary 4.8% Telecommunications 3.0% Industrials 2.6% Materials 2.0% Consumer staples 1.5% Foreign government 1.5% Energy 0.9% Health care 0.2% Other 0.1% CREDIT QUALITY SUMMARY Percentage of portfolio assets AAA bonds 60.0% AA bonds 0.6 A bonds 8.9 BBB bonds 13.7 Non-investment grade bonds 4.5 Non-rated bonds 0.1 For further detail about these holdings, please refer to the section entitled "Investments in Securities." Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT On Feb. 24, 2003, a team led by Tom Murphy, Sector Leader for Investment Grade Corporate Bonds, succeeded Ray Goodner in managing the day-to-day operations of AXP Diversified Bond Fund. The Fund's name changed from AXP Bond Fund to AXP Diversified Bond Fund in June 2003. Q: How did AXP Diversified Bond Fund perform for the fiscal year ended Aug. 31, 2003? A: AXP Diversified Bond Fund's Class A shares returned 4.91%, excluding sales charge, for the 12 months ended Aug. 31, 2003, outperforming the Lehman Brothers Aggregate Bond Index, which rose 4.36%. The Lipper Intermediate Investment Grade Index, representing the Fund's peer group, rose 5.38% over the same period. Q: How did the Fund's positioning contribute to its performance relative to the benchmark and peer group? A: For much of the fiscal first half, we had approximately 45% of the portfolio allocated to investment-grade corporate issues and about 15% in high-yield corporate debt securities (also known as junk bonds). Corporate bonds, both investment-grade and high-yield, led the bond market during this period as they rallied back from the confidence and liquidity-challenged environment of summer of 2002, making a significant contribution to performance. As a result of its large position in corporate bonds, the portfolio had underweight positions in the mortgage sectors (which outperformed Treasuries, but not to the extent of credit) and in Treasuries/agencies. However, many of the Fund's peers had even larger allocations to corporate bonds. This led to the Fund's relative underperformance compared to its peer group. The Fund outpaced its unmanaged benchmark, the Lehman Brothers Aggregate Bond Index in the first six months of the fiscal year. (bar graph) PERFORMANCE COMPARISON For the year ended Aug. 31, 2003 6% (bar 1) (bar 2) (bar 3) 5% +4.91% +4.36% +5.38% 4% 3% 2% 1% 0% (bar 1) AXP Diversified Bond Fund Class A (excluding sales charge) (bar 2) Lehman Brothers Aggregate Bond Index (unmanaged) (bar 3) Lipper Immediate Investment Grade Index (see "The Fund's Long-term Performance" for Index descriptions) Past performance is no guarantee of future results. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. - -------------------------------------------------------------------------------- 4 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Questions & Answers (begin callout quote)> We believe our best opportunities to enhance performance are through sector rotation and individual security selection rather than increasing interest rate sensitivity.(end callout quote) During the second half of the year -- following the reorganization of our fixed income organization and portfolio management structure -- the Fund continued to benefit from an overweight in corporate bonds, though we pared our investment-grade and high yield holdings to approximately 30% and 6%, respectively. In addition, small allocations to foreign-denominated bonds (2%) and emerging markets (1%) were opportunistically added to the portfolio and they also had a favorable impact on performance. Our high yield security selection had a bias to higher-rated BB securities, based primarily on relative valuations. AVERAGE ANNUAL TOTAL RETURNS as of Aug. 31, 2003
Class A Class B Class C Class Y (Inception dates) (10/3/74) (3/20/95) (6/26/00) (3/20/95) NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) After CDSC(5) 1 year +4.91% -0.07% +4.12% +0.12% +4.11% +4.11% +5.08% +5.08% 5 years +4.93% +3.91% +4.14% +3.98% N/A N/A +5.08% +5.08% 10 years +5.97% +5.46% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +6.12% +6.12% +5.79% +5.79% +7.07% +7.07%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. The performance shown for each class of shares will vary due to differences in sales charges and fees. Short term performance may be higher or lower than the figures shown. Visit americanexpress.com/funds for current information. - -------------------------------------------------------------------------------- 5 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Questions & Answers Although the mortgage sector struggled in the latter half of the fiscal year from the combination of low interest rates and a greater interest rate volatility, the Fund's emphasis on identifying mortgage pools with lower pre-payment histories helped support performance in this sector. In general, the portfolio had a somewhat defensive posture through much of the second half. Although this affected our relative performance versus our peer group, we believe it was the prudent course, given our outlook for the economy and valuations across various sectors in the overall bond market. Our opportunistic additions of out of index securities in high yield, global and emerging markets helped the portfolio outperform its unmanaged benchmark in the second half of the fiscal year. Q: What changes were made to the Fund's positioning during the year? A: In conjunction with our reorganization of the fixed income department and the portfolio management structure, we changed the emphasis of the Fund from being very credit-centric to more diversified across credit, mortgage product and Treasuries/agencies -- in line with our benchmark, the Lehman Brothers Aggregate Bond Index. As a point of reference, on Aug. 31, 2003, the Index was approximately 27% credit, 39% mortgages, and 34% Treasuries/agencies. These changes increased the portfolio's turnover rate for the fiscal year. Early in the second half of the fiscal year, we adjusted the mortgage component of the Fund, aligning it more closely with the duration and structure of our benchmark. We also moved from an underweight mortgage position to a market weight position, while shortening the portfolio's mortgage duration, a measure of interest rate sensitivity. In January and February of 2003, we began to trim our allocation to corporate bonds, both investment-grade and high-yield, and shifted those assets into government and mortgage-backed securities. Given the corporate sector's previous strong performance and the fact that so much positive economic news was already priced into the bonds, we believed near-term risks outweighed the potential rewards. We also began to phase out our short-dated Japanese and European bond holdings, which had performed well as the dollar weakened. Through the remainder of the fiscal year, we actively managed our allocation to high-yield corporate bonds -- incrementally adding or reducing our exposure based on valuations. Within the high yield sector, we focused primarily on BB-rated securities, which offered good incremental yield gains over BBB-rated bonds. We specifically sought - -------------------------------------------------------------------------------- 6 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT securities of companies whose financial profile and fundamental performance were comparable to higher rated companies. We believed such issues were overlooked and undervalued, creating an attractive investment opportunity for the Fund versus BBB-rated alternatives. Q: How sensitive is the Fund to interest rate changes? A: Throughout the year we kept the Fund's duration fairly conservative. Interest rates remain near historically low levels and the Fed has expressed its intention to maintain rates at current levels, (1% Fed Funds rate) while they look to stimulate the economy. Given monetary and fiscal stimulus present, it is unlikely that rates will decline much further, unless the economic recovery does not materialize as expected. Longer maturity rates shouldn't rise much either, given the Fed's focus on generating growth as opposed to concerns about inflation. Consequently, we still believe our best opportunities to provide attractive performance are through sector rotation and individual security selection rather than increasing interest rate sensitivity. Q: How do you plan to position the Fund for the coming months? A: In the corporate segment of the portfolio, we have maintained a defensive bias, focusing, for example, on securities of high-quality banks as well as non-cyclical consumer companies that generate strong free cash flow. However, if the economy fails to gain momentum, we may see opportunities to establish positions in more cyclical companies and sectors at wider spreads since steady economic growth and a return to pricing power are seemingly priced into those securities at present. Credit spreads in industries such as automobile manufacturing, basic industries and other cyclical sectors could widen in the short term should the economy disappoint, and we are positioned to take advantage of any weakness there. Mortgages tend to perform best when interest rates are stable, regardless of whether they are high or low. Unfortunately, during the early part of this past summer, Treasury rates were anything but stable, and mortgages struggled as a result. Mortgage rates have since moved slightly higher, and as the market adjusts to this higher rate level, we believe the outlook for mortgages could improve. While we believe the economy is likely to continue its recovery, we remain somewhat cautious. Regardless of the economic environment, the Fund's sector-based management team will continue to focus on adding value primarily through security selection and sector rotation. - -------------------------------------------------------------------------------- 7 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT The Fund's Long-term Performance This chart illustrates the total value of an assumed $10,000 investment in AXP Diversified Bond Fund Class A shares (from 9/1/93 to 8/31/03) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment Grade Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. Past performance is no guarantee of future results. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Returns do not reflect taxes payable on distributions and redemptions. Also see "Past Performance" in the Fund's current prospectus. (line graph) VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP DIVERSIFIED BOND FUND $20,000 $16,000 $12,000 (dotted line) Lehman Brothers Aggregate Bond Index(1) (dashed line) Lipper Intermediate Investment Grade Index(2) $8,000 (solid line) AXP Diversified Bond Fund Class A $4,000 `93 `94 `95 `96 `97 `98 `99 `00 `01 `02 `03 (solid line) AXP Diversified Bond Fund Class A $17,012 (dotted line) Lehman Brothers Aggregate Bond Index(1) $19,076 (dashed line) Lipper Intermediate Investment Grade Index(2) $18,101 (1) Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper 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. Average Annual Total Returns Class A with Sales Charge as of Aug. 31, 2003 1 year -0.07% 5 years +3.91% 10 years +5.46% Results for other share classes can be found on page 5. - -------------------------------------------------------------------------------- 8 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Investments in Securities AXP Diversified Bond Fund Aug. 31, 2003 (Percentages represent value of investments compared to net assets) Bonds (99.4%) Issuer Coupon Principal Value(a) rate amount Foreign government (1.6%) Dominican Republic (U.S. Dollar) 01-23-13 9.04% $4,000,000(c,d) $3,780,000 Federal Republic of Brazil (U.S. Dollar) 03-12-08 11.50 1,800,000(c) 1,908,000 04-15-10 12.00 4,200,000(c) 4,414,200 04-15-14 8.00 2,154,968(c) 1,940,117 Federation of Russia (U.S. Dollar) 03-31-30 5.00 2,000,000(c,d,j) 1,827,500 03-31-30 5.00 1,035,000(c,j) 947,025 Govt of Ukraine (U.S. Dollar) 06-11-13 7.65 2,000,000(c,d) 1,960,000 Republic of Colombia (U.S. Dollar) 04-23-09 9.75 4,000,000(c) 4,420,000 01-23-12 10.00 2,600,000(c) 2,808,000 Republic of El Salvador (U.S. Dollar) 01-24-23 7.75 2,675,000(c,d) 2,755,250 Republic of Peru (U.S. Dollar) 02-06-15 9.88 4,900,000(c) 5,390,000 Republic of Philippines (U.S. Dollar) 01-15-19 9.88 1,080,000(c) 1,128,600 United Mexican States (U.S. Dollar) 03-03-15 6.63 23,675,000(c) 23,556,625 Total 56,835,317 U.S. government obligations & agencies (18.8%) Federal Home Loan Mtge Corp 07-15-13 4.50 85,800,000 82,344,834 Federal Natl Mtge Assn 04-15-06 2.13 46,800,000 46,269,616 08-15-08 3.25 135,000,000 131,722,199 U.S. Treasury 01-31-05 1.63 7,200,000 7,207,034 05-31-05 1.25 21,100,000(l) 20,915,375 06-30-05 1.13 44,535,000 43,980,049 11-15-05 5.75 20,260,000 21,861,006 02-15-06 5.63 15,750,000 17,042,603 05-15-06 2.00 8,089,000 8,028,333 08-15-06 2.38 4,000,000 3,987,812 08-15-08 3.25 5,455,000 5,406,843 08-15-13 4.25 13,800,000 13,569,264 08-15-21 8.13 20,150,000 26,874,277 08-15-22 7.25 10,300,000(l) 12,693,143 08-15-23 6.25 67,800,000 75,260,644 08-15-27 6.38 44,450,000 50,412,567 08-15-29 6.13 15,000,000(l) 16,599,615 02-15-31 5.38 68,549,000 70,021,707 Total 654,196,921 Mortgage-backed securities (41.6%)(f) Federal Home Loan Mtge Corp 07-01-07 6.50 393 396 09-27-12 3.61 7,500,000 7,428,193 05-01-13 4.50 4,721,247 4,676,339 04-01-17 8.00 59,548 64,698 05-01-17 6.00 3,305,239 3,419,199 08-01-18 5.00 19,377,666 19,464,202 02-01-23 6.00 28,371,850 29,183,725 08-01-24 8.00 1,320,518 1,428,514 10-01-28 7.00 238,594 251,658 12-01-30 5.50 4,412,287 4,411,845 07-01-32 7.00 22,599,269 23,781,768 09-01-32 6.50 14,926,024 15,459,233 10-01-32 6.50 11,898,763 12,323,829 04-01-33 5.50 15,337,892 15,304,048 04-01-33 6.00 11,752,570 11,981,785 05-01-33 5.50 9,035,339 9,001,371 06-01-33 5.50 10,903,727 10,862,735 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 9 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Home Loan Mtge Corp (cont.) Collateralized Mtge Obligation 10-15-18 5.00% $7,100,000 $7,179,875 11-15-18 5.00 18,368,000 18,517,240 03-15-22 7.00 4,953,371 5,111,382 07-15-22 7.00 4,766,369 4,927,854 02-15-33 5.50 10,639,797 11,052,727 Interest Only 02-15-14 9.85 5,500,000(g) 639,890 06-15-18 24.49 5,311,859(g) 323,219 Federal Natl Mtge Assn 03-01-08 7.00 4,556,897 4,836,471 07-01-08 6.50 1,946,068 2,058,285 11-01-09 9.00 484 539 06-01-10 6.50 4,424,153 4,679,264 08-01-11 8.50 4,486,144 4,874,624 11-01-12 4.79 13,000,000 12,942,361 01-01-13 4.78 10,845,000 11,001,604 01-01-13 4.92 5,742,173 5,691,094 02-01-13 4.83 6,505,353 6,404,469 02-01-13 4.87 15,069,822 15,005,202 02-01-13 5.02 15,842,146 15,925,195 04-01-13 7.00 13,302,381 14,118,509 06-01-13 4.54 13,979,881 13,545,598 06-01-13 4.85 9,337,098 9,160,028 10-01-13 4.50 7,650,000(i) 7,556,747 04-01-14 6.50 2,670,561 2,811,554 08-01-14 5.50 15,900,000(i) 16,237,875 08-01-16 6.00 10,489,793 10,870,614 08-01-16 6.50 4,761,684 5,009,660 12-01-16 5.50 11,955,023 12,229,439 06-01-17 6.50 9,374,573 9,899,270 08-01-17 6.00 16,971,622 17,658,900 08-01-17 6.50 5,096,079 5,396,438 09-01-17 6.00 3,057,405 3,168,275 09-01-17 6.50 6,776,682 7,129,818 12-01-17 6.50 3,387,670 3,564,203 01-01-18 5.50 9,985,870 10,250,437 02-01-18 5.50 17,739,711 18,180,103 03-01-18 5.50 27,955,615 28,702,149 04-01-18 5.00 9,599,300 9,642,167 05-01-18 5.50 4,833,198 4,956,532 08-01-18 4.50 10,666,224 10,481,232 09-01-18 5.00 104,000,000(i) 104,292,239 04-01-23 8.50 1,735,870 1,896,898 09-01-23 5.00 9,188,671(i) 8,993,412 09-01-23 5.50 15,300,000(i) 15,438,512 09-01-23 6.50 1,121,215 1,167,466 01-01-24 6.50 583,673 607,749 05-01-24 6.00 17,814,357 18,222,895 06-01-24 9.00 1,349,247 1,496,865 02-01-25 8.00 526,949 571,335 09-01-25 8.00 1,349,273 1,461,307 03-01-26 7.00 2,730,145 2,886,683 07-01-28 5.50 4,946,798 4,957,140 08-01-28 5.50 6,612,696 6,626,521 09-01-28 7.50 5,000,000(i) 5,314,060 01-01-29 6.50 12,168,984 12,627,982 05-01-29 6.50 7,850,798 8,135,452 06-01-29 7.00 23,030 24,293 06-01-29 7.00 3,474,482(i) 3,665,122 07-01-29 6.00 13,000,000(i) 13,215,306 07-01-29 6.50 28,140,000(i) 29,089,725 08-01-29 6.50 27,000,000(i) 27,843,750 09-01-29 7.00 17,329,056 18,279,878 10-01-30 7.00 5,743,155 6,058,274 09-01-31 5.50 1,200,000(i) 1,194,000 09-01-31 7.00 2,485,861 2,648,656 03-01-32 5.50 3,279,584 3,286,441 08-01-32 7.00 3,710,082 3,911,608 09-01-32 6.00 58,583,924 59,578,255 09-01-32 6.50 5,160,489 5,380,652 10-01-32 5.50 36,125,000(i) 35,831,484 10-01-32 6.00 2,745,693 2,791,532 10-01-32 6.50 6,098,853 6,312,945 11-01-32 6.00 2,280,798 2,318,920 11-01-32 7.00 6,727,697(i) 7,085,090 12-01-32 6.50 6,179,159(i) 6,396,070 12-01-32 6.50 5,092,245 5,271,001 01-01-33 6.00 17,674,776 18,036,138 02-01-33 4.75 5,551,283(h) 5,659,538 02-01-33 6.00 3,781,685 3,854,273 02-01-33 6.50 1,065,945(i) 1,111,439 03-01-33 4.93 5,599,665 5,748,298 03-01-33 5.50 22,844,987 22,786,672 03-01-33 6.00 17,223,023 17,528,502 03-01-33 6.50 56,580,314 58,566,098 04-01-33 5.50 44,174,998 44,063,530 04-01-33 6.00 51,636,164 52,661,739 05-01-33 5.50 30,840,518 30,728,173 05-01-33 6.00 9,809,597 9,997,922 06-01-33 5.50 18,331,487 18,284,426 06-01-33 6.00 19,691,755 20,036,660 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 07-01-33 5.50% $23,565,005 $23,483,655 09-01-33 5.00 44,698,000(i) 43,217,601 11-01-33 5.00 13,000,000(h,i) 12,813,125 Collateralized Mtge Obligation 11-25-12 4.49 13,500,000 13,040,972 09-25-42 5.00 6,600,000 6,668,990 10-25-42 7.50 9,157,903 9,893,397 12-25-42 4.75 11,500,000 11,476,491 Interest Only 12-25-12 12.05 5,500,000(g) 522,588 Govt Natl Mtge Assn 02-15-24 8.00 644,102 696,810 02-15-25 9.00 86,396 95,350 06-15-26 8.00 839,458 906,377 08-15-26 8.00 515,492 556,585 03-15-33 7.00 6,472,048 6,843,647 05-15-33 6.00 14,158,956 14,466,672 09-01-33 5.50 30,925,000(i) 30,876,757 Collateralized Mtge Obligation Interest Only 01-20-32 10.48 8,000,000(g) 1,218,702 08-20-32 8.01 24,975,762(g) 7,261,506 Total 1,448,766,532 Aerospace & defense (0.7%) Alliant Techsystems 05-15-11 8.50 2,000,000 2,160,000 L-3 Communications 06-15-12 7.63 2,000,000 2,085,000 Raytheon 04-01-13 5.38 6,105,000 6,021,722 TD Funding Sr Sub Nts 07-15-11 8.38 1,500,000(d) 1,563,750 United Technologies 11-15-19 8.88 10,000,000 12,851,220 Total 24,681,692 Airlines (--%) Northwest Airlines 02-01-20 6.81 1,504,800 1,216,781 Automotive & related (0.8%) DaimlerChrysler North America Holding 01-15-08 4.75 3,500,000 3,468,990 06-04-08 4.05 18,330,000 17,550,791 Ford Motor 10-01-28 6.63 2,095,000 1,710,218 02-01-29 6.38 5,340,000 4,192,867 Total 26,922,866 Banks and savings & loans (2.6%) AmSouth Bank NA Sub Nts 04-01-13 4.85 7,090,000 6,873,401 Bank of America Sub Nts 02-15-10 7.80 21,000,000 24,613,721 Banknorth Group 05-01-08 3.75 3,120,000 3,060,127 Central Fidelity Capital I Series A 04-15-27 2.11 16,500,000(j) 15,984,210 Credit Suisse First Boston USA 01-15-12 6.50 5,750,000 6,185,591 Fifth Third Bank 08-15-08 3.38 2,485,000 2,423,770 Marshall & Ilsley Series E 09-01-06 5.75 8,000,000 8,677,600 Wachovia 08-15-08 3.50 5,050,000 4,924,811 Washington Mutual Bank 06-15-11 6.88 16,360,000 18,246,112 Total 90,989,343 Beverages & tobacco (0.4%) Cott Beverages 12-15-11 8.00 2,000,000 2,090,000 Diageo Capital (U.S. Dollar) 03-20-08 3.38 13,705,000(c) 13,454,336 Total 15,544,336 Broker dealers (2.4%) Goldman Sachs Group 01-15-11 6.88 3,430,000 3,812,812 04-01-13 5.25 3,175,000 3,129,559 07-15-13 4.75 4,860,000 4,602,906 LaBranche Sr Sub Nts 03-02-07 12.00 1,500,000 1,635,000 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Broker dealers (cont.) Lehman Brothers Holdings 01-22-08 4.00% $1,500,000 $1,500,735 08-07-08 3.50 8,200,000 7,951,294 Merrill Lynch 11-15-07 4.00 5,500,000 5,496,145 Morgan Stanley 04-15-06 6.10 14,000,000 15,121,190 04-15-11 6.75 2,530,000 2,789,145 03-01-13 5.30 9,740,000 9,576,465 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 6,472,177 6,114,447 Series 2003-T11 Cl A2 06-13-41 4.34 10,190,000 10,093,127 Morgan Stanley, Dean Witter Capital 1 Series 2002-IQ2 Cl A2 12-15-35 5.16 1,500,000 1,563,309 Series 2002-IQ2 Cl A3 12-15-35 5.52 2,950,000 3,071,216 Series 2002-TOP7 Cl A2 01-15-39 5.98 5,900,000 6,250,881 Total 82,708,231 Building materials & construction (0.1%) Louisiana Pacific Sr Nts 08-15-10 8.88 2,260,000 2,593,350 Ryland Group Sr Nts 06-01-08 5.38 2,500,000 2,481,250 Total 5,074,600 Cable (1.0%) Comcast 03-15-11 5.50 23,945,000 24,076,937 Comcast Cable Communications Sr Nts 06-15-13 7.13 4,020,000 4,421,059 Cox Communications 06-01-13 4.63 3,230,000 2,991,206 DirectTV Holdings/Finance Sr Nts 03-15-13 8.38 1,500,000(d) 1,638,750 Rogers Cable (U.S. Dollar) 06-15-13 6.25 2,000,000(c) 1,877,500 Total 35,005,452 Cellular telecommunications (0.4%) AT&T Wireless Services Sr Nts 03-01-11 7.88 11,080,000 12,515,514 Nextel Communications Sr Nts 08-01-15 7.38 1,035,000 1,035,000 Total 13,550,514 Chemicals (0.5%) Airgas 10-01-11 9.13 1,500,000 1,650,000 Compass Minerals Group 08-15-11 10.00 2,500,000 2,762,500 Dow Chemical 08-15-05 7.00 1,575,000 1,696,814 02-01-11 6.13 5,560,000 5,773,304 MacDermid 07-15-11 9.13 1,500,000 1,650,000 Praxair 06-15-08 2.75 2,940,000 2,773,184 Rhodia (U.S. Dollar) 06-01-10 7.63 385,000(c,d) 392,700 06-01-11 8.88 230,000(c,d) 231,150 Total 16,929,652 Electronics (--%) Flextronics Intl (U.S. Dollar) Sr Sub Nts 05-15-13 6.50 1,000,000(c,d) 957,500 Energy (0.9%) Amerada Hess 08-15-11 6.65 1,515,000 1,629,689 Conoco Funding (U.S. Dollar) 10-15-11 6.35 14,950,000(c) 16,271,221 Devon Financing 09-30-11 6.88 3,205,000 3,540,759 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 1,000,000(d) 970,000 Newfield Exploration Sr Nts 03-01-11 7.63 2,500,000 2,675,000 Westport Resources 11-01-11 8.25 1,500,000 1,605,000 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Energy (cont.) XTO Energy Sr Nts 04-15-12 7.50% $2,895,000 $3,112,125 04-15-13 6.25 1,520,000 1,520,000 Total 31,323,794 Energy equipment & services (0.2%) Grant Prideco Escrow 12-15-09 9.00 2,000,000 2,105,000 Key Energy Services Sr Nts 03-01-08 8.38 1,250,000 1,306,250 05-01-13 6.38 1,195,000 1,135,250 Offshore Logistics 06-15-13 6.13 725,000(d) 688,750 Total 5,235,250 Finance companies (2.6%) Citigroup Sub Nts 10-01-10 7.25 46,278,000 52,993,123 GMAC 09-15-11 6.88 23,020,000 23,028,517 Household Finance 01-24-06 6.50 5,750,000 6,238,411 10-15-11 6.38 6,850,000 7,332,021 Total 89,592,072 Financial services (5.5%) Bank of America First Union NB Commercial Mtge Series 2001-3 Cl A2 04-11-37 5.46 4,090,000 4,221,242 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 8,654,942 8,488,940 Capital One Bank Sr Nts 02-01-06 6.88 1,740,000 1,865,745 Chase Manhattan Bank-First Union Natl Series 1999-1 C1 A2 08-15-31 7.44 14,150,000 16,148,922 Citibank Credit Card Issuance Trust Series 2003-A5 Cl A5 04-07-08 2.50 10,400,000 10,339,264 Series 2003-A6 Cl A6 05-17-10 2.90 8,500,000 8,541,225 Commercial Mtge Acceptance Series 1998-C1 C1 A2 07-15-31 6.49 15,910,000 17,492,325 General Electric Capital 03-15-07 5.38 6,000,000 6,373,200 06-15-12 6.00 4,240,000 4,464,211 Greenwich Capital Commercial Funding Series 2002-C1 Cl A3 01-11-17 4.50 6,000,000 5,952,118 Series 2002-C1 Cl A4 01-11-35 4.95 6,825,000 6,712,606 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 11,350,000(c) 11,319,344 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 7,360,000 7,596,353 Series 2002-C2 Cl A4 06-15-31 5.59 4,905,000 5,055,774 Series 2002-C4 Cl A4 09-15-26 4.56 10,000,000 9,833,721 Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 5,874,793 Series 2003-C3 Cl A2 05-15-27 3.09 14,900,000 14,267,896 MBNA Credit Card Master Note Trust Series 2003-A1 Cl A1 07-15-10 3.30 5,795,000 5,710,567 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 2,500,000 2,483,789 Residential Asset Securities Series 2002-KS1 Cl A14 11-25-29 5.86 7,500,000 7,771,275 Residential Funding Mtge 10-25-17 5.50 6,768,772 6,833,955 SLM 03-17-08 3.63 5,420,000 5,342,543 TIAA Global Markets 01-22-08 3.88 14,990,000(d) 15,024,327 Toyota Motor Credit 08-01-08 2.88 4,630,000 4,438,272 Total 192,152,407 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Food (0.8%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75% $500,000(c,d) $512,500 Chiquita Brands Intl Sr Nts 03-15-09 10.56 500,000 545,000 General Mills 02-15-07 5.13 7,350,000 7,852,203 Kellogg Series B 04-01-11 6.60 10,115,000(l) 11,158,363 Kraft Foods 11-01-11 5.63 7,520,000 7,551,283 Total 27,619,349 Health care products (0.1%) Apogent Technologies Sr Sub Nts 05-15-13 6.50 1,500,000(d) 1,473,750 Kinetic Concepts Sr Sub Nts 05-15-13 7.38 795,000(d) 795,000 Total 2,268,750 Health care services (0.2%) AmerisourceBergen 11-15-12 7.25% $2,000,000 $2,020,000 Fisher Scientific Intl Sr Sub Nts 09-01-13 8.00 750,000(d) 770,625 Omnicare Sr Sub Nts 06-01-13 6.13 1,650,000 1,571,625 Province Healthcare Sr Sub Nts 06-01-13 7.50 500,000 481,250 Tenet Healthcare Sr Nts 12-01-11 6.38 1,000,000 930,000 Total 5,773,500 Home building (0.4%) D.R. Horton 07-01-13 5.88 1,500,000 1,353,750 Meritage 06-01-11 9.75 2,570,000 2,740,263 NVR Sr Nts 06-15-10 5.00 2,500,000 2,337,500 Pulte Homes Sr Nts 12-15-03 7.00 7,700,000 7,764,387 Total 14,195,900 Industrial transportation (1.1%) Burlington North Santa Fe 12-15-05 6.38 7,000,000 7,596,302 Canadian Natl Railways (U.S. Dollar) 10-15-11 6.38 8,440,000(c) 9,203,347 CSX 03-15-11 6.75 5,800,000 6,373,226 Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-07 9.50 3,640,000(b,c) 2,338,700 Interpool 08-01-07 7.35 400,000 390,000 Union Pacific 02-01-08 6.63 1,230,000 1,351,579 01-15-11 6.65 5,250,000 5,769,173 04-15-12 6.50 4,180,000 4,573,848 Total 37,596,175 Insurance (1.2%) Allstate 06-01-33 5.35 2,450,000 2,144,412 Sr Nts 02-15-12 6.13 1,615,000 1,735,692 ASIF Global Financing 01-17-13 4.90 20,010,000(d) 19,496,142 MassMutual Global Funding II 07-15-08 2.55 6,860,000(d) 6,426,626 Met Life Global Funding I 06-19-08 2.60 9,310,000(d) 8,712,764 Travelers Property Casualty Sr Nts 03-15-13 5.00 4,810,000 4,710,193 Total 43,225,829 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Leisure time & entertainment (1.3%) AOL Time Warner 05-01-12 6.88% $19,800,000 $21,519,967 05-01-32 7.70 3,785,000 4,151,891 KSL Resorts Series 2003-1A Cl C 05-15-13 2.04 3,500,000 3,499,728 Viacom 05-15-11 6.63 13,002,000 14,375,024 Total 43,546,610 Lodging & gaming (0.2%) Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 1,500,000 1,606,875 Coast Hotels & Casino 04-01-09 9.50 1,000,000 1,065,000 Hilton Hotels 12-01-12 7.63 750,000 793,125 Mohegan Tribal Gaming Sr Sub Nts 04-01-12 8.00 2,000,000 2,130,000 Park Place Entertainment Sr Sub Nts 03-15-10 7.88 1,500,000 1,601,250 Total 7,196,250 Machinery (--%) Joy Global Series B 03-15-12 8.75 1,500,000 1,620,000 Media (1.5%) Alliance Atlantis Communications (U.S. Dollar) Sr Sub Nts 12-15-09 13.00 1,000,000(c) 1,118,750 AOA Holdings LLC Sr Nts 06-15-08 12.00 6,000,000(k) 6,462,000 Belo (AH) 11-01-08 8.00 6,550,000 7,546,452 CanWest Media (U.S. Dollar) Sr Sub Nts 05-15-11 10.63 1,000,000(c) 1,115,000 CBD Media/Finance Sr Sub Nts 06-01-11 8.63 1,935,000(d) 2,031,750 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 1,500,000(c) 1,586,250 Dex Media West/Finance Sr Nts 08-15-10 8.50 700,000(d) 761,250 Sr Sub Nts 08-15-13 9.88 610,000(d) 680,150 Hollinger Intl Publishing Sr Nts 12-15-10 9.00 1,180,000 1,224,250 Lamar Media Corp 09-15-07 8.63 1,730,000 1,786,225 Morris Publishing Sr Sub Nts 08-01-13 7.00 1,250,000(d) 1,250,000 News Corp (U.S. Dollar) 06-24-10 10.15 2,722,711(c,k) 3,315,986 Nexstar Finance LLC 04-01-08 12.00 1,000,000 1,120,000 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 890,000(c) 983,450 Radio One Series B 07-01-11 8.88 1,000,000 1,092,500 Sinclair Broadcast Group 03-15-12 8.00 1,000,000 1,042,500 Sun Media (U.S. Dollar) Sr Nts 02-15-13 7.63 1,500,000(c) 1,548,750 Susquehanna Media Sr Sub Nts 04-15-13 7.38 665,000 677,469 TCI Communications 02-15-06 6.88 5,512,000 5,973,828 United Artists Theatre 07-01-15 9.30 10,417,788 10,157,343 Total 51,473,903 Metals (0.1%) Euramax Intl Sr Sub Nts 08-15-11 8.50 710,000(d) 717,100 Jorgensen Earle M. 06-01-12 9.75 500,000 527,500 Peabody Energy Series B 03-15-13 6.88 500,000 500,000 Total 1,744,600 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 15 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Multi-industry (1.1%) General Electric 02-01-13 5.00% $33,190,000 $32,555,407 SPX Sr Nts 06-15-11 6.25 500,000 490,000 Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 2,045,000(c) 2,080,788 Vivendi Universal (U.S. Dollar) Sr Nts 07-15-08 6.25 1,500,000(c,d) 1,500,000 Total 36,626,195 Paper & packaging (1.6%) Ball 12-15-12 6.88 1,520,000 1,535,200 Carter Holt Harvey (U.S. Dollar) 12-01-04 8.88 10,500,000(c) 11,200,319 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 2,000,000(c,d) 1,966,278 Crown Euro Holdings (U.S. Dollar) 03-01-13 10.88 500,000(c,d) 547,500 Crown Paper Sr Sub Nts 09-01-05 11.00 6,950,000(b) 695 Doman Inds (U.S. Dollar) Sr Nts Series B 11-15-07 9.25 3,395,000(b,c) 611,100 Domtar (U.S. Dollar) 10-15-11 7.88 1,100,000(c) 1,262,843 Georgia-Pacific Sr Nts 02-01-10 8.88 1,000,000(d) 1,050,000 Graphic Packaging Intl Sr Nts 08-15-11 8.50 540,000(d) 564,300 Intl Paper 10-30-12 5.85 1,835,000 1,869,986 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 2,000,000(c,d) 1,975,000 Packaging Corp of America 08-01-13 5.75 3,910,000(d) 3,792,114 Stone Container Sr Nts 07-01-12 8.38 1,500,000 1,590,000 Weyerhaeuser 03-15-07 6.13 21,680,000 23,382,334 (U.S. Dollar) 01-15-04 8.50 3,000,000(c) 3,053,790 Total 54,401,459 Retail -- general (0.4%) Sonic Automotive Sr Sub Nts 08-15-13 8.63 500,000(d) 505,000 Wal-Mart CRAVE 401 07-17-06 7.00 6,793,744(d) 7,348,929 Wal-Mart Stores 06-29-11 8.88 3,500,000 3,567,375 William Carter Series B 08-15-11 10.88 1,030,000 1,133,000 Total 12,554,304 Retail -- grocery (0.4%) Dairy Mart Convenience Stores Sr Sub Nts 03-15-04 10.25 5,925,000(b) 1,066,500 Kroger 03-01-08 7.45 3,000,000 3,362,760 Sr Nts 07-15-06 8.15 9,000,000 10,118,250 Total 14,547,510 Telecom equipment & services (1.0%) Qwest 11-01-04 7.20 2,000,000 2,030,000 Sprint Capital 03-15-12 8.38 7,425,000 8,432,706 Telus (U.S. Dollar) 06-01-07 7.50 7,050,000(c) 7,695,371 Verizon Maryland 03-01-12 6.13 5,940,000 6,311,630 Verizon Virginia Cl A 03-15-13 4.63 6,600,000 6,241,686 Vodafone Group (U.S. Dollar) 02-15-10 7.75 4,045,000(c) 4,683,665 Total 35,395,058 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 16 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (5.4%) American Electric Power Sr Nts 06-01-15 5.25% $4,850,000 $4,489,936 Carolina Power & Light 07-15-12 6.50 990,000 1,065,348 Cincinnati Gas & Electric 09-15-12 5.70 1,600,000 1,652,432 Cleveland Electric Illuminating 1st Mtge Series B 05-15-05 9.50 18,790,000 18,915,179 Columbus Southern Power 03-01-13 5.50 3,645,000(d) 3,629,017 Commonwealth Edison 02-01-08 3.70 6,355,000 6,304,605 Consolidated Natural Gas Sr Nts 04-15-11 6.85 1,660,000 1,850,186 Consumers Energy 1st Mtge 04-15-08 4.25 17,040,000(d) 16,830,919 Dominion Resources Sr Nts 09-17-12 5.70 9,300,000 9,527,924 Sr Nts Series F 08-01-33 5.25 1,630,000 1,539,651 Duke Energy 01-15-12 6.25 10,000,000 10,507,550 1st Mtge 03-05-08 3.75 11,600,000(d) 11,539,680 Exelon Sr Nts 05-01-11 6.75 1,530,000 1,677,140 FirstEnergy Series B 11-15-11 6.45 9,350,000 9,140,186 Florida Power 1st Mtge 03-01-13 4.80 10,885,000 10,665,994 FPL Group Capital 04-11-06 3.25 2,080,000 2,089,277 Indianapolis Power & Light 07-01-13 6.30 1,880,000(d) 1,870,562 IPALCO Enterprises 11-14-08 8.38 400,000 420,000 11-14-11 8.63 3,000,000 3,150,000 NiSource Finance Sr Nts 03-01-13 6.15 3,565,000 3,647,458 Northern States Power 1st Mtge 08-01-10 4.75 2,940,000 2,906,014 Northern States Power - Minnesota 1st Mtge Series B 08-29-12 8.00 3,070,000 3,641,800 Ohio Power 02-15-13 5.50 1,010,000(d) 1,005,557 Pacific Gas & Electric 1st Mtge Series 1992B 05-01-25 8.38 4,100,000 4,171,750 PG&E 07-15-08 6.88 2,010,000(d) 2,045,115 PowerGen US Funding LLC 10-15-04 4.50 8,000,000 8,198,824 PSI Energy 08-01-05 6.50 10,000,000 10,618,300 Public Service Colorado 1st Mtge 03-01-13 4.88 1,520,000(d) 1,460,317 Tampa Electric 08-15-07 5.38 900,000 922,074 Teco Energy Sr Nts 06-15-10 7.50 930,000 906,750 Texas Utilities Electric 01-01-05 9.45 1,416,000 1,424,925 1st Mtge 07-01-25 7.63 10,000,000 10,301,710 10-01-25 7.38 3,000,000 3,079,479 Tucson Electric Power 10-01-09 8.50 3,250,000 3,258,125 Virginia Electric & Power Sr Nts Series A 03-31-06 5.75 4,685,000 5,027,431 WPD Holdings (U.S. Dollar) 12-15-17 7.25 5,000,000(c,d) 4,365,935 Xcel Energy Sr Nts 07-01-08 3.40 2,380,000(d) 2,262,809 Total 186,109,959 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 17 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- natural gas (0.4%) ANR Pipeline 03-15-10 8.88% $2,250,000 $2,373,750 El Paso Production Holding 06-01-13 7.75 1,000,000(d) 960,000 NiSource Finance 07-15-14 5.40 3,210,000 3,043,080 Northwest Pipeline 03-01-10 8.13 570,000 592,800 Panhandle Eastern Pipeline 08-15-08 4.80 2,490,000(d) 2,479,467 Southern Natural Gas 03-15-10 8.88 1,750,000 1,846,250 Transcontinental Gas Pipeline Series B 08-15-11 7.00 2,250,000 2,207,813 Total 13,503,160 Utilities -- telephone (2.0%) AT&T Sr Nts 11-15-06 7.00 4,235,000(j) 4,696,488 British Telecom (U.S. Dollar) 12-15-10 8.38 12,700,000(c) 15,070,798 Citizens Communications 05-15-11 9.25 3,500,000 4,313,176 Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 5,255,000(c) 5,039,703 06-15-30 8.75 3,150,000(c) 3,782,791 France Telecom (U.S. Dollar) 03-01-11 9.25 1,280,000(c,j) 1,527,921 03-01-31 10.00 1,500,000(c,j) 1,933,497 SBC Communications 03-15-11 6.25 3,905,000 4,219,805 08-15-12 5.88 4,420,000 4,670,128 Verizon Global Funding 06-15-12 6.88 1,650,000 1,817,736 Verizon New England Sr Nts 09-15-11 6.50 14,990,000 16,245,861 Verizon Pennsylvania Cl A 11-15-11 5.65 6,890,000 7,089,741 Total 70,407,645 Variable rate senior loan interests (0.1%) American Commercial Lines LLC Term Loan B 06-30-06 5.38 2,488,972 2,090,737 Term Loan C 03-30-07 7.62 3,489,735 2,913,929 Total 5,004,666 Total bonds (Cost: $3,494,678,942) $3,456,494,082 Common stocks (--%) Issuer Shares Value(a) Davel Communications 703,793(b) $5,630 Stellex Aerostructures 1,311(b,n) -- Total common stocks (Cost: $4,947,691) $5,630 Other (0.1%) Issuer Shares Value(a) Wayland Investment Fund LLC 6,000,000(b,e,k) $2,255,220 Total other (Cost: $6,671,880) $2,255,220 Short-term securities (13.8%)(m) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agency (8.1%) Federal Natl Mtge Assn Disc Nts 09-10-03 1.05% $50,000,000 $49,982,501 10-15-03 1.00 33,400,000 33,356,870 10-22-03 1.03 21,200,000 21,168,546 10-29-03 1.05 20,000,000 19,967,700 11-17-03 1.00 22,200,000 22,151,249 11-26-03 1.06 49,500,000 49,370,283 11-26-03 1.07 42,500,000 42,395,620 12-24-03 1.00 42,000,000 41,861,568 Total 280,254,337 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Short-term securities (continued) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity Commercial paper (5.7%) AEGON Funding 10-06-03 1.03% $11,400,000(o) $11,387,366 ANZ (Delaware) Funding 10-03-03 1.03 6,100,000 6,093,508 Ciesco LLC 09-03-03 1.04 14,500,000 14,497,906 11-04-03 1.07 10,000,000(o) 9,980,086 CRC Funding LLC 10-06-03 1.08 16,400,000(o) 16,381,824 Danske 11-12-03 1.07 11,300,000 11,274,810 Delaware Funding 09-02-03 1.03 7,300,000(o) 7,299,164 Edison Asset Securitization 10-03-03 1.04 20,000,000(o) 19,978,713 Falcon Asset Securitization 09-15-03 1.06 30,000,000(o) 29,984,982 Fleet Funding 09-02-03 1.04 25,100,000(o) 25,097,678 Nordea North America 10-21-03 1.04 9,300,000 9,285,487 Park Avenue Receivables 09-09-03 1.03 19,800,000(o) 19,793,768 Preferred Receivables Funding 09-15-03 1.07 10,000,000(o) 9,994,947 Sigma Finance 11-03-03 1.08 1,500,000(o) 1,497,058 Svenska Handelsbanken 09-05-03 1.03 7,000,000 6,998,598 Total 199,545,895 Total short-term securities (Cost: $479,803,065) $479,800,232 Total investments in securities (Cost: $3,986,101,578)(p) $3,938,555,164 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) Non-income producing. For long-term debt securities, item identified is in default as to payment of interest and/or principal. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. As of Aug. 31, 2003, the value of foreign securities represented 5.5% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. (e) The share amount for Limited Liability Companies (LLC) or Limited Partnerships (LP) represents capital contributions. (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing of future cash flows as of Aug. 31, 2003. (h) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (i) At Aug. 31, 2003, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $372,824,835. - -------------------------------------------------------------------------------- 19 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Notes to investments in securities (continued) (j) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2003. (k) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Aug. 31, 2003, is as follows: Security Acquisition Cost dates AOA Holdings LLC 12.00% Sr Nts 2008 06-02-02 $6,000,000 News Corp (U.S. Dollar) 10.15% 2010 01-29-93 thru 06-01-03 2,788,138 Wayland Investment Fund LLC 05-17-00 6,671,880 (l) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 6 to the financial statements): Type of security Notional amount Purchase contracts Eurodollar, Sept. 2003, 90-day $192,000,000 Eurodollar, Sept. 2007, 90-day 177,750,000 U.S. Treasury Bonds, Dec. 2003, 20-year 30,000,000 Sale contracts U.S. Treasury Notes, Sept. 2003, 5-year 3,500,000 U.S. Treasury Notes, Sept. 2003, 10-year 68,000,000 U.S. Treasury Notes, Dec. 2003, 5-year 72,800,000 U.S. Treasury Notes, Dec. 2003, 10-year 181,500,000 (m) At Aug. 31, 2003, cash or short-term securities were designated to cover open call options on futures written as follows (see Note 7 to the financial statements):
Issuer Notional Exercise Expiration Value(a) amount price date U.S. Treasury Notes Dec. 2003, 10-year $39,500,000 $110 Nov. 2003 $734,451 At Aug. 31, 2003, cash or short-term securities were designated to cover open put options on futures written as follows (see Note 7 to the financial statements): Issuer Notional Exercise Expiration Value(a) amount price date U.S. Treasury Notes Dec. 2003, 10-year $39,500,000 $110 Nov. 2003 $845,545
(n) Negligible market value. (o) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (p) At Aug. 31, 2003, the cost of securities for federal income tax purposes was $3,984,242,901 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 41,456,610 Unrealized depreciation (87,144,347) ----------- Net unrealized depreciation $(45,687,737) ------------ - -------------------------------------------------------------------------------- 20 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Diversified Bond Fund Aug. 31, 2003 Assets Investments in securities, at value (Note 1)* (identified cost $3,986,101,578) $3,938,555,164 Cash in bank on demand deposit 19,957,417 Capital shares receivable 643,269 Dividends and accrued interest receivable 29,158,460 Receivable for investment securities sold 97,867,502 ---------- Total assets 4,086,181,812 ------------- Liabilities Dividends payable to shareholders 1,601,246 Capital shares payable 748,679 Payable for investment securities purchased 138,638,348 Payable for securities purchased on a forward-commitment basis (Note 1) 372,824,835 Payable upon return of securities loaned (Note 5) 94,272,500 Accrued investment management services fee 46,576 Accrued distribution fee 41,124 Accrued service fee 737 Accrued transfer agency fee 13,260 Accrued administrative services fee 4,162 Other accrued expenses 253,458 Options contracts written, at value (premiums received $1,120,125) (Note 7) 1,579,996 --------- Total liabilities 610,024,921 ----------- Net assets applicable to outstanding capital stock $3,476,156,891 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 7,278,529 Additional paid-in capital 3,648,047,082 Undistributed net investment income 3,631,514 Accumulated net realized gain (loss) (Note 9) (136,202,003) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) (46,598,231) ----------- Total -- representing net assets applicable to outstanding capital stock $3,476,156,891 ============== Net assets applicable to outstanding shares: Class A $2,279,810,794 Class B $ 901,664,851 Class C $ 26,520,135 Class Y $ 268,161,111 Net asset value per share of outstanding capital stock: Class A shares 477,385,529 $ 4.78 Class B shares 188,783,060 $ 4.78 Class C shares 5,545,851 $ 4.78 Class Y shares 56,138,452 $ 4.78 ---------- -------------- *Including securities on loan, at value (Note 5) $ 91,494,680 ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 21 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Statement of operations AXP Diversified Bond Fund Year ended Aug. 31, 2003 Investment income Income: Interest $191,743,752 Fee income from securities lending (Note 5) 298,766 ------- Total income 192,042,518 ----------- Expenses (Note 2): Investment management services fee 18,159,757 Distribution fee Class A 5,994,788 Class B 10,343,876 Class C 260,914 Transfer agency fee 5,645,366 Incremental transfer agency fee Class A 287,233 Class B 227,024 Class C 7,812 Service fee -- Class Y 286,295 Administrative services fees and expenses 1,674,570 Compensation of board members 27,775 Custodian fees 262,414 Printing and postage 639,997 Registration fees 72,593 Audit fees 43,000 Other 58,049 ------ Total expenses 43,991,463 Earnings credits on cash balances (Note 2) (45,481) ------- Total net expenses 43,945,982 ---------- Investment income (loss) -- net 148,096,536 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 118,661,863 Foreign currency transactions (8,780,944) Futures contracts (199,115) Options contracts written (Note 7) 2,155,018 --------- Net realized gain (loss) on investments 111,836,822 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (82,489,907) ----------- Net gain (loss) on investments and foreign currencies 29,346,915 ---------- Net increase (decrease) in net assets resulting from operations $177,443,451 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 22 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Statements of changes in net assets AXP Diversified Bond Fund Year ended Aug. 31, 2003 2002 Operations and distributions Investment income (loss) -- net $ 148,096,536 $ 193,601,257 Net realized gain (loss) on investments 111,836,822 (104,216,173) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (82,489,907) 21,330,971 ----------- ---------- Net increase (decrease) in net assets resulting from operations 177,443,451 110,716,055 ----------- ----------- Distributions to shareholders from: Net investment income Class A (98,126,653) (121,329,296) Class B (34,728,824) (44,277,498) Class C (854,382) (754,797) Class Y (12,225,930) (24,276,463) Tax return of capital Class A (2,476,941) (7,330,284) Class B (876,635) (2,675,088) Class C (21,567) (45,602) Class Y (308,611) (1,466,697) -------- ---------- Total distributions (149,619,543) (202,155,725) ------------ ------------ Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 392,003,998 524,025,978 Class B shares 232,251,463 398,928,016 Class C shares 11,080,202 18,470,000 Class Y shares 150,904,209 271,716,616 Reinvestment of distributions at net asset value Class A shares 77,130,545 96,090,237 Class B shares 30,927,117 40,340,249 Class C shares 767,401 691,608 Class Y shares 11,324,132 24,587,425 Payments for redemptions Class A shares (642,065,690) (516,477,447) Class B shares (Note 2) (419,428,542) (322,964,143) Class C shares (Note 2) (9,230,935) (5,410,217) Class Y shares (193,312,689) (520,331,103) ------------ ------------ Increase (decrease) in net assets from capital share transactions (357,648,789) 9,667,219 ------------ --------- Total increase (decrease) in net assets (329,824,881) (81,772,451) Net assets at beginning of year 3,805,981,772 3,887,754,223 ------------- ------------- Net assets at end of year $3,476,156,891 $3,805,981,772 ============== ============== Undistributed net investment income $ 3,631,514 $ 1,145,568 -------------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 23 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Notes to Financial Statements AXP Diversified Bond Fund (formerly AXP Bond Fund) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Fixed Income Series, Inc. (formerly AXP Bond Fund, Inc.) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Fixed Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund invests primarily in bonds and other debt securities including securities issued by the U.S. government, corporate bonds and mortgage- and asset-backed securities. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. The Fund's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. - -------------------------------------------------------------------------------- 24 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Option transactions To produce incremental earnings, protect gains, and facilitate buying and selling of securities for investments, the Fund may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Fund also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Fund gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Fund pays a premium whether or not the option is exercised. The Fund also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Fund will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Fund will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Fund may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Fund also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Fund is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Fund each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Fund recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. - -------------------------------------------------------------------------------- 25 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT The Fund may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Fund and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Fund is subject to the credit risk that the other party will not complete its contract obligations. Illiquid securities As of Aug. 31, 2003, investments in securities included issues that are illiquid which the Fund currently limits to 10% of net assets, at market value, at the time of purchase. The aggregate value of such securities as of Aug. 31, 2003 was $12,033,206 representing 0.35% of net assets. These securities are valued at fair value according to methods selected in good faith by the board. According to board guidelines, certain unregistered securities are determined to be liquid and are not included within the 10% limitation specified above. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Fund on a forward-commitment basis, including when-issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Fund's net assets the same as owned securities. The Fund designates cash or liquid securities at least equal to the amount of its forward-commitments. As of Aug. 31, 2003, the Fund has entered into outstanding when-issued securities of $339,136,481 and other forward-commitments of $33,688,354. The Fund also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Fund to "roll over" its purchase commitments, the Fund receives negotiated amounts in the form of reductions of the purchase price of the commitment. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $325,199 and accumulated net realized loss has been increased by $325,199. - -------------------------------------------------------------------------------- 26 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended Aug. 31, 2003 2002 Class A Distributions paid from: Ordinary income $98,126,653 $121,329,296 Long-term capital gain -- -- Tax return of capital 2,476,941 7,330,284 Class B Distributions paid from: Ordinary income 34,728,824 44,277,498 Long-term capital gain -- -- Tax return of capital 876,635 2,675,088 Class C Distributions paid from: Ordinary income 854,382 754,797 Long-term capital gain -- -- Tax return of capital 21,567 45,602 Class Y Distributions paid from: Ordinary income 12,225,930 24,276,463 Long-term capital gain -- -- Tax return of capital 308,611 1,466,697 As of Aug. 31, 2003, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ -- Accumulated long-term gain (loss) $(134,159,555) Unrealized appreciation (depreciation) $ (43,407,919) Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium and discount using the effective interest method, is accrued daily. 2. EXPENSES AND SALES CHARGES The Fund has agreements with American Express Financial Corporation (AEFC) to manage its portfolio and provide administrative services. Under an Investment Management Services Agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Fund's average daily net assets in reducing percentages from 0.52% to 0.395% annually. - -------------------------------------------------------------------------------- 27 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 In addition, there is an annual closed-account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is not being charged to the Fund until a new transfer agency system is installed. Under terms of a prior agreement that ended April 30, 2003, the Fund paid a transfer agency fee at an annual rate per shareholder account of $19.50 for Class A, $20.50 for Class B, $20 for Class C and $17.50 for Class Y. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $3,815,788 for Class A, $1,213,704 for Class B and $16,511 for Class C for the year ended Aug. 31, 2003. During the year ended Aug. 31, 2003, the Fund's custodian and transfer agency fees were reduced by $45,481 as a result of earnings credits from overnight cash balances. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $9,243,313,617 and $9,520,130,022, respectively, for the year ended Aug. 31, 2003. Realized gains and losses are determined on an identified cost basis. - -------------------------------------------------------------------------------- 28 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended Aug. 31, 2003 Class A Class B Class C Class Y Sold 80,898,241 48,207,053 2,295,059 31,349,284 Issued for reinvested distributions 16,049,376 6,438,951 159,500 2,357,634 Redeemed (133,258,985) (86,570,359) (1,914,872) (40,187,210) ------------ ----------- ---------- ----------- Net increase (decrease) (36,311,368) (31,924,355) 539,687 (6,480,292) ----------- ----------- ------- ---------- Year ended Aug. 31, 2002 Class A Class B Class C Class Y Sold 109,760,309 83,489,844 3,858,357 56,720,131 Issued for reinvested distributions 20,137,632 8,455,159 145,079 5,140,336 Redeemed (108,208,221) (67,735,175) (1,133,847) (108,994,850) ------------ ----------- ---------- ------------ Net increase (decrease) 21,689,720 24,209,828 2,869,589 (47,134,383) ---------- ---------- --------- -----------
5. LENDING OF SECURITIES As of Aug. 31, 2003, securities valued at $91,494,680 were on loan to brokers. For collateral, the Fund received $94,272,500 in cash. Income from securities lending amounted to $298,766 for the year ended Aug. 31, 2003. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 6. INTEREST RATE FUTURES CONTRACTS As of Aug. 31, 2003, investments in securities included securities valued at $6,870,514 that were pledged as collateral to cover initial margin deposits on 1,779 open purchase contracts and 3,258 open sale contracts. The notional market value of the open purchase contracts as of Aug. 31, 2003 was $389,152,125 with a net unrealized loss of $2,790,592. The notional market value of the open sale contracts as of Aug. 31, 2003 was $358,860,363 with a net unrealized gain of $4,198,646. See "Summary of significant accounting policies." 7. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written are as follows: Year ended Aug. 31, 2003 Puts Calls Contracts Premiums Contracts Premiums Balance Aug 31, 2002 -- $ -- -- $ -- Opened 7,713 3,175,705 9,359 6,930,275 Closed (6,118) (2,639,500) (7,964) (6,098,583) Expired (1,200) (173,642) (1,000) (74,130) ------ -------- ------ ------- Balance Aug. 31, 2003 395 $ 362,563 395 $ 757,562 --- ----------- --- ----------- See "Summary of significant accounting policies." - -------------------------------------------------------------------------------- 29 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT 8. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by Deutsche Bank, whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The agreement went into effect Sept. 24, 2002. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the IBOR plus 0.50% or the higher of the Federal Funds Rate plus 0.25% and the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $200 million with U.S. Bank, N.A. The Fund had no borrowings outstanding during the year ended Aug. 31, 2003. 9. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $134,159,555 as of Aug. 31, 2003, that will expire in 2008 through 2010 if not offset by capital gains. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. 10. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended Aug. 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $4.75 $4.86 $4.70 $4.82 $5.11 Income from investment operations: Net investment income (loss) .20 .25 .31 .33 .33 Net gains (losses) (both realized and unrealized) .03 (.10) .17 (.12) (.25) Total from investment operations .23 .15 .48 .21 .08 Less distributions: Dividends from net investment income (.20) (.25) (.32) (.33) (.33) Distributions from realized gains -- -- -- -- (.04) Tax return of capital -- (.01) -- -- -- Total distributions (.20) (.26) (.32) (.33) (.37) Net asset value, end of period $4.78 $4.75 $4.86 $4.70 $4.82 Ratios/supplemental data Net assets, end of period (in millions) $2,280 $2,438 $2,390 $2,229 $2,591 Ratio of expenses to average daily net assets(c) .97% .95% .94% .93% .86% Ratio of net investment income (loss) to average daily net assets 4.16% 5.17% 6.51% 7.04% 6.56% Portfolio turnover rate (excluding short-term securities) 256% 169% 115% 64% 57% Total return(e) 4.91% 3.13% 10.48% 4.67% 1.64%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 30 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $4.75 $4.86 $4.70 $4.82 $5.11 Income from investment operations: Net investment income (loss) .16 .21 .27 .30 .29 Net gains (losses) (both realized and unrealized) .03 (.10) .17 (.13) (.24) Total from investment operations .19 .11 .44 .17 .05 Less distributions: Dividends from net investment income (.16) (.21) (.28) (.29) (.30) Distributions from realized gains -- -- -- -- (.04) Tax return of capital -- (.01) -- -- -- Total distributions (.16) (.22) (.28) (.29) (.34) Net asset value, end of period $4.78 $4.75 $4.86 $4.70 $4.82 Ratios/supplemental data Net assets, end of period (in millions) $902 $1,047 $954 $867 $1,093 Ratio of expenses to average daily net assets(c) 1.73% 1.71% 1.70% 1.69% 1.63% Ratio of net investment income (loss) to average daily net assets 3.40% 4.40% 5.74% 6.28% 5.79% Portfolio turnover rate (excluding short-term securities) 256% 169% 115% 64% 57% Total return(e) 4.12% 2.35% 9.65% 3.88% .87%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 31 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2003 2002 2001 2000(b) Net asset value, beginning of period $4.75 $4.86 $4.71 $4.64 Income from investment operations: Net investment income (loss) .16 .21 .27 .04 Net gains (losses) (both realized and unrealized) .03 (.10) .16 .07 Total from investment operations .19 .11 .43 .11 Less distributions: Dividends from net investment income (.16) (.21) (.28) (.04) Tax return of capital -- (.01) -- -- Total distributions (.16) (.22) (.28) (.04) Net asset value, end of period $4.78 $4.75 $4.86 $4.71 Ratios/supplemental data Net assets, end of period (in millions) $27 $24 $10 $1 Ratio of expenses to average daily net assets(c) 1.74% 1.72% 1.70% 1.69%(d) Ratio of net investment income (loss) to average daily net assets 3.34% 4.33% 5.62% 6.80%(d) Portfolio turnover rate (excluding short-term securities) 256% 169% 115% 64% Total return(e) 4.11% 2.35% 9.43% 2.58%(f)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 32 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $4.75 $4.86 $4.70 $4.82 $5.11 Income from investment operations: Net investment income (loss) .21 .25 .32 .34 .33 Net gains (losses) (both realized and unrealized) .03 (.10) .17 (.12) (.24) Total from investment operations .24 .15 .49 .22 .09 Less distributions: Dividends from net investment income (.21) (.25) (.33) (.34) (.34) Distributions from realized gains -- -- -- -- (.04) Tax return of capital -- (.01) -- -- -- Total distributions (.21) (.26) (.33) (.34) (.38) Net asset value, end of period $4.78 $4.75 $4.86 $4.70 $4.82 Ratios/supplemental data Net assets, end of period (in millions) $268 $297 $533 $385 $296 Ratio of expenses to average daily net assets(c) .81% .78% .78% .77% .77% Ratio of net investment income (loss) to average daily net assets 4.34% 5.30% 6.66% 7.20% 6.67% Portfolio turnover rate (excluding short-term securities) 256% 169% 115% 64% 57% Total return(e) 5.08% 3.29% 10.65% 4.84% 1.71%
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 33 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Independent Auditors' Report THE BOARD AND SHAREHOLDERS AXP FIXED INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of AXP Diversified Bond Fund (formerly AXP Bond Fund) (a series of AXP Fixed Income Series, Inc.) as of August 31, 2003, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended August 31, 2003, and the financial highlights for each of the years in the five-year period ended August 31, 2003. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2003, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Diversified Bond Fund as of August 31, 2003, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Minneapolis, Minnesota October 10, 2003 - -------------------------------------------------------------------------------- 34 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Diversified Bond Fund Fiscal year ended Aug. 31, 2003 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals (effective for distributions made after Jan. 1, 2003) 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 26, 2002 $0.02081 Oct. 25, 2002 0.02076 Nov. 25, 2002 0.02108 Dec. 20, 2002 0.02016 Jan. 22, 2003 0.01889 Feb. 21, 2003 0.01692 March 24, 2003 0.01669 April 24, 2003 0.01645 May 23, 2003 0.01261 June 23, 2003 0.01250 July 24, 2003 0.01251 Aug. 22, 2003 0.01169 Total distributions(a) $0.20107 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals (effective for distributions made after Jan. 1, 2003) 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 26, 2002 $0.01774 Oct. 25, 2002 0.01792 Nov. 25, 2002 0.01803 Dec. 20, 2002 0.01769 Jan. 22, 2003 0.01559 Feb. 21, 2003 0.01390 March 24, 2003 0.01357 April 24, 2003 0.01333 May 23, 2003 0.00964 June 23, 2003 0.00925 July 24, 2003 0.00934 Aug. 22, 2003 0.00879 Total distributions(a) $0.16479 - -------------------------------------------------------------------------------- 35 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals (effective for distributions made after Jan. 1, 2003) 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 26, 2002 $0.01773 Oct. 25, 2002 0.01788 Nov. 25, 2002 0.01799 Dec. 20, 2002 0.01766 Jan. 22, 2003 0.01556 Feb. 21, 2003 0.01387 March 24, 2003 0.01353 April 24, 2003 0.01329 May 23, 2003 0.00961 June 23, 2003 0.00925 July 24, 2003 0.00930 Aug. 22, 2003 0.00876 Total distributions(b) $0.16443 Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals (effective for distributions made after Jan. 1, 2003) 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share Sept. 26, 2002 $0.02147 Oct. 25, 2002 0.02136 Nov. 25, 2002 0.02173 Dec. 20, 2002 0.02069 Jan. 22, 2003 0.01960 Feb. 21, 2003 0.01756 March 24, 2003 0.01736 April 24, 2003 0.01712 May 23, 2003 0.01324 June 23, 2003 0.01319 July 24, 2003 0.01319 Aug. 22, 2003 0.01231 Total distributions(a) $0.20882 (a) $0.005 per share represents a tax return of capital. (b) $0.004 per share represents a tax return of capital. - -------------------------------------------------------------------------------- 36 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 86 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held with Principal occupation during past Other directorships Fund and length of five years service - --------------------------------- --------------------- ---------------------------------- -------------------------- Arne H. Carlson Board member since Chair, Board Services 901 S. Marquette Ave. 1999 Corporation (provides Minneapolis, MN 55402 administrative services to Age 69 boards). Former Governor of Minnesota - --------------------------------- --------------------- ---------------------------------- -------------------------- Philip J. Carroll, Jr. Board member since Retired Chairman and CEO, Fluor Scottish Power PLC, 901 S. Marquette Ave. 2002 Corporation (engineering and Vulcan Materials Minneapolis, MN 55402 construction) since 1998 Company, Inc. Age 65 (construction materials/chemicals) - --------------------------------- --------------------- ---------------------------------- -------------------------- Livio D. DeSimone Board member since Retired Chair of the Board and Cargill, Incorporated 30 Seventh Street East 2001 Chief Executive Officer, (commodity merchants and Suite 3050 Minnesota Mining and processors), General St. Paul, MN 55101-4901 Manufacturing (3M) Mills, Inc. (consumer Age 69 foods), Vulcan Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - --------------------------------- --------------------- ---------------------------------- -------------------------- Heinz F. Hutter* Board member since Retired President and Chief 901 S. Marquette Ave. 1994 Operating Officer, Cargill, Minneapolis, MN 55402 Incorporated (commodity Age 74 merchants and processors) - --------------------------------- --------------------- ---------------------------------- -------------------------- Anne P. Jones Board member since Attorney and Consultant 901 S. Marquette Ave. 1985 Minneapolis, MN 55402 Age 68 - --------------------------------- --------------------- ---------------------------------- -------------------------- Stephen R. Lewis, Jr.** Board member since Retired President and Professor Valmont Industries, Inc. 901 S. Marquette Ave. 2002 of Economics, Carleton College (manufactures irrigation Minneapolis, MN 55402 systems) Age 64 - --------------------------------- --------------------- ---------------------------------- -------------------------- Alan G. Quasha Board member since President, Quadrant Management, Compagnie Financiere 901 S. Marquette Ave. 2002 Inc. (management of private Richemont AG (luxury Minneapolis, MN 55402 equities) goods), Harken Energy Age 53 Corporation (oil and gas exploration) and SIRIT Inc. (radio frequency identification technology) - --------------------------------- --------------------- ---------------------------------- --------------------------
* 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. - -------------------------------------------------------------------------------- 37 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position held with Principal occupation during past Other directorships Fund and length of five years service - --------------------------------- --------------------- ---------------------------------- -------------------------- Alan K. Simpson Board member since Former three-term United States Biogen, Inc. 1201 Sunshine Ave. 1997 Senator for Wyoming (biopharmaceuticals) Cody, WY 82414 Age 71 - --------------------------------- --------------------- ---------------------------------- -------------------------- Alison Taunton-Rigby Board member since President, Forester Biotech 901 S. Marquette Ave. 2002 since 2000. Former President and Minneapolis, MN 55402 CEO, Aquila Biopharmaceuticals, Age 59 Inc. - --------------------------------- --------------------- ---------------------------------- -------------------------- Board Members Affiliated with AEFC*** Name, address, age Position held with Principal occupation during past Other directorships Fund and length of five years service - --------------------------------- --------------------- ---------------------------------- -------------------------- Barbara H. Fraser Board member since Executive Vice President - AEFA 1546 AXP Financial Center 2002 Products and Corporate Marketing Minneapolis, MN 55474 of AEFC since 2002. President - Age 53 Travelers Check Group, American Express Company, 2001-2002. Management Consultant, Reuters, 2000-2001. Managing Director - International Investments, Citibank Global, 1999-2000. Chairman and CEO, Citicorp Investment Services and Citigroup Insurance Group, U.S., 1998-1999 - --------------------------------- --------------------- ---------------------------------- -------------------------- Stephen W. Roszell Board member since Senior Vice President - 50238 AXP Financial Center 2002, Vice Institutional Group of AEFC Minneapolis, MN 55474 President since Age 54 2002 - --------------------------------- --------------------- ---------------------------------- -------------------------- William F. Truscott Board member since Senior Vice President - Chief 53600 AXP Financial Center 2001, Vice Investment Officer of AEFC since Minneapolis, MN 55474 President since 2001. Former Chief Investment Age 42 2002 Officer and Managing Director, Zurich Scudder Investments - --------------------------------- --------------------- ---------------------------------- --------------------------
*** Interested person by reason of being an officer, director and/or employee of AEFC. - -------------------------------------------------------------------------------- 38 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Roszell, who is vice president, and Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held with Principal occupation during past Other directorships Fund and length of five years service - -------------------------------- ---------------------- ---------------------------------- -------------------------- Jeffrey P. Fox Treasurer since 2002 Vice President - Investment 50005 AXP Financial Center Accounting, AEFC, since 2002; Minneapolis, MN 55474 Vice President - Finance, Age 48 American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - -------------------------------- ---------------------- ---------------------------------- -------------------------- Paula R. Meyer 596 President since 2002 Senior Vice President and AXP Financial Center General Manager - Mutual Funds, Minneapolis, MN 55474 AEFC, since 2002; Vice President Age 49 and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - -------------------------------- ---------------------- ---------------------------------- -------------------------- Leslie L. Ogg Vice President, President of Board Services 901 S. Marquette Ave. General Counsel, and Corporation Minneapolis, MN 55402 Secretary since 1978 Age 65 - -------------------------------- ---------------------- ---------------------------------- --------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - -------------------------------------------------------------------------------- 39 -- AXP DIVERSIFIED BOND FUND -- 2003 ANNUAL REPORT The policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities can be found in the Fund's Statement of Additional Information (SAI) which is available (i) without charge, upon request, by calling toll-free (800) 862-7919; (ii) on the American Express Company Web site at americanexpress.com/funds; and (iii) on the Securities and Exchange Commission Web site at http://www.sec.gov. - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS (R) - -------------------------------------------------------------------------------- American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Livio D. DeSimone, Anne P. Jones, and Alan G. Quasha, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services. Not applicable. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. [Reserved] Item 9. Controls and Procedures. (a) The registrant's Principal Executive Officer and Principal Financial Officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) At the date of filing this Form N-CSR, the registrant's Principal Executive Officer and Principal Financial Officer are aware of no significant changes in the registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Fixed Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date November 5, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date November 5, 2003 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 5, 2003 EX-99.CODE ETH 3 code-ethics.txt CODE OF ETHICS AMERICAN EXPRESS FUNDS PREFERRED MASTER TRUST GROUP (THE AXP FUNDS) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Purpose of the Code; Covered Officers This code of ethics ("Code") for the AXP Funds (collectively, "Funds," and each, "Fund") applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers," each of whom is identified in Exhibit A) for the purpose of promoting, in connection with his or her duties: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely, and understandable disclosure in reports and documents that a Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; o compliance with laws and governmental rules and regulations applicable to the conduct of the Funds' business and their financial reporting; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions, such as the purchase or sale of securities or other property, with the Funds because of their status as "affiliated persons" of the Funds. The compliance programs and -1- procedures of the Funds and of American Express Financial Corporation ("AEFC"), the investment adviser to the Funds, are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Funds and AEFC, of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Funds or for AEFC, or for both, be involved in establishing policies and implementing decisions that will have different effects on AEFC and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and AEFC and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds. Each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds; o not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds; o not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; III. Disclosure and Compliance o Each Covered Officer should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including to the Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and AEFC with the goal of promoting full, fair, accurate, timely, and understandable disclosure in the reports -2- and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules, and regulations. IV. Reporting and Accountability Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code; o annually thereafter affirm to the Board that he or she has complied with the requirements of the Code; o not retaliate against any other Covered Officer or any employee of AEFC or its affiliated persons for reports of potential violations that are made in good faith; and o notify the general counsel of the Funds ("Funds General Counsel") promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Funds General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officers will be considered by the Board Effectiveness Committees (the "Committees"). The Funds will follow these procedures in investigating and enforcing this Code: o The Funds General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, the Funds General Counsel believes that no violation has occurred, he or she is not required to take any further action; o Any matter that the Funds General Counsel believes is a violation will be reported to the Committees; o If the Committees concur that a violation has occurred, they will inform the Board, and the Board will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Committees will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, AEFC, or any -3- affiliate of AEFC govern or purport to govern the activities of the Covered Officers, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. AEFC's code of ethics under Rule 17j-1 under the Investment Company Act is a separate requirement applying to the Covered Officers and others, and is not part of this Code. VI. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Fund's Board, including a majority of its independent directors. Date: July, 2003 -4- Exhibit A Persons Covered by this Code of Ethics Paula R. Meyer President Jeffrey P. Fox Treasurer -5- EX-99.CERT 4 ex99-cert.txt CERTIFICATION PURSUANT TO 270.30A-2 OF THE INVESTMENT COMPANY ACT OF 1940 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Paula Meyer, certify that: 1. I have reviewed this report on Form N-CSR of AXP Fixed Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2003 /s/ Paula R. Meyer -------------------------------- Name: Paula R. Meyer Title: President and Chief Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey Fox, certify that: 1. I have reviewed this report on Form N-CSR of AXP Fixed Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 4, 2003 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 5 ex99-906cert.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION AXP Fixed Income Series, Inc. (the Registrant) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned below certifies that 1. This report on Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: November 4, 2003 /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Chief Executive Officer Date: November 4, 2003 /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR filed with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----