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) 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: 8/31/04 -------------- AXP(R) Diversified Bond Fund Annual Report for the Period Ended Aug. 31, 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 Performance Summary 4 Questions & Answers with Portfolio Management 5 The Fund's Long-term Performance 10 Investments in Securities 12 Financial Statements 24 Notes to Financial Statements 27 Report of Independent Registered Public Accounting Firm 40 Federal Income Tax Information 41 Fund Expenses Example 43 Board Members and Officers 45 Proxy Voting 47 [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 -- 2004 ANNUAL REPORT Fund Snapshot AS OF AUG. 31, 2004 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 16 Scott Kirby 2/03 25 Tom Murphy, CFA 2/03 18 Nic Pifer 2/03 14 Jennifer Ponce de Leon 2/03 15 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 by class: 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 $2.785 billion Number of holdings 406 Weighted average life(1) 6.9 years Effective duration(2) 4.0 years Weighted average bond rating(3) AA STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT LONG X HIGH X MEDIUM QUALITY X LOW SECTOR COMPOSITION Percentage of portfolio assets [pie chart] Mortgage-backed securities 38.5% Corporate bonds* 23.0% U.S. government obligations & agencies 19.3% CMBS/ABS** 9.6% Short-term securities*** 7.0% Foreign government bonds 2.5% Other 0.1% * Includes 4.4% Communications, 3.3% Consumer cyclical, 3.1% Utilities, 2.9% Banks and brokers, 1.7% Energy, 1.6% Other financial, 1.4% Insurance, 1.3% Technology, 1.2% Capital goods, 1.0% Basic industries, 1.0% Consumer non-cyclical and 0.1% Transporation. ** Commercial mortgage-backed securities/ Asset-backed securities. *** 1.0% of the securities in this category is due to security lending activity. 6.0% of the short term securities is the Fund's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of portfolio assets excluding cash equivalents AAA bonds 75.3% AA bonds 1.6 A bonds 5.3 BBB bonds 12.2 Non-investment grade bonds 5.6 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. 0.3% of the portfolio rating above was determined through internal analysis. For further detail about these holdings, please refer to the section entitled "Investments in Securities." (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) 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. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. Fund holdings are subject to change. -------------------------------------------------------------------------------- 3 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Performance Summary [bar graph] PERFORMANCE COMPARISON For the year ended Aug. 31, 2004 8% [bar 1] [bar 2] [bar 3] 6% 5.54 6.13 6.14 4% 2% 0% [bar 1] AXP Diversified Bond Fund Class A (excluding sales charge) [bar 2] Lehman Brothers Aggregate Bond Index (unmanaged) [bar 3] Lipper Intermediate 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 other classes 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.
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 Aug. 31, 2004 1 year +5.54% +0.53% +4.95% +0.95% +4.95% +4.95% +5.92% +5.92% 3 years +4.52% +2.84% +3.80% +2.87% +3.80% +3.80% +4.76% +4.76% 5 years +5.72% +4.70% +4.96% +4.80% N/A N/A +5.93% +5.93% 10 years +6.76% +6.24% N/A N/A N/A N/A N/A N/A Since inception +9.58% +9.40% +5.99% +5.99% +5.59% +5.59% +6.95% +6.95% as of Sept. 30, 2004 1 year +3.63% -1.29% +2.85% -1.15% +2.85% +2.85% +3.79% +3.79% 3 years +4.83% +3.15% +4.04% +3.11% +4.04% +4.04% +4.93% +4.93% 5 years +5.70% +4.68% +4.90% +4.74% N/A N/A +5.87% +5.87% 10 years +6.93% +6.41% N/A N/A N/A N/A N/A N/A Since inception +9.57% +9.40% +5.97% +5.97% +5.59% +5.59% +6.92% +6.92%
The performance information shown represents the past performance and is not a guarantee of future results. The investment return and principal value of your investment 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. (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. -------------------------------------------------------------------------------- 4 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below, AXP Diversified Bond Fund's portfolio management team discusses the Fund's positioning and results for fiscal year 2004. Q: How did AXP Diversified Bond Fund perform for the 12-month period ended Aug. 31, 2004? A: AXP Diversified Bond Fund's Class A shares rose 5.54%, excluding sales charge, for the 12-month period ended Aug. 31, 2004. This was less than the Fund's benchmark, the Lehman Brothers Aggregate Bond Index, which gained 6.13% for the period. It was also less than Lipper Intermediate Investment Grade Index, representing the Fund's peer group, which advanced 6.14% over the same time frame. Q: What factors most significantly affected the Fund's performance? A: A meaningful contributor to overall portfolio performance was the Fund's positioning, which reflected our view that the difference in interest rates between short-term and long-term securities would narrow. A negative contributor to Fund performance was its holdings in investment grade corporate bonds, which were relatively weak during the second half of fiscal year 2004. For much of the period, the Fund benefited from the outperformance of long-term U.S. Treasuries, where the Fund had a higher-than-index position. Over the course of the fiscal year, the Fund's short duration relative to its benchmark (effective duration was 4.0 years as of Aug. 31, 2004) was also a small positive factor in its results. The Fund's annual returns were further boosted by its allocation to high-yield debt, which, with the exception of a weak first calendar quarter, produced strong returns. The market focused on the improving fundamentals of the high yield sector. Emerging markets provided strong returns through early February but then suffered during much of the second half of the fiscal year, amid the increase in U.S. interest rates. The Fund did not own any emerging market debt given these concerns and our view that these securities were overvalued. AXP Diversified Bond Fund SEC YIELDS Class A Class B Class C Class Y As of Aug. 31, 2004 3.42% 2.83% 2.82% 3.74% As of Sept. 30, 2004 3.53% 2.96% 2.96% 3.87% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 4 for additional performance information. -------------------------------------------------------------------------------- 5 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Questions & Answers (begin callout quote) >We constantly re-evaluate all of the Fund's positions as we seek to have the best risk/reward opportunities in the portfolio across sectors.(end callout quote) At the same time, corporate and mortgage securities produced mixed results over the period. We selectively sold corporate bonds, throughout the period amid market strength. We found very poor risk/reward in the broader bond market. However, we maintained higher-than-index weightings in bonds we thought offered attractive value. Investment grade credit generated positive performance versus similar duration U.S. Treasuries for much of the reporting period. However, the sector did not perform well during the second half of the fiscal year, as the market struggled to interpret signals from economic data and the raft of Federal Reserve Board (the Fed) commentary about inflation, the pace of economic expansion, and its likely approach to monetary policy. This detracted from the Fund's relative results. Mortgages generated positive returns over the period (though not without some late second quarter 2004 fireworks when Treasuries sold off dramatically), as investors took advantage of the steepness of the yield curve and long stretches of low market volatility. The Fund, however, held a lower-than-index position in this sector, since mortgage valuations remained expensive by historical standards, and we believe these securities are vulnerable to underperformance if and when market volatility heightens. As in corporate bonds, we sold mortgages throughout the period as opportunities arose. We viewed AAA-rated commercial mortgage-backed securities (CMBS) as an excellent substitute for high quality credit and agency securities and positioned the portfolio accordingly. This was a positive contributor to Fund performance, as the CMBS market has absorbed an increase in bond supply. The Fund's global bond position (long the euro/short the dollar) had a small positive impact on portfolio performance over the period, and we maintained those positions given our expectation of a longer-term decline in the value of the U.S. dollar. -------------------------------------------------------------------------------- 6 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Questions & Answers Q: How did the interest rate environment change during the reporting period? A: Ten-year U.S. Treasury rates were volatile, but ended the period less than 50 basis points (0.50%) lower than where they began. Much of the volatility was driven by the market's analysis of Fed statements. Q: What changes did you make to the portfolio and how is it currently positioned? A: We began the period with a higher-than-index position in mortgages, investment grade credit, and commercial mortgage-backed securities (CMBS). By the end of the fiscal year, the Fund was neutral investment grade corporate bonds [line graph] U.S. TREASURY YIELDS (Sept. 30, 2004 compared to Sept. 30, 2003) [dash line] 0.94% 1.00% 1.46% 1.86% 2.83% 3.94% 4.88% [solid line] 1.70% 1.99% 2.61% 2.85% 3.37% 4.12% 4.89% 3 mos. 6 mos. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 30 yrs. Maturity Treasury yields as of: [solid line] 9/30/04 [dash line] 9/30/03 Source: Bloomberg This chart compares the income potential of U.S. Treasury bills, notes and bonds as of Sept. 30, 2004 compared to a year earlier. This is known as the yield curve. -------------------------------------------------------------------------------- 7 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Questions & Answers versus its benchmark, and moved to a lower-than-index exposure to mortgages. We had a higher-than-index position in commercial mortgage-backed securities (CMBS) than when the period began. We constantly re-evaluate all of the Fund's positions as we seek to have the best risk/reward opportunities in the portfolio across sectors, with an eye toward having a higher-than-index position in securities that may offer the greatest likelihood of outperforming the Fund's benchmark. Q: Did portfolio turnover affect the Fund this past year? A: Our portfolio turnover was higher than a year earlier and added value to the portfolio. A significant portion of the Fund's 279% turnover rate this past fiscal year was the result of "roll" transactions in U.S. Treasury notes. For U.S. Treasury notes, existing holdings were sold and newly issued securities with better liquidity were purchased. These transactions affect the Fund's turnover rate but do not change the risk exposure or result in material transaction costs. Q: How do you intend to manage the Fund in the coming months? A: Though recent economic data appears to have moderated a bit from the dramatic rebound early in April and May, we are of the view that the economic expansion continues at an above-trend pace. We view the recent weakness as transitory but continue to re-evaluate our view with each new data point. While interest rates have declined from their period highs of May and June, we believe rates will move still higher over the remainder of the year. In particular, we believe the improvement in economic conditions and higher inflation so far this year present risks to the Fed's willingness to remain measured in its tightening plan. Our outlook calls for persistent monetary tightening moves by the Fed through 2005. In managing the Fund, we continue to emphasize capital preservation strategies designed to benefit from a rising rate environment. -------------------------------------------------------------------------------- 8 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Questions & Answers In the corporate and mortgage sectors, we will likely have lower-than-index positions for the near term. From a relative value perspective, the yield difference over U.S. Treasuries generally continue to look unattractive on a historical basis and look even less compelling given the liquidity risks surrounding the commencement of the Fed's tightening regime. In corporates, we remain highly selective, seeking to reduce the Fund's exposure modestly. In mortgages, we intend to maintain the Fund's more significant lower-than-index position, especially to lower-coupon mortgages, which we believe may underperform as the sector reprices to a higher, flatter yield curve. We intend to maintain the Fund's meaningful exposure to commercial mortgage-backed securities compared to its index weighting, as we view these securities as a strong substitute for high-quality corporate and government agency securities. As always, we maintain a disciplined focus on individual security selection in concert with our qualitative and quantitative partners in research. -------------------------------------------------------------------------------- 9 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT The Fund's Long-term Performance The chart on the facing page illustrates the total value of an assumed $10,000 investment in AXP Diversified Bond Fund Class A shares (from 9/1/94 to 8/31/04) 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. 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. Returns do not reflect taxes payable on distributions and redemptions. 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. Also see "Past Performance" in the Fund's current prospectus. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. DISTRIBUTION SUMMARY The table below details the Fund's income and capital gain distributions for the fiscal years shown. More information on the other classes can be found in the Financial Highlights section of this report's Notes to Financial Statements. Class A Short-term Long-term Fiscal year ended Income capital gains capital gains Total Aug. 31, 2004 $0.17 $-- $-- $0.17 Aug. 31, 2003 0.20 -- -- 0.20 Aug. 31, 2002 0.26 -- -- 0.26 Aug. 31, 2001 0.32 -- -- 0.32 Aug. 31, 2000 0.33 -- -- 0.33 -------------------------------------------------------------------------------- 10 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT [bar graph]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP DIVERSIFIED BOND FUND AXP Diversified Bond Fund Class A (includes sales charge) $ 9,525 $10,825 $11,449 $12,829 $13,650 $13,877 $14,525 $16,047 $16,550 $17,362 $18,324 Lehman Brothers Aggregate Bond Index(1) $10,000 $11,130 $11,587 $12,746 $14,093 $14,206 $15,280 $17,167 $18,560 $19,369 $20,556 Lipper Intermediate Investment Grade Index(2) $10,000 $11,020 $11,454 $12,553 $13,745 $13,806 $14,714 $16,525 $17,492 $18,433 $19,565 `94 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04
COMPARATIVE RESULTS Results as of Aug. 31, 2004 Since 1 year 3 years 5 years 10 years inception(3) AXP Diversified Bond Fund (includes sales charge) Class A Cumulative value of $10,000 $10,053 $10,876 $12,582 $18,324 $146,890 Average annual total return +0.53% +2.84% +4.70% +6.24% +9.40% Lehman Brothers Aggregate Bond Index(1) Cumulative value of $10,000 $10,613 $11,974 $14,470 $20,556 N/A Average annual total return +6.13% +6.19% +7.67% +7.47% N/A Lipper Intermediate Investment Grade Index(2) Cumulative value of $10,000 $10,614 $11,836 $14,170 $19,565 N/A Average annual total return +6.14% +5.78% +7.22% +6.94% N/A
Results for other share classes can be found on page 4. (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. (3) Fund data is from Oct. 3, 1974. The Fund began operating before both indices. -------------------------------------------------------------------------------- 11 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Investments in Securities AXP Diversified Bond Fund Aug. 31, 2004 (Percentages represent value of investments compared to net assets) Bonds (97.2%) Issuer Coupon Principal Value(a) rate amount Foreign government (2.6%) Bundesrepublik Deutschland (European Monetary Unit) 07-04-10 5.25% 39,060,000(c) $51,851,828 Pemex Project Funding Master Trust (U.S. Dollar) 12-15-14 7.38 4,895,000(c) 5,384,500 United Mexican States (U.S. Dollar) 03-03-15 6.63 15,545,000(c) 16,399,975 Total 73,636,303 U.S. government obligations & agencies (20.2%) Federal Home Loan Mtge Corp 08-15-06 2.75 50,500,000 50,674,427 07-15-13 4.50 28,240,000 28,254,967 11-15-13 4.88 31,926,000 32,685,392 Federal Natl Mtge Assn 04-15-06 2.13 26,800,000(i) 26,668,224 08-15-08 3.25 86,170,000 85,664,182 02-15-09 3.25 2,990,000 2,951,312 U.S. Treasury 12-31-05 1.88 55,425,000 55,251,799 08-15-09 3.50 4,035,000(i) 4,068,414 08-15-14 4.25 5,730,000 5,787,300 08-15-23 6.25 107,204,000(q) 124,528,381 02-15-26 6.00 122,907,000(q) 139,245,028 02-15-31 5.38 5,515,000 5,871,754 Total 561,651,180 Commercial mortgage-backed/ Asset-backed securities (10.0%)(f) Aesop Funding II LLC Series 2002-1A Cl A1 10-20-06 3.85 7,090,000(d) 7,193,914 Series 2003-3A Cl A3 07-20-09 3.72 4,650,000(d) 4,655,858 AmeriCredit Automobile Receivables Trust Series 2002-C Cl 4A (FSA) 02-12-09 3.55 2,660,000(n) 2,690,077 Series 2004-CA Cl A3 03-06-09 3.00 5,500,000 5,504,950 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 9,207,403 9,437,588 Bear Stearns Commercial Mtge Securities Series 2004-PWR3 Cl A2 02-11-41 3.87 6,000,000 5,960,760 Commercial Mtge Pass-Through Certificates Series 2004-LB3A Cl A2 07-10-37 4.71 6,000,000 6,191,940 Series 2004-LB3A Cl A5 07-10-37 5.44 6,500,000 6,796,660 CS First Boston Mtge Securities Series 2004-C1 Cl A2 01-15-37 3.52 6,000,000 5,944,394 GE Capital Commercial Mtge Series 2004-C2 Cl A2 03-10-40 4.12 3,000,000 3,003,870 Series 2004-C2 Cl A4 03-10-40 4.89 6,800,000 6,870,094 Series 2004-C3 Cl A2 07-10-39 4.43 6,600,000 6,721,259 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 5,800,000 6,357,882 Greenwich Capital Commercial Funding Series 2004-GG1 Cl A7 06-10-36 5.32 8,000,000 8,328,871 GS Mtge Securities Series 2004-GG2 Cl A6 08-10-38 5.40 10,550,000 11,008,080 J.P. Morgan Chase Commercial Mtge Securities Series 2001-CIBC Cl A3 03-15-33 6.26 2,000,000 2,212,552 Series 2003-CB6 Cl A1 07-12-37 4.39 8,261,667 8,402,859 Series 2003-CB6 Cl A2 07-12-37 5.26 4,200,000 4,372,930 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 12 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed/ Asset-backed securities (cont.) J.P. Morgan Chase Commercial Mtge Securities (cont.) Series 2004-C2 Cl A3 05-15-41 5.39% $2,850,000 $2,960,032 Series 2004-PNC1 Cl A2 06-12-41 4.56 3,500,000 3,601,040 Series 2004-PNC1 Cl A4 06-12-41 5.55 6,500,000 6,822,768 KSL Resorts Series 2003-1A Cl C 05-15-13 2.50 3,500,000(d,m) 3,505,589 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 7,360,000 7,820,380 Series 2002-C2 Cl A4 06-15-31 5.59 4,905,000 5,258,952 Series 2002-C4 Cl A4 09-15-26 4.56 5,200,000 5,279,391 Series 2002-C4 Cl A5 09-15-31 4.85 6,000,000 6,118,030 Series 2002-C8 Cl A3 11-15-27 4.83 2,950,000 3,010,269 Series 2003-C3 Cl A2 05-15-27 3.09 14,900,000 14,630,540 Series 2003-C7 Cl A2 09-15-27 4.06 2,200,000 2,216,727 Series 2003-C8 Cl A2 11-15-27 4.21 7,500,000 7,593,975 Series 2003-C8 Cl A4 11-15-32 5.12 8,500,000 8,771,516 Series 2004-C2 Cl A2 03-15-29 3.25 10,190,000 9,947,274 Series 2004-C2 Cl A4 03-15-36 4.37 3,700,000 3,600,988 Series 2004-C4 Cl A2 06-15-29 4.57 4,300,000 4,426,690 Series 2004-C4 Cl A4 06-15-29 5.31 7,500,000(i) 7,847,667 Series 2004-C6 Cl A2 08-15-29 4.19 6,500,000 6,569,485 Series 2004-C6 Cl A6 08-15-29 5.02 7,500,000 7,583,203 Merrill Lynch Mtge Trust Series 2003-KEY1 Cl A4 11-12-35 5.24 4,000,000 4,144,448 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 4,300,000 4,300,000 Morgan Stanley Capital 1 Series 2003-IQ4 Cl A1 05-15-40 3.27 6,064,478 5,872,720 Series 2004-T13 Cl A2 09-13-45 3.94 4,800,000 4,766,640 Series 2004-IQ7 Cl A4 06-15-38 5.57 9,300,000 9,755,235 Morgan Stanley, Dean Witter Capital 1 Series 2002-TOP7 Cl A2 01-15-39 5.98 5,900,000 6,453,149 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 2,500,000 2,494,715 Residential Asset Securities Series 2002-KS1 Cl AI4 11-25-29 5.86 7,500,000 7,591,050 WFS Financial Owner Trust Series 2004-3 Cl A3 03-17-09 3.30 5,000,000 5,038,280 Total 279,635,291 Mortgage-backed securities (40.3%)(f,h) Bank of America Alternative Loan Trust Series 2004-3 Cl 1A1 04-25-34 6.00 14,193,210 14,541,103 Bank of American Mtge Securities Series 2004-E Cl B1 06-25-34 4.06 2,968,826(k) 2,897,545 Series 2004-F Cl B1 07-25-34 4.17 5,341,509(k) 5,214,969 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75 5,727,941 5,717,343 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.69 3,549,299(k) 3,556,007 Series 2004-J6 Cl 3A1 08-25-19 5.00 15,739,222 15,884,318 CS First Boston Mtge Securities Series 2003-29 Cl 8A1 11-25-18 6.00 5,609,651 5,821,769 Series 2004-AR5 Cl CB1 06-25-34 4.46 3,391,259(k) 3,331,912 Federal Home Loan Mtge Corp 05-01-13 4.50 4,073,740 4,153,147 04-01-17 8.00 22,151 24,225 05-01-17 6.00 2,527,644 2,658,013 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 13 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Home Loan Mtge Corp (cont.) 05-01-18 5.50% $5,794,865 $6,003,914 08-01-18 5.00 17,324,866 17,700,639 10-01-18 5.00 10,687,062 10,921,363 02-01-23 6.00 19,461,081 20,295,926 10-01-23 5.50 7,145,547 7,362,431 12-01-23 6.00 15,226,290 15,876,441 08-01-24 8.00 794,403 867,307 10-01-28 7.00 121,740 130,168 12-01-30 5.50 3,224,319 3,294,279 04-01-33 5.50 13,859,191 14,159,136 04-01-33 6.00 9,899,477 10,297,210 06-01-33 5.50 9,704,759 9,885,748 07-01-33 5.00 6,285,672 6,254,585 09-01-33 4.56 923,833(k) 927,418 08-01-34 5.21 12,000,000(k) 12,158,406 Collateralized Mtge Obligation 03-15-22 7.00 2,583,995 2,628,085 02-15-27 5.00 10,070,000 10,375,319 11-15-28 4.50 6,344,704 6,422,390 02-15-33 5.50 9,889,951 10,327,422 07-25-43 7.00 6,276,052 6,721,257 Interest Only 02-15-14 7.40 5,027,816(l) 416,756 06-15-18 8.78 3,579,588(l) 242,826 10-15-22 14.56 13,223,047(l) 1,145,911 Federal Natl Mtge Assn 03-01-08 7.00 2,563,523 2,722,163 07-01-08 6.50 1,088,435 1,155,132 11-01-09 9.00 161 175 06-01-10 6.50 2,614,600 2,774,818 08-01-11 8.50 2,794,841 2,993,672 01-01-13 4.92 5,667,793 5,864,330 02-01-13 4.83 6,416,394 6,600,481 02-01-13 5.02 5,829,682 6,025,360 04-01-13 7.00 7,672,257 8,147,046 01-01-14 4.84 4,169,568 4,243,065 02-01-14 4.77 7,958,211 8,092,581 03-01-14 4.60 1,143,919 1,140,304 04-01-14 4.65 3,987,151 4,002,662 04-01-14 6.50 1,560,943 1,660,025 08-01-16 6.00 6,395,390 6,723,779 08-01-16 6.50 2,847,450 3,025,937 12-01-16 5.50 8,873,089 9,207,106 06-01-17 6.50 6,090,356 6,488,332 08-01-17 6.00 11,941,057 12,584,041 08-01-17 6.50 3,671,847 3,917,983 09-01-17 6.00 1,766,316 1,856,635 09-01-17 6.50 4,318,755 4,588,861 12-01-17 6.50 2,058,057 2,186,773 01-01-18 5.50 8,107,100 8,424,476 02-01-18 5.50 13,283,031 13,789,776 03-01-18 5.50 22,274,980 23,167,296 04-01-18 5.00 8,351,492 8,526,856 05-01-18 5.50 4,135,035 4,296,215 05-01-18 6.00 13,827,775 14,546,712 06-01-18 5.00 9,121,345 9,331,069 07-01-18 4.50 4,703,332 4,711,656 08-01-18 4.50 9,585,998 9,611,460 10-01-18 5.00 11,087,310 11,326,350 10-01-18 6.00 2,799,025 2,942,090 12-01-18 5.00 7,259,662 7,412,101 02-01-19 6.00 4,726,141 4,967,704 09-01-19 4.50 6,985,000(g) 6,978,448 04-01-23 8.50 1,021,740 1,125,692 07-01-23 5.00 8,342,435 8,419,210 09-01-23 5.50 13,067,538 13,454,444 09-01-23 6.50 763,352 808,090 01-01-24 6.50 257,472 272,562 05-01-24 6.00 10,967,130 11,447,206 06-01-24 9.00 874,097 976,094 02-01-25 8.00 285,786 312,397 09-01-25 8.00 698,039 763,822 03-01-26 7.00 1,498,528 1,605,852 07-01-28 5.50 3,599,236 3,678,808 08-01-28 5.50 5,837,105 5,966,152 09-01-28 7.50 2,158,316 2,326,673 12-01-28 5.50 12,421,041 12,695,648 01-01-29 6.50 6,617,298 6,983,906 04-01-29 5.00 20,229,151 20,106,172 05-01-29 6.50 4,675,244 4,927,975 06-01-29 7.00 12,750 13,631 09-01-29 7.00 8,447,897 9,031,835 10-01-30 7.00 3,108,965 3,323,864 07-01-31 7.00 5,206,849 5,562,963 09-01-31 7.00 1,463,535 1,576,539 03-01-32 5.50 2,372,726 2,425,183 06-01-32 7.00 4,780,682 5,123,842 07-01-32 6.50 3,220,420 3,403,819 08-01-32 7.00 2,224,114 2,376,713 09-01-32 6.00 20,700,462 21,473,577 09-01-32 6.50 3,733,885 3,950,349 10-01-32 6.00 2,534,960 2,638,329 10-01-32 6.50 3,836,434 4,041,975 11-01-32 6.00 2,252,770 2,344,662 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 14 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 11-01-32 7.00% $2,300,887 $2,457,668 12-01-32 6.50 6,941,422 7,313,315 01-01-33 6.00 15,614,614 16,203,172 02-01-33 6.00 2,969,743 3,087,900 02-01-33 6.50 719,936 759,931 03-01-33 5.50 19,468,249 19,848,362 03-01-33 6.00 6,405,620 6,652,587 03-01-33 6.50 9,586,636 10,077,334 04-01-33 5.50 16,062,248 16,403,211 04-01-33 6.00 31,534,812 32,858,007 05-01-33 5.50 27,181,220 27,693,727 07-01-33 4.85 7,030,780(k) 6,991,197 07-01-33 5.00 14,578,509(g) 14,512,762 07-01-33 5.50 16,696,941 17,005,405 08-01-33 5.50 1,102,977 1,123,068 11-01-33 6.50 8,699,626 9,144,922 12-01-33 5.00 10,586,500(k) 10,684,229 01-01-34 6.50 1,687,260 1,783,652 02-01-34 6.50 14,743,669 15,498,333 03-01-34 5.00 14,855,969(g) 14,788,971 03-01-34 5.00 30,684,358 30,545,975 04-01-34 5.00 3,599,461 3,585,711 08-01-34 4.53 6,592,656(k) 6,563,780 10-01-34 6.00 27,025,000(g) 27,886,421 Collateralized Mtge Obligation 05-25-16 4.00 8,700,000 8,738,207 12-25-26 8.00 5,730,607 6,238,973 02-25-44 7.00 26,245,163 27,886,573 06-25-44 7.50 6,004,092 6,514,740 Interest Only 12-25-12 13.29 4,743,421(l) 292,573 Govt Natl Mtge Assn 02-15-24 8.00 312,654 344,491 02-15-25 9.00 85,072 95,322 06-15-26 8.00 351,300 385,834 08-15-26 8.00 337,058 370,192 05-15-33 6.00 9,608,487 9,989,160 10-15-33 5.50 18,089,379 18,473,486 03-20-34 6.50 5,381,736 5,680,327 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 4,267,140(l) 522,582 08-20-32 0.00 16,398,827(l) 2,692,399 GRS Mtge Loan Trust Series 2004-6F Cl 2A2 05-25-34 5.50 5,431,647 5,640,518 Series 2004-10F Cl 1A5 08-25-19 4.50 14,150,000 13,968,703 Harborview Mtge Loan Trust Series 2004-3 Cl B1 05-19-34 4.40 4,427,101 4,339,350 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.46 4,199,992(k) 4,187,140 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 2,034,508 2,085,370 Series 2004-7 Cl 8A1 08-25-19 5.00 5,538,963 5,626,313 Series 2004-8 Cl 7A1 09-25-19 5.00 7,625,000 7,691,719 Morgan Stanley Mtge Loan Trust Series 2004-3 Cl 4A 04-25-34 5.74 13,972,673 14,255,772 Structured Adjustable Rate Mtge Loan Series 2004-3AC 03-25-34 4.94 5,587,859(k) 5,725,097 Series 2004-5 Cl B1 05-25-34 4.64 4,246,616(k) 4,231,370 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 19,865,570 19,934,122 Washington Mutual Series 2004-CB2 Cl 6A 07-25-19 4.50 4,918,164 4,851,769 Total 1,121,638,484 Aerospace & defense (0.2%) Alliant Techsystems 05-15-11 8.50 1,000,000 1,087,500 DRS Technologies Sr Sub Nts 11-01-13 6.88 1,000,000 1,030,000 L-3 Communications 06-15-12 7.63 2,000,000 2,165,000 07-15-13 6.13 190,000 187,150 Total 4,469,650 Airlines (--%) Northwest Airlines Series 1999-1A 02-01-20 6.81 1,453,500 1,264,167 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 15 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Automotive & related (0.5%) DaimlerChrysler NA Holding 11-15-13 6.50% $4,949,000 $5,334,675 Ford Motor 10-01-28 6.63 2,095,000 1,900,540 02-01-29 6.38 4,245,000 3,721,961 Meritor Automotive 02-15-09 6.80 1,000,000 1,030,000 TRW Automotive Sr Nts 02-15-13 9.38 931,000 1,072,978 Total 13,060,154 Banks and savings & loans (3.0%) Banknorth Group Sr Nts 05-01-08 3.75 3,960,000 3,957,980 J.P. Morgan Chase Sub Nts 02-01-11 6.75 3,946,000 4,411,024 03-15-14 4.88 604,000 598,816 US Bank NA Minnesota 08-01-11 6.38 9,020,000 10,079,011 Wachovia Sub Nts 08-01-14 5.25 14,170,000 14,498,801 Washington Mutual Bank FA Sub Nts 06-15-11 6.88 15,850,000 17,902,306 08-15-14 5.65 8,910,000 9,230,404 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 21,120,000 23,750,707 Total 84,429,049 Beverages & tobacco (0.1%) Cott Beverages 12-15-11 8.00 2,770,000 3,001,988 Building materials & construction (0.3%) Associated Materials 04-15-12 9.75 600,000 675,000 Louisiana Pacific Sr Nts 08-15-10 8.88 2,260,000 2,666,800 Norcraft Companies LP/Finance Sr Sub Nts 11-01-11 9.00 1,135,000(d) 1,214,450 Ryland Group Sr Nts 06-01-08 5.38 2,500,000 2,581,250 Total 7,137,500 Cable (1.0%) Comcast 03-15-11 5.50 22,710,000 23,628,165 CSC Holdings Sr Nts 12-15-07 7.88 1,500,000 1,593,750 DirectTV Holdings/Finance Sr Nts 03-15-13 8.38 1,700,000 1,933,750 Echostar DBS Sr Nts 10-01-08 5.75 750,000 751,875 Videotron Ltee (U.S. Dollar) 01-15-14 6.88 1,250,000(c) 1,262,500 Total 29,170,040 Cellular telecommunications (0.2%) Nextel Communications Sr Nts 10-31-13 6.88 1,500,000 1,515,000 US Cellular Sr Nts 12-15-33 6.70 5,495,000 5,401,558 Total 6,916,558 Chemicals (0.3%) Airgas 10-01-11 9.13 1,500,000 1,691,250 Sr Sub Nts 07-15-14 6.25 180,000 177,075 BCP Caylux Holdings (U.S. Dollar) Sr Sub Nts 06-15-14 9.63 985,000(c,d) 1,057,644 Compass Minerals Group 08-15-11 10.00 2,500,000 2,775,000 Georgia Gulf Sr Nts 12-15-13 7.13 1,525,000 1,555,500 Innophos Sr Sub Nts 08-15-14 8.88 115,000(d) 119,600 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 16 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Chemicals (cont.) MacDermid 07-15-11 9.13% $1,500,000 $1,674,375 Total 9,050,444 Energy (0.9%) Amerada Hess 08-15-11 6.65 5,940,000 6,516,263 Chesapeake Energy Sr Nts 06-15-14 7.50 375,000 400,313 08-15-14 7.00 670,000(d) 690,100 01-15-16 6.88 480,000 486,000 Devon Financing 09-30-11 6.88 4,615,000 5,207,211 Encore Acquisition Sr Sub Nts 04-15-14 6.25 2,800,000 2,744,000 Foundation PA Coal Sr Nts 08-01-14 7.25 300,000(d) 313,500 Gulfterra Energy Partner Sr Nts 06-01-10 6.25 3,645,000 4,014,056 Newfield Exploration Sr Nts 03-01-11 7.63 2,500,000 2,750,000 Sr Sub Nts 08-15-12 8.38 380,000 420,850 09-01-14 6.63 475,000(d) 486,875 Peabody Energy Series B 03-15-13 6.88 2,000,000 2,110,000 Total 26,139,168 Energy equipment & services (0.9%) Grant Prideco Escrow 12-15-09 9.00 2,000,000 2,220,000 Halliburton 10-15-10 5.50 17,045,000 17,702,596 Key Energy Services Series C 03-01-08 8.38 1,250,000 1,318,750 Sr Nts 05-01-13 6.38 1,195,000 1,141,225 Offshore Logistics 06-15-13 6.13 1,420,000 1,405,800 Pacific Energy Sr Nts 06-15-14 7.13 890,000(d) 941,175 Pride Intl Sr Nts 07-15-14 7.38 495,000(d) 527,175 Total 25,256,721 Finance companies (0.6%) Ford Motor Credit 10-01-13 7.00 1,155,000 1,210,821 GMAC 09-15-11 6.88 14,755,000 15,447,747 Total 16,658,568 Financial services (0.6%) Capital One Bank Sr Nts 02-01-06 6.88 1,740,000 1,841,884 HSBC Holdings (U.S. Dollar) Sub Nts 12-12-12 5.25 4,618,000(c) 4,784,788 Pricoa Global Funding I 06-15-08 4.35 8,755,000(d) 8,952,601 Total 15,579,273 Food (0.5%) Burns Philp Capital Property (U.S. Dollar) Sr Sub Nts 02-15-11 10.75 1,745,000(c) 1,910,775 Chiquita Brands Intl Sr Nts 03-15-09 10.56 1,500,000 1,625,625 Del Monte Sr Sub Nts 12-15-12 8.63 500,000 550,000 Kraft Foods 10-01-13 5.25 8,515,000 8,674,682 Total 12,761,082 Health care services (0.5%) Cardinal Health 06-15-15 4.00 6,876,000 6,060,314 HCA 03-15-14 5.75 2,000,000 1,982,610 IASIS Healthcare Sr Sub Nts 06-15-14 8.75 350,000(d) 365,750 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 17 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Health care services (cont.) NeighborCare Sr Sub Nts 11-15-13 6.88% $410,000 $428,450 Omnicare Sr Sub Nts 06-01-13 6.13 1,100,000 1,067,000 Triad Hospitals Sr Nts 05-15-12 7.00 1,000,000 1,042,500 US Oncology Sr Nts 08-15-12 9.00 290,000(d) 303,775 Vanguard Health Systems 08-01-11 9.75 1,235,000 1,432,600 Total 12,682,999 Home building (0.2%) D.R. Horton 12-01-07 7.50 1,000,000 1,100,000 01-15-09 5.00 990,000 1,004,850 07-01-13 5.88 1,000,000 1,000,000 Meritage 06-01-11 9.75 1,200,000 1,338,000 Total 4,442,850 Industrial services (0.1%) Allied Waste North America 11-15-10 6.50 625,000 625,000 04-15-11 6.38 1,110,000 1,090,575 Total 1,715,575 Industrial transportation (--%) Greater Beijing First Expressways (U.S. Dollar) Sr Nts 06-15-07 9.50 3,640,000(b,c,p) 72,800 Insurance (1.5%) ASIF Global Financing 01-17-13 4.90 38,990,000(d) 39,570,951 Pacific Life 09-15-33 6.60 1,540,000(d) 1,668,883 Total 41,239,834 Leisure time & entertainment (1.4%) Blockbuster Sr Sub Nts 09-01-12 9.00 165,000(d) 170,775 Time Warner 05-15-29 6.63 18,265,000 18,623,104 Speedway Motorsports Sr Sub Nts 06-01-13 6.75 865,000(d) 899,600 Viacom 05-15-11 6.63 18,475,000 20,518,889 Total 40,212,368 Lodging & gaming (0.5%) Boyd Gaming Sr Sub Nts 12-15-12 7.75 375,000 396,094 04-15-14 6.75 1,145,000 1,147,863 Caesars Entertainment Sr Sub Nts 05-15-11 8.13 2,790,000 3,159,674 Choctaw Resort Development Enterprises Sr Nts 04-01-09 9.25 1,500,000 1,608,750 Hilton Hotels 12-01-12 7.63 1,250,000 1,434,375 MGM Mirage 10-01-09 6.00 670,000 683,400 Sr Nts 02-27-14 5.88 720,000 680,400 Mohegan Tribal Gaming Sr Sub Nts 04-01-12 8.00 1,500,000 1,646,250 08-15-14 7.13 250,000(d) 256,875 Prime Hospitality Sr Sub Nts Series B 05-01-12 8.38 560,000 644,000 Station Casinos Sr Nts 04-01-12 6.00 1,000,000 1,002,500 Total 12,660,181 Machinery (0.1%) Case New Holland Sr Nts 08-01-11 9.25 570,000(d) 629,850 Joy Global Series B 03-15-12 8.75 1,500,000 1,691,250 Manitowoc 11-01-13 7.13 1,355,000 1,399,038 Total 3,720,138 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 18 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Media (0.9%) CanWest Media (U.S. Dollar) Series B 04-15-13 7.63% $1,000,000(c) $1,065,000 CBD Media/Finance 06-01-11 8.63 1,000,000 1,057,500 Corus Entertainment (U.S. Dollar) Sr Sub Nts 03-01-12 8.75 1,475,000(c) 1,611,438 Dex Media West LLC/Finance Sr Nts Series B 08-15-10 8.50 700,000 788,375 Emmis Operating 05-15-12 6.88 1,085,000 1,088,092 Lamar Media 01-01-13 7.25 425,000 452,625 News Corp (U.S. Dollar) 06-24-10 10.15 2,437,209(c,p) 3,009,365 Nexstar Finance LLC 04-01-08 12.00 575,000 633,938 Quebecor Media (U.S. Dollar) Sr Nts 07-15-11 11.13 640,000(c) 736,800 Radio One Series B 07-01-11 8.88 1,000,000 1,108,750 Shaw Communications (U.S. Dollar) Sr Nts 04-06-11 7.25 2,435,000(c) 2,603,707 Sun Media (U.S. Dollar) 02-15-13 7.63 1,500,000(c) 1,597,500 Susquehanna Media Sr Sub Nts 04-15-13 7.38 900,000 927,000 United Artists Theatre 07-01-15 9.30 8,331,332 8,497,958 Total 25,178,048 Metals (0.1%) Jorgensen Earle M. 06-01-12 9.75 500,000 555,000 Russel Metals (U.S. Dollar) Sr Nts 03-01-14 6.38 1,500,000(c) 1,436,250 Total 1,991,250 Multi-industry (0.9%) SPX Sr Nts 06-15-11 6.25 750,000 742,500 Tyco Intl Group (U.S. Dollar) 02-15-11 6.75 21,160,000(c) 23,646,470 10-15-11 6.38 75,000(c) 82,164 Total 24,471,134 Paper & packaging (0.7%) Ainsworth Lumber (U.S. Dollar) Sr Nts 03-15-14 6.75 885,000(c,d) 863,475 Ball 12-15-12 6.88 2,220,000 2,319,900 Cascades (U.S. Dollar) Sr Nts 02-15-13 7.25 1,400,000(c) 1,452,500 Crown Paper Sr Sub Nts 09-01-05 11.00 6,950,000(b,o,p) -- Domtar (U.S. Dollar) 12-01-13 5.38 6,240,000(c) 6,203,122 Georgia-Pacific 02-01-10 8.88 1,000,000 1,172,500 Graphic Packaging Intl Sr Nts 08-15-11 8.50 430,000 477,300 Norampac (U.S. Dollar) Sr Nts 06-01-13 6.75 2,110,000(c) 2,178,575 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 1,990,000 Stone Container Sr Nts 07-01-12 8.38 1,000,000 1,095,000 Total 19,777,372 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 19 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Real estate (0.5%) Archstone-Smith OPR Trust 08-15-14 5.63% $11,930,000 $12,328,366 Host Marriott Sr Nts 08-15-12 7.00 1,500,000(d) 1,526,250 La Quinta Properties Sr Nts 08-15-12 7.00 295,000(d) 304,219 Total 14,158,835 Restaurants (--%) Domino's Pizza LLC Sr Sub Nts 07-01-11 8.25 729,000 780,030 Retail -- drugstores (--%) Jean Coutu Group PJC (U.S. Dollar) Sr Nts 08-01-12 7.63 925,000(c,d) 952,750 Retail -- general (0.6%) Finlay Fine Jewelry Sr Nts 06-01-12 8.38 355,000(d) 378,075 May Department Stores 07-15-14 5.75 9,565,000(d) 9,876,063 United Auto Group 03-15-12 9.63 670,000 743,700 Wal-Mart Stores 06-29-11 8.88 3,500,000 3,569,965 William Carter Series B 08-15-11 10.88 2,195,000 2,469,375 Total 17,037,178 Telecom equipment & services (1.3%) PanAmSat 08-15-14 9.00 440,000(d) 457,600 Qwest 03-15-12 9.13 2,015,000(d) 2,156,050 Sprint Capital 11-15-28 6.88 21,355,000 22,258,124 TELUS (U.S. Dollar) 06-01-07 7.50 5,145,000(c) 5,652,328 06-01-11 8.00 5,832,500(c) 6,781,086 Total 37,305,188 Utilities -- electric (2.7%) Centerpoint Energy 02-15-11 7.75 2,000,000 2,318,364 Centerpoint Energy Resources Sr Nts Series B 04-01-13 7.88 1,610,000 1,899,270 Cleveland Electric Illuminating Sr Nts 12-15-13 5.65 4,170,000 4,258,383 Columbus Southern Power Sr Nts Series C 03-01-13 5.50 1,462,000 1,519,674 Consolidated Natural Gas 12-01-13 6.63 2,980,000 3,333,273 Dayton Power & Light 1st Mtge 10-01-13 5.13 6,195,000(d) 6,213,895 DPL Sr Nts 09-01-11 6.88 750,000 780,000 Duke Energy 01-15-12 6.25 3,925,000 4,234,989 1st Mtge 03-05-08 3.75 4,960,000 4,988,520 04-01-10 4.50 1,445,000 1,462,990 Sr Nts 11-30-12 5.63 9,430,000 9,806,521 Duquesne Light 1st Mtge Series Q 05-15-14 5.70 1,230,000 1,292,213 Florida Power 1st Mtge 03-01-13 4.80 2,975,000 2,989,012 Indianapolis Power & Light 1st Mtge 07-01-13 6.30 1,880,000(d) 2,008,009 IPALCO Enterprises 11-14-08 8.38 400,000 444,000 11-14-11 8.63 3,680,000 4,084,800 Metropolitan Edison 03-15-13 4.95 6,365,000 6,309,892 1st Mtge 04-01-14 4.88 3,050,000(d) 2,981,229 Tampa Electric 06-15-12 6.88 985,000 1,101,026 08-15-12 6.38 1,385,000 1,506,164 Texas Utilities Electric 01-01-05 9.45 741,000 744,400 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 20 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Utilities -- electric (cont.) Westar Energy 1st Mtge 07-01-14 6.00% $10,240,000 $10,898,965 Total 75,175,589 Utilities -- natural gas (0.5%) ANR Pipeline 03-15-10 8.88 785,000 883,125 Consolidated Natural Gas Sr Nts 04-15-11 6.85 1,660,000 1,872,696 El Paso Natl Gas Sr Nts Series A 08-01-10 7.63 680,000 724,200 Northwest Pipeline 03-01-10 8.13 2,455,000 2,764,944 Plains Exploration & Production Sr Nts 06-15-14 7.13 1,500,000(d) 1,590,000 Southern Natural Gas 03-15-10 8.88 875,000 984,375 Southern Star Central 08-01-10 8.50 1,000,000 1,095,000 Transcontinental Gas Pipeline Series B 08-15-11 7.00 2,250,000 2,486,250 Williams Companies 03-15-12 8.13 1,750,000 2,012,500 Total 14,413,090 Utilities -- telephone (2.4%) Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 5,740,000(c) 5,828,453 Telecom Italia Capital (U.S. Dollar) 11-15-13 5.25 18,600,000(c,d) 18,888,765 11-15-33 6.38 1,890,000(c,d) 1,951,315 Verizon New York Series B 04-01-32 7.38 7,060,000 7,804,145 Verizon Pennsylvania Series A 11-15-11 5.65 30,820,000 32,335,420 Total 66,808,098 Total bonds (Cost: $2,673,877,308) $2,706,250,927 Common stock (--%) Issuer Shares Value(a) Stellex Aerostructures 1,311(b,o,p) $-- Total common stock (Cost: $--) $-- Other (0.1%) Issuer Shares Value(a) Wayland Investment LLC 6,000,000(b,e,p) $1,683,420 Total other (Cost: $6,671,880) $1,683,420 Short-term securities (7.3%)(j) Issuer Effective Amount Value(a) yield payable at maturity U.S. government agencies (4.9%) Federal Home Loan Mtge Corp Disc Nt 09-14-04 1.50% $50,000,000 $49,970,835 Federal Natl Mtge Assn Disc Nts 09-01-04 1.21 50,000,000 49,998,314 09-27-04 1.47 6,200,000 6,193,164 10-12-04 1.58 30,000,000 29,944,700 Total 136,107,013 Commercial paper (2.4%) Barton Capital 10-07-04 1.58 10,000,000 9,983,761 Falcon Asset Securitization 09-28-04 1.58 15,000,000 14,981,567 Household Finance 09-01-04 1.58 1,200,000 1,199,947 Kitty Hawk Funding 10-12-04 1.60 25,000,000 24,953,333 Receivables Capital 09-24-04 1.55 15,000,000 14,984,500 Total 66,103,108 Total short-term securities (Cost: $202,218,366) $202,210,121 Total investments in securities (Cost: $2,882,767,554)(r) $2,910,144,468 See accompanying notes to investments in securities. -------------------------------------------------------------------------------- 21 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL 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 Aug. 31, 2004, the value of foreign securities represented 6.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the board. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. As of Aug. 31, 2004, the value of these securities amounted to $123,672,635 or 4.4% 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) At Aug. 31, 2004, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $63,880,702. (h) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments as of Aug. 31, 2004:
Security Principal Settlement Proceeds Value amount date receivable Federal Natl Mtge Assn 09-01-19 5.00% $ 950,000 9-20-04 $ 961,875 $ 967,516 09-01-34 5.00 26,550,000 9-15-04 26,195,309 26,334,281 09-01-34 5.50 19,810,000 9-15-04 19,987,421 20,113,331 09-01-34 6.00 13,100,000 9-15-04 13,476,625 13,566,688 09-01-34 6.50 20,500,000 9-15-04 21,409,687 21,518,604 ------------- ---------- ------- ---------- ----------
(i) Security is partially or fully on loan. See Note 5 to the financial statements. (j) Cash collateral received from security lending activity is invested in short-term securities and represents 1.1% of this category (see Note 5 to the financial statements). 6.2% of the short-term securities is the Fund's cash equivalent position. (k) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2004. (l) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows as of Aug. 31, 2004. (m) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on Aug. 31, 2004. (n) The following abbreviation is used in the portfolio security description to identify the insurer of the issue: FSA -- Financial Security Assurance (o) Negligible market value. -------------------------------------------------------------------------------- 22 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Notes to investments in securities (continued) (p) 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, 2004, is as follows: Security Acquisition Cost dates Crown Paper 11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724 Greater Beijing First Expressways (U.S. Dollar) 9.50% Sr Nts 2007 09-16-98 -- News Corp (U.S. Dollar) 10.15% 2010 01-29-93 2,467,251 Stellex Aerostructures 10-31-97 -- Wayland Investment LLC 05-19-00 6,671,880 (q) 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, Dec. 2004, 20-year $ 71,000,000 Sale contracts U.S. Treasury Notes, Sept. 2004, 5-year 5,600,000 U.S. Treasury Notes, Sept. 2004, 10-year 90,300,000 U.S. Treasury Notes, Dec. 2004, 5-year 56,800,000 U.S. Treasury Notes, Dec. 2004, 10-year 244,200,000 (r) At Aug. 31, 2004, the cost of securities for federal income tax purposes was $2,879,208,482 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 45,886,038 Unrealized depreciation (14,950,052) ----------- Net unrealized appreciation $ 30,935,986 ------------ How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.americanexpress.com/funds. -------------------------------------------------------------------------------- 23 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Financial Statements
Statement of assets and liabilities AXP Diversified Bond Fund Aug. 31, 2004 Assets Investments in securities, at value (Note 1)* (identified cost $2,882,767,554) $2,910,144,468 Cash in bank on demand deposit 2,166,153 Expense reimbursement receivable from AEFC 472,107 Capital shares receivable 591,093 Dividends and accrued interest receivable 18,444,234 Receivable for investment securities sold 114,678,525 ----------- Total assets 3,046,496,580 ------------- Liabilities Dividends payable to shareholders 1,638,915 Capital shares payable 474,974 Payable for investment securities purchased 146,425,054 Payable upon return of securities loaned (Note 5) 30,092,500 Accrued investment management services fee 37,766 Accrued distribution fee 30,898 Accrued service fee 555 Accrued transfer agency fee 8,834 Accrued administrative services fee 3,450 Other accrued expenses 258,845 Forward sale commitments, at value (proceeds receivable $82,030,917) (Note 1) 82,500,420 ---------- Total liabilities 261,472,211 ----------- Net assets applicable to outstanding capital stock $2,785,024,369 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 5,713,203 Additional paid-in capital 2,893,139,173 Undistributed net investment income 6,413,116 Accumulated net realized gain (loss) (Note 9) (142,002,409) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies (Note 6) 21,761,286 ---------- Total -- representing net assets applicable to outstanding capital stock $2,785,024,369 ============== Net assets applicable to outstanding shares: Class A $1,932,496,967 Class B $ 628,262,697 Class C $ 20,877,765 Class I $ 9,932 Class Y $ 203,377,008 Net asset value per share of outstanding capital stock: Class A shares 396,460,333 $ 4.87 Class B shares 128,868,605 $ 4.88 Class C shares 4,277,175 $ 4.88 Class I shares 2,037 $ 4.88 Class Y shares 41,712,199 $ 4.88 ---------- -------------- * Including securities on loan, at value (Note 5) $ 29,587,105 --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 24 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Statement of operations AXP Diversified Bond Fund Year ended Aug. 31, 2004 Investment income Income: Dividends $ 12,077 Interest 141,197,223 Fee income from securities lending (Note 5) 318,608 ------- Total income 141,527,908 ----------- Expenses (Note 2): Investment management services fee 15,409,504 Distribution fee Class A 5,209,432 Class B 7,944,719 Class C 241,016 Transfer agency fee 4,829,880 Incremental transfer agency fee Class A 259,949 Class B 174,395 Class C 5,699 Service fee -- Class Y 224,387 Administrative services fees and expenses 1,460,195 Compensation of board members 23,907 Custodian fees 340,348 Printing and postage 502,063 Registration fees 110,555 Audit fees 43,000 Other 76,975 ------ Total expenses 36,856,024 Expenses waived/reimbursed by AEFC (Note 2) (472,107) -------- 36,383,917 Earnings credits on cash balances (Note 2) (48,841) ------- Total net expenses 36,335,076 ---------- Investment income (loss) -- net 105,192,832 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 8,204,035 Foreign currency transactions (141,246) Futures contracts (13,804,387) Options contracts written (Note 7) 1,120,125 --------- Net realized gain (loss) on investments (4,621,473) Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 68,359,517 ---------- Net gain (loss) on investments and foreign currencies 63,738,044 ---------- Net increase (decrease) in net assets resulting from operations $168,930,876 ============
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 25 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Statements of changes in net assets AXP Diversified Bond Fund Year ended Aug. 31, 2004 2003 Operations and distributions Investment income (loss) -- net $ 105,192,832 $ 148,096,536 Net realized gain (loss) on investments (4,621,473) 111,836,822 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 68,359,517 (82,489,907) ---------- ----------- Net increase (decrease) in net assets resulting from operations 168,930,876 177,443,451 ----------- ----------- Distributions to shareholders from: Net investment income Class A (72,912,216) (98,126,653) Class B (21,667,704) (34,728,824) Class C (659,148) (854,382) Class I (1,353) -- Class Y (8,189,423) (12,225,930) Tax return of capital Class A -- (2,476,941) Class B -- (876,635) Class C -- (21,567) Class I -- -- Class Y -- (308,611) ------------ ------------ Total distributions (103,429,844) (149,619,543) ------------ ------------ Capital share transactions (Note 4) Proceeds from sales Class A shares (Note 2) 251,088,529 392,003,998 Class B shares 89,582,880 232,251,463 Class C shares 5,454,766 11,080,202 Class I shares 821,608 -- Class Y shares 71,322,514 150,904,209 Reinvestment of distributions at net asset value Class A shares 56,831,525 77,130,545 Class B shares 18,955,456 30,927,117 Class C shares 580,863 767,401 Class I shares 1,139 -- Class Y shares 6,500,832 11,324,132 Payments for redemptions Class A shares (699,205,028) (642,065,690) Class B shares (Note 2) (397,699,256) (419,428,542) Class C shares (Note 2) (12,180,164) (9,230,935) Class I shares (814,281) -- Class Y shares (147,874,937) (193,312,689) ------------ ------------ Increase (decrease) in net assets from capital share transactions (756,633,554) (357,648,789) ------------ ------------ Total increase (decrease) in net assets (691,132,522) (329,824,881) Net assets at beginning of year 3,476,156,891 3,805,981,772 ------------- ------------- Net assets at end of year $2,785,024,369 $3,476,156,891 ============== ============== Undistributed net investment income $ 6,413,116 $ 3,631,514 -------------- --------------
See accompanying notes to financial statements. -------------------------------------------------------------------------------- 26 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Notes to Financial Statements AXP Diversified Bond Fund 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 offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. As of Aug. 31, 2004, American Express Financial Corporation (AEFC) owned 100% of Class I 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. -------------------------------------------------------------------------------- 27 -- AXP DIVERSIFIED BOND FUND -- 2004 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. -------------------------------------------------------------------------------- 28 -- AXP DIVERSIFIED BOND FUND -- 2004 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, 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 Aug. 31, 2004 was $4,765,585 representing 0.17% 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 Aug. 31, 2004, the Fund has entered into outstanding when-issued securities of $34,731,648 and other forward-commitments of $29,149,054. 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. Forward sale commitments The Fund may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Fund as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss. If the Fund delivers securities under the commitment, the Fund realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." -------------------------------------------------------------------------------- 29 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. 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 $1,018,614 and accumulated net realized loss has been increased by $1,178,933 resulting in a net reclassification adjustment to increase paid-in capital by $160,319. -------------------------------------------------------------------------------- 30 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended Aug. 31, 2004 2003 Class A Distributions paid from: Ordinary income $72,912,216 $98,126,653 Long-term capital gain -- -- Tax return of capital -- 2,476,941 Class B Distributions paid from: Ordinary income 21,667,704 34,728,824 Long-term capital gain -- -- Tax return of capital -- 876,635 Class C Distributions paid from: Ordinary income 659,148 854,382 Long-term capital gain -- -- Tax return of capital -- 21,567 Class I* Distributions paid from: Ordinary income 1,353 N/A Long-term capital gain -- N/A Tax return of capital -- N/A Class Y Distributions paid from: Ordinary income 8,189,423 12,225,930 Long-term capital gain -- -- Tax return of capital -- 308,611 * Inception date was March 4, 2004. As of Aug. 31, 2004, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 2,720,960 Accumulated long-term gain (loss) $(134,156,528) Unrealized appreciation (depreciation) $ 19,246,476 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. -------------------------------------------------------------------------------- 31 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT 2. EXPENSES AND SALES CHARGES The Fund has agreements with 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. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. 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. 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. -------------------------------------------------------------------------------- 32 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Sales charges received by the Distributor for distributing Fund shares were $2,924,778 for Class A, $991,121 for Class B and $10,370 for Class C for the year ended Aug. 31, 2004. Under an agreement that began June 1, 2004, AEFC and its affiliates have agreed to waive certain fees and expenses until Aug. 31, 2005. Under this agreement, net expenses will not exceed 0.945% for Class A, 1.695% for Class B, 1.695% for Class C, 0.735% for Class I and 0.775% for Class Y of the Fund's average daily net assets. As a result of the agreement that began June 1, 2004, net expenses for the year ended Aug. 31, 2004 were 0.98% for Class A, 1.73% for Class B, 1.73% for Class C and 0.81% for Class Y. During the year ended Aug. 31, 2004, the Fund's custodian and transfer agency fees were reduced by $48,841 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 $8,429,906,585 and $9,346,641,437, respectively, for the year ended Aug. 31, 2004. Realized gains and losses are determined on an identified cost basis. 4. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended Aug. 31, 2004 Class A Class B Class C Class I* Class Y Sold 51,888,177 18,469,701 1,122,760 166,209 14,733,853 Issued for reinvested distributions 11,728,875 3,911,848 119,675 231 1,341,478 Redeemed (144,542,248) (82,296,004) (2,511,111) (164,403) (30,501,584) ------------ ----------- ---------- -------- ----------- Net increase (decrease) (80,925,196) (59,914,455) (1,268,676) 2,037 (14,426,253) ----------- ----------- ---------- ----- ----------- * Inception date was March 4, 2004. Year ended Aug. 31, 2003 Class A Class B Class C Class I Class Y Sold 80,898,241 48,207,053 2,295,059 N/A 31,349,284 Issued for reinvested distributions 16,049,376 6,438,951 159,500 N/A 2,357,634 Redeemed (133,258,985) (86,570,359) (1,914,872) N/A (40,187,210) ------------ ----------- ---------- ----- ----------- Net increase (decrease) (36,311,368) (31,924,355) 539,687 N/A (6,480,292) ----------- ----------- ------- ----- ----------
5. LENDING OF PORTFOLIO SECURITIES As of Aug. 31, 2004, securities valued at $29,587,105 were on loan to brokers. For collateral, the Fund received $30,092,500 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 $318,608 for the year ended Aug. 31, 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. -------------------------------------------------------------------------------- 33 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT 6. INTEREST RATE FUTURES CONTRACTS As of Aug. 31, 2004, investments in securities included securities valued at $3,758,003 that were pledged as collateral to cover initial margin deposits on 710 open purchase contracts and 3,969 open sale contracts. The notional market value of the open purchase contracts as of Aug. 31, 2004 was $79,031,875 with a net unrealized gain of $1,351,057. The notional market value of the open sale contracts as of Aug. 31, 2004 was $445,835,910 with a net unrealized loss of $6,495,466. 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: Year ended Aug. 31, 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 Aug. 31, 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 year ended Aug. 31, 2004. Effective Sept. 21, 2004, the Fund will enter into a new revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund will be permitted to have bank borrowings for temporary or emergency purposes, including funding shareholder redemptions. 9. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $134,156,528 as of Aug. 31, 2004, that if not offset by capital gains will expire as follows: 2009 2010 2013 $100,641,177 $26,118,914 $7,396,437 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. -------------------------------------------------------------------------------- 34 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL 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 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) .18 .20 .25 .31 .33 Net gains (losses) (both realized and unrealized) .08 .03 (.10) .17 (.12) Total from investment operations .26 .23 .15 .48 .21 Less distributions: Dividends from net investment income (.17) (.20) (.25) (.32) (.33) Tax return of capital -- -- (.01) -- -- Total distributions (.17) (.20) (.26) (.32) (.33) Net asset value, end of period $4.87 $4.78 $4.75 $4.86 $4.70 Ratios/supplemental data Net assets, end of period (in millions) $1,933 $2,280 $2,438 $2,390 $2,229 Ratio of expenses to average daily net assets(b) .98%(d) .97% .95% .94% .93% Ratio of net investment income (loss) to average daily net assets 3.55% 4.16% 5.17% 6.51% 7.04% Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64% Total return(c) 5.54% 4.91% 3.13% 10.48% 4.67%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class A would have been 1.00% for the year ended Aug. 31, 2004. -------------------------------------------------------------------------------- 35 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004 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) .14 .16 .21 .27 .30 Net gains (losses) (both realized and unrealized) .09 .03 (.10) .17 (.13) Total from investment operations .23 .19 .11 .44 .17 Less distributions: Dividends from net investment income (.13) (.16) (.21) (.28) (.29) Tax return of capital -- -- (.01) -- -- Total distributions (.13) (.16) (.22) (.28) (.29) Net asset value, end of period $4.88 $4.78 $4.75 $4.86 $4.70 Ratios/supplemental data Net assets, end of period (in millions) $628 $902 $1,047 $954 $867 Ratio of expenses to average daily net assets(b) 1.73%(d) 1.73% 1.71% 1.70% 1.69% Ratio of net investment income (loss) to average daily net assets 2.78% 3.40% 4.40% 5.74% 6.28% Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64% Total return(c) 4.95% 4.12% 2.35% 9.65% 3.88%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class B would have been 1.75% for the year ended Aug. 31, 2004. -------------------------------------------------------------------------------- 36 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004 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) .14 .16 .21 .27 .04 Net gains (losses) (both realized and unrealized) .09 .03 (.10) .16 .07 Total from investment operations .23 .19 .11 .43 .11 Less distributions: Dividends from net investment income (.13) (.16) (.21) (.28) (.04) Tax return of capital -- -- (.01) -- -- Total distributions (.13) (.16) (.22) (.28) (.04) Net asset value, end of period $4.88 $4.78 $4.75 $4.86 $4.71 Ratios/supplemental data Net assets, end of period (in millions) $21 $27 $24 $10 $1 Ratio of expenses to average daily net assets(c) 1.73%(g) 1.74% 1.72% 1.70% 1.69%(d) Ratio of net investment income (loss) to average daily net assets 2.79% 3.34% 4.33% 5.62% 6.80%(d) Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64% Total return(e) 4.95% 4.11% 2.35% 9.43% 2.58%(f)
(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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class C would have been 1.75% for the year ended Aug. 31, 2004. -------------------------------------------------------------------------------- 37 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Class I Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004(b) Net asset value, beginning of period $4.91 Income from investment operations: Net investment income (loss) .11 Net gains (losses) (both realized and unrealized) (.04) Total from investment operations .07 Less distributions: Dividends from net investment income (.10) Net asset value, end of period $4.88 Ratios/supplemental data Net assets, end of period (in millions) $-- Ratio of expenses to average daily net assets(c) .59%(d) Ratio of net investment income (loss) to average daily net assets 3.13%(d) Portfolio turnover rate (excluding short-term securities) 279% Total return(e) 1.43%(f) (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was March 4, 2004. (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. -------------------------------------------------------------------------------- 38 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended Aug. 31, 2004 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) .18 .21 .25 .32 .34 Net gains (losses) (both realized and unrealized) .10 .03 (.10) .17 (.12) Total from investment operations .28 .24 .15 .49 .22 Less distributions: Dividends from net investment income (.18) (.21) (.25) (.33) (.34) Tax return of capital -- -- (.01) -- -- Total distributions (.18) (.21) (.26) (.33) (.34) Net asset value, end of period $4.88 $4.78 $4.75 $4.86 $4.70 Ratios/supplemental data Net assets, end of period (in millions) $203 $268 $297 $533 $385 Ratio of expenses to average daily net assets(b) .81%(d) .81% .78% .78% .77% Ratio of net investment income (loss) to average daily net assets 3.70% 4.34% 5.30% 6.66% 7.20% Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64% Total return(c) 5.92% 5.08% 3.29% 10.65% 4.84%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) Total return does not reflect payment of a sales charge. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class Y would have been 0.83% for the year ended Aug. 31, 2004. -------------------------------------------------------------------------------- 39 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Report of Independent Registered Public Accounting Firm 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 (a series of AXP Fixed Income Series, Inc.) as of August 31, 2004, 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, 2004, and the financial highlights for each of the years in the five-year period ended August 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004, 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, 2004, 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 20, 2004 -------------------------------------------------------------------------------- 40 -- AXP DIVERSIFIED BOND FUND -- 2004 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, 2004 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.10% Dividends Received Deduction for corporations 0.10% Payable date Per share Sept. 22, 2003 $0.01205 Oct. 23, 2003 0.01250 Nov. 21, 2003 0.01250 Dec. 22, 2003 0.01651 Jan. 26, 2004 0.01400 Feb. 25, 2004 0.01400 March 26, 2004 0.01500 April 26, 2004 0.01500 May 26, 2004 0.01500 June 25, 2004 0.01500 July 26, 2004 0.01400 Aug. 25, 2004 0.01497 Total distributions $0.17053 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.10% Dividends Received Deduction for corporations 0.10% Payable date Per share Sept. 22, 2003 $0.00894 Oct. 23, 2003 0.00937 Nov. 21, 2003 0.00957 Dec. 22, 2003 0.01336 Jan. 26, 2004 0.01044 Feb. 25, 2004 0.01105 March 26, 2004 0.01192 April 26, 2004 0.01185 May 26, 2004 0.01202 June 25, 2004 0.01203 July 26, 2004 0.01086 Aug. 25, 2004 0.01194 Total distributions $0.13335 -------------------------------------------------------------------------------- 41 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.10% Dividends Received Deduction for corporations 0.10% Payable date Per share Sept. 22, 2003 $0.00890 Oct. 23, 2003 0.00934 Nov. 21, 2003 0.00954 Dec. 22, 2003 0.01334 Jan. 26, 2004 0.01041 Feb. 25, 2004 0.01124 March 26, 2004 0.01189 April 26, 2004 0.01185 May 26, 2004 0.01202 June 25, 2004 0.01202 July 26, 2004 0.01089 Aug. 25, 2004 0.01194 Total distributions $0.13338 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.10% Dividends Received Deduction for corporations 0.10% Payable date Per share March 26, 2004 0.01923 April 26, 2004 0.01674 May 26, 2004 0.01666 June 25, 2004 0.01667 July 26, 2004 0.01573 Aug. 25, 2004 0.01663 Total distributions $0.10166 Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.10% Dividends Received Deduction for corporations 0.10% Payable date Per share Sept. 22, 2003 $0.01271 Oct. 23, 2003 0.01317 Nov. 21, 2003 0.01313 Dec. 22, 2003 0.01718 Jan. 26, 2004 0.01476 Feb. 25, 2004 0.01462 March 26, 2004 0.01566 April 26, 2004 0.01569 May 26, 2004 0.01563 June 25, 2004 0.01564 July 26, 2004 0.01466 Aug. 25, 2004 0.01562 Total distributions $0.17847 -------------------------------------------------------------------------------- 42 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended Aug. 31, 2004. Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. -------------------------------------------------------------------------------- 43 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Beginning Ending Expenses paid account value account value during the period March 1, 2004 Aug. 31, 2004 March 1, 2004-Aug. 31, 2004 Class A Actual(e) $1,000 $1,008.60 $4.95(a),(g) Hypothetical (5% return before expenses) $1,000 $1,020.48 $4.98(a),(g) Class B Actual(e) $1,000 $1,006.80 $8.82(b),(g) Hypothetical (5% return before expenses) $1,000 $1,016.62 $8.86(b),(g) Class C Actual(e) $1,000 $1,006.80 $8.87(c),(g) Hypothetical (5% return before expenses) $1,000 $1,016.57 $8.92(c),(g) Class I(f) Actual N/A N/A N/A Hypothetical (5% return before expenses) N/A N/A N/A Class Y Actual(e) $1,000 $1,011.50 $4.14(d),(g) Hypothetical (5% return before expenses) $1,000 $1,021.29 $4.16(d),(g)
(a) Expenses are equal to the Fund's Class A annualized expense ratio of 0.97%, multiplied by the average account value over the period, multiplied by 186/366 (to reflect the one-half year period). (b) Expenses are equal to the Fund's Class B annualized expense ratio of 1.73%, multiplied by the average account value over the period, multiplied by 186/366 (to reflect the one-half year period). (c) Expenses are equal to the Fund's Class C annualized expense ratio of 1.74%, multiplied by the average account value over the period, multiplied by 186/366 (to reflect the one-half year period). (d) Expenses are equal to the Fund's Class Y annualized expense ratio of 0.81%, multiplied by the average account value over the period, multiplied by 186/366 (to reflect the one-half year period). (e) Based on the actual return for the six months ended Aug. 31, 2004: 0.86% for Class A, 0.68% for Class B, 0.68% for Class C and 1.15% for Class Y. (f) The values and expenses paid are not presented because Class I does not have a full six months of history. The inception date for Class I was March 4, 2004. (g) AEFC and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until Aug. 31, 2005, which will not exceed the net expenses of 0.95% for Class A; 1.70% for Class B; 1.70% for Class C and 0.78% for Class Y. If this expense cap had been in place for the entire six-month period ended Aug. 31, 2004, the actual expenses paid would have been: $4.82% for Class A, $8.64% for Class B, $8.64 for Class C and $3.96 for Class Y; the hypothetical expenses paid would have been: $4.85 for Class A, $8.69 for Class B, $8.69 for Class C and $3.98 for Class Y. -------------------------------------------------------------------------------- 44 -- AXP DIVERSIFIED BOND FUND -- 2004 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 14 Master Trust portfolios and 89 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, Position held Principal occupation during past five Other directorships address, with Fund and years age length of service -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Arne H. Carlson Board member Chair, Board Services Corporation 901 S. Marquette Ave. since 1999 (provides administrative services to Minneapolis, MN 55402 boards). Former Governor of Minnesota Age 69 -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 Corporation (engineering and Materials Company, Inc. Minneapolis, MN 55402 construction) since 1998 (construction materials/chemicals) Age 66 -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Livio D. DeSimone Board member Retired Chair of the Board and Chief Cargill, Incorporated (commodity 30 Seventh Street East since 2001 Executive Officer, Minnesota Mining and merchants and processors), General Suite 3050 Manufacturing (3M) Mills, Inc. (consumer foods), St. Paul, MN 55101-4901 Vulcan Materials Company Age 70 (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 69 -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Stephen R. Lewis, Jr.* Board member Retired President and Professor of Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 Economics, Carleton College (manufactures irrigation systems) Minneapolis, MN 55402 Age 65 -------------------------------- ----------------- ------------------------------------------- -------------------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Columbia Wanger Asset Management, L.P., one of the fund's subadvisers. -------------------------------------------------------------------------------- 45 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Independent Board Members (continued) Name, Position held Principal occupation during past five Other directorships address, with Fund and years age length of service -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Alan K. Simpson Board member Former three-term United States Senator 1201 Sunshine Ave. since 1997 for Wyoming Cody, WY 82414 Age 72 -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Alison Taunton-Rigby Board member Founder and Chief Executive Officer, 901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2004; President, Minneapolis, MN 55402 Forester Biotech since 2000; prior to Age 60 that, President and CEO, Aquila Biopharmaceuticals, Inc. -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Board Member Affiliated with AEFC** Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service -------------------------------- ----------------- ------------------------------------------- ------------------------------------- William F. Truscott Board member Senior Vice President - Chief Investment 53600 AXP Financial Center since 2001, Officer of AEFC since 2001. Former Chief Minneapolis, MN 55474 Vice President Investment Officer and Managing Director, Age 43 since 2002 Zurich Scudder Investments -------------------------------- ----------------- ------------------------------------------- -------------------------------------
** Interested person by reason of being an officer, director and/or employee of AEFC. -------------------------------------------------------------------------------- 46 -- AXP DIVERSIFIED BOND FUND -- 2004 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. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupation during past five Other directorships with Fund and years length of service -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Jeffrey P. Fox Treasurer Vice President - Investment Accounting, 50005 AXP Financial Center since 2002 AEFC, since 2002; Vice President - Minneapolis, MN 55474 Finance, American Express Company, Age 49 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Paula R. Meyer President Senior Vice President and General Manager 596 AXP Financial Center since 2002 - Mutual Funds, AEFC, since 2002; Vice Minneapolis, MN 55474 President and Managing Director - Age 50 American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 -------------------------------- ----------------- ------------------------------------------- ------------------------------------- Leslie L. Ogg Vice President, President of Board Services Corporation 901 S. Marquette Ave. General Minneapolis, MN 55402 Counsel, and Age 65 Secretary since 1978 -------------------------------- ----------------- ------------------------------------------- -------------------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. 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 website americanexpress.com/funds; or by searching the website 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, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at http://www.sec.gov. -------------------------------------------------------------------------------- 47 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT (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 and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees* (a) Audit Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for professional services rendered for the audits of the annual financial statements for AXP Fixed Income Series, Inc. were as follows: 2004 - $43,383; 2003 - $43,122 (b) Audit - Related Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 for AXP Fixed Income Series, Inc. were as follows: 2004 - $639; 2003 - $746 (c) Tax Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for tax compliance related services for AXP Fixed Income Series, Inc. were as follows: 2004 - $1,930; 2003 - $2,575 (d) All Other Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for additional professional services rendered in connection to proxy filing for AXP Fixed Income Series, Inc. were as follows: 2004 - None; 2003 - $47 (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by KPMG LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2004 and 2003 were pre-approved by the audit committee with the exception of the 2003 tax fees. (f) Not applicable. (g) Non-Audit Fees. The fees paid for the years ended Aug. 31, by the registrant for non-audit services to KPMG LLP were as follows: 2004 - None; 2003 - None The fees paid for the years ended Aug. 31, to KPMG LLP by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2004 - $126,900; 2003 - $184,000 (h) For the fees disclosed in item (g) above, 100% and 97% of the fees for services performed during 2004 and 2003, respectively, were pre-approved by the audit committee. The exception was a 2003 tax research request by the adviser on defaulted securities for $5,000. The amounts not pre-approved are compatible with maintaining KPMG LLP's independence. * 2003 represents bills paid 9/1/02 - 8/31/03 2004 represents bills paid 9/1/03 - 8/31/04 Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. 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) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last 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. Item 11. 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. (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 November 2, 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 November 2, 2004 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date November 2, 2004