-----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, JjYHC4YeeTxl2damKTu9KTec01B80D0M+giXeXSEH5fWBjz4WU0RH70oqjCRgDSj i0cZk65a72In4uYCZ3sC2g== 0000820027-04-000426.txt : 20040505 0000820027-04-000426.hdr.sgml : 20040505 20040505091133 ACCESSION NUMBER: 0000820027-04-000426 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20040505 EFFECTIVENESS DATE: 20040505 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-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02503 FILM NUMBER: 04779618 BUSINESS ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126712772 MAIL ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 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-CSRS 1 fixedincome-ncsrs.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) 50606 AXP Financial Center, Minneapolis, Minnesota 55474 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 8/31 -------------- Date of reporting period: 2/29 -------------- AXP(R) Diversified Bond Fund Semiannual Report for the Period Ended Feb. 29, 2004 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. (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) Table of Contents Fund Snapshot 3 Questions & Answers with Portfolio Management 4 Investments in Securities 8 Financial Statements 21 Notes to Financial Statements 24 Proxy Voting 34 (logo) Dalbar 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 -- 2004 SEMIANNUAL REPORT Fund Snapshot AS OF FEB. 29, 2004 PORTFOLIO MANAGER Portfolio manager Tom Murphy, CFA* Since 2/03 Years in industry 18 * The Fund is managed by a team of portfolio managers led by Tom Murphy. 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 $3.136 billion Number of holdings 435 Average weighted life* 6.48 years Effective duration** 4.25 years STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH X MEDIUM X LOW SECTOR COMPOSITION Percentage of portfolio assets (pie chart) Mortgage-backed securities 35.7% Corporate bonds* 31.6% U.S. government obligations & agencies 20.9% CMBS/ABS** 6.4% Short-term securities 4.8% Foreign government bonds 0.6% * Includes 5.8% Utilities, 5.4% Communications, 3.9% Other financials, 3.6% Consumer cyclical, 3.5% Banks & brokers, 2.0% Insurance, 1.9% Consumer non-cyclical, 1.6% Basic industries, 1.5% Technology, 1.0% Capital goods, 0.9% Energy, 0.4% Transportation and 0.1% Other. ** Commercial mortgage-backed/Asset-backed securities CREDIT QUALITY SUMMARY Percentage of portfolio assets AAA bonds 64.8% AA bonds 2.4 A bonds 5.7 BBB bonds 15.6 Non-investment grade bonds 6.7 Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. * Average weighted life is the average number of years that each dollar of unpaid principal due on a security remains outstanding. ** Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, Portfolio Manager Tom Murphy discusses AXP Diversified Bond Fund's results and positioning for the first half of fiscal year 2004. Q: How did AXP Diversified Bond Fund perform for the six-month period ended Feb. 29, 2004? A: AXP Diversified Bond Fund's Class A shares rose 4.42%, excluding sales charge, for the six months ended Feb. 29, 2004. This was less than the Fund's benchmark, the Lehman Brothers Aggregate Bond Index, which gained 4.92% for the period. It was also less than Lipper Intermediate Investment Grade Index, representing the Fund's peer group, which advanced 5.11% over the same time frame. Q: What factors most significantly affected the Fund's performance? A: Lower credit quality bonds outperformed higher credit quality bonds for most of the six-month period. Many funds in the Fund's peer group held a higher proportion of higher-risk, non-index sectors like high yield and emerging markets in their portfolios during the period than did the Fund, and so our results lagged. While this Fund typically holds some high-yield bonds and some U.S. dollar-dominated emerging market bonds, the Fund's primary focus is on investment-grade securities. Indeed, (bar chart) PERFORMANCE COMPARISON For the six-month period ended Feb. 29, 2004 6% (bar 3) 5% (bar 1) (bar 2) +5.11% +4.42% +4.92% 4% 3% 2% 1% 0% (bar 1) AXP Diversified Bond Fund Class A (excluding sales change) (bar 2) Lehman Brothers Aggregate Bond Index (bar 3) Lipper Intermediate Investment Grade Index (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. 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 -- 2004 SEMIANNUAL REPORT Questions & Answers (begin callout quote)> Favorable security selection within the mortgage and investment-grade corporate sectors had a positive effect on portfolio performance during the period.(end callout quote) nearly 90% of the portfolio's assets were invested in investment-grade securities for the first half of fiscal year 2004. Based on our historical analyses, we believe our high-quality emphasis will provide competitive performance within our peer group over longer time periods.
AVERAGE ANNUAL TOTAL RETURNS 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) POP(5) as of Feb. 29, 2004 6 months* +4.42% -0.54% +4.24% +0.24% +4.24% +3.24% +4.71% +4.71% 1 year +4.63% -0.33% +3.84% -0.16% +3.63% +3.63% +4.80% +4.80% 5 years +5.41% +4.39% +4.61% +4.45% N/A N/A +5.56% +5.56% 10 years +6.24% +5.72% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +6.26% +6.26% +6.18% +6.18% +7.22% +7.22% as of March 31, 2004 6 months* +2.97% -1.91% +2.59% -1.41% +2.38% +1.38% +3.05% +3.05% 1 year +5.26% +0.26% +4.47% +0.47% +4.25% +4.25% +5.43% +5.43% 5 years +5.38% +4.36% +4.59% +4.42% N/A N/A +5.54% +5.54% 10 years +6.70% +6.18% N/A N/A N/A N/A N/A N/A Since inception N/A N/A +6.28% +6.28% +6.23% +6.23% +7.24% +7.24%
The performance information shown represents the past performance and is not a guarantee of future results. The value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (888) 723-8476 or visiting www.americanexpress.com/funds. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. * Not annualized. (1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. - -------------------------------------------------------------------------------- 5 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Questions & Answers Between August 2003 and February 2004, our long-term strategy did not bear as much fruit as we would have liked. In comparing the Fund to its peers, most of our peers had higher non-index positions that outpaced the benchmark. Still, favorable security selection within the mortgage and investment-grade corporate sectors had a positive effect on portfolio performance during the period. Since August 2003, the Federal Open Market Committee (the part of the Federal Reserve Board that sets short-term interest rate targets) has stated that it believes its accommodative policy can be maintained for a "considerable period". As a result, the yield curve (the difference in interest rates between long-term and short-term securities) has remained relatively steep. Most investors believe that there will be no increase in short-term rates until mid-2004 at the earliest. On January 28th, the Fed substituted "patient" for "considerable period." This change served to remind people that short rates will rise eventually. Low inflation, slack in the economy, and disappointing job creation to date are the factors that can allow the Fed to keep policy accommodative, even though they remain optimistic that robust growth is coming. This does point to a potential for increased volatility later this year if there is a moderate up-tick in inflation, tightening capacity utilization and jobs become more plentiful. Q: What changes did you make to the portfolio and how is it currently positioned? A: We modestly increased the Fund's allocation to corporate bonds during the period. We also took advantage of volatility in the corporate sector to enhance the quality profile of the Fund's corporate holdings. As lower-quality, more economically sensitive corporate issues outperformed, higher-quality, less cyclical issues became more attractively valued, creating opportunities for us to increase the Fund's positions in higher-quality bonds. By the end of the semiannual period, the difference in prices between bonds of varying quality within the high-grade corporate sector had become compressed. We substantially increased the portfolio's allocation to government agency securities, such that we were close to the benchmark positioning at the end of the semiannual period. Valuations on agency securities grew more attractive as prices were temporarily depressed by negative publicity early in the period regarding the questioned status of these agencies as government-sponsored entities. We do not anticipate any change in the agencies' - -------------------------------------------------------------------------------- 6 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Questions & Answers government-sponsored status, therefore we saw this as an opportunity to purchase the securities when they were more attractively priced. We positioned the mortgage portion of the portfolio more defensively and reduced the Fund's overall exposure to mortgages over the semiannual period, as bond prices rose and valuations became more extreme. Q: How do you intend to manage the Fund in the coming months? A: Treasuries have traded in a 0.50% range since September 2003. Continued foreign central bank buying of U.S. Treasuries, election year politics, and a pause in the performance of more volatile stocks and corporate bonds during the reporting period offset generally constructive economic releases and concerns that with the passage of time, we are that much closer to an increase in short-term rates. This scenario has kept current market rates for U.S. Treasuries at the lower end of the recent trading range. While we believe the economy is likely to continue its recovery, we remain cautious given relatively full valuations on what are known as the spread sectors of the bond market, including corporate and mortgage-backed securities, and the numerous crosscurrents in the market. Thus, we intend to continue to position the portfolio for the market's most likely scenario. We do not plan to deviate dramatically from the Lehman Brothers Aggregate Bond Index in the near term. We intend to maintain a slightly higher-than-index position in corporate bonds with a higher-quality focus and a slightly lower-than-index position in mortgages with a higher coupon focus. Our expectation is that the eventual increase in interest rates will affect the short end of the U.S. Treasury yield curve more adversely than longer maturity securities. At the same time, we are mindful that we do not simply want to mirror a consensus view about the bond market. As Federal Reserve Board Chairman Greenspan stated in his recent Humphrey-Hawkins testimony, "...all forecasts are projections into an uncertain future. The fact that most professional forecasters perceive much the same benign short-term outlook that is our most likely expectation provides scant comfort. When the future surprises, history tells us, it often surprises us all." - -------------------------------------------------------------------------------- 7 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Investments in Securities AXP Diversified Bond Fund Feb. 29, 2004 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (97.8%) Issuer Coupon Principal Value(a) rate amount Foreign government (0.6%) United Mexican States (U.S. Dollar) 03-03-15 6.63% $18,295,000(c) $19,502,470 U.S. government obligations & agencies (21.2%) Federal Home Loan Mtge Corp 08-15-06 2.75 50,500,000 51,307,495 11-15-13 4.88 46,926,000 48,574,229 01-15-14 4.50 35,800,000 35,955,730 Federal Natl Mtge Assn 04-15-06 2.13 26,800,000 26,928,586 08-15-08 3.25 86,170,000 86,791,286 11-17-08 3.88 32,300,000 32,818,738 02-15-09 3.25 44,990,000 44,872,981 Student Loan Mtge Assn 07-25-39 3.46 6,000,000(d) 6,001,878 U.S. Treasury 02-15-07 2.25 7,460,000 7,488,557 02-15-09 3.00 32,190,000(l) 32,270,475 02-15-14 4.00 46,060,500 46,118,076 08-15-23 6.25 112,900,000 132,838,365 02-15-26 6.00 98,542,000(l) 113,030,729 Total 664,997,125 Commercial mortgage-backed/Asset-backed securities (6.6%)(f) Aesop Funding II LLC Series 2002-1A Cl A1 10-20-06 3.85 7,090,000 7,304,712 Series 2003-3A Cl A3 07-20-09 3.72 4,650,000 4,702,381 AmeriCredit Automobile Receivables Trust Series 2002-C Cl 4A (FSA Insured) 02-12-09 3.55 2,660,000(o) 2,729,633 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 8,706,526 9,019,439 Bear Stearns Commercial Mtge Securities Series 2003-RWR2 Cl A4 05-11-39 5.19 8,000,000 8,108,732 Bear Stearns Series 2003-T10 Cl A1 03-13-40 4.00 8,436,270 8,547,376 CS First Boston Mortgage Securities Series 2003-29 Cl 8A1 11-25-18 6.00 6,686,766(i) 7,030,183 Series 2003-8 Cl 5A1 04-25-33 6.50 13,031,994(i) 13,590,740 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 5,800,000 6,506,133 Greenwich Capital Commercial Funding Series 2003-C2 Cl A2 01-05-36 4.02 5,000,000 5,091,461 KSL Resorts Series 2003-1A Cl C 05-15-13 1.99 3,500,000(d,j) 3,499,942 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 7,360,000 7,926,972 Series 2002-C2 Cl A4 06-15-31 5.59 4,905,000 5,310,609 Series 2002-C4 Cl A4 09-15-26 4.56 10,000,000 10,302,912 Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 6,195,875 Series 2002-C8 Cl A3 11-15-27 4.83 2,950,000 3,060,714 Series 2003-C3 Cl A2 05-15-27 3.09 14,900,000 14,800,982 Series 2003-C8 Cl A2 11-15-27 4.21 1,500,000 1,544,745 Series 2004-C1 Cl A4 01-15-31 4.57 8,000,000 7,947,500 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 8 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed/Asset-backed securities (cont.) Morgan Stanley Capital 1 Series 2003-IQ4 Cl A1 05-15-40 3.27% $6,244,820 $6,128,055 Series 2003-T11 Cl A2 06-13-41 4.34 10,190,000 10,514,349 Series 2004-T13 Cl A2 09-13-45 3.94 4,800,000 4,840,656 Morgan Stanley, Dean Witter Capital 1 Series 2002-TOP7 Cl A2 01-15-39 5.98 5,900,000 6,537,205 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 2,500,000 2,524,541 Residential Asset Securities Series 2002-KS1 Cl AI4 11-25-29 5.86 7,500,000 7,719,675 Series 2004-KS1 Cl AI3 09-25-28 2.95 2,400,000 2,407,874 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 5,622,959 5,674,166 Wachovia Bank Commercial Mtge Trust Series 2003-C8 Cl A2 11-15-35 3.89 15,000,000 15,313,515 Washington Mutual Series 2003-AR10 Cl A6 10-25-33 4.10 12,300,000 12,368,063 Total 207,249,140 Mortgage-backed securities (36.8%)(f) Federal Home Loan Mtge Corp 09-27-12 3.61 7,500,000 7,624,663 05-01-13 4.50 4,338,671 4,448,832 04-01-17 8.00 33,687 36,872 05-01-17 6.00 2,962,303 3,123,973 05-01-18 5.50 6,787,553 7,077,844 08-01-18 5.00 18,774,938 19,291,037 10-01-18 5.00 11,387,631 11,700,662 10-01-18 6.00 3,363,448 3,546,651 11-15-18 5.00 16,000,000 16,790,488 02-01-23 6.00 23,854,903 24,964,927 10-01-23 5.50 7,599,305 7,873,367 12-01-23 6.00 16,924,861 17,711,388 08-01-24 8.00 1,037,624 1,132,889 10-01-28 7.00 157,967 167,799 11-15-28 4.50 6,562,927 6,664,938 12-01-30 5.50 3,801,364 3,903,747 04-01-33 5.50 14,744,348 15,147,893 04-01-33 6.00 11,116,478 11,631,892 05-01-33 5.50 8,562,317 8,772,190 06-01-33 5.50 10,474,280 10,731,016 09-01-33 4.56 973,382(h) 973,285 04-01-34 5.00 10,598,000(i) 10,516,395 Collateralized Mtge Obligation 07-15-16 4.00 7,600,000 7,654,413 03-01-17 4.50 2,500,000 2,485,938 10-15-18 4.00 5,364,338 4,980,627 10-15-18 5.00 7,100,000 7,450,875 11-15-18 5.00 18,368,000 19,277,341 01-15-19 5.00 12,740,000 13,378,829 03-15-22 7.00 3,433,579 3,527,089 07-15-22 7.00 3,397,602 3,529,429 02-15-27 5.00 10,070,000 10,481,345 02-15-33 5.50 10,269,501 10,916,788 Interest Only 02-15-14 7.40 5,500,000(g) 524,865 06-15-18 30.45 4,237,292(g) 329,592 10-15-22 0.00 13,998,982(g) 1,683,798 Federal Natl Mtge Assn 03-01-08 7.00 3,344,503 3,587,766 07-01-08 6.50 1,446,366 1,542,743 11-01-09 9.00 309 342 06-01-10 6.50 3,335,222 3,557,460 08-01-11 8.50 3,545,758 3,903,152 01-01-13 4.78 10,845,000 11,201,056 01-01-13 4.92 5,706,389 5,979,513 02-01-13 4.83 6,462,415 6,730,237 02-01-13 5.02 15,738,970 16,516,167 04-01-13 7.00 9,950,011 10,673,726 06-01-13 4.85 9,273,255 9,642,305 04-01-14 6.50 1,960,844 2,087,883 08-01-16 6.00 8,002,885 8,441,866 08-01-16 6.50 3,661,688 3,896,820 12-01-16 5.50 10,589,114 11,047,998 06-01-17 6.50 7,513,157 8,044,978 08-01-17 6.00 14,243,635 15,110,408 08-01-17 6.50 4,305,304 4,628,292 09-01-17 6.00 2,177,625 2,297,084 09-01-17 6.50 5,210,413 5,545,807 12-01-17 6.50 2,659,262 2,830,439 01-01-18 5.50 8,925,086 9,339,997 02-01-18 5.50 15,600,434 16,308,607 03-01-18 5.50 25,614,752 26,801,373 04-01-18 5.00 9,282,021 9,540,613 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 9 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 05-01-18 5.50% $4,535,043 $4,746,463 06-01-18 5.00 9,789,313 10,062,037 08-01-18 4.50 10,221,271 10,335,462 10-01-18 5.00 5,842,484 6,018,474 03-01-19 4.50 25,440,000(i) 25,678,500 03-01-19 5.00 4,500,000(i) 4,619,529 03-01-19 5.50 24,700,000(i) 25,726,581 03-01-19 6.00 5,690,000(i) 5,994,062 04-01-19 5.00 30,700,000(i) 31,419,548 04-01-23 8.50 1,309,678 1,437,767 07-01-23 5.00 8,951,785 9,119,619 09-01-23 5.50 14,664,486 15,169,571 09-01-23 6.50 902,522 954,664 01-01-24 6.50 377,508 399,318 05-01-24 6.00 13,346,465 13,982,219 06-01-24 9.00 1,038,030 1,156,789 02-01-25 8.00 365,838 399,789 09-01-25 8.00 864,829 943,736 03-01-26 7.00 1,980,174 2,107,418 07-01-28 5.50 4,460,541 4,585,928 08-01-28 5.50 6,306,182 6,483,450 09-01-28 7.50 3,330,056 3,581,072 01-01-29 6.50 8,666,154 9,133,042 05-01-29 6.50 5,864,853 6,174,358 06-01-29 7.00 2,099,943 2,230,889 09-01-29 7.00 11,549,410 12,269,594 10-01-30 7.00 4,064,691 4,318,152 07-01-31 7.00 7,665,526 8,141,293 09-01-31 7.00 1,833,548 1,963,265 03-01-32 5.50 2,689,827 2,765,439 06-01-32 7.00 5,920,685 6,339,456 07-01-32 6.50 4,088,828 4,302,156 08-01-32 7.00 2,786,413 2,959,244 09-01-32 6.00 23,992,794 24,999,578 09-01-32 6.50 4,366,477 4,628,168 10-01-32 6.00 2,728,677 2,843,178 10-01-32 6.50 4,776,472 5,025,677 11-01-32 6.00 2,267,009 2,362,126 11-01-32 7.00 3,861,770 4,101,523 12-01-32 6.50 9,953,890 10,473,217 01-01-33 6.00 16,806,506 17,543,267 02-01-33 6.00 3,476,352 3,630,907 02-01-33 6.50 815,646 864,519 03-01-33 5.50 21,699,529 22,255,613 03-01-33 6.00 12,870,980 13,438,615 03-01-33 6.50 11,309,787 11,899,859 04-01-33 5.50 17,058,302 17,464,796 04-01-33 6.00 46,809,562 49,000,592 05-01-33 5.50 29,551,907 30,268,617 05-01-33 6.00 9,514,255 9,937,208 06-01-33 5.50 12,531,698 12,845,949 06-01-33 6.00 5,729,571 5,984,283 07-01-33 5.50 19,226,234 19,684,339 08-01-33 5.50 1,191,754 1,220,153 11-01-33 6.50 11,204,955 11,789,557 12-01-33 5.00 12,958,904(h) 13,218,601 01-01-34 6.50 1,788,297 1,881,599 02-01-34 6.50 19,505,980(i) 20,523,676 03-01-34 6.50 11,500,000(i) 12,092,963 04-01-34 6.00 1,730,000(i) 1,794,875 Collateralized Mtge Obligation 04-25-12 5.34 15,000,000 15,985,512 11-25-12 4.49 13,500,000 13,541,448 07-25-16 4.00 7,500,000 7,551,290 12-25-26 8.00 6,780,110 7,429,505 03-30-34 5.00 9,300,000(i) 9,731,578 09-25-42 5.00 6,600,000 6,829,517 Interest Only 12-25-12 0.00 5,325,377(g) 404,143 Govt Natl Mtge Assn 02-15-24 8.00 447,202 490,658 02-15-25 9.00 85,750 95,296 06-15-26 8.00 479,941 525,265 08-15-26 8.00 423,425 463,413 05-15-33 6.00 12,141,101 12,689,422 10-15-33 5.50 19,082,249 19,612,822 Collateralized Mtge Obligation Interest Only 01-20-32 9.44 6,054,722(g) 581,366 08-20-32 6.70 22,033,560(g) 2,804,634 Total 1,155,338,517 Aerospace & defense (0.5%) Alliant Techsystems 05-15-11 8.50 1,000,000 1,110,000 DRS Technologies Sr Sub Nts 11-01-13 6.88 1,000,000(d) 1,035,000 L-3 Communications 06-15-12 7.63 2,000,000 2,220,000 07-15-13 6.13 420,000 431,550 Raytheon 11-01-08 6.15 1,490,000 1,648,439 04-01-13 5.38 6,105,000 6,319,719 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Aerospace & defense (cont.) TD Funding 07-15-11 8.38% $1,525,000 $1,608,875 Total 14,373,583 Airlines (--%) Northwest Airlines Series 1999-1A 02-01-20 6.81 1,465,230 1,377,799 Automotive & related (0.6%) DaimlerChrysler NA Holding 01-15-08 4.75 3,500,000 3,615,150 06-04-08 4.05 535,000 536,107 11-15-13 6.50 6,635,000 7,084,389 Ford Motor 10-01-28 6.63 2,095,000 1,925,460 02-01-29 6.38 5,340,000 4,754,042 TRW Automotive Sr Nts 02-15-13 9.38 931,000 1,061,340 Total 18,976,488 Banks and savings & loans (2.3%) ANZ Capital Trust I 12-29-49 5.36 6,000,000(d) 6,125,916 Bank of America Sr Nts 09-15-12 4.88 6,605,000 6,774,313 Banknorth Group Sr Nts 05-01-08 3.75 3,960,000 3,986,374 Golden West Financial Sr Nts 10-01-12 4.75 2,500,000 2,558,338 US Bank Natl Assn Minnesota 08-01-11 6.38 11,115,000 12,584,181 Wachovia Sr Nts 02-17-09 3.63 6,020,000 6,061,971 Washington Mutual Bank FA Sub Nts 06-15-11 6.88 13,700,000 15,812,376 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 15,845,000 18,045,568 Total 71,949,037 Beverages & tobacco (0.1%) Cott Beverages 12-15-11 8.00 2,000,000 2,185,000 Broker dealers (1.3%) Goldman Sachs Group 04-01-13 5.25 6,120,000 6,301,409 07-15-13 4.75 1,460,000 1,444,217 Lehman Brothers Holdings 03-13-09 3.60 5,710,000 5,724,161 Merrill Lynch & Co 11-04-10 4.50 7,385,000 7,583,723 Morgan Stanley 01-15-09 3.88 5,900,000 5,986,022 05-15-10 4.25 3,920,000 3,986,464 03-01-13 5.30 10,660,000 11,121,152 Total 42,147,148 Building materials & construction (0.3%) Associated Materials 04-15-12 9.75 600,000 660,000 Louisiana Pacific Sr Nts 08-15-10 8.88 2,260,000 2,700,700 Norcraft Companies LP/Finance Sr Sub Nts 11-01-11 9.00 1,245,000(d) 1,307,250 Nortek Holdings Sr Sub Nts Series B 06-15-11 9.88 1,000,000 1,115,000 Ryland Group Sr Nts 06-01-08 5.38 2,500,000 2,581,250 Total 8,364,200 Cable (1.0%) Comcast 03-15-11 5.50 1,650,000 1,753,158 Comcast Cable Communications 11-15-08 6.20 18,410,000 20,336,698 CSC Holdings Sr Nts 12-15-07 7.88 1,500,000 1,616,250 DirectTV Holdings/Finance Sr Nts 03-15-13 8.38 1,700,000 1,933,750 EchoStar DBS Sr Nts 10-01-08 5.75 1,500,000(d) 1,530,000 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Cable (cont.) Videotron Ltee (U.S. Dollar) 01-15-14 6.88% $2,705,000(c) $2,833,488 Total 30,003,344 Cellular telecommunications (0.4%) AT&T Wireless Services Sr Nts 03-01-11 7.88 7,170,000 8,437,047 Nextel Communications Sr Nts 10-31-13 6.88 3,550,000 3,780,750 Total 12,217,797 Chemicals (0.2%) Airgas 10-01-11 9.13 1,500,000 1,702,500 Compass Minerals Group 08-15-11 10.00 2,500,000 2,825,000 Georgia Gulf Sr Nts 12-15-13 7.13 920,000(d) 977,500 MacDermid 07-15-11 9.13 1,500,000 1,702,500 Total 7,207,500 Computer hardware (--%) Seagate Technology HDD Holdings (U.S. Dollar) 05-15-09 8.00 1,000,000(c) 1,082,500 Energy (0.7%) Chesapeake Energy Sr Nts 01-15-16 6.88 1,250,000(d) 1,290,625 01-15-16 6.88 750,000 775,313 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 2,790,000 2,936,475 Newfield Exploration Sr Nts 03-01-11 7.63 2,500,000 2,812,500 Sr Sub Nts 08-15-12 8.38 380,000 427,500 Pemex Project Funding Master Trust 12-15-14 7.38 4,895,000 5,335,941 Tom Brown 09-15-13 7.25 335,000 359,288 XTO Energy Sr Nts 04-15-12 7.50 2,895,000 3,401,625 04-15-13 6.25 4,770,000 5,169,487 Total 22,508,754 Energy equipment & services (0.2%) Grant Prideco Escrow 12-15-09 9.00 2,000,000 2,230,000 Key Energy Services Series C 03-01-08 8.38 1,250,000 1,350,000 Sr Nts 05-01-13 6.38 1,195,000 1,236,825 Offshore Logistics 06-15-13 6.13 1,975,000 1,915,750 Total 6,732,575 Finance companies (2.6%) Citigroup 02-01-08 3.50 17,000,000 17,238,680 Sub Nts 10-01-10 7.25 5,383,000 6,349,055 Ford Motor Credit 10-25-11 7.25 2,230,000 2,415,899 10-01-13 7.00 11,190,000 11,758,788 GMAC 09-15-11 6.88 39,950,000 43,086,514 Total 80,848,936 Financial services (1.4%) Capital One Bank Sr Nts 02-01-06 6.88 1,740,000 1,884,258 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 23,580,000(c) 24,600,494 TIAA Global Markets 01-22-08 3.88 14,990,000(d) 15,431,905 Toyota Motor Credit 12-15-10 4.35 1,395,000 1,445,639 Total 43,362,296 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Food (1.3%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75% $500,000(c,d) $545,000 Chiquita Brands Intl Sr Nts 03-15-09 10.56 1,500,000 1,657,500 Del Monte Sr Sub Nts 12-15-12 8.63 500,000 552,500 Kellogg Sr Nts 06-01-08 2.88 19,015,000 18,700,302 Kraft Foods 10-01-08 4.00 18,705,000 19,116,697 Total 40,571,999 Health care products (0.3%) Apogent Technologies Sr Sub Nts 05-15-13 6.50 1,500,000 1,571,250 Kinetic Concepts Sr Sub Nts 05-15-13 7.38 615,000(d) 651,900 Wyeth 02-01-14 5.50 6,225,000 6,487,259 Total 8,710,409 Health care services (0.2%) Fisher Scientific Intl Sr Sub Nts 09-01-13 8.00 750,000(d) 823,125 09-01-13 8.00 750,000 823,125 NeighborCare Sr Sub Nts 11-15-13 6.88 910,000(d) 946,400 Omnicare Sr Sub Nts 06-01-13 6.13 2,100,000 2,152,500 Province Healthcare Sr Sub Nts 06-01-13 7.50 500,000 516,250 Triad Hospitals Sr Sub Nts 11-15-13 7.00 500,000(d) 517,500 Total 5,778,900 Home building (0.4%) D.R. Horton 12-01-07 7.50 1,000,000 1,100,000 01-15-09 5.00 990,000 999,900 07-01-13 5.88 3,030,000 3,060,300 KB HOME Sr Nts 02-01-14 5.75 2,055,000(d) 1,983,075 Meritage 06-01-11 9.75 2,570,000 2,878,400 NVR Sr Nts 06-15-10 5.00 2,500,000 2,468,750 Total 12,490,425 Household products (--%) Scotts Sr Sub Nts 11-15-13 6.63 280,000(d) 289,800 Industrial services (0.1%) Allied Waste North America 11-15-10 6.50 625,000(d) 634,375 02-15-14 6.13 995,000(d) 962,663 Sr Nts 04-15-13 7.88 1,500,000 1,627,500 Total 3,224,538 Industrial transportation (0.4%) Canadian Natl Railways (U.S. Dollar) 10-15-11 6.38 8,440,000(c) 9,546,872 Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-07 9.50 3,640,000(b,c,k) 72,800 Union Pacific 02-01-08 6.63 1,230,000 1,365,903 Total 10,985,575 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Insurance (2.0%) ASIF Global Financing 11-26-07 3.85% $5,190,000(d) $5,344,195 01-17-13 4.90 30,125,000(d) 30,612,121 Berkshire Hathaway 10-15-13 4.63 13,560,000(d,l) 13,643,530 MassMutual Global Funding II 07-15-08 2.55 3,201,000(d) 3,110,399 Met Life Global Funding I 06-19-08 2.60 9,310,000(d) 9,049,413 Pacific Life 09-15-33 6.60 1,650,000(d) 1,797,015 Total 63,556,673 Leisure time & entertainment (0.9%) Speedway Motorsports Sr Sub Nts 06-01-13 6.75 1,500,000 1,563,750 Time Warner 05-01-12 6.88 3,435,000 3,890,502 05-15-29 6.63 10,895,000 11,315,449 05-01-32 7.70 4,745,000 5,582,488 Vail Resorts Sr Sub Nts 02-15-14 6.75 865,000(d) 860,675 Viacom 05-15-11 6.63 3,120,000 3,579,404 Total 26,792,268 Lodging & gaming (0.4%) Caesars Entertainment Sr Sub Nts 05-15-11 8.13 500,000 565,000 Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 1,500,000 1,627,500 Coast Hotels & Casino 04-01-09 9.50 1,000,000 1,052,500 Hilton Hotels 12-01-12 7.63 1,250,000 1,412,500 MGM Mirage 10-01-09 6.00 2,000,000 2,080,000 02-27-14 5.88 860,000 851,400 Mohegan Tribal Gaming Sr Sub Nts 04-01-12 8.00 3,000,000 3,285,000 Park Place Entertainment Sr Sub Nts 03-15-10 7.88 1,500,000 1,665,000 Total 12,538,900 Machinery (0.1%) Joy Global Series B 03-15-12 8.75 1,500,000 1,680,000 Manitowoc Sr Nts 11-01-13 7.13 385,000 404,250 Terex 01-15-14 7.38 970,000(d) 1,023,350 Total 3,107,600 Media (1.3%) AOA Holdings LLC Sr Nts 06-15-08 12.00 5,850,000(k) 6,083,999 CanWest Media (U.S. Dollar) Series B 04-15-13 7.63 1,000,000(c) 1,090,000 CBD Media/Finance 06-01-11 8.63 1,955,000 2,140,725 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 2,000,000(c) 2,225,000 Dex Media West/Finance Sr Nts 08-15-10 8.50 700,000(d) 780,500 Hollinger Intl Publishing Sr Nts 12-15-10 9.00 1,180,000 1,286,200 Lamar Media 01-01-13 7.25 425,000 459,000 Lin Television Sr Sub Nts 05-15-13 6.50 1,340,000 1,366,800 Morris Publishing Sr Sub Nts 08-01-13 7.00 1,250,000(d) 1,276,563 News Corp (U.S. Dollar) 06-24-10 10.15 2,583,493(c,k) 3,256,430 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (cont.) Nexstar Finance LLC 04-01-08 12.00% $1,000,000 $1,126,250 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 640,000(c) 732,800 Radio One Series B 07-01-11 8.88 1,000,000 1,105,000 Shaw Communications (U.S. Dollar) Sr Nts 04-06-11 7.25 1,685,000(c) 1,882,988 Sinclair Broadcast Group 03-15-12 8.00 1,000,000 1,075,000 Sun Media (U.S. Dollar) 02-15-13 7.63 1,500,000(c) 1,623,750 Susquehanna Media Sr Sub Nts 04-15-13 7.38 900,000 955,125 United Artists Theatre 07-01-15 9.30 8,527,309 8,442,035 Vivendi Universal (U.S. Dollar) Sr Nts 07-15-08 6.25 4,690,000(c) 4,947,950 Total 41,856,115 Metals (0.1%) Jorgensen Earle M. 06-01-12 9.75 500,000 557,500 Peabody Energy Series B 03-15-13 6.88 1,000,000 1,067,500 United States Steel Sr Nts 05-15-10 9.75 1,500,000 1,710,000 Total 3,335,000 Multi-industry (0.4%) SPX Sr Nts 06-15-11 6.25 2,335,000 2,405,050 Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 2,045,000(c) 2,258,968 (U.S. Dollar) Sr Nts 11-15-13 6.00 6,885,000(c,d) 7,203,645 Total 11,867,663 Paper & packaging (1.4%) Abitibi-Consolidated (U.S. Dollar) 06-20-13 6.00 2,100,000(c) 2,015,479 Ball 12-15-12 6.88 2,220,000 2,364,300 Boise Cascade Sr Nts 11-01-10 6.50 560,000 588,011 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 2,000,000(c) 2,090,000 Crown Paper Sr Sub Nts 09-01-05 11.00 6,950,000(b,m) -- Doman Inds (U.S. Dollar) Sr Nts Series B 11-15-07 9.25 3,395,000(b,c) 950,600 Georgia-Pacific 02-01-10 8.88 1,000,000 1,140,000 Graphic Packaging Intl Sr Nts 08-15-11 8.50 430,000 474,075 Intl Paper 01-15-14 5.50 8,340,000 8,611,551 MeadWestvaco 04-01-12 6.85 2,970,000 3,326,941 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 2,110,000(c) 2,226,050 Owens-Brockway Glass 02-15-09 8.88 400,000 435,000 05-15-11 7.75 1,500,000 1,590,000 Silgan Holdings Sr Sub Nts 11-15-13 6.75 2,000,000(d) 2,040,000 Stone Container Sr Nts 07-01-12 8.38 1,500,000 1,616,250 Weyerhaeuser 03-15-07 6.13 5,860,000 6,400,743 03-15-12 6.75 5,980,000 6,711,294 Total 42,580,294 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 15 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Real estate investment trust (--%) Host Marriott LP Sr Nts 11-01-13 7.13% $1,000,000 $1,032,500 Restaurants (0.2%) Dominos Sr Sub Nts 07-01-11 8.25 1,000,000 1,072,500 YUM! Brands Sr Nts 05-15-08 7.65 4,872,000 5,578,440 Total 6,650,940 Retail -- general (0.9%) CSK Auto 01-15-14 7.00 1,000,000(d) 1,000,000 United Auto Group 03-15-12 9.63 1,500,000 1,657,500 Wal-Mart CRAVE 401 07-17-06 7.00 5,756,483(d) 6,176,533 Wal-Mart Stores 02-15-11 4.13 13,945,000 14,073,294 06-29-11 8.88 3,500,000 3,568,810 William Carter Series B 08-15-11 10.88 2,195,000 2,546,200 Total 29,022,337 Retail -- grocery (0.1%) Dairy Mart Convenience Stores Sr Sub Nts 03-15-04 10.25 5,925,000(b) 1,007,250 Kroger 02-01-13 5.50 1,270,000 1,333,360 Total 2,340,610 Telecom equipment & services (1.5%) Cincinnati Bell 07-15-13 7.25 1,500,000 1,545,000 Cingular Wireless LLC Sr Nts 12-15-11 6.50 4,020,000 4,430,434 Qwest 11-01-04 7.20 2,000,000 2,050,000 03-15-12 9.13 2,015,000(d,j) 2,287,025 Rogers Wireless (U.S. Dollar) 03-01-14 6.38 1,500,000(c,d) 1,515,000 Sprint Capital 03-15-12 8.38 15,395,000 18,454,571 Telus (U.S. Dollar) 06-01-07 7.50 9,480,000(c) 10,715,140 Verizon Virginia Cl A 03-15-13 4.63 6,600,000 6,466,548 Vodafone Group (U.S. Dollar) 02-15-10 7.75 825,000(c) 984,885 Total 48,448,603 Utilities -- electric (5.3%) American Electric Power Sr Nts Series C 03-15-10 5.38 4,360,000 4,653,925 Carolina Power & Light 07-15-12 6.50 1,185,000 1,334,399 Centerpoint Energy 02-15-11 7.75 2,000,000 2,265,070 CenterPoint Energy Houston Electric LLC 01-15-14 5.75 305,000 324,237 Cleveland Electric Illuminating Sr Nts 12-15-13 5.65 6,240,000(d) 6,385,317 Columbus Southern Power Sr Nts Series C 03-01-13 5.50 4,715,000 4,974,929 Commonwealth Edison 02-01-08 3.70 3,205,000 3,270,478 1st Mtge 08-15-10 4.74 2,230,000 2,318,040 Consumers Energy 1st Mtge 02-17-09 4.80 3,160,000 3,272,711 1st Mtge Series C 04-15-08 4.25 13,665,000 13,975,824 Dayton Power & Light 1st Mtge 10-01-13 5.13 7,795,000(d) 8,032,981 Dominion Resources Sr Nts 09-17-12 5.70 725,000 778,447 Sr Nts Series B 06-30-12 6.25 620,000 684,900 Sr Nts Series F 08-01-33 5.25 4,614,000 4,655,595 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 16 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (cont.) DPL Sr Nts 09-01-11 6.88% $1,525,000 $1,612,688 Duke Energy 01-15-12 6.25 3,610,000 3,950,845 1st Mtge 03-05-08 3.75 12,470,000 12,731,122 Sr Nts 10-01-08 4.20 14,605,000 14,830,166 Duquesne Light 1st Mtge Series O 04-15-12 6.70 820,000 934,628 Florida Power 1st Mtge 03-01-13 4.80 13,455,000 13,786,397 Indianapolis Power & Light 1st Mtge 07-01-13 6.30 1,880,000(d) 2,040,627 IPALCO Enterprises 11-14-08 8.38 400,000 446,000 11-14-11 8.63 3,680,000 4,158,400 Metropolitan Edison 03-15-13 4.95 3,685,000 3,714,310 MidAmerican Energy Sr Nts 05-15-08 3.50 1,260,000 1,255,615 Northern States Power 1st Mtge 08-01-10 4.75 6,110,000 6,370,775 Northern States Power - Minnesota 1st Mtge Series B 08-28-12 8.00 3,070,000 3,823,510 Ohio Power Sr Nts Series F 02-15-13 5.50 2,155,000 2,273,225 Sr Nts Series H 01-15-14 4.85 4,510,000 4,504,678 Pacific Gas & Electric 1st Mtge Series 1992B 05-01-25 8.38 4,100,000 4,161,500 PG&E 07-15-08 6.88 2,010,000(d) 2,193,955 Public Service Co of Colorado 10-01-08 4.38 4,690,000 4,878,116 03-01-13 4.88 210,000 214,850 04-01-14 5.50 2,730,000 2,901,529 Tampa Electric 08-15-07 5.38 900,000 962,192 08-15-12 6.38 7,410,000 8,110,319 Teco Energy Sr Nts 06-15-10 7.50 930,000 981,150 Texas Utilities Electric 01-01-05 9.45 741,000 744,749 Tucson Electric Power 10-01-09 8.50 3,205,000 3,245,063 Virginia Electric & Power Sr Nts Series A 03-31-06 5.75 4,685,000 5,020,783 Total 166,774,045 Utilities -- natural gas (0.6%) ANR Pipeline 03-15-10 8.88 1,570,000 1,734,850 Consolidated Natural Gas Sr Nts 04-15-11 6.85 1,660,000 1,899,057 El Paso Natl Gas Sr Nts Series A 08-01-10 7.63 680,000 693,600 NiSource Finance 11-01-06 3.20 3,200,000 3,245,663 Northwest Pipeline 03-01-10 8.13 2,455,000 2,675,950 Panhandle Eastern Pipeline Sr Nts 08-15-08 4.80 2,490,000 2,578,744 Southern Natural Gas 03-15-10 8.88 1,750,000 1,925,000 Transcontinental Gas Pipeline Series B 08-15-11 7.00 2,250,000 2,418,750 Williams Companies 03-15-12 8.13 1,750,000 1,907,500 Total 19,079,114 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 17 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- telephone (2.9%) AT&T Sr Nts 11-15-11 8.05% $3,682,000 $4,288,613 British Telecom (U.S. Dollar) 12-15-10 8.38 4,165,000(c) 5,094,403 Deutsche Telekom Intl Finance (U.S. Dollar) 06-15-10 8.50 3,835,000(c) 4,664,196 07-22-13 5.25 11,055,000(c) 11,297,215 06-15-30 8.75 3,150,000(c) 4,058,054 France Telecom (U.S. Dollar) 03-01-11 8.75 1,280,000(c,j) 1,543,986 03-01-31 9.50 1,500,000(c,j) 1,983,506 Telecom Italia Capital (U.S. Dollar) 11-15-13 5.25 12,450,000(c,d) 12,615,249 11-15-33 6.38 1,890,000(c,d) 1,940,678 Verizon New England Sr Nts 09-15-11 6.50 11,135,000 12,450,489 Verizon New York Series A 04-01-12 6.88 10,305,000 11,609,190 Verizon Pennsylvania Series A 11-15-11 5.65 16,880,000 18,034,592 Total 89,580,171 Variable rate senior loan interests (0.2%) American Commercial Lines LLC Term Loan B 06-30-06 5.38 2,488,972 2,227,630 Term Loan C 03-30-07 7.62 3,489,735 3,123,313 Total 5,350,943 Total bonds (Cost: $3,021,755,601) $3,066,389,631 Common stock (--%) Issuer Shares Value(a) Stellex Aerostructures 1,311(b,m) $-- Total common stock (Cost: $--) $-- Other (--%) Issuer Shares Value(a) Wayland Investment Fund LLC 6,000,000(b,e,k) $1,474,440 Total other (Cost: $6,671,880) $1,474,440 Short-term securities (4.9%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (1.6%) Federal Home Loan Mtge Corp Disc Nts 05-20-04 1.01% $25,000,000 $24,945,550 05-25-04 1.01 20,000,000 19,953,720 Federal Natl Mtge Assn Disc Nt 03-10-04 1.07 4,900,000 4,898,478 Total 49,797,748 Commercial paper (3.3%) Danske 04-08-04 1.05 13,500,000 13,484,010 Edison Asset Securitization 04-02-04 1.04 14,800,000(n) 14,784,789 General Electric Capital 03-01-04 1.04 20,100,000 20,098,259 Jupiter Securitization 03-11-04 1.03 8,500,000(n) 8,496,838 Sigma Finance 03-01-04 1.04 25,800,000(n) 25,797,764 04-26-04 1.04 6,700,000(n) 6,688,983 Special Purpose Accounts Receivable 03-08-04 1.06 14,200,000(n) 14,195,819 Total 103,546,462 Total short-term securities (Cost: $153,341,830) $153,344,210 Total investments in securities (Cost: $3,181,769,311)(p) $3,221,208,281 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 18 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT 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 Feb. 29, 2004, the value of foreign securities represented 4.7% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of Feb. 29, 2004, the value of these securities amounted to $165,482,625 or 5.3% of net assets. (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 and amount of future cash flows as of Feb. 29, 2004. (h) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Feb. 29, 2004. (i) At Feb. 29, 2004, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $168,779,360. (j) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Feb. 29, 2004. (k) Identifies issues considered to be illiquid as to their marketability (see Note 1 to the financial statements). Information concerning such security holdings at Feb. 29, 2004, is as follows: Security Acquisition Cost dates AOA Holdings LLC 12.00% Sr Nts 2008 06-02-02 $5,850,000 News Corp (U.S. Dollar) 10.15% 2010 01-29-93 thru 06-01-03 2,617,427 Greater Beijing First Expressways (U.S. Dollar) Sr Nts 9.50% 2007 10-22-03 -- Wayland Investment Fund LLC 05-17-00 6,671,880 - -------------------------------------------------------------------------------- 19 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Notes to investments in securities (continued) (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 U.S. Treasury Bonds, June 2004, 30-year $ 71,000,000 Sale contracts U.S. Treasury Notes, March 2004, 5-year 23,100,000 U.S. Treasury Notes, March 2004, 10-year 23,100,000 U.S. Treasury Notes, June 2004, 5-year 45,800,000 U.S. Treasury Notes, June 2004, 10-year 322,000,000 (m) Negligible market value. (n) 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. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of Feb. 29, 2004, the value of these securities amounted to $69,964,193 or 2.2% of net assets. (o) The following abbreviation is used in the portfolio security description to identify the insurer of the issue: FSA -- Financial Security Assurance (p) At Feb. 29, 2004, the cost of securities for federal income tax purposes was approximately $3,181,769,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 60,579,000 Unrealized depreciation (21,140,000) ----------- Net unrealized appreciation $ 39,439,000 ------------ - -------------------------------------------------------------------------------- 20 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Diversified Bond Fund Feb. 29, 2004 (Unaudited) Assets Investments in securities, at value (Note 1)* (identified cost $3,181,769,311) $3,221,208,281 Capital shares receivable 962,262 Dividends and accrued interest receivable 24,701,518 Receivable for investment securities sold 261,326,891 ----------- Total assets 3,508,198,952 ------------- Liabilities Disbursements in excess of cash on demand deposit 418,644 Dividends payable to shareholders 605,393 Capital shares payable 699,772 Payable for investment securities purchased 163,641,082 Payable for securities purchased on a forward-commitment basis (Note 1) 168,779,360 Payable upon return of securities loaned (Note 5) 37,698,750 Accrued investment management services fee 42,177 Accrued distribution fee 37,032 Accrued service fee 563 Accrued transfer agency fee 10,961 Accrued administrative services fee 3,815 Other accrued expenses 273,620 ------- Total liabilities 372,211,169 ----------- Net assets applicable to outstanding capital stock $3,135,987,783 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 6,380,243 Additional paid-in capital 3,213,367,942 Undistributed net investment income 6,422,003 Accumulated net realized gain (loss) (Note 9) (127,757,129) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) 37,574,724 ---------- Total -- representing net assets applicable to outstanding capital stock $3,135,987,783 ============== Net assets applicable to outstanding shares: Class A $2,096,694,314 Class B $ 808,498,979 Class C $ 24,437,729 Class Y $ 206,356,761 Net asset value per share of outstanding capital stock: Class A shares 426,601,940 $ 4.91 Class B shares 164,482,472 $ 4.92 Class C shares 4,965,421 $ 4.92 Class Y shares 41,974,507 $ 4.92 ---------- -------------- * Including securities on loan, at value (Note 5) $ 37,055,000 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 21 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT
Statement of operations AXP Diversified Bond Fund Six months ended Feb. 29, 2004 (Unaudited) Investment income Income: Interest $ 73,130,723 Fee income from securities lending (Note 5) 116,962 ------- Total income 73,247,685 ---------- Expenses (Note 2): Investment management services fee 8,066,629 Distribution fee Class A 2,714,323 Class B 4,244,785 Class C 126,868 Transfer agency fee 2,415,204 Incremental transfer agency fee Class A 129,524 Class B 82,770 Class C 2,290 Service fee -- Class Y 121,898 Administrative services fees and expenses 750,662 Compensation of board members 13,100 Custodian fees 149,833 Printing and postage 261,860 Registration fees 66,515 Audit fees 21,500 Other 39,535 ------ Total expenses 19,207,296 Earnings credits on cash balances (Note 2) (25,201) ------- Total net expenses 19,182,095 ---------- Investment income (loss) -- net 54,065,590 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 24,000,200 Futures contracts (16,675,451) Options contracts written (Note 7) 1,120,125 --------- Net realized gain (loss) on investments 8,444,874 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 84,172,955 ---------- Net gain (loss) on investments and foreign currencies 92,617,829 ---------- Net increase (decrease) in net assets resulting from operations $146,683,419 ============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 22 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT
Statements of changes in net assets AXP Diversified Bond Fund Feb. 29, 2004 Aug. 31, 2003 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss) -- net $ 54,065,590 $ 148,096,536 Net realized gain (loss) on investments 8,444,874 111,836,822 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 84,172,955 (82,489,907) ---------- ----------- Net increase (decrease) in net assets resulting from operations 146,683,419 177,443,451 ----------- ----------- Distributions to shareholders from: Net investment income Class A (35,916,733) (98,126,653) Class B (10,811,713) (34,728,824) Class C (323,847) (854,382) Class Y (4,222,808) (12,225,930) Tax return of capital Class A -- (2,476,941) Class B -- (876,635) Class C -- (21,567) Class Y -- (308,611) ----------- ------------ Total distributions (51,275,101) (149,619,543) ----------- ------------ Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 99,915,045 392,003,998 Class B shares 54,005,331 232,251,463 Class C shares 3,271,365 11,080,202 Class Y shares 43,640,841 150,904,209 Reinvestment of distributions at net asset value Class A shares 28,471,926 77,130,545 Class B shares 9,604,179 30,927,117 Class C shares 289,863 767,401 Class Y shares 3,528,672 11,324,132 Payments for redemptions Class A shares (374,492,161) (642,065,690) Class B shares (Note 2) (181,445,292) (419,428,542) Class C shares (Note 2) (6,387,907) (9,230,935) Class Y shares (115,979,288) (193,312,689) ------------ ------------ Increase (decrease) in net assets from capital share transactions (435,577,426) (357,648,789) ------------ ------------ Total increase (decrease) in net assets (340,169,108) (329,824,881) Net assets at beginning of period 3,476,156,891 3,805,981,772 ------------- ------------- Net assets at end of period $3,135,987,783 $3,476,156,891 ============== ============== Undistributed net investment income $ 6,422,003 $ 3,631,514 -------------- --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 23 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Notes to Financial Statements AXP Diversified Bond Fund (Unaudited as to Feb. 29, 2004) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Fixed Income Series, 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. Effective March 4, 2004, the Fund will offer an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. 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 -- 2004 SEMIANNUAL 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 -- 2004 SEMIANNUAL 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 Feb. 29, 2004, 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 Feb. 29, 2004 was $10,887,669 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. Assets are liquid if they can be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the asset is valued by the Fund. 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 Feb. 29, 2004, the Fund has entered into outstanding when-issued securities of $127,590,365 and other forward-commitments of $41,188,995. 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. - -------------------------------------------------------------------------------- 26 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT 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, market discount and original issue 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. 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 Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. In addition, AECSC is entitled to charge an annual closed-account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. - -------------------------------------------------------------------------------- 27 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT 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 $1,580,555 for Class A, $543,527 for Class B and $3,854 for Class C for the six months ended Feb. 29, 2004. During the six months ended Feb. 29, 2004, the Fund's custodian and transfer agency fees were reduced by $25,201 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 $4,786,052,298 and $5,287,898,219, respectively, for the six months ended Feb. 29, 2004. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows:
Six months ended Feb. 29, 2004 Class A Class B Class C Class Y Sold 20,569,718 11,132,069 672,775 9,018,636 Issued for reinvested distributions 5,853,600 1,974,414 59,455 725,675 Redeemed (77,206,907) (37,407,071) (1,312,660) (23,908,256) ----------- ----------- ---------- ----------- Net increase (decrease) (50,783,589) (24,300,588) (580,430) (14,163,945) ----------- ----------- -------- ----------- 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) ----------- ----------- ------- ----------
5. LENDING OF PORTFOLIO SECURITIES As of Feb. 29, 2004, securities valued at $37,055,000 were on loan to brokers. For collateral, the Fund received $37,698,750 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investments in securities." Income from securities lending amounted to $116,962 for the six months ended Feb. 29, 2004. 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. - -------------------------------------------------------------------------------- 28 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT 6. INTEREST RATE FUTURES CONTRACTS As of Feb. 29, 2004, investments in securities included securities valued at $6,716,029 that were pledged as collateral to cover initial margin deposits on 710 open purchase contracts and 4,140 open sale contracts. The notional market value of the open purchase contracts as of Feb. 29, 2004 was $79,830,625 with a net unrealized gain of $809,181. The notional market value of the open sale contracts as of Feb. 29, 2004 was $471,091,048 with a net unrealized loss of $2,673,427. See "Summary of significant accounting policies" and "Notes to investments in securities." 7. OPTIONS CONTRACTS WRITTEN Contracts and premiums associated with options contracts written are as follows: Six months ended Feb. 29, 2004 Puts Calls Contracts Premiums Contracts Premiums Balance Aug. 31, 2003 395 $ 362,563 395 $ 757,562 Opened -- -- -- -- Exercised -- -- (395) (757,562) Expired (395) (362,563) -- -- --- --------- --- --------- Balance Feb. 29, 2004 -- $ -- -- $ -- --- --------- --- --------- See "Summary of significant accounting policies." 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 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. The Fund had no borrowings outstanding during the six months ended Feb. 29, 2004. 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. - -------------------------------------------------------------------------------- 29 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT 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, 2004(g) 2003 2002 2001 2000 Net asset value, beginning of period $4.78 $4.75 $4.86 $4.70 $4.82 Income from investment operations: Net investment income (loss) .09 .20 .25 .31 .33 Net gains (losses) (both realized and unrealized) .12 .03 (.10) .17 (.12) Total from investment operations .21 .23 .15 .48 .21 Less distributions: Dividends from net investment income (.08) (.20) (.25) (.32) (.33) Tax return of capital -- -- (.01) -- -- Total distributions (.08) (.20) (.26) (.32) (.33) Net asset value, end of period $4.91 $4.78 $4.75 $4.86 $4.70 Ratios/supplemental data Net assets, end of period (in millions) $2,097 $2,280 $2,438 $2,390 $2,229 Ratio of expenses to average daily net assets(c) .98%(d) .97% .95% .94% .93% Ratio of net investment income (loss) to average daily net assets 3.48%(d) 4.16% 5.17% 6.51% 7.04% Portfolio turnover rate (excluding short-term securities) 147% 256% 169% 115% 64% Total return(e) 4.42%(f) 4.91% 3.13% 10.48% 4.67%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 30 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004(g) 2003 2002 2001 2000 Net asset value, beginning of period $4.78 $4.75 $4.86 $4.70 $4.82 Income from investment operations: Net investment income (loss) .07 .16 .21 .27 .30 Net gains (losses) (both realized and unrealized) .13 .03 (.10) .17 (.13) Total from investment operations .20 .19 .11 .44 .17 Less distributions: Dividends from net investment income (.06) (.16) (.21) (.28) (.29) Tax return of capital -- -- (.01) -- -- Total distributions (.06) (.16) (.22) (.28) (.29) Net asset value, end of period $4.92 $4.78 $4.75 $4.86 $4.70 Ratios/supplemental data Net assets, end of period (in millions) $809 $902 $1,047 $954 $867 Ratio of expenses to average daily net assets(c) 1.73%(d) 1.73% 1.71% 1.70% 1.69% Ratio of net investment income (loss) to average daily net assets 2.72%(d) 3.40% 4.40% 5.74% 6.28% Portfolio turnover rate (excluding short-term securities) 147% 256% 169% 115% 64% Total return(e) 4.24%(f) 4.12% 2.35% 9.65% 3.88%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 31 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004(g) 2003 2002 2001 2000(b) Net asset value, beginning of period $4.78 $4.75 $4.86 $4.71 $4.64 Income from investment operations: Net investment income (loss) .07 .16 .21 .27 .04 Net gains (losses) (both realized and unrealized) .13 .03 (.10) .16 .07 Total from investment operations .20 .19 .11 .43 .11 Less distributions: Dividends from net investment income (.06) (.16) (.21) (.28) (.04) Tax return of capital -- -- (.01) -- -- Total distributions (.06) (.16) (.22) (.28) (.04) Net asset value, end of period $4.92 $4.78 $4.75 $4.86 $4.71 Ratios/supplemental data Net assets, end of period (in millions) $24 $27 $24 $10 $1 Ratio of expenses to average daily net assets(c) 1.73%(d) 1.74% 1.72% 1.70% 1.69%(d) Ratio of net investment income (loss) to average daily net assets 2.72%(d) 3.34% 4.33% 5.62% 6.80%(d) Portfolio turnover rate (excluding short-term securities) 147% 256% 169% 115% 64% Total return(e) 4.24%(f) 4.11% 2.35% 9.43% 2.58%(f)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 32 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004(g) 2003 2002 2001 2000 Net asset value, beginning of period $4.78 $4.75 $4.86 $4.70 $4.82 Income from investment operations: Net investment income (loss) .09 .21 .25 .32 .34 Net gains (losses) (both realized and unrealized) .14 .03 (.10) .17 (.12) Total from investment operations .23 .24 .15 .49 .22 Less distributions: Dividends from net investment income (.09) (.21) (.25) (.33) (.34) Tax return of capital -- -- (.01) -- -- Total distributions (.09) (.21) (.26) (.33) (.34) Net asset value, end of period $4.92 $4.78 $4.75 $4.86 $4.70 Ratios/supplemental data Net assets, end of period (in millions) $206 $268 $297 $533 $385 Ratio of expenses to average daily net assets(c) .82%(d) .81% .78% .78% .77% Ratio of net investment income (loss) to average daily net assets 3.62%(d) 4.34% 5.30% 6.66% 7.20% Portfolio turnover rate (excluding short-term securities) 147% 256% 169% 115% 64% Total return(e) 4.71%(f) 5.08% 3.29% 10.65% 4.84%
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. (g) Six months ended Feb. 29, 2004 (Unaudited). - -------------------------------------------------------------------------------- 33 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the Web site americanexpress.com/funds; or by searching the Web site of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, after Aug. 1, 2004, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 will be available at http://www.sec.gov. - -------------------------------------------------------------------------------- 34 -- AXP DIVERSIFIED BOND FUND -- 2004 SEMIANNUAL REPORT 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. Code of Ethics. Not applicable for semi-annual reports. Item 3. Audit Committee Financial Expert. Not applicable for semi-annual reports. Item 4. Principal Accountant Fees and Services. Not applicable for semi-annual reports. 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. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 9. Submission of matters to a vote of security holders. Not applicable. Item 10. 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 11. Exhibits. (a)(1) Not applicable for semi-annual reports. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Fixed Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date May 5, 2004 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 May 5, 2004 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date May 5, 2004 EX-99.CERT 2 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, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 26, 2004 /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, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation and disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 26, 2004 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 3 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: April 26, 2004 /s/ Paula R. Meyer -------------------- Paula R. Meyer President and Chief Executive Officer Date: April 26, 2004 /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-----