-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LGMlA6qaMTePsRVywoJnf6J76oGlTNXyKNlmajIBK5e6V1/cEUkEcu0KExbVscz2 1WXJaZbQKvzxwVnJv+NSWA== 0000820027-04-000070.txt : 20040202 0000820027-04-000070.hdr.sgml : 20040202 20040202144529 ACCESSION NUMBER: 0000820027-04-000070 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20040202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP GROWTH SERIES INC/MN CENTRAL INDEX KEY: 0000049702 IRS NUMBER: 410962638 STATE OF INCORPORATION: MN FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-112408 FILM NUMBER: 04558844 BUSINESS ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126712772 MAIL ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: AXP GROWTH FUND INC DATE OF NAME CHANGE: 20000829 FORMER COMPANY: FORMER CONFORMED NAME: IDS GROWTH FUND INC DATE OF NAME CHANGE: 19920703 N-14 1 n-14.txt AXP GROWTH SERIES, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No.[ ] [ ] Post-Effective Amendment No. [ ] (Check Appropriate Box or Boxes) AXP Growth Series, Inc. - ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) (612) 330-9283 - ------------------------------------------------------------------------------- (Area Code and Telephone Number) 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) Leslie L. Ogg - 901 Marquette Avenue South, - ------------------------------------------------------------------------------- (Name and Address of Agent For Service) Suite 2810, Minneapolis MN 55402-3268 - ------------------------------------------------------------------------------- (Number and Street) (City) (State) (Zip Code) Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement. Title of Securities Being Registered: Common Stock No filing fee is due because of reliance on Section 24(f) of the Investment Company Act of 1940. Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine. It is proposed that this filing will become effective on March 3, 2004. AMERICAN EXPRESS(R) FUNDS Principal Executive Office 901 Marquette Avenue South, Suite 2810 Minneapolis, MN 55402-3268 NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS To be held ________, 2004 AXP(R) Market Advantage Series, Inc. - AXP(R) Blue Chip Advantage Fund AXP(R) Growth Series, Inc. - AXP(R) Research Opportunities Fund AXP Blue Chip Advantage Fund ("Blue Chip") and AXP Research Opportunities Fund ("Research Opportunities") (individually a "Selling Fund" and together the "Selling Funds") will hold a special shareholders' meeting at ____.m. on _______, 2004, at _________________, Minneapolis, MN. This will be a joint meeting for each of the funds listed above. At the meeting, shareholders will consider the following: o A proposal to approve an Agreement and Plan of Reorganization (the "Agreement") between each Selling Fund and AXP Large Cap Equity Fund ("Large Cap Equity" or the "Buying Fund"). Under this Agreement, the Selling Fund will transfer all of its assets attributable to Classes A, B, C and Y to the Buying Fund in exchange for corresponding Class A, B, C and Y shares of the Buying Fund. These shares will be distributed proportionately to you and the other shareholders of the Selling Fund. The Buying Fund will assume the Selling Fund's liabilities. Please take a few minutes to read the proxy statement. It discusses the proposal in more detail. If you were a shareholder on ________, 2004, you may vote at the meeting or any adjournment of the meeting. We hope you can attend the meeting. For those of you who cannot attend, please vote by mail, telephone or internet. Just follow the instructions on the enclosed proxy card. If you have questions, please call your advisor or call client services toll free at (866) 270-3133. It is important that you vote. The Board of Directors (the "Board") recommends that you vote FOR the proposal. This proxy statement was first mailed to shareholders the week of ________, 2004. By order of the Board of Directors Leslie L. Ogg, Secretary ________, 2004 - -------------------------------------------------------------------------------- 1 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT COMBINED PROXY STATEMENT/PROSPECTUS Dated ________, 2004 This document is a proxy statement for Blue Chip and Research Opportunities and a prospectus for Large Cap Equity (each individually a "Fund" and collectively the "Funds"). It contains the information you should know before voting on the proposal. Please read it carefully and keep it for future reference. The address of each of the Funds is 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The phone number for each of the Funds is (_____) _____-________. The following information describes the proposed reorganization of the Selling Fund into the Buying Fund (the "Reorganization"). How the Reorganization Will Work o The Selling Fund will transfer all of its assets to the Buying Fund. The Buying Fund will assume the Selling Fund's stated liabilities. o The Buying Fund will issue shares of Classes A, B, C and Y to the Selling Fund in an amount equal to the value of the assets of Classes A, B, C and Y that it receives from the Selling Fund, less the liabilities it assumes. These shares will be distributed to the Selling Fund's shareholders in proportion to their holdings in the Selling Fund. You will not pay any sales charge in connection with this distribution of shares. Fund Investment Objectives The investment objective for each of the Funds is as follows: Selling Fund Blue Chip: Long-term total return exceeding that of the U.S. stock market. Research Opportunities: Long term capital growth. Buying Fund Large Cap Equity: Long term growth of capital. Please note that the Buying Fund is not a bank deposit, is not federally insured, is not endorsed by any bank or government agency and is not guaranteed to achieve its goal. As with all mutual funds, the Securities and Exchange Commission (the "SEC") has not approved or disapproved these securities or passed on the adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- 2 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Where to Get More Information The Buying Fund Most recent prospectus, dated Sept. Accompanying, and incorporated by 29, 2003. reference into, this proxy statement/prospectus. - ------------------------------------- --------------------------------------- Most recent annual report, for the Incorporated by reference into this period ended July 31, 2003. proxy statement/prospectus. For a copy at no charge, call toll-free (800) 862-7919 or write to the address at the bottom of this table. - ------------------------------------- --------------------------------------- The Selling Fund Blue Chip's most recent prospectus, Incorporated by reference into this dated April 1, 2003, as proxy statement/prospectus. For a supplemented. copy at no charge, call toll-free (800) 862-7919 or write to the address at the bottom of this table. Research Opportunities' most recent prospectus, dated Sept. 29, 2003, as supplemented. - ------------------------------------- --------------------------------------- This Proxy Statement/Prospectus SStatement of Additional Information Incorporated by reference into this dated the same date as this proxy proxy statement/prospectus. For a statement/prospectus. This document copy at no charge, call toll-free contains information about both the (866) 270-3133 or write to the Selling Fund and the Buying Fund. address at the bottom of this table. - ------------------------------------- --------------------------------------- To ask questions about this proxy Call toll-free (866) 270-3133 or statement/prospectus. write to: American Express Client Service Corporation 70100 AXP Financial Center, Minneapolis, MN 55474. - ------------------------------------- --------------------------------------- Each of the Funds is subject to the information requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 (the "1940 Act") and files reports, proxy materials and other information with the SEC. These reports, proxy materials and other information can be inspected and copied at the Public Reference Room maintained by the SEC. Copies may be obtained, after paying a duplicating fee, by electronic request at http://www.publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102. In addition, copies of these documents may be viewed on-line or downloaded from the SEC's Web site at http://www.sec.gov. - -------------------------------------------------------------------------------- 3 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT TABLE OF CONTENTS Page Section A -- Approve or Reject the Agreement and Plan of Reorganization 5 Summary 5 How the Reorganization Will Work 5 Comparison of the Selling Fund and the Buying Fund 5 Risk Factors 7 Tax Consequences 8 Fees and Expenses 9 The Reorganization 14 Terms of the Reorganization 14 Conditions to Closing the Reorganization 14 Termination of the Agreement 15 Tax Status of the Reorganization 15 Reasons for the Proposed Reorganization and Board Deliberations 17 Boards' Determinations 19 Recommendation and Vote Required 19 Section B -- Proxy Voting and Shareholder Meeting Information 20 Section C -- Capitalization and Ownership of Fund Shares 22 Exhibits A. Form of Agreement and Plan of Reorganization. A.1 B. Minnesota Business Corporation Act Sections 302A.471 and 302A.473. B.1 C. Management's Discussion of the Buying Fund. C.1 D. Most Recent Buying Fund Prospectus. D.1 - -------------------------------------------------------------------------------- 4 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT SECTION A -- APPROVE OR REJECT THE AGREEMENT AND PLAN OF REORGANIZATION SUMMARY This proxy statement/prospectus is being used by the Board of the Selling Fund to solicit proxies to vote at a special meeting of shareholders. The purpose of the meeting is to consider a proposal to approve the Agreement providing for the Reorganization of the Selling Fund into the Buying Fund. The following is a summary. More complete information appears later in this proxy statement/prospectus. You should read the entire proxy statement/prospectus and the exhibits because they contain details that are not in the summary. How the Reorganization Will Work o The Selling Fund will transfer all of its assets to the Buying Fund. The Buying Fund will assume the Selling Fund's stated liabilities. o The Buying Fund will issue shares of Classes A, B, C and Y to the Selling Fund in an amount equal to the value of the assets of Classes A, B, C and Y that it receives from the Selling Fund, less the liabilities it assumes. These shares will be distributed to the Selling Fund's shareholders in proportion to their holdings in the Selling Fund. If you already have a Buying Fund account, shares distributed in the Reorganization will be added to that account. o Neither the Selling Fund nor the shareholders of the Selling Fund will pay any sales charge in connection with the Reorganization. o After the Reorganization is completed, current Selling Fund shareholders will be shareholders of the Buying Fund. The Selling Fund will be terminated. Comparison of the Selling Fund and the Buying Fund Both the Selling Fund and the Buying Fund: o Are structured as a series of capital stock of an open-end management investment company organized as a Minnesota corporation. o Have American Express Financial Corporation ("AEFC") as an investment adviser. o Have the same policies for buying and selling shares and the same exchange rights. o Have the same distribution policies, although Blue Chip makes distributions quarterly and the Buying Fund makes distributions annually. o Have different classes of shares: Classes A, B, C and Y. The Buying Fund also has Class I shares. - -------------------------------------------------------------------------------- 5 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Comparison of Investment Objectives The investment objectives for the funds are as follows: Selling Fund Blue Chip: Long-term total return exceeding that of the U.S. stock market. Research Opportunities: Long term capital growth. Buying Fund Large Cap Equity: Long term growth of capital. Comparison of Investment Strategies Blue Chip: Under normal market conditions, at least 80% of the Fund's net assets are invested in blue chip stocks. Blue chip stocks are issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. A common measure of blue chip stocks is the S&P 500 Composite Stock Price Index (S&P 500 Index). The S&P 500 Index is an unmanaged market index used to measure the total return of the U.S. stock market (the Fund may change this market index from time to time). While the Fund invests in stocks included in the S&P 500 Index, it is not an index fund. It may own companies not included in the index, and its results will likely differ from the index. Research Opportunities: The Fund invests primarily in securities of companies included in the S&P 500 Index. The Fund invests in those securities that are believed to offer the potential for long-term growth using a proprietary research rating system. Large Cap Equity: Under normal market conditions, at least 80% of the fund's net assets are invested in equity securities of companies with a market capitalization greater than $5 billion at the time of purchase. The fund may invest in income-producing equity securities, such as dividend paying stocks, convertible securities and preferred stocks. All Funds: o Unusual Market Conditions. During weak or declining markets, each of the Funds may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees and expenses. o Other Strategies. For each of the Funds, the investment adviser may invest in other securities and may employ other investment strategies that are not principal investment strategies. Each of the Funds may invest in money market securities and may use derivative instruments, such as futures, options - -------------------------------------------------------------------------------- 6 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT and forward contracts, to produce incremental earnings, to hedge existing positions, and to increase flexibility. In addition Large Cap Equity and Research Opportunities may invest in debt securities and foreign securities. Comparison of Fundamental Policies Each Fund has substantially similar fundamental investment policies. The fundamental policies of Research Opportunities permit concentration in either or both the energy or utilities industries. Large Cap Equity's policies do not permit concentration. Each of the Funds has a policy prohibiting the purchase of more than 10% of the outstanding voting securities of an issuer. Large Cap Equity's policy provides that up to 25% of the Fund's assets may be invested without regard to the 10% limitation. Blue Chip and Research Opportunities each has a policy prohibiting the making of loans to affiliates. Even though this is not stated as a fundamental policy of Large Cap Equity, the Fund is nonetheless subject to that restriction under the provisions of the 1940 Act. Similarly, Large Cap Equity has a policy prohibiting the issuing of senior securities, except as permitted under the 1940 Act. Even though this is not stated as a fundamental policy of Blue Chip or Research Opportunities, the Funds are nonetheless subject to that restriction under the provisions of the 1940 Act. If shareholders of the Selling Fund approve the Reorganization, they will be subject to the fundamental investment policies of the Buying Fund. AEFC does not believe that the differences between the fundamental investment policies will result in any material difference in the way the Funds are managed. Risk Factors The principal risks associated with an investment in the Fund are shown below. Research Large Cap Risk Blue Chip Opportunities Equity Market Risk x x x Issuer Risk x x x Style Risk x x x o Market Risk. The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. o Issuer Risk. The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decision, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. - -------------------------------------------------------------------------------- 7 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT o Style Risk -- Blue Chip. The objective of the Fund is to provide shareholders with a long-term return exceeding that of the U.S. stock market. Currently, the S&P 500 Index is the market index used to measure total return of the U.S. stock market. However, unlike the unmanaged index, the Fund's performance is affected by factors such as the size of the Fund's portfolio, transaction costs, management fees and expenses, brokerage commissions and fees, the extent and timing of cash flows in and out of the Fund, stock selection, sector weightings, and other such factors. As a result, once these factors are accounted for, the Fund may underperform the market index. o Style Risk -- Research Opportunities. The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline significantly and quickly. o Style Risk -- Large Cap Equity. The Fund's management strategy will influence performance significantly. Large capitalization stocks as a group could fall out of favor with the market, causing the Fund to underperform funds that invest primarily in small or medium capitalization stocks. If the manager's stock selection strategy does not perform as expected, the Fund could underperform its peers. Performance Performance information for Class A shares of the Funds is shown below. Table A-1
Average Annual Total Returns As of Dec. 31, 2003(a) Since Inception Fund 1 year 5 years 10 years inception date Blue Chip 27.37% (2.76%) 8.52% -- -- Research Opportunities 23.95% (3.86%) -- 4.54% 8/19/1996 Large Cap Equity 27.57% -- -- .35% 3/28/2002
(a) Returns do not include the 5.75% Class A sales charges. Tax Consequences The Reorganization is expected to be tax-free for federal income tax purposes and will not take place unless the Selling Fund and the Buying Fund receive a satisfactory opinion of tax counsel, substantially to that effect. Accordingly, no gain or loss is expected to be recognized by the Selling Fund or its shareholders as a result of the Reorganization, and the tax basis of the shares received by the Selling Fund's shareholders is expected to be the same in the aggregate as the tax basis of the shareholder's Selling Fund shares. At any time prior to the - -------------------------------------------------------------------------------- 8 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT consummation of the Reorganization, a shareholder may redeem shares. This would likely result in recognition of gain or loss to these shareholders for federal income tax purposes. A substantial portion of the portfolio assets of the Selling Fund may be sold in connection with the Reorganization. The actual tax impact of those sales will depend on the difference between the price at which the portfolio assets are sold and the Selling Fund's basis in the assets. Any capital gains recognized in these sales on a net basis will be distributed to the Selling Fund's shareholders as capital-gain dividends (to the extent of net realized long-term capital gains distributed) and/or ordinary dividends (to the extent of net realized short-term capital gains distributed) during or with respect to the year of sale, and the distributions will be taxable to shareholders. For more information about the federal income tax consequences of the Reorganization, see the section entitled "Tax Status of the Reorganization." FEES AND EXPENSES The following table describes the fees and expenses that you pay if you buy and hold shares of the Selling Fund or shares of the Buying Fund. The table also shows pro forma expenses of the Buying Fund assuming the proposed Reorganization had been effective during the most recent fiscal year. If shareholders approve the Reorganization, AEFC has agreed to waive .05% of Buying Fund management fees for a period of one year. This waiver is reflected in the pro forma tables shown below. - -------------------------------------------------------------------------------- 9 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT
Table A-2 Actual and Pro Forma Fund Expenses For the Most Recent Fiscal Year Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) as a percentage of offering price 5.75% none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none(b) 5% 1%(c) none
Annual Fund operating expenses(d) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Blue Chip Management fees(e) 0.45% 0.45% 0.45% 0.45% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(h) 0.30% 0.32% 0.34% 0.37% Total 1.00% 1.77% 1.79% 0.82% Research Opportunities Management fees(f) 0.58% 0.58% 0.58% 0.58% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(h) 0.52% 0.53% 0.53% 0.60% Total 1.35% 2.11% 2.11% 1.18% Large Cap Equity Management fees(g) 0.61% 0.61% 0.61% 0.61% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(h) 0.99% 1.00% 1.00% 1.06% Total 1.85% 2.61% 2.61% 1.67% Fee waiver/expense reimbursement 0.60% 0.60% 0.60% 0.60% Net expenses 1.25% 2.01% 2.01% 1.07% Large Cap Equity - Pro Forma with Blue Chip Management fees(g) 0.60% 0.60% 0.60% 0.60% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(h) 0.38% 0.39% 0.41% 0.45% Total 1.23% 1.99% 2.01% 1.05% Fee waiver/expense reimbursement 0.05% 0.05% 0.05% 0.05% Net expenses(i) 1.18% 1.94% 1.96% 1.00% See accompanying notes to annual fund operating expenses. - -------------------------------------------------------------------------------- 10 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Table A-2 (continued) Annual Fund operating expenses(d) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Research Opportunities Management fees(g) 0.61% 0.61% 0.61% 0.61% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(h) 0.60% 0.62% 0.62% 0.65% Total 1.46% 2.23% 2.23% 1.26% Fee waiver/expense reimbursement 0.21% 0.22% 0.22% 0.19% Net expenses(i) 1.25% 2.01% 2.01% 1.07% Large Cap Equity - Pro Forma with Research Opportunities and Blue Chip Management fees(g) 0.60% 0.60% 0.60% 0.60% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(h) 0.40% 0.41% 0.43% 0.47% Total 1.25% 2.01% 2.03% 1.07% Fee waiver/expense reimbursement 0.05% 0.05% 0.05% 0.05% Net expenses(i) 1.20% 1.96% 1.98% 1.02% Notes to annual fund operating expenses (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Other expenses are based on estimated amounts for the current fiscal year. For Research Opportunities, AEFC has agreed to waive certain fees and to absorb certain expenses until July 31, 2004. Under this agreement, total expenses will not exceed 1.35% for Class A, 2.11% for Class B, 2.11% for Class C and 1.18% for Class Y. Research Opportunities is a feeder fund that is part of a master/feeder structure. For Research Opportunities, both in this table and the following example, fund operating expenses include expenses charged by both the Fund and its Master Portfolio. For Large Cap Equity, AEFC has agreed to waive certain fees and to absorb certain expenses until July 31, 2004. Under this agreement, total expenses will not exceed 1.25% for Class A, 2.01% for Class B, 2.01% for Class C and 1.07% for Class Y. (e) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.02% for Blue Chip. (f) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.07% for Research Opportunities. (g) Includes the impact of a performance incentive adjustment fee that increased the management fee by 0.01% for Large Cap Equity. (h) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. (i) Includes the impact of the .05% management fee waiver that AEFC has agreed to put in place following shareholder approval of the Reorganization through July 31, 2005. - -------------------------------------------------------------------------------- 11 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Example: These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return. The operating expenses remain the same each year. You would pay the following expenses if you redeem all of your shares at the end of the time periods indicated under the current arrangements and if the proposed reorganization had been in effect. Fund 1 year 3 years 5 years 10 years Blue Chip Class A(a) $671 $875 $1,097 $1,734 Class B $580(b) $857(b) $1,060(b) $1,885(c) Class C $182 $564 $ 971 $2,110 Class Y $ 84 $262 $ 456 $1,018 Research Opportunities Class A(a) $705 $978 $1,273 $2,110 Class B $614(b) $961(b) $1,235(b) $2,252(c) Class C $214 $661 $1,135 $2,446 Class Y $120 $375 $ 650 $1,437 Large Cap Equity Class A(a) $695 $1,069 $1,467 $2,578 Class B $604(b) $1,055(b) $1,433(b) $2,718(c) Class C $204 $ 755 $1,333 $2,904 Class Y $109 $ 468 $ 852 $1,931 Large Cap Equity - Pro Forma with Blue Chip(d) Class A(a) $688 $938 $1,208 $1,979 Class B $597(b) $920(b) $1,169(b) $2,121(c) Class C $199 $626 $1,079 $2,338 Class Y $102 $329 $ 575 $1,283 Large Cap Equity - Pro Forma with Research Opportunities(d) Class A(a) $695 $991 $1,309 $2,209 Class B $604(b) $976(b) $1,276(b) $2,357(c) Class C $204 $676 $1,176 $2,552 Class Y $109 $381 $ 674 $1,511 Large Cap Equity - Pro Forma with Research Opportunities and Blue Chip(d) Class A(a) $690 $944 $1,218 $2,000 Class B $599(b) $926(b) $1,179(b) $2,142(c) Class C $201 $632 $1,089 $2,359 Class Y $104 $336 $ 286 $1,306 (a) Includes a 5.75% sales charge. (b) Includes the applicable CDSC. (c) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. (d) Includes the additional .05% management fee waiver in year 1 only. - -------------------------------------------------------------------------------- 12 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT You would pay the following expenses if you did not redeem your shares. Fund 1 year 3 years 5 years 10 years Blue Chip Class A(a) $671 $875 $1,097 $1,734 Class B $180 $557 $ 960 $1,885(b) Class C $182 $564 $ 971 $2,110 Class Y $ 84 $262 $ 456 $1,018 Research Opportunities Class A(a) $705 $978 $1,273 $2,110 Class B $214 $661 $1,135 $2,252(b) Class C $214 $661 $1,135 $2,446 Class Y $120 $375 $ 650 $1,437 Large Cap Equity Class A(a) $695 $1,069 $1,467 $2,578 Class B $204 $ 755 $1,333 $2,718(b) Class C $204 $ 755 $1,333 $2,904 Class Y $109 $ 468 $ 852 $1,931 Large Cap Equity - Pro Forma with Blue Chip(c) Class A(a) $688 $938 $1,208 $1,979 Class B $197 $620 $1,069 $2,121(b) Class C $199 $626 $1,079 $2,338 Class Y $102 $329 $ 575 $1,283 Large Cap Equity - Pro Forma with Research Opportunities(c) Class A(a) $695 $991 $1,309 $2,209 Class B $204 $676 $1,176 $2,357(b) Class C $204 $676 $1,176 $2,552 Class Y $109 $381 $ 674 $1,511 Large Cap Equity - Pro Forma with Research Opportunities and Blue Chip(c) Class A(a) $690 $944 $1,218 $2,000 Class B $199 $626 $1,079 $2,142(b) Class C $201 $632 $1,089 $2,359 Class Y $104 $336 $ 286 $1,306 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. (c) Includes the additional .05% management fee waiver in year 1 only. This example does not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. - -------------------------------------------------------------------------------- 13 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT THE REORGANIZATION Terms of the Reorganization The Board has approved the Agreement, a copy of which is attached as Exhibit A. The Agreement provides for Reorganization on the following terms: o The Reorganization is scheduled to occur on the first day that the NYSE is open for business following shareholder approval and receipt of any necessary regulatory approvals, but may occur on any later date agreed to by the Selling Fund and the Buying Fund. o The Selling Fund will transfer all of its assets to the Buying Fund and, in exchange, the Buying Fund will assume the Selling Fund's stated liabilities. o The Buying Fund will issue Class A, B, C and Y shares to the Selling Fund in an amount equal to the value of the assets of Classes A, B, C and Y that it receives from the Selling Fund, less the liabilities assumed by the Buying Fund in the transaction. These shares will immediately be distributed by the Selling Fund to its shareholders in proportion to their holdings in the Selling Fund. As a result, shareholders of the Selling Fund will become Class A, B, C or Y shareholders of the Buying Fund. o Neither the Selling Fund nor the shareholders of the Selling Fund will pay any sales charge in connection with the Reorganization. o The net asset value of the Selling Fund and the Buying Fund will be computed as of 3:00 p.m. Central time, on the closing date. o After the Reorganization, the Selling Fund will be terminated. Conditions to Closing the Reorganization The completion of the Reorganization is subject to certain conditions described in the Agreement, including: o The Selling Fund will have declared and paid a dividend that will distribute all of the Fund's taxable income, if any, to the shareholders of the Fund for the taxable years ending at or prior to the closing. o The Funds will have received any approvals, consents or exemptions from the SEC or any regulatory body necessary to carry out the Reorganization. o A registration statement on Form N-14 will have been filed with the SEC and declared effective. o The shareholders of the Selling Fund will have approved the Agreement. o The Selling Fund will have received an opinion of tax counsel that the proposed Reorganization will result in no gain or loss being recognized by any shareholder. - -------------------------------------------------------------------------------- 14 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Termination of the Agreement The Agreement and the transactions contemplated by it may be terminated and abandoned by resolutions of the Board of the Selling Fund or the Buying Fund at any time prior to closing. In the event of a termination, there will be no liability for damages on the part of either the Selling Fund or the Buying Fund or the directors, officers or shareholders of the Selling Fund or of the Buying Fund. Tax Status of the Reorganization The Reorganization is expected to be tax-free for federal income tax purposes and will not take place unless the Selling Fund and the Buying Fund receive a satisfactory opinion of tax counsel (which opinion will be based on certain factual representations and certain customary assumptions), to the effect that, on the basis of existing law under specified sections of the Internal Revenue Code of 1986, as amended (the "Code"): o The transfer of the Selling Fund's assets to the Buying Fund in exchange for Class A, B, C and Y shares of the Buying Fund and the assumption of the Selling Fund's liabilities, followed by the distribution of those Class A, B, C and Y shares to the Selling Fund's shareholders and the termination of the Selling Fund will be a "reorganization" within the meaning of Section 368(a)(1) of the Code, and the Selling Fund and the Buying Fund will each be a "party to the reorganization" within the meaning of Section 368(b) of the Code. o Under Section 361 of the Code, no gain or loss will be recognized by the Selling Fund upon the transfer of all of its assets to the Buying Fund or on the distribution by the Selling Fund of Class A, B, C and Y shares of the Buying Fund to Selling Fund shareholders in liquidation. o Under Section 354 of the Code, the shareholders of the Selling Fund will not recognize gain or loss upon the exchange of their Class A, B, C or Y shares of the Selling Fund solely for Buying Fund Class A, B, C or Y shares as part of the Reorganization. o Under Section 358 of the Code, the aggregate basis of the Class A, B, C or Y shares of the Buying Fund that a Selling Fund shareholder receives in the Reorganization will be the same as the aggregate basis of the Class A, B, C or Y shares of the Selling Fund exchanged therefore. o Under Section 1223(1) of the Code, the tax holding period for the Class A, B, C or Y shares of the Buying Fund that a Selling Fund shareholder receives in the Reorganization will include the period for which he or she held the Class A, B, C or Y shares of the Selling Fund exchanged therefore, provided that on the date of the exchange he or she held such Selling Fund shares as capital assets. - -------------------------------------------------------------------------------- 15 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT o Under Section 1032 of the Code, no gain or loss will be recognized by the Buying Fund upon the receipt of the Selling Fund's assets solely in exchange for the issuance of Buying Fund's Class A, B, C and Y shares to the Selling Fund and the assumption of all of the Selling Fund's liabilities by the Buying Fund. o Under Section 362(b) of the Code, the basis in the hands of the Buying Fund of the assets of the Selling Fund transferred to the Buying Fund will be, in each instance, the same as the basis of those assets in the hands of the Selling Fund immediately prior to the transfer. o Under Section 1223(2) of the Code, the tax holding period of the assets of the Selling Fund in the hands of the Buying Fund will include periods during which such assets were held by the Selling Fund. o The Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and Regulations thereunder. Prior to the closing of the Reorganization, the Selling Fund will distribute to its shareholders all of its respective net investment company taxable income, if any, and net realized capital gains (after reduction by any available capital loss carryforward), if any, that have not been previously distributed to shareholders. These distributions will be taxable to shareholders. A Fund's ability to carry forward realized capital losses of another Fund and use them to offset future gains may be limited. First, one Fund's capital losses cannot be used to offset non de-minimis net pre-reorganization "built-in" gains of any other Fund for five tax years. Second, a portion of a Fund's capital losses may become unavailable for use by another Fund to offset any gains at all. Third, capital losses that do remain available will offset capital gains realized after a Reorganization and thus will reduce subsequent capital gain distributions to a broader group of shareholders than would have been the case absent such Reorganization. Therefore, in certain circumstances, former shareholders of a Fund may pay taxes sooner, or pay more taxes, than they would have had the Reorganizations not occurred. - -------------------------------------------------------------------------------- 16 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT As of Feb. 29, 2004, none of the Funds had non de-minimis "built-in" gains against which another Fund's capital losses could not be used. As of the same date, Large Cap Equity Fund had no net realized capital losses and no net unrealized "built-in" capital losses; Blue Chip Advantage Fund had approximately $_______ million of net realized capital losses, including net current-year capital losses and capital loss carryforwards, and had approximately $_______ of net unrealized "built-in" capital losses; and Research Opportunities Fund had approximately $_______ million of net realized capital losses, including net current-year capital losses and capital loss carryforwards, and had no net unrealized "built-in" capital losses. If the Reorganizations had occurred on Feb. 29, 2004, (i) Large Cap Equity Fund and Blue Chip Advantage Fund would have experienced no limitation of capital losses, (ii) a significant portion of Research Opportunities Fund's capital losses would have become unavailable for use by the Buying Fund, and (iii) the capital losses of Blue Chip Advantage Fund would have been spread among a broader group of shareholders than would have been the case absent the Reorganization. This description of the federal income tax consequences of the Reorganization does not take into account your particular facts and circumstances. Consult your own tax adviser about the effect of state, local, foreign, and other tax laws. Reasons for the Proposed Reorganization and Board Deliberations The Board believes that the proposed Reorganization will be advantageous to Selling Fund shareholders for several reasons. The Board considered the following matters, among others, in approving the Reorganization. o Terms and Conditions of the Reorganization. The Board considered the terms and conditions of the Reorganization as described in the previous paragraphs. o Tax Consequences. The Board considered the tax-free nature of the Reorganization. o Continuity of Investment. The Board took into account the fact that, following the Reorganization, shareholders of the Selling Fund will be invested in a fund holding a similar investment securities portfolio, with similar investment objectives, policies, and restrictions. - -------------------------------------------------------------------------------- 17 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT o Expense Ratios. The Board considered the relative expenses of the Funds. For Research Opportunities following the Reorganization, the expense ratio for the Buying Fund is expected to be lower than the expense ratio of Research Opportunities. Thus, Research Opportunities shareholders are expected to experience lower per share fixed costs by holding shares of the Buying Fund than they would if they continued to hold shares in Research Opportunities. For Blue Chip, higher aggregate net assets resulting from the Reorganization and the opportunity for net cash inflows may reduce the risk that, if the net assets of Blue Chip fail to grow, or diminish, its total expense ratio could rise as fixed expenses become a larger percentage of net assets. In addition, for a period of one year following the Reorganization, AEFC will waive a portion of its management fee charged to the Buying Fund so that Selling Fund shareholders are not expected to experience an increase in base fees as a result of the Reorganization. The base fee may be increased or decreased under the terms of the existing performance incentive adjustment based on the Buying Fund's performance relative to a Lipper Index. o Economies of Scale. The Board considered the advantage of combining Funds that share similar investment objectives, styles and holdings. The Board believes that by combining the Funds, the shareholders continue to have available to them a Fund with a similar investment objective, but can at the same time take advantage of the economies of scale associated with a larger fund. A larger fund should have an enhanced ability to effect portfolio transactions on more favorable terms and should have greater investment flexibility. Expenses such as audit expenses and accounting expenses that are charged on a per fund basis will be reduced. o Costs. The Board considered the fact that AEFC has agreed to bear all solicitation expenses in order to achieve shareholder approval of the Reorganization and to bear any other costs of effecting the Reorganization. o Dilution. The Board considered the fact that the Reorganization will not dilute the interests of the current shareholders. o Performance. The Board considered the relative performance records of the funds. o Potential Benefits to AEFC and its Affiliates. The Board also considered the potential benefits from the Reorganization that could be realized by AEFC and its affiliates. The Board recognized that the potential benefits to AEFC consist principally of the elimination of expenses incurred in duplicative efforts to administer separate funds. For Research Opportunities, AEFC also will benefit to the extent it no longer waives its fees. The Board also noted, however, that shareholders of the Selling Fund will benefit directly from any decrease in overall operating expense ratios resulting from the proposed Reorganization. - -------------------------------------------------------------------------------- 18 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Boards' Determinations After considering the factors described above and other relevant information, at a meeting held on Jan. 7-8, 2004, the Selling Fund Board members, including a majority of the independent Board members, found that participation in the Reorganization is in the best interests of the Selling Fund and that the interests of existing shareholders of the Fund will not be diluted as a result of the Reorganization. The Board of Directors of the Buying Fund approved the Agreement at a meeting held on Jan. 7-8, 2004. The Board members considered the terms of the Agreement, the provisions intended to avoid the dilution of shareholder interests and the anticipated tax consequences of the Reorganization. The Board found that participation in the Reorganization is in the best interests of the Buying Fund and that the interests of existing shareholders of the Buying Fund will not be diluted as a result of the Reorganization. Recommendation and Vote Required The Board recommends that shareholders approve the proposed Agreement. The Agreement must be approved by a majority of the voting power of all shares entitled to vote. If the Agreement is not approved, the Board will consider what further action should be taken. - -------------------------------------------------------------------------------- 19 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT SECTION B -- PROXY VOTING AND SHAREHOLDER MEETING INFORMATION Voting. You are entitled to vote based on your total dollar interest in the Fund. Each dollar is entitled to one vote. For those of you who cannot come to the meeting, the Board is asking permission to vote for you. The shares will be voted as you instruct either by mail, telephone or internet. Signed proxy cards returned without instructions will be voted in favor of all proposals. All votes count toward a quorum, regardless of how they are voted (For, Against or Abstain). Broker non-votes will be counted toward a quorum but not toward the approval of any proposals. (Broker non-votes are shares for which the underlying owner has not voted and the broker holding the shares does not have authority to vote.) If your shares are held in an IRA account, you have the right to instruct the IRA Custodian how to vote those shares. The IRA Custodian will vote any shares for which it has not received voting instructions in proportionately the same manner -- either For, Against, or Abstain -- as other fund shareholders have voted. Master/Feeder Funds. Research Opportunities currently is part of a master/feeder structure. The feeder fund seeks its investment objective by investing its assets in a master fund with the same policies. The master fund invests in and manages the securities. Immediately prior to the Reorganization, the Board intends to withdraw the Fund's assets from the master fund. Revoking Your Proxy. If your plans change and you can attend the meeting, simply inform the Secretary at the meeting that you will be voting your shares in person. Also, if you change your mind after you vote, you may change your vote or revoke it by mail, telephone or internet. Joint Proxy Statement/Simultaneous Meetings. This joint proxy statement reduces the preparation, printing and mailing costs of sending separate proxy statements for each Selling Fund. The meetings will be held simultaneously with each proposal being voted on separately by shareholders of a Fund. If any shareholder objects to the holding of simultaneous meetings, the shareholder may move for an adjournment of his or her Fund's meeting to a time immediately after the simultaneous meetings so that a meeting of that Fund may be held separately. If a shareholder makes this motion, the persons named as proxies will take into consideration the reasons for the objection in deciding whether to vote in favor of the adjournment. - -------------------------------------------------------------------------------- 20 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Solicitation of Proxies. The Board is asking for your vote and for you to vote as promptly as possible. AEFC will pay the expenses of the solicitation. Supplementary solicitations may be made by mail, telephone, electronic means or personal contact. Shareholder Proposals. No proposals were received from shareholders. The Funds are not required to hold regular meetings of shareholders each year. However, meetings of shareholders are held from time to time and proposals of shareholders that are intended to be presented at future shareholder meetings must be submitted in writing to the Funds in reasonable time prior to the solicitation of proxies for the meeting. Dissenters' Right of Appraisal. Under Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act, Selling Fund shareholders are entitled to assert dissenters' rights in connection with the Reorganization and obtain payment of the "fair value" of their shares, provided that they comply with the requirements of Minnesota law. A copy of the relevant provisions is attached as Exhibit B. Notwithstanding the provisions of Minnesota law, the SEC has taken the position that use of state appraisal procedures by a mutual fund would be a violation of Rule 22c-1, the forward pricing rule, under the 1940 Act. This rule states that no mutual fund may redeem its shares other than at net asset value next computed after receipt of a request for redemption. It is the SEC's position that Rule 22c-1 supersedes appraisal provisions in state statutes. In the interest of ensuring equal valuation for all shareholders, dissenters' rights will be determined in accordance with the SEC's interpretation. As a result, if any shareholder elects to exercise dissenters' rights under Minnesota law, the Selling Fund intends to submit this question to a court of competent jurisdiction. In that event, a dissenting shareholder would not receive any payment until the end of the court proceeding. Adjournment. In the event that not enough votes in favor of the proposal are received by the time scheduled for the meeting, the persons named as proxies may move for one or more adjournments of the meeting for a period of not more than 120 days in the aggregate to allow further solicitation of shareholders on the proposal. Any adjournment requires the affirmative vote of a majority of the voting power of the shares present at the meeting. The persons named as proxies will vote in favor of adjournment those shares they are entitled to vote that have voted in favor of the proposal. They will vote against any adjournment those shares that have voted against the proposal. AEFC will pay the costs of any additional solicitation and of any adjourned meeting. - -------------------------------------------------------------------------------- 21 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT SECTION C -- CAPITALIZATION AND OWNERSHIP OF FUND SHARES Capitalization The following table shows the capitalization of the Funds as of Feb. 29, 2004 and on a pro forma basis, assuming the proposed Reorganization had taken place. Table C-1 Capitalization Net asset value Shares Fund Net assets per share outstanding Blue Chip Class A Class B Class C Class Y Research Opportunities Class A Class B Class C Class Y Large Cap Equity Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Blue Chip Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Research Opportunities Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Research Opportunities and Blue Chip Class A Class B Class C Class Y - -------------------------------------------------------------------------------- 22 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Ownership of Fund Shares The following table provides information on shareholders who owned more than 5% of the Fund's outstanding shares as of Feb. 29, 2004. As of Feb. 29, 2004, officers and directors of the Fund as a group owned less than 1% of the outstanding shares of the Fund. Table C-2 Ownership of Fund Shares Number Percent Percent of shares of shares of shares held following Fund 5% owners held held the reorganization Blue Chip Class A Class B Class C Class Y Research Opportunities Class A Class B Class C Class Y Large Cap Equity Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Blue Chip Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Research Opportunities Class A Class B Class C Class Y Large Cap Equity - Pro Forma with Research Opportunities and Blue Chip Class A Class B Class C Class Y - -------------------------------------------------------------------------------- 23 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Exhibit A Form of Agreement and Plan of Reorganization This Agreement and Plan of Reorganization dated as of Jan. 8, 2004 (the "Agreement") is between AXP Market Advantage Series, Inc. (the "Selling Corporation"), a Minnesota corporation, on behalf of its series, AXP Blue Chip Advantage Fund (the "Selling Fund"), and AXP Growth Series, Inc. (the "Buying Corporation"), a Minnesota corporation, on behalf of its series, AXP Large Cap Equity Fund (the "Buying Fund"), and American Express Financial Corporation (solely for the purposes of Section 3c and 10 of the Agreement). In consideration of their mutual promises, the parties agree as follows: 1. Shareholder Approval. The Selling Fund will call a meeting of its shareholders for the purpose of approving the Agreement and the transactions it contemplates (the "Reorganization"). The Buying Fund agrees to furnish data and information, as reasonably requested, for the proxy statement to be furnished to shareholders of the Selling Fund. 2. Reorganization. a. Plan of Reorganization. The Reorganization will be a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). At the Closing, the Selling Corporation will convey all of the assets of the Selling Fund to the Buying Fund. The Buying Fund will assume all liabilities of the Selling Fund. At the Closing, the Buying Corporation will deliver shares of the Buying Fund, including fractional shares, to the Selling Corporation. The number of shares will be determined by dividing the value of the net assets of shares of the Selling Fund, computed as described in paragraph 3(a), by the net asset value of one share of the Buying Fund, computed as described in paragraph 3(b). The Selling Fund will not pay a sales charge on the receipt of Buying Fund shares in exchange for the assets of the Selling Fund. In addition, the shareholders of the Selling Fund will not pay a sales charge on distribution to them of shares of the Buying Fund. b. Closing and Effective Time of the Reorganization. The Reorganization and all related acts necessary to complete the Reorganization (the "Closing") will occur on the first day on which the New York Stock Exchange (the "NYSE") is open for business following approval of shareholders of the Selling Fund and receipt of all necessary regulatory approvals, or such later date as the parties may agree. - -------------------------------------------------------------------------------- A.1 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT 3. Valuation of Net Assets. a. The net asset value of shares of the Selling Fund will be computed as of the close of regular trading on the NYSE on the day of Closing (the "Valuation Date") using the valuation procedures in the Buying Fund's prospectus. b. The net asset value per share of shares of the Buying Fund will be determined as of the close of regular trading on the NYSE on the Valuation Date, using the valuation procedures in the Buying Fund's prospectus. c. At the Closing, the Selling Fund will provide the Buying Fund with a copy of the computation showing the valuation of the net asset value per share of shares of the Selling Fund on the Valuation Date. The Buying Fund will provide the Selling Fund with a copy of the computation showing the determination of the net asset value per share of shares of the Buying Fund on the Valuation Date. Both computations will be certified by an officer of American Express Financial Corporation, the investment manager. 4. Liquidation and Dissolution of the Selling Fund. a. As soon as practicable after the Valuation Date, the Selling Corporation will liquidate the Selling Fund and distribute shares of the Buying Fund to the Selling Fund's shareholders of record. The Buying Fund will establish shareholder accounts in the names of each Selling Fund shareholder, representing the respective pro rata number of full and fractional shares of the Buying Fund due to each shareholder. All issued and outstanding shares of the Selling Fund will simultaneously be cancelled on the books of the Selling Corporation. The Buying Fund or its transfer agent will establish shareholder accounts in accordance with instructions from the Selling Corporation. b. Immediately after the Valuation Date, the share transfer books of the Selling Corporation relating to the Selling Fund will be closed and no further transfer of shares will be made. c. Promptly after the distribution, the Buying Fund or its transfer agent will notify each shareholder of the Selling Fund of the number of shares distributed to the shareholder and confirm the registration in the shareholder's name. d. As promptly as practicable after the liquidation of the Selling Fund, and in no event later than twelve months from the date of the Closing, the Selling Fund will be dissolved. - -------------------------------------------------------------------------------- A.2 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT 5. Representations, Warranties and Covenants of the Buying Corporation. The Buying Corporation represents and warrants to the Selling Fund as follows: a. Organization, Existence, etc. The Buying Corporation is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota and has the power to carry on its business as it is now being conducted. b. Registration as Investment Company. The Buying Fund is a series of the Buying Corporation, registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end, management investment company. c. Capitalization. The Buying Corporation has authorized capital of 10,000,000,000 shares of common stock, par value $0.01 per share. All of the outstanding shares have been duly authorized and are validly issued, fully paid and non-assessable. Since the Buying Fund is engaged in the continuous offering and redemption of its shares, the number of outstanding shares may vary daily. d. Financial Statements. The audited financial statements as of the end of the last fiscal year, and the subsequent unaudited semi-annual financial statements, if any (the "Buying Fund Financial Statements"), fairly present the financial position of the Buying Fund, and the results of its operations and changes in its net assets for the periods shown. e. Shares to be Issued Upon Reorganization. The shares to be issued in connection with the Reorganization will be duly authorized and, at the time of the Closing, will be validly issued, fully paid and non-assessable. f. Authority Relative to the Agreement. The Buying Corporation has the power to enter into and carry out the obligations described in this Agreement. The Agreement and the transactions contemplated by it have been duly authorized by the Board of Directors of the Buying Corporation and no other proceedings by the Buying Corporation or the Buying Fund are necessary. g. No Violation. The Buying Corporation is not in violation of its Articles of Incorporation or By-Laws (the "Articles") or in default in the performance of any material agreement to which it is a party. The execution of this Agreement and the completion of the transactions contemplated by it will not conflict with, or constitute a breach of, any material contract or other instrument to which the Buying Fund is subject. The transactions will not result in any violation of the provisions of the Articles or any law, administrative regulation or administrative or court decree applicable to the Buying Fund. - -------------------------------------------------------------------------------- A.3 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT h. Liabilities. There are no liabilities of the Buying Fund other than: o liabilities disclosed in the Buying Fund Financial Statements, o liabilities incurred in the ordinary course of business subsequent to the date of the latest annual or semi-annual financial statements, or o liabilities previously disclosed to the Selling Fund, none of which has been materially adverse to the business, assets or results of operation of the Buying Fund. i. Litigation. There is no litigation, administrative proceeding or investigation before any court or governmental body currently pending or, to the knowledge of the Buying Fund, threatened, that would materially and adversely affect the Buying Fund, its financial condition or the conduct of its business, or that would prevent or hinder completion of the transactions contemplated by this Agreement. The Buying Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding or investigation and the Buying Fund is not a party to or subject to the provisions of any order, decree or judgment. j. Contracts. Except for contracts and agreements previously disclosed to the Selling Corporation, the Buying Fund is not a party to or subject to any material contract, debt instrument, plan, lease, franchise, license or permit. k. Taxes. The Buying Fund has qualified as a regulated investment company under the Internal Revenue Code with respect to each taxable year since commencement of its operations and will qualify as a regulated investment company at all times through the Closing. As of the Closing, the Buying Fund will (i) have filed all federal and other tax returns and reports that have been required to be filed, (ii) have paid or provided for payment of all federal and other taxes shown to be due on such returns or on any assessments received, (iii) have adequately provided for all tax liabilities on its books, (iv) except as disclosed to the Selling Fund, not have had any tax deficiency or liability asserted against it or question with respect thereto raised, and (v) except as disclosed to the Selling Fund, not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. l. Registration Statement. The Buying Fund will file a registration statement on Form N-14 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933 (the "1933 Act") relating to the shares to be issued in the Reorganization. At the time the Registration Statement becomes effective, at the time of the shareholders' meeting and at the Closing, - -------------------------------------------------------------------------------- A.4 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. However, none of the representations and warranties in this subsection apply to statements in, or omissions from, the Registration Statement made in reliance on information furnished by the Selling Fund for use in the Registration Statement. 6. Representations, Warranties and Covenants of the Selling Corporation. The Selling Corporation represents and warrants to the Buying Fund as follows: a. Organization, Existence, etc. The Selling Corporation is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota and has the power to carry on its business as it is now being conducted. b. Registration as Investment Company. The Selling Fund is a series of the Selling Corporation, registered under the 1940 Act as an open-end, management investment company. c. Capitalization. The Selling Corporation has authorized capital of 10,000,000,000 shares of common stock, par value $0.01 per share. All of the outstanding shares have been duly authorized and are validly issued, fully paid and non-assessable. Since the Selling Fund is engaged in the continuous offering and redemption of its shares, the number of outstanding shares may vary daily. d. Financial Statements. The audited financial statements as of the end of the last fiscal year, and the subsequent unaudited semi-annual financial statements, if any (the "Selling Fund Financial Statements"), fairly present the financial position of the Selling Fund, and the results of its operations and changes in its net assets for the periods shown. e. Authority Relative to the Agreement. The Selling Corporation has the power to enter into and to carry out its obligations under this Agreement. The Agreement and the transactions contemplated by it have been duly authorized by the Board of Directors of the Selling Corporation and no other proceedings by the Selling Corporation or the Selling Fund are necessary. f. No Violation. The Selling Corporation is not in violation of its Articles or in default in the performance of any material agreement to which it is a party. The execution of this Agreement and the completion of the transactions contemplated by it will not conflict with or constitute a breach of, any material contract to which the Selling Fund is subject. The transactions will not result in any violation of the provisions of the Articles or any law, administrative regulation or administrative or court decree applicable to the Selling Fund. - -------------------------------------------------------------------------------- A.5 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT g. Liabilities. There are no liabilities of the Selling Fund other than: o liabilities disclosed in the Selling Fund Financial Statements, o liabilities incurred in the ordinary course of business subsequent to the date of the latest annual or semi-annual financial statements, or o liabilities previously disclosed to the Buying Fund, none of which has been materially adverse to the business, assets or results of operation of the Selling Fund. h. Litigation. There is no litigation, administrative proceeding or investigation before any court or governmental body currently pending or, to the knowledge of the Selling Fund, threatened, that would materially and adversely affect the Selling Fund, its financial condition or the conduct of its business, or that would prevent or hinder completion of the transactions contemplated by this Agreement. The Selling Fund knows of no facts that might form the basis for the institution of any such litigation, proceeding or investigation and is not a party to or subject to the provisions of any order, decree or judgment. i. Contracts. Except for contracts and agreements previously disclosed to the Buying Corporation, the Selling Fund is not a party to or subject to any material contract, debt instrument, plan, lease, franchise, license or permit. j. Taxes. The Selling Fund has qualified as a regulated investment company under the Internal Revenue Code with respect to each taxable year since commencement of its operations and will qualify as a regulated investment company at all times through the Closing. As of the Closing, the Selling Fund will (i) have filed all federal and other tax returns and reports that have been required to be filed, (ii) have paid or provided for payment of all federal and other taxes shown to be due on such returns or on any assessments received, (iii) have adequately provided for all tax liabilities on its books, (iv) except as disclosed to the Buying Fund, not have had any tax deficiency or liability asserted against it or question with respect thereto raised, and (v) except as disclosed to the Buying Fund, not be under audit by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid. k. Fund Securities. All securities listed in the schedule of investments of the Selling Fund as of the Closing will be owned by the Selling Fund free and clear of any encumbrances, except as indicated in the schedule. l. Registration Statement. The Selling Fund will cooperate with the Buying Fund and will furnish information relating to the Selling Corporation and the Selling Fund required in the Registration Statement. At the time the Registration Statement becomes effective, at - -------------------------------------------------------------------------------- A.6 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT the time of the shareholders' meeting and at the Closing, the Registration Statement, as it relates to the Selling Corporation or the Selling Fund, will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. However, the representations and warranties in this subsection apply only to statements in or omissions from the Registration Statement made in reliance upon information furnished by the Selling Corporation or the Selling Fund for use in the Registration Statement. 7. Conditions to Obligations of the Buying Corporation. The obligations of the Buying Corporation with respect to the Reorganization are subject to the satisfaction of the following conditions: a. Shareholder Approval. This Agreement will have been approved by the affirmative vote of the holders of the majority of the voting power of all Selling Fund shares entitled to vote. b. Representations, Warranties and Agreements. The Selling Corporation and the Selling Fund will have complied with this Agreement and each of the representations and warranties in this Agreement will be true in all material respects as of the Closing. An officer of the Selling Corporation will provide a certificate to the Buying Fund confirming that, as of the Closing, the representations and warranties set forth in Section 6 are true and correct and that there have been no material adverse changes in the financial condition, results of operations, business, properties or assets of the Selling Fund since the date of its last financial statement, except as otherwise indicated in any financial statements, certified by an officer of the Selling Corporation, and delivered to the Buying Fund on or prior to the last business day before the Closing. c. Regulatory Approvals. o The Registration Statement referred to in Section 5(l) will be effective and no stop orders under the 1933 Act will have been issued. o All necessary approvals, consents and exemptions from federal and state regulatory authorities will have been obtained. d. Tax Opinion. The Buying Corporation will have received the opinion of Ropes & Gray LLP dated as of the Closing, as to the federal income tax consequences of the Reorganization to the Buying Fund and its shareholders. For purposes of rendering their opinion, Ropes & Gray LLP may rely, as to factual matters, upon the statements made in this Agreement, the proxy statement which will be distributed to the shareholders of the Selling Fund, and other written representations as an officer of the Selling Corporation will - -------------------------------------------------------------------------------- A.7 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT have verified as of Closing. The opinion of Ropes & Gray LLP will be to the effect that: (i) neither the Selling Fund nor the Buying Fund will recognize any gain or loss upon the transfer of the assets of the Selling Fund to, and assumption of its liabilities by, the Buying Fund in exchange for shares of the Buying Fund and upon the distribution of the shares to the Selling Fund shareholders in exchange for their shares of the Selling Fund; (ii) the shareholders of the Selling Fund who receive shares of the Buying Fund in the Reorganization will not recognize any gain or loss on the exchange of their shares of the Selling Fund for the shares of the Buying Fund; (iii) the holding period and the basis of the shares received by the Selling Fund shareholders will be the same as the holding period and the basis of the shares of the Selling Fund surrendered in the exchange; (iv) the holding period and the basis of the assets acquired by the Buying Fund will be the same as the holding period and the basis of the assets to the Selling Fund immediately prior to the Reorganization. e. Opinion of Counsel. The Buying Corporation will have received an opinion of counsel for the Selling Corporation, dated as of the Closing, to the effect that: (i) the Selling Corporation is a corporation duly organized and validly existing under the laws of the state of Minnesota; (ii) the Selling Fund is a series of the Selling Corporation, an open-end investment company registered under the 1940 Act; (iii) this Agreement and the Reorganization have been duly authorized and approved by all requisite action of the Selling Corporation and the Selling Fund and this Agreement has been duly executed by, and is a valid and binding obligation of, the Selling Corporation. f. Declaration of Dividend. The Selling Fund, prior to the Closing, has declared a dividend or dividends, which, together with all previous such dividends, shall have the effect of distributing to the Selling Fund shareholders (i) all of the excess of (x) the Selling Fund's investment income excludable from gross income under Section 103 of the Code over (y) the Selling Fund's deductions disallowed under Sections 265 and 171 of the Code, (ii) all of the Selling Fund's investment company taxable income as defined in Section 852 of the Code (in each case computed without regard to any deduction for dividends paid), and (iii) all of the Selling Fund's net capital gain realized (after reduction for any capital loss carryover), in each case for the current taxable year (which will end on the Closing date) and any preceding taxable years for which such a dividend is eligible to be made under Section 855 of the Code. - -------------------------------------------------------------------------------- A.8 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT 8. Conditions to Obligations of the Selling Corporation. The obligations of the Selling Corporation with respect to the Reorganization are subject to the satisfaction of the following conditions: a. Shareholder Approval. This Agreement will have been approved by the affirmative vote of the holders of the majority of the voting power of all Selling Fund shares entitled to vote. b. Representations, Warranties and Agreements. The Buying Fund will have complied with this Agreement and each of the representations and warranties in this Agreement will be true in all material respects as of the Closing. An officer of the Buying Corporation will provide a certificate to the Selling Fund confirming that, as of the Closing, the representations and warranties set forth in Section 5 are true and correct and that there have been no material adverse changes in the financial condition, results of operations, business, properties or assets of the Buying Fund since the date of its last financial statement, except as otherwise indicated in any financial statements, certified by an officer of the Buying Corporation, and delivered to the Selling Fund on or prior to the last business day before the Closing. c. Regulatory Approvals. o The Registration Statement referred to in Section 5(l) will be effective and no stop orders under the 1933 Act will have been issued. o All necessary approvals, consents and exemptions from federal and state regulatory authorities will have been obtained. d. Tax Opinion. The Selling Corporation will have received the opinion of Ropes & Gray LLP dated as of the Closing, as to the federal income tax consequences of the Reorganization to the Selling Fund and its shareholders. For purposes of rendering their opinion, Ropes & Gray LLP may rely, as to factual matters, upon the statements made in this Agreement, the proxy statement which will be distributed to the shareholders of the Selling Fund, and other written representations as an officer of the Buying Corporation will have verified as of Closing. The opinion of Ropes & Gray LLP will be to the effect that: (i) neither the Selling Fund nor the Buying Fund will recognize any gain or loss upon the transfer of the assets of the Selling Fund to, and assumption of its liabilities by, the Buying Fund in exchange for shares of the Buying Fund and upon the distribution of the shares to the Selling Fund shareholders in exchange for their shares of the Selling Fund; (ii) the shareholders of the Selling Fund who receive shares of the Buying Fund in the Reorganization will not recognize any gain or loss on the exchange of their shares of the Selling Fund for the shares of the - -------------------------------------------------------------------------------- A.9 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Buying Fund; (iii) the holding period and the basis of the shares received by the Selling Fund shareholders will be the same as the holding period and the basis of the shares of the Selling Fund surrendered in the exchange; (iv) the holding period and the basis of the assets acquired by the Buying Fund will be the same as the holding period and the basis of the assets to the Selling Fund immediately prior to the Reorganization; and (v) the Buying Fund will succeed to and take into account the items of the Selling Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383, and 384 of the Code and the regulations thereunder. e. Opinion of Counsel. The Selling Corporation will have received the opinion of counsel for the Buying Corporation, dated as of the Closing, to the effect that: (i) the Buying Corporation is a corporation duly organized and validly existing under the laws of the state of Minnesota; (ii) the Buying Fund is a series of the Buying Corporation, an open-end investment company registered under the 1940 Act; (iii) this Agreement and the Reorganization have been authorized and approved by all requisite action of the Buying Corporation and the Buying Fund and this Agreement has been duly executed by, and is a valid and binding obligation of, the Buying Corporation; and (iv) the shares to be issued in the Reorganization are duly authorized and upon issuance in accordance with this Agreement will be validly issued, fully paid and non-assessable shares of the Buying Fund. 9. Amendment; Termination; Non-Survival of Covenants, Warranties and Representations. a. This Agreement may be amended in writing if authorized by the respective Boards of Directors. The Agreement may be amended at any time before or after approval by the shareholders of the Selling Fund, but after shareholder approval, no amendment shall be made that substantially changes the terms of paragraphs 2 or 3. b. At any time prior to the Closing, any of the parties may waive in writing (i) any inaccuracies in the representations and warranties made to it and (ii) compliance with any of the covenants or conditions made for its benefit. However, neither party may waive the requirement to obtain shareholder approval or the requirement to obtain a tax opinion. c. The Selling Corporation may terminate this Agreement at any time prior to the Closing by notice to the Buying Corporation if a material condition to its performance or a material covenant of the Buying Corporation on behalf of the Buying Fund is not fulfilled on or before the date specified for its fulfillment or a material breach of this Agreement is made by the Buying Corporation on behalf of the Buying Fund and is not cured. - -------------------------------------------------------------------------------- A.10 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT d. The Buying Corporation may terminate this Agreement at any time prior to the Closing by notice to the Selling Corporation if a material condition to its performance or a material covenant of the Selling Corporation on behalf of the Selling Fund is not fulfilled on or before the date specified for its fulfillment or a material breach of this Agreement is made by the Selling Corporation on behalf of the Selling Fund and is not cured. e. This Agreement may be terminated by any party at any time prior to the Closing, whether before or after approval by the shareholders of the Selling Fund, without any liability on the part of either party or its respective directors, officers, or shareholders, on written notice to the other party, and shall be terminated without liability as of the close of business on Dec. 31, 2004, or a later date agreed upon by the parties, if the Closing is not on or prior to that date. f. The representations, warranties and covenants contained in this Agreement, or in any document delivered in connection with this Agreement, will survive the Reorganization. 10. Expenses. American Express Financial Corporation will pay the costs of carrying out the provisions of this Agreement whether or not the Reorganization is completed. 11. General. a. Headings. The headings contained in this Agreement are for reference purposes only and will not affect the meaning or interpretation of this Agreement. Nothing in this Agreement is intended to confer upon any other person any rights or remedies by reason of this Agreement. b. Governing Law. This Agreement will be governed by the laws of the state of Minnesota. 12. Indemnification. Each party will indemnify and hold the other and its officers and directors (each an "Indemnitee") harmless from and against any liability or other cost and expense, in connection with the defense or disposition of any action, suit, or other proceeding, before any court or administrative or investigative body in which the Indemnitee may be involved as a party, with respect to actions taken under this Agreement. However, no Indemnitee will be indemnified against any liability or expense arising by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the Indemnitee's position. - -------------------------------------------------------------------------------- A.11 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT IN WITNESS WHEREOF, each of the parties has caused this Agreement to be signed. AXP Market Advantage Series, Inc. on behalf of AXP Blue Chip Advantage Fund By _________________________________ Leslie L. Ogg Vice President AXP Growth Series, Inc. on behalf of AXP Large Cap Equity Fund By _________________________________ Leslie L. Ogg Vice President The undersigned is a party to this Agreement for purposes of Section 3c and 10 only. American Express Financial Corporation By _________________________________ Paula R. Meyer Senior Vice President and General Manager - Mutual Funds - -------------------------------------------------------------------------------- A.12 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Exhibit B Minnesota Business Corporation Act Sections 302A.471 and 302A.473 Minnesota law requires that we provide you with a copy of the state law on dissenters' rights. Notwithstanding the provisions of the law set out below, the SEC has taken the position that use of state appraisal procedures by a registered mutual fund such as the Fund would be a violation of Rule 22c-1, the forward pricing rule, under the 1940 Act. As a result, if any shareholder elects to exercise dissenters' rights under Minnesota law, the Fund intends to submit this question to a court of competent jurisdiction. In that event, a dissenting shareholder would not receive any payment until the end of the court proceeding. 302A.471. Rights of dissenting shareholders Subdivision 1. Actions creating rights. A shareholder of a corporation may dissent from, and obtain payment for the fair value of the shareholder's shares in the event of, any of the following corporate actions: (a) An amendment of the articles that materially and adversely affects the rights or preferences of the shares of the dissenting shareholder in that it: (1) alters or abolishes a preferential right of the shares; (2) creates, alters, or abolishes a right in respect of the redemption of the shares, including a provision respecting a sinking fund for the redemption or repurchase of the shares; (3) alters or abolishes a preemptive right of the holder of the shares to acquire shares, securities other than shares, or rights to purchase shares or securities other than shares; (4) excludes or limits the right of a shareholder to vote on a matter, or to cumulate votes, except as the right may be excluded or limited through the authorization or issuance of securities of an existing or new class or series with similar or different voting rights; except that an amendment to the articles of an issuing public corporation that provides that section 302A.671 does not apply to a control share acquisition does not give rise to the right to obtain payment under this section; (b) A sale, lease, transfer, or other disposition of all or substantially all of the property and assets of the corporation, but not including a transaction permitted without shareholder approval in section 302A.661, subdivision 1, or a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms requiring that all or substantially all of the net proceeds of disposition be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition; - -------------------------------------------------------------------------------- B.1 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT (c) A plan of merger, whether under this chapter or under chapter 322B, to which the corporation is a party, except as provided in subdivision 3, and except for a plan of merger adopted under section 302A.626; (d) A plan of exchange, whether under this chapter or under chapter 322B, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring corporation, except as provided in subdivision 3; or (e) Any other corporate action taken pursuant to a shareholder vote with respect to which the articles, the bylaws, or a resolution approved by the board directs that dissenting shareholders may obtain payment for their shares. Subdivision 2. Beneficial owners. (a) A shareholder shall not assert dissenters' rights as to less than all of the shares registered in the name of the shareholder, unless the shareholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the shareholder and discloses the name and address of each beneficial owner on whose behalf the shareholder dissents. In that event, the rights of the dissenter shall be determined as if the shares as to which the shareholder has dissented and the other shares were registered in the names of different shareholders. (b) The beneficial owner of shares who is not the shareholder may assert dissenters' rights with respect to shares held on behalf of the beneficial owner, and shall be treated as a dissenting shareholder under the terms of this section and section 302A.473, if the beneficial owner submits to the corporation at the time of or before the assertion of the rights a written consent of the shareholder. Subdivision 3. Rights not to apply. (a) Unless the articles, the bylaws, or a resolution approved by the board otherwise provide, the right to obtain payment under this section does not apply to a shareholder of (1) the surviving corporation in a merger with respect to shares of the shareholder that are not entitled to be voted on the merger or (2) the corporation whose shares will be acquired by the acquiring corporation in a plan of exchange with respect to shares of the shareholder that are not entitled to be voted on the plan of exchange and are not exchanged in the plan of exchange. (b) If a date is fixed according to section 302A.445, subdivision 1, for the determination of shareholders entitled to receive notice of and to vote on an action described in subdivision 1, only shareholders as of the date fixed, and beneficial owners as of the date fixed who hold through shareholders, as provided in subdivision 2, may exercise dissenters' rights. - -------------------------------------------------------------------------------- B.2 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Subdivision 4. Other rights. The shareholders of a corporation who have a right under this section to obtain payment for their shares do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation. 302A.473. Procedures for asserting dissenters' rights Subdivision 1. Definitions. (a) For purposes of this section, the terms defined in this subdivision have the meanings given them. (b) "Corporation" means the issuer of the shares held by a dissenter before the corporate action referred to in section 302A.471, subdivision 1 or the successor by merger of that issuer. (c) "Fair value of the shares" means the value of the shares of a corporation immediately before the effective date of the corporate action referred to in section 302A.471, subdivision 1. (d) "Interest" means interest commencing five days after the effective date of the corporate action referred to in section 302A.471, subdivision 1, up to and including the date of payment, calculated at the rate provided in section 549.09 for interest on verdicts and judgments. Subdivision 2. Notice of action. If a corporation calls a shareholder meeting at which any action described in section 302A.471, subdivision 1 is to be voted upon, the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections. Subdivision 3. Notice of dissent. If the proposed action must be approved by the shareholders, a shareholder who is entitled to dissent under section 302A.471 and who wishes to exercise dissenters' rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action. Subdivision 4. Notice of procedure; deposit of shares. (a) After the proposed action has been approved by the board and, if necessary, the shareholders, the corporation shall send to all shareholders who have complied with subdivision 3 and to all shareholders entitled to dissent if no shareholder vote was required, a notice that contains: (1) The address to which a demand for payment and certificates of certificated shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received; - -------------------------------------------------------------------------------- B.3 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT (3) A form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of section 302A.471 and this section and a brief description of the procedures to be followed under these sections. (b) In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given, but the dissenter retains all other rights of a shareholder until the proposed action takes effect. Subdivision 5. Payment; return of shares. (a) After the corporate action takes effect, or after the corporation receives a valid demand for payment, whichever is later, the corporation shall remit to each dissenting shareholder who has complied with subdivisions 3 and 4 the amount the corporation estimates to be the fair value of the shares, plus interest, accompanied by: (1) The corporation's closing balance sheet and statement of income for a fiscal year ending not more than 16 months before the effective date of the corporate action, together with the latest available interim financial statements; (2) An estimate by the corporation of the fair value of the shares and a brief description of the method used to reach the estimate; and (3) A copy of section 302A.471 and this section, and a brief description of the procedure to be followed in demanding supplemental payment. (b) The corporation may withhold the remittance described in paragraph (a) from a person who was not a shareholder on the date the action dissented from was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If the dissenter has complied with subdivisions 3 and 4, the corporation shall forward to the dissenter the materials described in paragraph (a), a statement of the reason for withholding the remittance, and an offer to pay to the dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. The dissenter may decline the offer and demand payment under subdivision 6. Failure to do so entitled the dissenter only to the amount offered. If the dissenter makes demand, subdivision 7 and 8 apply. (c) If the corporation fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertificated shares, it shall return all deposited certificates and cancel all transfer restrictions. However, the corporation may again give notice under subdivision 4 and require deposit or restrict transfer at a later time. - -------------------------------------------------------------------------------- B.4 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Subdivision 6. Supplemental payment; demand. If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter's own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation. Subdivision 7. Petition; determination. If the corporation receives a demand under subdivision 6, it shall, within 60 days after receiving the demand, either pay to the dissenter the amount demanded or agreed to by the dissenter after discussion with the corporation or file in a court a petition requesting that the court determine the fair value of the shares, plus interest. The petition shall be filed in the county in which the registered office of the corporation is located, except that a surviving foreign corporation that receives a demand relating to the shares of a constituent domestic corporation shall file the petition in the county in this state in which the last registered office of the constituent corporation was located. The petition shall name as parties all dissenters who have demanded payment under subdivision 6 and who have not reached agreement with the corporation. The corporation shall, after filing the petition, serve all parties with a summons and copy of the petition under the rules of civil procedure. Nonresidents of this state may be served by registered or certified mail or by publication as provided by law. Except as otherwise provided, the rules of civil procedures apply to this proceeding. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court shall determine whether the shareholder or shareholders in question have fully complied with the requirements of this section, and shall determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter. The fair value of the shares as determined by the court is binding on all shareholders, wherever located. A dissenter is entitled to judgment in cash for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted under subdivision 5, but shall not be liable to the corporation for the amount, if any, by which the amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair value of the shares as determined by the court, plus interest. - -------------------------------------------------------------------------------- B.5 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Subdivision 8. Costs; fees; expenses. (a) The court shall determine the costs and expenses of a proceeding under subdivision 7, including the reasonable expenses and compensation of any appraisers appointed by the court, and shall assess those costs and expenses against the corporation, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or not in good faith. (b) If the court finds that the corporation has failed to comply substantially with this section, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expenses may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions. (c) The court may award, in its discretion, fees and expenses to an attorney for the dissenters out of the amount awarded to the dissenters, if any. - -------------------------------------------------------------------------------- B.6 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Exhibit C Management's Discussion of the Buying Fund for the fiscal year ended July 31, 2003 Questions & Answers with Portfolio Management AXP Large Cap Equity Fund has grown to more than $120 million in assets during its first 15 months in operation. Below, Portfolio Manager Doug Chase discusses the Fund's performance and positioning as of July 31, 2003. Q: How did the AXP Large Cap Equity Fund perform in fiscal year 2003? A: AXP Large Cap Equity Fund's Class A shares advanced 10.22%, excluding sales charge, for the 12 months ended July 31, 2003. The Fund outperformed its peers as represented by the Lipper Large-Cap Core Funds Index, which gained 8.63%. The Fund underperformed its benchmark, the Russell 1000(R) Index, which advanced 11.19% for the period. Q: What factors significantly affected performance? A: Individual stock selection added to the Fund's relative performance while sector positioning hampered results. Underweights in technology and telecommunications, which had benefited the Fund during the volatile period from July to September 2002, prevented the Fund from fully participating in the subsequent market rallies. Similarly, an overweight in health care that was advantageous early in the period had a negative impact late in 2002. In addition, the Fund had no exposure to utilities, a sector that did well in the first seven months of 2003. Strong results from select portfolio holdings helped offset the impact of sector allocations. Cendant, a leisure and travel company that was purchased in the first half of the fiscal year, was one of the Fund's strongest performers. Among other stocks that contributed to the Fund's results were pharmaceutical companies Wyeth and Pfizer, media giant AOL Time Warner, technology company Sun Microsystems and a number of financial services companies, including Citigroup. On the negative side, Transocean, an oil service company, did not perform well for the Fund. Fannie Mae and Freddie Mac, which were added to the portfolio in the first half of the fiscal period, also proved to be a disappointment later in the year. Despite benefiting from record home refinancing volume, both stocks declined due to unfavorable sentiment stemming from Freddie Mac's accounting and regulatory problems. - -------------------------------------------------------------------------------- C.1 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Q: What changes were made to the portfolio during the period? A: At the start of the fiscal year, the Fund was positioned for a continuation of the weak economic and market environments. In particular, exposure to stocks believed to be most sensitive to cyclical economic trends was reduced. Later in 2002, the Fund's overweight in health care stocks was reduced and its energy positioning increased. At the beginning of 2003, the expectation was that the economy would surprise on the upside. The Fund was overweighted energy, materials and industrial stocks in order to gain some cyclical exposure. Underweights were maintained in financial and technology stocks because the fundamentals were not as favorable as in other areas. The Fund's position in consumer discretionary stocks was increased in February and March 2003, as these stocks became more attractively priced in the midst of war-related pessimism. In particular, holdings of media companies were increased. Media stocks appeared cheap compared to where they would typically trade in a more normal environment. The Fund emphasized media companies with strong brands and spread its investments among content providers, infrastructure companies, advertising firms and other communications companies. During the latter part of the fiscal period, the Fund began to trim positions in individual stocks that had outperformed. These included AOL Time Warner, Cendant, McDonald's and McKesson, as well as both Pfizer and Wyeth. (bar chart) PERFORMANCE COMPARISON For the period ended July 31, 2003 12% (bar 2) (bar 1) +11.19% 10% +10.22% (bar 3) +8.63% 8% 6% 4% 2% 0% (bar 1) AXP Large Cap Equity Fund Class A (excluding sales charge) (bar 2) Russell 1000(R) Index (unmanaged) (bar 3) Lipper Large-Cap Core Funds Index (see "The Fund's Long-term Performance" for Index descriptions) Past performance is no guarantee of future results. The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes. - -------------------------------------------------------------------------------- C.2 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Q: How will the Fund be managed in the coming months? A: It appears as though the marketplace is experiencing somewhat of a euphoric period right now. Stock prices have been rising without a clear reason for them to do so. It seems as though a large amount of earnings growth has already been priced into many stocks, particularly in the technology and small-cap areas. Despite the potentially favorable impact of the recent tax cut, expectations for economic growth in the fourth quarter may be too high. The economy is already recovering and given that it declined just 0.2% in the recent recession, there is little case for a strong rebound. Estimates for growth in the fourth quarter are coming in at about 4%. Given the broad economic and market backdrop, as the stock market rises we may sell stocks that have shifted from inexpensive to expensive. However, we anticipate no major shifts in sector positioning. While sectors we emphasized underperformed in the past year, this potentially positions these areas of the market for a period of stronger performance in the future.
AVERAGE ANNUAL TOTAL RETURNS as of July 31, 2003 Class A Class B Class C Class Y (Inception dates) (3/28/02) (3/28/02) (3/28/02) (3/28/02) NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5) 1 year +10.22% +3.90% +9.27% +5.27% +9.51% +9.51% +10.46% +10.46% Since inception -7.03% -11.04% -7.85% -10.61% -7.70% -7.70% -6.87% -6.87%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 5.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to institutional investors only. Past performance is no guarantee of future results. Investment return and principal value will fluctuate, so that your shares, when redeemed, may be worth more or less than the original cost. The performance shown for each class of shares will vary due to differences in sales charges and fees. Short term performance may be higher or lower than the figures shown. Visit americanexpress.com/funds for current information. - -------------------------------------------------------------------------------- C.3 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT The Fund's Long-term Performance This chart illustrates the total value of an assumed $10,000 investment in AXP Large Cap Equity Fund Class A shares (from 4/1/02 to 7/31/03) as compared to the performance of two widely cited performance indices, the Russell 1000(R) Index and the Lipper Large-Cap Core Funds 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 5.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. Past performance is no guarantee of future results. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Returns do not reflect taxes payable on distributions and redemptions. Also see "Past Performance" in the Fund's current prospectus.
(line chart) VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP LARGE CAP EQUITY FUND AXP Large Cap Equity Fund Class A $ 9,425 $8,954 $7,767 $7,616 $7,302 $7,925 $8,548 Russell 1000(R) Index(1) $10,000 $9,427 $8,014 $7,788 $7,589 $8,158 $8,911 Lipper Large-Cap Core Funds Index(2) $10,000 $9,477 $8,108 $7,954 $7,665 $8,189 $8,807 4/1/02 4/02 7/02 10/02 1/03 4/03 7/03
(1) The Russell 1000(R) Index, an unmanaged index, measures the performance of the 1,000 largest companies in the Russell 3000(R) Index and represents approximately 92% of the total market capitalization of the Russell 3000 Index. (2) Lipper Large-Cap Core Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. Average Annual Total Returns Class A with Sales Charge as of July 31, 2003 1 year +3.90% Since inception (3/28/02) -11.04% - -------------------------------------------------------------------------------- C.4 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Exhibit D AXP(R) LARGE CAP EQUITY FUND Prospectus Sept. 29, 2003 Please note that this Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goal Like all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- D.1 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Table of Contents TAKE A CLOSER LOOK AT: The Fund D. 3 Goal D. 3 Principal Investment Strategies D. 3 Principal Risks D. 4 Past Performance D. 4 Fees and Expenses D. 5 Investment Manager D. 7 Other Securities and Investment Strategies D. 7 Buying and Selling Shares D. 8 Valuing Fund Shares D. 8 Investment Options D. 8 Purchasing Shares D. 10 Transactions Through Third Parties D. 12 Sales Charges D. 13 Exchanging/Selling Shares D. 16 Distributions and Taxes D. 20 Financial Highlights D. 21 Supplement dated Jan. 20, 2004 D. 25 - -------------------------------------------------------------------------------- D.2 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT The Fund GOAL AXP Large Cap Equity Fund (the Fund) seeks to provide shareholders with long-term growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, at least 80% of the Fund's net assets are invested in equity securities of companies with a market capitalization greater than $5 billion at the time of purchase. The Fund may invest in income-producing equity securities, such as dividend paying stocks, convertible securities and preferred stocks. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, American Express Financial Corporation (AEFC), the Fund's investment manager, chooses investments by: o Identifying companies with: o attractive valuations, and o the potential for earnings growth. o Identifying securities that AEFC believes have good potential for capital appreciation. o Evaluating opportunities and risks by reviewing interest rates and economic forecasts. o Buying a diversified portfolio of securities. AEFC may weight certain sectors more heavily than others based on its expectations about growth and market trends. In evaluating whether to sell a security, AEFC considers, among other factors, whether o The security is overvalued relative to other potential investments. o The security has reached AEFC's price objective. o The company has met AEFC's earnings and/or growth expectations. o Political, economic, or other events could affect the company's or security's performance. o Potential losses, due to factors such as a market down-turn, can be minimized. o A more attractive opportunity has been identified. - -------------------------------------------------------------------------------- D.3 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Unusual Market Conditions During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing could prevent the Fund from achieving its investment objective. During these times, the Fund may trade its portfolio securities more frequently. Frequent trading could result in increased fees, expenses, and taxes. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: Market Risk Style Risk Issuer Risk Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Style Risk The Fund's management strategy will influence performance significantly. Large capitalization stocks as a group could fall out of favor with the market, causing the Fund to underperform funds that invest primarily in small or medium capitalization stocks. If the manager's stock selection strategy does not perform as expected, the Fund could underperform its peers. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. PAST PERFORMANCE The bar chart and past performance table are not presented because the Fund has not had a full calendar year of operations. The Fund began operations on March 28, 2002. When available, the Fund intends to compare its performance to the Russell 1000(R) Index, an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000 Index, and represents approximately 92% of the total market capitalization of the Russell 3000 Index. - -------------------------------------------------------------------------------- D.4 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT The Fund also intends to compare its performance to the Lipper Large-Cap Core Funds Index, an index published by Lipper Inc., which includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 5.75%(b) none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none 5% 1%(c) none
Annual Fund operating expenses(d) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees(e) 0.61% 0.61% 0.61% 0.61% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(f) 0.99% 1.00% 1.00% 1.06% Total 1.85% 2.61% 2.61% 1.67% Fee waiver/expense reimbursement 0.60% 0.60% 0.60% 0.60% Net expenses 1.25% 2.01% 2.01% 1.07% (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. See "Sales Charges." (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Other expenses are based on estimated amounts for the current fiscal year. AEFC has agreed to waive certain fees and to absorb certain expenses until July 31, 2004. Under this agreement, total expenses will not exceed 1.25% for Class A; 2.01% for Class B; 2.01% for Class C and 1.07% for Class Y. (e) Includes the impact of a performance incentive adjustment fee that increased the management fee by 0.01% for the most recent fiscal year. (f) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. Effective May 2003, the Fund's transfer agency fee increased. The percentages above reflect the increase. - -------------------------------------------------------------------------------- D.5 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Examples These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return each year. The operating expenses remain the same each year. You would pay the following expenses if you redeem all of your shares at the end of the time periods indicated: 1 year 3 years 5 years 10 years Class A(a) $695 $1,069 $1,467 $2,578 Class B $604 $1,055 $1,433 $2,718(b) Class C $204 $ 755 $1,333 $2,904 Class Y $109 $ 468 $ 852 $1,931 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares: 1 year 3 years 5 years 10 years Class A(a) $695 $1,069 $1,467 $2,578 Class B $204 $ 755 $1,333 $2,718(b) Class C $204 $ 755 $1,333 $2,904 Class Y $109 $ 68 $ 852 $1,931 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. These examples do not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. - -------------------------------------------------------------------------------- D.6 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT INVESTMENT MANAGER Doug Chase, Portfolio Manager o Managed the Fund since 2002. o Joined AEFC in 2002. o Prior to that, Analyst and Portfolio Manager at Fidelity Investments. o Began investment career in 1992. o MBA, University of Michigan. The Fund pays AEFC a fee for managing its assets. Under the Investment Management Services Agreement, the fee for the most recent fiscal year was 0.61% of the Fund's average daily net asstes, including an adjustment under the terms of a performance incentive arrangement. The maximum monthly adjustment (increase or decrease) will be 0.12% of the Fund's average net assets on an annual basis. Under the agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. AEFC or an affiliate may make payments from its own resources, which include profits from management fees paid by the Fund, to compensate broker-dealers or other persons for providing distribution assistance. AEFC, located at 200 AXP Financial Center, Minneapolis, Minnesota 55474, is a wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, New York 10285. The Fund operates under an order from the Securities and Exchange Commission that permits AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may utilize other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, debt securities and foreign securities. Additionally, the Fund may use derivative instruments such as futures, options and forward contracts to produce incremental earnings, to hedge existing positions and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. - -------------------------------------------------------------------------------- D.7 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Buying and Selling Shares The public offering price for Class A shares of the Fund is the net asset value (NAV) plus a sales charge, and for Class B, C, and Y shares, the NAV. In addition to buying and selling shares through the Fund's distributor, American Express Financial Advisors Inc., you may buy or sell shares through third parties, including 401(k) plans, banks, brokers, and investment advisers. Where authorized by the Fund, orders in good form are priced using the NAV next determined after your order is placed with the third party. If you buy or redeem shares through a third party, consult that firm to determine whether your order will be priced at the time it is placed with the third party or at the time it is placed with the Fund. The third party may charge a fee for its services. VALUING FUND SHARES The NAV is the value of a single share of the Fund. The NAV is determined by dividing the value of the Fund's assets, minus any liabilities, by the number of shares outstanding. AEFC calculates the NAV as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The Fund's assets are valued primarily on the basis of market quotations. Certain short-term securities are valued at amortized cost. Foreign investments are valued in U.S. dollars. AEFC will price a security at fair value in accordance with procedures adopted by the Fund's Board of Directors if a reliable market quotation is not readily available. AEFC also may use fair value if a security's value has been materially affected by events after the close of the primary exchanges or markets on which the security is traded and before the NAV is calculated. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution fee of 1.00% (may be subject to a CDSC). 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee. Please see the SAI for information on eligibility to purchase Class Y shares. - -------------------------------------------------------------------------------- D.8 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Investment options summary The Fund offers four different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision. The following table shows the key features of each class: Class A Class B Class C Class Y - ------------------ ------------- -------------- ------------- ------------------ Availability Available Available to Available Limited to to all all to all qualifying investors. investors. investors. institutional investors. - ------------------ ------------- -------------- ------------- ------------------ Initial Sales Yes. No. Entire No. Entire No. Entire Charge Payable at purchase purchase purchase price time of price is price is is invested in purchase. invested in invested in shares of the Lower sales shares of shares of Fund. charge for the Fund. the Fund. larger investments. - ------------------ ------------- -------------- ------------- ------------------ Deferred Sales On Maximum 5% 1% CDSC None. Charge purchases CDSC during applies if over the first you sell $1,000,000, year your shares 1% CDSC decreasing less than applies if to 0% after one year you sell six years. after your shares purchase. less than one year after purchase. - ------------------ ------------- -------------- ------------- ------------------ Distribution Yes.* Yes.* Yes.* Yes. and/or 0.25% 1.00% 1.00% 0.10% Shareholder Service Fee - ------------------ ------------- -------------- ------------- ------------------ Conversion to N/A Yes, No. No. Class A automatically in ninth calendar year of ownership. - ------------------ ------------- -------------- ------------- ------------------ * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $250,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $250,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. - -------------------------------------------------------------------------------- D.9 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. PURCHASING SHARES To purchase shares through entities other than American Express Financial Advisors Inc. (the Distributor), please consult your selling agent. The following section explains how you can purchase shares from the Distributor. If you do not have an existing American Express mutual fund account, you will need to establish a brokerage account. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. - -------------------------------------------------------------------------------- D.10 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - -------------------------------------- ---------------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - -------------------------------------- ---------------------------------------- Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - -------------------------------------- ---------------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - -------------------------------------- ---------------------------------------- An irrevocable trust, pension trust The legal entity (not the personal or estate representative or trustee, unless no legal entity is designated in the account title) - -------------------------------------- ---------------------------------------- Sole proprietorship or single-owner The owner LLC - -------------------------------------- ---------------------------------------- Partnership or multi-member LLC The partnership - -------------------------------------- ---------------------------------------- Corporate or LLC electing corporate The corporation status on Form 8837 - -------------------------------------- ---------------------------------------- Association, club or tax-exempt The organization organization - -------------------------------------- ---------------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (www.irs.gov). Methods of purchasing shares By mail Once your account has been established, send your check to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000* Additional investments: $500** Fund minimum balances: $300 Qualified minimum account balances: none * $1,000 for tax qualified accounts. ** $100 minimum add-on for existing mutual fund accounts outside of a brokerage account (direct at fund accounts). If your Fund balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. - -------------------------------------------------------------------------------- D.11 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT By scheduled investment plan Minimum amounts Initial investment: $2,000* Additional investments: $100** Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. * $100 for direct at fund accounts. ** $50 minimum per payment for qualified accounts in a direct at fund account. By wire or electronic funds transfer Please contact your financial advisor or selling agent for specific instructions. Minimum wire purchase amount: $1,000 or new account minimum, as applicable. By telephone If you have a brokerage account, you may use the money in your account to make initial and subsequent purchases. To place your order, call: (800) 872-4377 for brokerage accounts (800) 967-4377 for wrap accounts TRANSACTIONS THROUGH THIRD PARTIES You may buy or sell shares through certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through third parties or to determine if there are policy differences, please consult your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. - -------------------------------------------------------------------------------- D.12 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT SALES CHARGES Class A -- initial sales charge alternative When you purchase Class A shares, you pay a sales charge as shown in the following table: Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 * Offering price includes the sales charge. The sales charge on Class A shares may be lower than 5.75%, based on the combined market value of: o your current investment in this Fund, o your previous investment in this Fund, and o investments you and your primary household group have made in other American Express mutual funds that have a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. For purposes of this policy, domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do not have sales charges. Other Class A sales charge policies o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, and o if you intend to invest more than $50,000 over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. If purchasing shares in a brokerage account or through a third party, you must request the reduced sales charge when you buy shares. For more details, please contact your financial advisor or see the SAI. - -------------------------------------------------------------------------------- D.13 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired American Express financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. o registered representatives and other employees of brokers, dealers or other financial institutions having a sales agreement with the Distributor, including their spouses, domestic partners, children and parents. o investors who have a business relationship with a newly associated financial advisor who joined the Distributor from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with the Distributor, (2) the purchase is made with proceeds of shares sold that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds are the result of a sale of an equal or greater value where a sales load was assessed. o qualified employee benefit plans offering participants daily access to American Express mutual funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. o shareholders who have at least $1 million in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived only in the circumstances described for waivers for Class B and Class C shares. o purchases made within 90 days after a sale of American Express Fund shares (up to the amount sold). Send the Fund a written request along with your payment, indicating the date and the amount of the sale. o purchases made: o with dividend or capital gain distributions from this Fund or from the same class of another American Express mutual fund, o through or under a wrap fee product or other investment product sponsored by the Distributor or another authorized broker-dealer, investment advisor, bank or investment professional, o within the University of Texas System ORP, o within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, - -------------------------------------------------------------------------------- D.14 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT o within the University of Massachusetts After-Tax Savings Program, or o through or under a subsidiary of AEFC offering Personal Trust Services' Asset-Based pricing alternative. o shareholders whose original purchase was in a Strategist fund merged into an American Express fund in 2000. Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of calendar years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline after a purchase: If the sale is made during the: The CDSC percentage rate is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% For Class C, a 1% CDSC is charged if you sell your shares less than one year after purchase. For both Class B and Class C, if the amount you are selling causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC is based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you never have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. Example Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. - -------------------------------------------------------------------------------- D.15 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Waivers of the sales charge for Class B and Class C shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if American Express Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: o at least 59 1/2 years old AND o taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR o selling under an approved substantially equal periodic payment arrangement. EXCHANGING/SELLING SHARES Exchanges You may exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. The Fund does not permit market-timing. Do not invest in the Fund if you are a market timer. Excessive trading (market-timing) or other abusive short-term trading practices may disrupt portfolio management strategies, harm performance and increase fund expenses. To prevent abuse or adverse effects on the Fund and its shareholders, the Distributor and the Fund reserve the right to reject any purchase orders, including exchanges, limit the amount, modify or discontinue the exchange privilege, or charge a fee to any investor we believe has a history of abusive trading or whose trading, in our judgement has been disruptive to the Fund. For example, we may exercise these rights if exchanges are too numerous or too large. - -------------------------------------------------------------------------------- D.16 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is received from the secured party. Selling Shares You may sell your shares at any time. The payment will be mailed within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. To sell or exchange shares held with entities other than the Distributor, please consult your selling agent. The following section explains how you can exchange or sell shares held with the Distributor. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. Payment may be made earlier if your bank provides evidence satisfactory to the Fund and the Distributor that your check has cleared. - -------------------------------------------------------------------------------- D.17 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Ways to request an exchange or sale of shares By regular or express mail American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 Include in your letter: o your account number o the name of the fund(s) o the class of shares to be exchanged or sold o your Social Security number or Employer Identification number o the dollar amount or number of shares you want to exchange or sell o specific instructions regarding delivery or exchange destination o signature(s) of registered account owner(s) (All signatures may be required. Contact your financial advisor for more information.) o delivery instructions, if applicable o any paper certificates of shares you hold Payment will be mailed to the address of record and made payable to the names listed on the account, unless specified differently and signed by all owners. The express mail delivery charges you pay will vary depending on domestic or international delivery instructions. By telephone (800) 872-4377 for brokerage accounts (800) 437-3133 for direct at fund accounts (800) 967-4377 for wrap accounts o The Fund and the Distributor will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing the Distributor. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- D.18 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT By wire Money can be wired from your account to your bank account. Contact your financial advisor or the Distributor at the above numbers for additional information. o Minimum amount: $1,000 o Pre-authorization is required. o A service fee may be charged against your account for each wire sent. By scheduled payout plan o Minimum payment: $100*. o Contact your financial advisor or the Distributor to set up regular payments. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. * Minimum is $50 in a direct at fund account. Electronic transactions The ability to initiate transactions via the internet may be unavailable or delayed at certain times (for example, during periods of unusual market activity). The Fund and the Distributor are not responsible for any losses associated with unexecuted transactions. In addition, the Fund and the Distributor are not responsible for any losses resulting from unauthorized transactions if reasonable security measures are followed to validate the investor's identity. The Fund may modify or discontinue electronic privileges at any time. - -------------------------------------------------------------------------------- D.19 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered American Express mutual fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). - -------------------------------------------------------------------------------- D.20 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. Financial Highlights The financial highlights tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by KPMG LLP, whose report, along with the Fund's financial statements, is included in the annual report which, if not included with this prospectus, is available upon request.
Class A Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.11 $5.00 Income from investment operations: Net investment income (loss) .01 -- Net gains (losses) (both realized and unrealized) .41 (.89) Total from investment operations .42 (.89) Net asset value, end of period $4.53 $4.11 Ratios/supplemental data Net assets, end of period (in millions) $83 $11 Ratio of expenses to average daily net assets(c),(e) 1.25% 1.25%(d) Ratio of net investment income (loss) to average daily net assets .24% (.11%)(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 10.22% (17.80%)(j)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- D.21 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT
Class B Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.10 $5.00 Income from investment operations: Net investment income (loss) (.01) (.01) Net gains (losses) (both realized and unrealized) .39 (.89) Total from investment operations .38 (.90) Net asset value, end of period $4.48 $4.10 Ratios/supplemental data Net assets, end of period (in millions) $36 $5 Ratio of expenses to average daily net assets(c),(f) 2.01% 2.01%(d) Ratio of net investment income (loss) to average daily net assets (.52%) (.86%)(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 9.27% (18.00%)(j) Class C Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.10 $5.00 Income from investment operations: Net investment income (loss) (.01) (.01) Net gains (losses) (both realized and unrealized) .40 (.89) Total from investment operations .39 (.90) Net asset value, end of period $4.49 $4.10 Ratios/supplemental data Net assets, end of period (in millions) $2 $-- Ratio of expenses to average daily net assets(c),(g) 2.01% 2.01%(d) Ratio of net investment income (loss) to average daily net assets (.53%) (.92%)(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 9.51% (18.00%)(j)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- D.22 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT
Class Y Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.11 $5.00 Income from investment operations: Net investment income (loss) .01 -- Net gains (losses) (both realized and unrealized) .42 (.89) Total from investment operations .43 (.89) Net asset value, end of period $4.54 $4.11 Ratios/supplemental data Net assets, end of period (in millions) $-- $-- Ratio of expenses to average daily net assets(c),(h) 1.07% 1.07%(d) Ratio of net investment income (loss) to average daily net assets .45% .09%(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 10.46% (17.80%)(j)
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 28, 2002 (when shares became publicly available) to July 31, 2002. (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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class A would have been 1.84% and 5.12% for the periods ended July 31, 2003 and 2002, respectively. (f) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class B would have been 2.60% and 5.88% for the periods ended July 31, 2003 and 2002, respectively. (g) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class C would have been 2.60% and 5.88% for the periods ended July 31, 2003 and 2002, respectively. (h) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class Y would have been 1.66% and 4.94% for the periods ended July 31, 2003 and 2002, respectively. (i) Total return does not reflect payment of a sales charge. (j) Not annualized. - -------------------------------------------------------------------------------- D.23 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT This Fund, along with the other American Express mutual funds, is distributed by American Express Financial Advisors Inc. and can be purchased from an American Express financial advisor or from other authorized broker-dealers or third parties. The Funds can be found under the "Amer Express" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's Statement of Additional Information (SAI), annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund during its last fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report or the semiannual report, contact your selling agent or American Express Client Service Corporation. American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 Web site address: americanexpress.com/funds You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at (http://www.sec.gov). Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-2111 Ticker Symbol Class A: ALEAX Class B:ALEBX Class C: -- Class Y:-- - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS(R) - -------------------------------------------------------------------------------- American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 S-6244-99 D (9/03) - -------------------------------------------------------------------------------- D.24 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Prospectus Supplement -- Jan. 20, 2004* Fund Name (Date) Prospectus Form # AXP Blue Chip Advantage Fund (April 1, 2003) S-6025-99 V AXP Diversified Bond Fund (Oct. 30, 2003) S-6495-99 W AXP California Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Core Bond Fund (Sept. 29, 2003)S-6267-99 C AXP Discovery Fund (Sept. 29, 2003)S-6457-99 Y AXP Diversified Equity Income Fund (Nov. 28, 2003) S-6475-99 W AXP Emerging Markets Fund (Dec. 30, 2003) S-6354-99 L AXP Equity Select Fund (Jan. 29, 2003) S-6426-99 W AXP Equity Select Fund (Jan. 29, 2004) S-6426-99 X AXP Equity Value Fund (May 30, 2003)S-6382-99 N AXP European Equity Fund (Dec. 30, 2003) S-6006-99 F AXP Focused Growth Fund (May 30, 2003) S-6003-99 E AXP Global Balanced Fund (Dec. 30, 2003) S-6352-99 J AXP Global Bond Fund (Dec. 30, 2003) S-6309-99 X AXP Global Equity Fund (Dec. 30, 2003) S-6334-99 W AXP Global Technology Fund (Dec. 30, 2003) S-6395-99 G AXP Growth Dimensions Fund (Sept. 29, 2003) S-6004-99 F AXP Growth Fund (Sept. 29, 2003) S-6455-99 X AXP High Yield Bond Fund (July 30, 2003) S-6370-99 W AXP High Yield Tax-Exempt Fund (Jan. 29, 2003) S-6430-99 X AXP High Yield Tax-Exempt Fund (Jan. 29, 2004) S-6430-99 Y AXP Income Opportunities Fund (Sept. 29, 2003) S-6266-99 C AXP Inflation Protected Securities Fund (Jan. 12, 2004) S-6280-99 A AXP Insured Tax-Exempt Fund (Aug. 29, 2003) S-6327-99 Y AXP Intermediate Tax-Exempt Fund (Jan. 29, 2003) S-6355-99 K AXP Intermediate Tax-Exempt Fund (Jan. 29, 2004) S-6355-99 L AXP International Fund (Dec. 30, 2003) S-6140-99 Y AXP Large Cap Equity Fund (Sept. 29, 2003) S-6244-99 D AXP Large Cap Value Fund (Sept. 29, 2003) S-6246-99 D AXP Limited Duration Bond Fund (Sept. 29, 2003) S-6265-99 C AXP Managed Allocation Fund (Nov. 28, 2003) S-6141-99 X AXP Massachusetts Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Michigan Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Mid Cap Value Fund (Nov. 28, 2003) S-6241-99 D AXP Minnesota Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Mutual (Nov. 28, 2003) S-6326-99 X AXP New Dimensions Fund (Sept. 29, 2003) S-6440-99 W AXP New York Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Ohio Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Partners Aggressive Growth Fund (July 30, 2003) S-6260-99 C AXP Partners Fundamental Value Fund (July 30, 2003) S-6236-99 E AXP Partners Growth Fund (July 30, 2003) S-6261-99 C - -------------------------------------------------------------------------------- D.25 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Prospectus Supplement -- Jan. 20, 2004* (continued) Fund Name (Date) Prospectus Form # AXP Partners International Aggressive Growth Fund (Dec. 30, 2003) S-6243-99 F AXP Partners International Core Fund (Dec. 30, 2003) S-6259-99 D AXP Partners International Select Value Fund (Dec. 30, 2003) S-6242-99 F AXP Partners International Small Cap Fund (Dec. 30, 2003) S-6258-99 D AXP Partners Select Value Fund (July 30, 2003) S-6240-99 D AXP Partners Small Cap Core Fund (July 30, 2003) S-6237-99 E AXP Partners Small Cap Growth Fund (May 30, 2003) S-6301-99 E AXP Partners Small Cap Value Fund (July 30, 2003) S-6239-99 E AXP Partners Value Fund (July 30, 2003) S-6238-99 E AXP Precious Metals Fund (May 30, 2003) S-6142-99 X AXP Progressive Fund (Nov. 28, 2003) S-6449-99 X AXP Quantitative Large Cap Equity Fund (Sept. 29, 2003) S-6263-99 C AXP Real Estate Fund (Jan. 6, 2004) S-6281-99 A AXP Research Opportunities Fund (Sept. 29, 2003) S-6356-99LK AXP Selective Fund (July 30, 2003) S-6376-99 X AXP Short Duration U.S. Government Fund (July 30, 2003) S-6042-99 X AXP Small Cap Advantage Fund (May 30, 2003) S-6427-99 G AXP Small Company Index Fund (April 1, 2003) S-6357-99 L AXP Stock Fund (Nov. 28, 2003) S-6351-99 X AXP Strategy Aggressive Fund (May 30, 2003) S-6381-99 N AXP Tax-Exempt Bond Fund (Jan. 29, 2003) S-6310-99 X AXP Tax-Exempt Bond Fund (Jan. 29, 2004) S-6310-99 Y AXP U.S. Government Mortgage Fund (July 30, 2003) S-6245-99 D AXP Utilities Fund (Aug. 29, 2003) S-6341-99 X For the prospectus Under the heading "Buying and Selling Shares," the section titled "Should you purchase Class A, Class B or Class C shares" has been revised to read as follows: Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. - -------------------------------------------------------------------------------- D.26 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. Under the heading "Sales Charges," the first bullet in the section titled "Other Class A sales charge policies" has been revised to read as follows: o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, provided that the plan uses the Distributor's group billing services, and S-6426-24 C (1/04) * Valid until next prospectus update. Destroy - Jan. 30, 2005 - -------------------------------------------------------------------------------- D.27 AMERICAN EXPRESS FUNDS -- PROXY STATEMENT - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS(R) - -------------------------------------------------------------------------------- S-6303 A (3/04) American PROXY Express(R) Funds [FUND NAME DROP-IN] Principal Executive Office 901 Marquette Avenue South, Suite 2810 Minneapolis, MN 55402-3268 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To be held ______, 2004 Your fund will hold a special shareholders' meeting at __________ on ______, 2004, at ______________________, Minneapolis, MN. You are entitled to vote at the meeting if you were a shareholder on ________, 2004. Please read the proxy statement. The Board recommends that you vote FOR the proposal. Please vote immediately by mail, telephone, or internet, even if you plan to attend the meeting. Just follow the instructions on this proxy card. VOTE VIA THE INTERNET: VOTE VIA THE TELEPHONE: CONTROL NUMBER: 999 9999 999 The undersigned hereby appoints Leslie L. Ogg, ________ and _________ or anyone of them, as proxies, with full power of substitution, to represent and to vote all of the shares of the undersigned at the special meeting to be held on ______, ____, and any adjournment therof. Note: Please sign this proxy exactly as your name or names appears hereon. Joint owners should each sign personally. Trustees and other fiduciaries should indicate the capacity in which they sign, and where more than one name appears, a majority must sign. If a corporation, this signature should be that of an authorized officer who should state his or her title. ------------------------------------------------------------ Signature ------------------------------------------------------------ Signature of joint owner, if any ------------------------------------------------------------ Date Please vote by filling in the appropriate box below. If you do not mark the proposal, your Proxy will be voted FOR the proposal. PLEASE MARK VOTES AS IN THIS EXAMPLE (shade box) [X]
FOR AGAINST ABSTAIN 1. To approve an Agreement and Plan of Reorganization between the Fund and AXP Large Cap Equity Fund. [ ] [ ] [ ]
EVERY SHAREHOLDER'S VOTE IS IMPORTANT! PLEASE SIGN, DATE AND RETURN YOUR PROXY CARD TODAY! Statement of Additional Information ________, 2004 AXP(R) Growth Series, Inc. AXP Large Cap Equity Fund This Statement of Additional Information ("SAI") consists of this cover page and incorporates by reference the following described documents, each of which has been previously filed and accompanies this Statement of Additional Information: 1. AXP Large Cap Equity Fund's most recent SAI, dated Sept. 29, 2003. 2. AXP Large Cap Equity Fund's most recent annual report, for the period ended July 31, 2003. 3. AXP Blue Chip Advantage Fund's most recent SAI, dated April 1, 2003, as supplemented. 4. AXP Research Opportunities Fund's most recent SAI, dated Sept. 29, 2003. 5. AXP Blue Chip Advantage Fund's most recent annual report, for the period ended Jan. 31, 2003. 6. AXP Blue Chip Advantage Fund's most recent semiannual report, for the period ended July 31, 2003. 7. AXP Research Opportunities Fund's most recent annual report, for the period ended July 31, 2003. This SAI is not a prospectus. It should be read in conjunction with the proxy statement/prospectus, dated the same date as this SAI, which may be obtained by calling (866) 270-3133 or writing American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474. AXP Large Cap Equity Fund AXP Blue Chip Advantage Fund AXP Research Opportunities Fund Introduction to Proposed Fund Merger July 31, 2003 The accompanying unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the three funds at and for the 12-month period ending July 31, 2003. These statements have been derived from financial statements prepared for AXP Large Cap Equity Fund, AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund. (AXP Large Cap Equity and AXP Research Opportunities Fund are a series of AXP Growth Series, Inc. and AXP Blue Chip Advantage Fund is a series of AXP Market Advantage Series, Inc.) AXP Large Cap Equity invests primarily in equity securities of companies with a market capitalization greater than $5 billion at the time of purchase. AXP Blue Chip Advantage Fund invests, under normal market conditions, at least 80% of the Fund's net assets in blue chip stocks issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. AXP Research Opportunities Fund invests all of its assets in Aggressive Growth Portfolio, a series of Growth Trust, an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in equity securities of companies included in the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). Under the proposed Agreement and Plan of Reorganization, Class A shares of the AXP Blue Chip Advantage Fund and Class A shares of the AXP Research Opportunities Fund would be exchanged for Class A shares of the AXP Large Cap Equity Fund. Class B shares of the AXP Blue Chip Advantage Fund and Class B shares of the AXP Research Opportunities Fund would be exchanged for Class B shares of the AXP Large Cap Equity Fund. Class C shares of the AXP Blue Chip Advantage Fund and Class C shares of the AXP Research Opportunities Fund would be exchanged for Class C shares of the AXP Large Cap Equity Fund. Class Y shares of the AXP Blue Chip Advantage Fund and Class Y shares of the AXP Research Opportunities Fund would be exchanged for Class Y shares of the AXP Large Cap Equity Fund. The pro forma combining statements have been prepared based upon the various fee structures of the funds in existence as of July 31, 2003. - -------------------------------------------------------------------------------- 2 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund AXP Large Cap Equity Fund AXP Blue Chip Advantage Fund AXP Research Opportunities Pro forma combining
Statement of assets and liabilities AXP Blue Chip AXP Research AXP Large Cap Advantage Opportunities Pro forma Pro forma July 31, 2003 (Unaudited) Equity Fund Fund Fund Adjustments Combined Assets Investments in securities, at cost (Note 2) $115,901,359 $ 1,610,935,271 $ -- $ 240,281,966(a) $ 1,967,118,596 ------------ --------------- ------------- ------------- --------------- Investments in securities, at value (Note 2) $121,699,226 $ 1,591,302,646 $ -- $ 239,524,250(a) $ 1,952,526,122 Investment in Portfolio (Note 2) -- -- 240,807,347 (240,807,347)(a) -- Cash in bank on demand deposit 186,921 -- -- -- 186,921 Capital shares receivable 766,524 13,982 933 -- 781,439 Dividends and accrued interest receivable (Note 2) 120,039 1,873,309 -- 216,895(a) 2,210,243 Receivable for investment securities sold (Note 2) 1,026,697 43,875 -- 3,305,845(a) 4,376,417 ----------- ------------- ----------- --------- ------------- Total assets 123,799,407 1,593,233,812 240,808,280 2,239,643 1,960,081,142 ----------- ------------- ----------- --------- ------------- Liabilities Disbursements in excess of cash on demand deposit (Note 2) -- 259,515 -- 14,987(a) 274,502 Capital shares payable 12,526 96,623 31,155 -- 140,304 Payable for investment securities purchased (Note 2) 2,758,797 -- -- 2,166,022(a) 4,924,819 Payable upon return of securities loaned -- 11,483,400 -- -- 11,483,400 Accrued investment management services fee (Note 2) 1,976 20,799 -- 4,290(a) 27,065 Accrued distribution fee 1,590 21,409 3,530 -- 26,529 Accrued service fee -- 343 -- -- 343 Accrued transfer agency fee 772 8,713 1,852 -- 11,337 Accrued administrative services fee 165 1,210 395 -- 1,770 Other accrued expenses (Note 2) 101,537 143,317 68,280 (747,733)(a) (434,599) Options contracts written, at value (Note 2) -- -- -- 31,742(a) 31,742 ----------- ------------- ----------- --------- ------------- Total liabilities 2,877,363 12,035,329 105,212 1,469,308 16,487,212 ----------- ------------- ----------- --------- ------------- Net assets applicable to outstanding capital stock $120,922,044 $ 1,581,198,483 $ 240,703,068 $ 770,335 $ 1,943,593,930 ============ =============== ============= ============= =============== Represented by Capital stock -- $.01 par value (Note 3) $ 267,737 $ 2,301,816 $ 593,484 $ 1,141,856 $ 4,304,893 Additional paid-in capital (Note 3) 113,970,315 2,741,438,886 514,070,863 (1,141,856) 3,368,338,208 Undistributed net investment income (Note 2) -- 277,340 338,450 770,335 1,386,125 Accumulated net realized gain (loss) 886,125 (1,142,999,728) (273,542,013) -- (1,415,655,616) Unrealized appreciation (depreciation) on investments 5,797,867 (19,819,831) (757,716) -- (14,779,680) ----------- ------------- ----------- --------- ------------- Total -- representing net assets applicable to outstanding capital stock $120,922,044 $ 1,581,198,483 $ 240,703,068 $ 770,335 $ 1,943,593,930 ============ =============== ============= ============= =============== Net assets applicable to outstanding shares: Class A $ 83,257,409 $ 900,916,101 $ 149,101,302 $ 428,937 $ 1,133,703,749 Class B $ 35,551,265 $ 550,646,860 $ 91,325,311 $ 283,969 $ 677,807,405 Class C $ 2,052,118 $ 4,354,767 $ 275,194 $ 1,960 $ 6,684,039 Class Y $ 61,252 $ 125,280,755 $ 1,261 $ 55,469 $ 125,398,737 Shares outstanding (Note 3): Class A shares 18,374,049 129,936,973 35,889,959 -- 250,165,970 Class B shares 7,929,314 81,567,149 23,387,745 -- 151,226,674 Class C shares 456,827 646,903 70,413 -- 1,487,999 Class Y shares 13,477 18,030,537 300 -- 27,608,635 Net asset value per share of outstanding capital stock: Class A $ 4.53 $ 6.93 $ 4.15 $ -- $ 4.53 Class B $ 4.48 $ 6.75 $ 3.90 $ -- $ 4.48 Class C $ 4.49 $ 6.73 $ 3.91 $ -- $ 4.49 Class Y $ 4.54 $ 6.95 $ 4.20 $ -- $ 4.54 ------------ --------------- ------------- ------------- ---------------
See accompanying notes to pro forma financial statements. - -------------------------------------------------------------------------------- 3 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
AXP Large Cap Equity Fund AXP Blue Chip Advantage Fund AXP Research Opportunities Pro forma combining Statement of operations AXP Blue Chip AXP Research AXP Large Cap Advantage Opportunities Pro forma Pro forma Year ended July 31, 2003 (Unaudited) Equity Fund Fund Fund Adjustments Combined Investment income Income: Dividends $ 764,115 $ 28,736,204 $ 4,458,482 $ -- $ 33,958,801 Interest 68,385 598,202 100,196 -- 766,783 Fee income from securities lending -- -- 114 -- 114 ---------- ------------- ------------ ----------- ------------- Total income 832,500 29,334,406 4,558,792 -- 34,725,698 ---------- ------------- ------------ ----------- ------------- Expenses: Expenses allocated from Portfolio (Note 2) -- -- 1,543,302 (1,543,302)(a) -- Investment management services fee (Note 2) 342,000 7,313,747 -- 1,483,704(a) 9,139,451 Distribution fee Class A 94,937 2,250,917 392,605 -- 2,738,459 Class B 171,345 5,937,339 990,618 -- 7,099,302 Class C 9,241 41,342 2,630 -- 53,213 Transfer agency fee 129,382 4,022,018 796,870 -- 4,948,270 Incremental transfer agency fee Class A 8,905 236,297 55,639 -- 300,841 Class B 8,414 260,375 55,748 -- 324,537 Class C 617 2,421 146 -- 3,184 Service fee -- Class Y 29 137,127 50 -- 137,206 Administrative services fees and expenses 27,560 452,072 154,538 -- 634,170 Compensation of board members (Note 2) 4,966 24,322 8,150 (12,438)(a),(b) 25,000 Custodian fees (Note 2) 274,440 119,945 -- (44,385)(a),(c) 350,000 Printing and postage 1,370 593,727 179,445 -- 774,542 Registration fees 81,089 17,889 30,250 -- 129,228 Audit fees (Note 2) 17,000 26,500 7,000 (20,500)(a),(d) 30,000 Other -- 64,467 7,628 7,030(a) 79,125 ---------- ------------- ------------ ----------- ------------- Total expenses 1,171,295 21,500,505 4,224,619 (129,891) 26,766,528 Expenses waived/reimbursed by AEFC (Note 2) (333,483) -- -- (640,437)(e) (973,920) ---------- ------------- ------------ ----------- ------------- 837,812 21,500,505 4,224,619 (770,328) 25,792,608 Earnings credits on cash balances (Note 2) (4,492) (28,308) (4,277) (7)(a) (37,084) ---------- ------------- ------------ ----------- ------------- Total net expenses 833,320 21,472,197 4,220,342 (770,335) 25,755,524 ---------- ------------- ------------ ----------- ------------- Investment income (loss) -- net (820) 7,862,209 338,450 770,335 8,970,174 ---------- ------------- ------------ ----------- ------------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 1,719,341 (344,835,812) (54,095,224) -- (397,211,695) Futures contracts -- 9,104,164 -- -- 9,104,164 Options contracts written -- 687,543 14,286 -- 701,829 ---------- ------------- ------------ ----------- ------------- Net realized gain (loss) on investments 1,719,341 (335,044,105) (54,080,938) -- (387,405,702) Net change in unrealized appreciation (depreciation) on investments 7,080,694 422,211,953 65,030,053 -- 494,322,700 ---------- ------------- ------------ ----------- ------------- Net gain (loss) on investments 8,800,035 87,167,848 10,949,115 -- 106,916,998 ---------- ------------- ------------ ----------- ------------- Net increase (decrease) in net assets resulting from operations $8,799,215 $ 95,030,057 $ 11,287,565 $ 770,335 $ 115,887,172 ========== ============= ============ =========== =============
See accompanying notes to pro forma financial statements. - -------------------------------------------------------------------------------- 4 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund AXP Large Cap Equity Fund AXP Blue Chip Advantage Fund AXP Research Opportunities Fund Notes to Pro Forma Financial Statements (Unaudited as to July 31, 2003) 1. BASIS OF COMBINATION The unaudited pro forma combining statement of assets and liabilities and the statement of operations reflect the accounts of the three funds at and for the 12-month period ending July 31, 2003. These statements have been derived from financial statements prepared for the AXP Large Cap Equity Fund, AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund as of July 31, 2003. AXP Large Cap Equity Fund and AXP Research Opportunities Fund are a series of AXP Growth Series, Inc. and AXP Blue Chip Advantage Fund is a series of AXP Market Advantage Series, Inc. Each Fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The primary investments of each Fund are as follows: AXP Large Cap Equity Fund invests primarily in equity securities of companies with a market capitalization greater than $5 billion at the time of purchase. AXP Blue Chip Advantage Fund invests, under normal market conditions, at least 80% of the Fund's net assets in blue chip stocks issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. AXP Research Opportunities Fund invests all of its assets in Aggressive Growth Portfolio, a series of Growth Trust, an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in equity securities of companies that comprise the S&P 500 Index. The pro forma statements give effect to the proposed transfer of the assets and liabilities of AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund in exchange for Class A, B, C, or Y shares of AXP Large Cap Equity Fund under generally accepted accounting principles. The pro forma statements also reflect changes needed regarding the change in structure of AXP Research Opportunities Fund. Finally, the pro forma statements reflect estimates for the combined AXP Large Cap Equity Fund based on the increased asset level of the merger and associated economies of scale. The pro forma combining statements should be read in conjunction with the historical financial statements of the funds incorporated by reference in the Statement of Additional Information. The pro forma statement of operations give effect to the proposed transaction on the historical operations of the accounting survivor, AXP Large Cap Equity Fund, as if the transaction had occurred at the beginning of the year presented. 2. PRO FORMA ADJUSTMENTS (a) To reflect the adjustments needed regarding the change in structure of AXP Research Opportunites Fund from a feeder fund presentation into a reporting format comparable with the accounting survivor. (b) To adjust for the change in the compensation of board members due to the reorganization. (c) To reflect the reduction in custodian fees due to the reorganization. (d) To reflect the reduction in audit fees due to the reorganization. (e) To adjust the expense reimbursement to conform with the Buying Fund contractual arrangements and to include the impact of the .05% management fee waiver that AEFC agreed to put in place for one year following the merger. - -------------------------------------------------------------------------------- 5 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund 3. CAPITAL SHARES The pro forma net asset value per share assumes the issuance of additional Class A, Class B, Class C, and Class Y shares of AXP Large Cap Equity Fund if the reorganization were to have taken place on July 31, 2003. The pro forma number of Class A shares outstanding of 250,165,970 consists of 198,877,726 shares assumed to be issued to Class A shareholders of the AXP Blue Chip Advantage Fund, plus 32,914,195 shares assumed to be issued to Class A shareholders of the AXP Research Opportunities Fund, plus 18,374,049 Class A shares of the AXP Large Cap Equity Fund outstanding as of July 31, 2003. The pro forma number of Class B shares outstanding of 151,226,674 consists of 122,912,246 shares assumed to be issued to Class B shareholders of the AXP Blue Chip Advantage Fund, plus 20,385,114 shares assumed to be issued to Class B shareholders of the AXP Research Opportunities Fund, plus 7,929,314 Class B shares of the AXP Large Cap Equity Fund outstanding as of July 31, 2003. The pro forma number of Class C shares outstanding of 1,487,999 consists of 969,881 shares assumed to be issued to Class C shareholders of the AXP Blue Chip Advantage Fund, plus 61,291 shares assumed to be issued to Class C shareholders of the AXP Research Opportunities Fund, plus 456,827 Class C shares of the AXP Large Cap Equity Fund outstanding as of July 31, 2003. The pro forma number of Class Y shares outstanding of 27,608,635 consists of 27,594,880 shares assumed to be issued to Class Y shareholders of the AXP Blue Chip Advantage Fund, plus 278 shares assumed to be issued to Class Y shareholders of the AXP Research Opportunities Fund, plus 13,477 Class Y shares of the AXP Large Cap Equity Fund outstanding as of July 31, 2003. - -------------------------------------------------------------------------------- 6 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund Combined Investments in Securities AXP Large Cap Equity Fund July 31, 2003 (Unaudited) (Percentages represent value of investments compared to net assets)
Common stocks (97.6%) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Aerospace & defense (2.3%) Boeing 14,400 -- -- 14,400 $476,928 $-- $-- $476,928 General Dynamics -- 95,500 -- 95,500 -- 7,576,970 -- 7,576,970 Goodrich -- 202,600 -- 202,600 -- 4,659,800 -- 4,659,800 Lockheed Martin 12,625 38,500 50,100 101,225 660,793 2,015,090 2,622,234 5,298,117 Northrop Grumman 6,900 32,700 18,500 58,100 636,456 3,016,248 1,706,440 5,359,144 Precision Castparts -- 173,700 -- 173,700 -- 5,601,825 -- 5,601,825 Rockwell Automation 18,282 -- -- 18,282 472,407 -- -- 472,407 Rockwell Collins -- 277,400 -- 277,400 -- 7,220,722 -- 7,220,722 United Technologies 17,468 70,500 14,700 102,668 1,314,117 5,303,715 1,105,881 7,723,713 Total 3,560,701 35,394,370 5,434,555 44,389,626 Airlines (0.1%) Southwest Airlines -- 132,700 -- 132,700 -- 2,177,607 -- 2,177,607 Automotive & related (0.8%) Delphi -- 567,900 -- 567,900 -- 4,770,360 -- 4,770,360 Johnson Controls -- -- 14,500 14,500 -- -- 1,400,845 1,400,845 PACCAR -- 106,700 -- 106,700 -- 8,237,240 -- 8,237,240 Snap-On -- 49,400 -- 49,400 -- 1,399,008 -- 1,399,008 Total -- 14,406,608 1,400,845 15,807,453 Banks and savings & loans (7.8%) AmSouth Bancorporation -- 133,000 -- 133,000 -- 2,882,110 -- 2,882,110 Bank of America -- 354,100 71,800 425,900 -- 29,238,037 5,928,526 35,166,563 Charter One Financial -- 224,900 -- 224,900 -- 7,313,748 -- 7,313,748 FleetBoston Financial -- 234,600 -- 234,600 -- 7,293,714 -- 7,293,714 Golden West Financial -- 98,900 -- 98,900 -- 8,169,140 -- 8,169,140 GreenPoint Financial -- 181,400 -- 181,400 -- 9,117,164 -- 9,117,164 KeyCorp -- 114,600 47,300 161,900 -- 3,083,886 1,272,843 4,356,729 Natl City -- 223,100 -- 223,100 -- 7,351,145 -- 7,351,145 Regions Financial -- 109,000 -- 109,000 -- 3,934,900 -- 3,934,900 TCF Financial -- -- 36,100 36,100 -- -- 1,647,965 1,647,965 U.S. Bancorp 25,800 491,100 174,300 691,200 632,616 12,041,772 4,273,836 16,948,224 Wachovia -- 217,500 -- 217,500 -- 9,502,575 -- 9,502,575 Washington Mutual -- 389,100 -- 389,100 -- 15,361,668 -- 15,361,668 Wells Fargo -- 315,700 112,500 428,200 15,952,321 5,684,625 21,636,946 Total 632,616 131,242,180 18,807,795 150,682,591 Beverages & tobacco (3.3%) Altria Group 80,300 354,300 106,900 541,500 3,212,803 14,175,543 4,277,069 21,665,415 Anheuser-Busch 11,700 -- -- 11,700 606,294 -- -- 606,294 Coca-Cola -- 393,000 -- 393,000 -- 17,673,210 -- 17,673,210 Constellation Brands -- 92,100 -- 92,100(b) -- 2,657,085 -- 2,657,085 Fortune Brands -- 25,600 -- 25,600 -- 1,423,616 -- 1,423,616 PepsiCo 65,824 263,500 85,800 415,124 3,032,512 12,139,445 3,952,806 19,124,763 Total 6,851,609 48,068,899 8,229,875 63,150,383 Broker dealers (1.7%) J.P. Morgan Chase 16,700 410,600 -- 427,300 585,335 14,391,530 -- 14,976,865 Merrill Lynch & Co 16,201 -- 36,100 52,301 880,848 -- 1,962,757 2,843,605 Morgan Stanley 15,500 266,500 25,900 307,900 735,320 12,642,760 1,228,696 14,606,776 Total 2,201,503 27,034,290 3,191,453 32,427,246
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 7 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Building materials & construction (0.3%) American Standard 12,100 65,400 -- 77,500(b) $924,440 $4,996,560 $-- $5,921,000 Cable (0.8%) Comcast Cl A 33,484 395,500 29,600 458,584(b) 1,015,234 11,991,560 897,472 13,904,266 Comcast Special Cl A 33,925 -- -- 33,925(b) 994,003 -- -- 994,003 EchoStar Communications Cl A 26,900 -- -- 26,900(b) 975,663 -- -- 975,663 Total 2,984,900 11,991,560 897,472 15,873,932 Cellular telecommunications (0.5%) AT&T Wireless Services -- 463,900 -- 463,900(b) -- 3,957,067 -- 3,957,067 Nextel Communications Cl A -- 175,900 -- 175,900(b) -- 3,211,934 -- 3,211,934 Vodafone Group ADR -- -- 89,600 89,600(c) -- -- 1,700,608 1,700,608 Total -- 7,169,001 1,700,608 8,869,609 Chemicals (0.9%) Dow Chemical 42,545 198,300 -- 240,845 1,501,839 6,999,990 -- 8,501,829 Lyondell Chemical 48,392 -- -- 48,392 724,428 -- -- 724,428 Praxair -- 65,600 -- 65,600 -- 4,241,696 -- 4,241,696 Sigma-Aldrich -- 80,600 -- 80,600 -- 4,591,782 -- 4,591,782 Total 2,226,267 15,833,468 -- 18,059,735 Computer hardware (4.7%) Cisco Systems 82,500 1,205,300 -- 1,287,800(b) 1,610,400 23,527,456 -- 25,137,856 Dell 56,700 509,500 88,500 654,700(b) 1,909,656 17,159,960 2,980,680 22,050,296 EMC -- 880,100 57,000 937,100(b) -- 9,364,264 606,480 9,970,744 Hewlett-Packard -- 522,900 151,400 674,300 -- 11,069,793 3,205,138 14,274,931 Lexmark Intl Cl A -- 25,400 -- 25,400(b) -- 1,629,918 -- 1,629,918 SanDisk -- 145,400 -- 145,400(b) -- 8,242,726 -- 8,242,726 Storage Technology -- 241,800 -- 241,800(b) -- 6,441,552 -- 6,441,552 Sun Microsystems 362,333 547,700 -- 910,033(b) 1,355,125 2,048,398 -- 3,403,523 Total 4,875,181 79,484,067 6,792,298 91,151,546 Computer software & services (10.6%) Adobe Systems -- -- 37,500 37,500 -- -- 1,225,500 1,225,500 Affiliated Computer Services Cl A 12,700 73,600 -- 86,300(b) 629,285 3,646,880 -- 4,276,165 Autodesk -- -- 110,100 110,100 -- -- 1,647,096 1,647,096 BMC Software -- 270,000 -- 270,000(b) -- 3,807,000 -- 3,807,000 Citrix Systems -- 472,600 -- 472,600(b) -- 8,577,690 -- 8,577,690 Computer Sciences -- 90,200 -- 90,200(b) -- 3,659,414 -- 3,659,414 Comverse Technology -- 203,500 -- 203,500(b) -- 3,001,625 -- 3,001,625 Convergys -- 118,900 -- 118,900(b) -- 2,005,843 -- 2,005,843 Electronic Arts -- 123,000 33,600 156,600(b) -- 10,332,000 2,822,400 13,154,400 First Data 42,965 149,100 -- 192,065 1,622,358 5,630,016 -- 7,252,374 Fiserv -- 293,000 38,200 331,200(b) -- 11,438,720 1,491,328 12,930,048 Intl Business Machines -- 373,500 43,700 417,200 -- 30,346,875 3,550,625 33,897,500 Macromedia -- 192,500 -- 192,500(b) -- 3,950,100 -- 3,950,100 Microsoft 163,500 1,889,200 405,000 2,457,700 4,316,400 49,874,880 10,692,000 64,883,280 Oracle -- 1,631,500 -- 1,631,500(b) -- 19,578,000 -- 19,578,000 Siebel Systems -- 251,800 -- 251,800(b) -- 2,361,884 -- 2,361,884 SunGard Data Systems -- 141,200 47,900 189,100(b) -- 3,705,088 1,256,896 4,961,984 Symantec -- 161,800 -- 161,800(b) -- 7,567,386 -- 7,567,386 VeriSign -- 92,900 -- 92,900(b) -- 1,240,215 -- 1,240,215 VERITAS Software -- 221,800 -- 221,800(b) -- 6,831,440 -- 6,831,440 Total 6,568,043 177,555,056 22,685,845 206,808,944
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 8 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Electronics (2.5%) Altera -- 173,300 -- 173,300(b) $-- $3,334,292 $-- $3,334,292 Analog Devices 10,221 -- -- 10,221(b) 387,887 -- -- 387,887 Applied Materials -- -- 46,500 46,500(b) -- -- 906,750 906,750 Avnet -- 147,900 -- 147,900(b) -- 2,129,760 -- 2,129,760 Flextronics Intl -- -- 113,200 113,200(b,c) -- -- 1,245,200 1,245,200 Intel 51,200 1,135,100 200,300 1,386,600 1,277,440 28,320,745 4,997,485 34,595,670 Jabil Circuit -- -- 53,500 53,500(b) -- -- 1,233,175 1,233,175 KLA-Tencor -- -- 22,900 22,900(b) -- -- 1,182,785 1,182,785 Linear Technology -- -- 24,400 24,400 -- -- 899,872 899,872 Maxim Integrated Products -- -- 17,500 17,500 -- -- 683,900 683,900 Novellus Systems -- -- 41,700 41,700(b) -- -- 1,493,277 1,493,277 Taiwan Semiconductor Mfg ADR 45,368 -- -- 45,368(b,c) 453,680 -- -- 453,680 Total 2,119,007 33,784,797 12,642,444 48,546,248 Energy (5.1%) Anadarko Petroleum -- 137,700 -- 137,700 -- 6,031,260 -- 6,031,260 Apache -- 68,900 23,325 92,225 -- 4,269,044 1,445,217 5,714,261 BP ADR -- -- 102,500 102,500(c) -- -- 4,258,875 4,258,875 Burlington Resources -- 108,800 -- 108,800 -- 5,023,296 -- 5,023,296 ChevronTexaco 8,400 201,100 41,900 251,400 605,724 14,501,321 3,021,409 18,128,454 ConocoPhillips 64,873 116,000 -- 180,873 3,395,453 6,071,440 -- 9,466,893 Exxon Mobil 78,946 1,113,400 -- 1,192,346 2,808,899 39,614,772 -- 42,423,671 Kerr-McGee -- 70,700 -- 70,700 -- 3,110,800 -- 3,110,800 Newfield Exploration -- 12,100 -- 12,100(b) -- 437,173 -- 437,173 Pogo Producing -- 82,500 -- 82,500 -- 3,489,750 -- 3,489,750 Sunoco -- 20,000 -- 20,000 -- 740,000 -- 740,000 Total 6,810,076 83,288,856 8,725,501 98,824,433 Energy equipment & services (0.4%) Nabors Inds -- -- 37,400 37,400(b,c) -- -- 1,338,920 1,338,920 Schlumberger -- -- 28,700 28,700 -- -- 1,293,509 1,293,509 Transocean 76,696 126,700 -- 203,396(b) 1,500,941 2,479,519 -- 3,980,460 Weatherford Intl -- -- 33,800 33,800(b) -- -- 1,225,926 1,225,926 Total 1,500,941 2,479,519 3,858,355 7,838,815 Finance companies (2.8%) Citigroup 106,408 934,700 185,100 1,226,208 4,767,078 41,874,560 8,292,480 54,934,118 Financial services (2.8%) Capital One Financial 25,800 -- 41,000 66,800 1,236,078 -- 1,964,310 3,200,388 Countrywide Financial -- 147,500 -- 147,500 -- 9,854,475 -- 9,854,475 Fannie Mae 41,197 224,400 33,800 299,397 2,638,256 14,370,576 2,164,552 19,173,384 Freddie Mac -- 210,300 -- 210,300 -- 10,273,155 -- 10,273,155 MBNA 33,827 106,800 115,850 256,477 754,004 2,380,572 2,582,297 5,716,873 Radian Group -- 127,900 -- 127,900 -- 5,986,999 -- 5,986,999 Total 4,628,338 42,865,777 6,711,159 54,205,274 Food (1.2%) ConAgra Foods -- 439,800 -- 439,800 -- 9,908,694 -- 9,908,694 Dean Foods -- 27,450 39,900 67,350(b) -- 821,579 1,194,207 2,015,786 Heinz (HJ) -- 90,200 -- 90,200 -- 3,072,212 -- 3,072,212 Kellogg -- -- 53,200 53,200 -- -- 1,826,356 1,826,356 Sara Lee -- 298,400 -- 298,400 -- 5,577,096 -- 5,577,096 Total -- 19,379,581 3,020,563 22,400,144
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 9 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Health care products (12.2%) Abbott Laboratories -- 267,800 -- 267,800 $-- $10,511,150 $-- $10,511,150 Amgen 18,000 270,900 62,100 351,000(b) 1,252,440 18,849,222 4,320,918 24,422,580 Bard (CR) -- 107,600 -- 107,600 -- 7,377,056 -- 7,377,056 Baxter Intl -- -- 71,900 71,900 -- -- 1,985,159 1,985,159 Bausch & Lomb -- 75,100 -- 75,100 -- 3,174,477 -- 3,174,477 Beckman Coulter -- 71,800 -- 71,800 -- 3,183,612 -- 3,183,612 Becton, Dickinson & Co -- 128,300 -- 128,300 -- 4,699,629 -- 4,699,629 Biogen -- 27,700 -- 27,700(b) -- 1,064,234 -- 1,064,234 Boston Scientific -- 148,600 35,700 184,300(b) -- 9,395,978 2,257,311 11,653,289 Chiron -- 34,100 -- 34,100(b) -- 1,554,960 -- 1,554,960 Genzyme - General Division -- 38,700 -- 38,700(b) -- 1,952,028 -- 1,952,028 Guidant -- 254,800 -- 254,800 -- 12,031,656 -- 12,031,656 Johnson & Johnson -- 582,600 63,400 646,000 -- 30,172,854 3,283,486 33,456,340 Lilly (Eli) -- 109,600 -- 109,600 -- 7,216,064 -- 7,216,064 MedImmune -- 45,600 -- 45,600(b) -- 1,787,064 -- 1,787,064 Medtronic 44,400 -- 46,500 90,900 2,286,600 -- 2,394,750 4,681,350 Merck & Co -- 455,700 -- 455,700 -- 25,191,096 -- 25,191,096 Pfizer 242,900 1,368,000 220,000 1,830,900 8,103,145 45,636,479 7,339,199 61,078,823 Schering-Plough 34,900 -- -- 34,900 592,602 -- -- 592,602 St. Jude Medical -- 171,100 31,500 202,600(b) -- 9,179,515 1,689,975 10,869,490 Wyeth 93,050 79,500 -- 172,550 4,241,219 3,623,610 -- 7,864,829 Total 16,476,006 196,600,684 23,270,798 236,347,488 Health care services (4.8%) Aetna -- 178,900 29,500 208,400 -- 11,023,818 1,817,790 12,841,608 AmerisourceBergen 66,155 -- -- 66,155 4,173,720 -- -- 4,173,720 Anthem -- 139,900 23,000 162,900(b) -- 10,563,849 1,736,730 12,300,579 Cardinal Health 56,500 154,800 28,500 239,800 3,093,375 8,475,300 1,560,375 13,129,050 Coventry Health Care -- 208,200 -- 208,200(b) -- 11,215,734 -- 11,215,734 Fisher Scientific Intl -- 98,600 -- 98,600(b) -- 3,727,080 -- 3,727,080 Humana -- 199,400 -- 199,400(b) -- 3,493,488 -- 3,493,488 McKesson 23,766 -- -- 23,766 766,691 -- -- 766,691 Oxford Health Plans -- 239,800 -- 239,800(b) -- 10,239,460 -- 10,239,460 Patterson Dental -- -- 27,100 27,100(b) -- -- 1,449,850 1,449,850 Select Medical 2,800 -- -- 2,800(b) 78,680 -- -- 78,680 UnitedHealth Group -- -- 45,800 45,800 -- -- 2,385,722 2,385,722 Universal Health Services Cl B -- 135,100 -- 135,100(b) -- 6,923,875 -- 6,923,875 WellPoint Health Networks -- 127,800 8,600 136,400(b) -- 10,690,470 719,390 11,409,860 Total 8,112,466 76,353,074 9,669,857 94,135,397 Home building (0.1%) KB HOME -- 47,800 -- 47,800 -- 2,705,958 -- 2,705,958 Household products (2.8%) Avon Products 8,814 -- -- 8,814 549,905 -- -- 549,905 Colgate-Palmolive -- -- 22,100 22,100 -- -- 1,206,660 1,206,660 Energizer Holdings -- 286,800 -- 286,800(b) -- 9,822,900 -- 9,822,900 Gillette -- 417,200 -- 417,200 -- 12,833,072 -- 12,833,072 Kimberly-Clark 23,800 -- 46,900 70,700 1,151,920 -- 2,269,960 3,421,880 Procter & Gamble 36,458 221,500 35,300 293,258 3,203,565 19,463,205 3,101,811 25,768,581 Total 4,905,390 42,119,177 6,578,431 53,602,998 Industrial transportation (0.9%) Burlington Northern Santa Fe -- 279,400 -- 279,400 -- 7,700,264 -- 7,700,264 Expeditors Intl of Washington 12,100 -- -- 12,100 410,311 -- -- 410,311 Union Pacific -- -- 9,900 9,900 -- -- 603,306 603,306 United Parcel Service Cl B 9,400 141,600 -- 151,000 592,952 8,932,128 -- 9,525,080 Total 1,003,263 16,632,392 603,306 18,238,961
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Insurance (4.6%) ACE 7,447 -- -- 7,447(c) $245,677 $-- $-- $245,677 AFLAC -- -- 79,100 79,100 -- -- 2,537,528 2,537,528 Aon -- -- 47,900 47,900 -- -- 1,151,995 1,151,995 Allstate -- 161,800 -- 161,800 -- 6,153,254 -- 6,153,254 American Intl Group 29,294 446,800 -- 476,094 1,880,674 28,684,560 -- 30,565,234 Chubb 19,100 -- -- 19,100 1,237,680 -- -- 1,237,680 Fidelity Natl Financial -- 296,000 -- 296,000 -- 8,492,240 -- 8,492,240 John Hancock Financial Services -- 120,200 -- 120,200 -- 3,924,530 -- 3,924,530 Lincoln Natl -- 68,600 34,100 102,700 -- 2,561,524 1,273,294 3,834,818 Marsh & McLennan -- 92,000 14,200 106,200 -- 4,565,040 704,604 5,269,644 MetLife -- 115,500 -- 115,500 -- 3,201,660 -- 3,201,660 Montpelier Re Holdings -- -- 40,600 40,600(b,c) -- -- 1,306,914 1,306,914 Principal Financial Group -- 67,300 36,500 103,800 -- 2,193,980 1,189,900 3,383,880 Prudential Financial -- 164,200 -- 164,200 -- 5,842,236 -- 5,842,236 St. Paul Companies -- -- 38,300 38,300 -- -- 1,347,011 1,347,011 Travelers Property Casualty Cl B -- 194,000 -- 194,000 -- 3,131,160 -- 3,131,160 UnumProvident -- 365,600 108,400 474,000 -- 4,964,848 1,472,072 6,436,920 XL Capital Cl A -- -- 18,700 18,700(c) -- -- 1,486,650 1,486,650 Total 3,364,031 73,715,032 12,469,968 89,549,031 Leisure time & entertainment (1.7%) AOL Time Warner -- 442,400 -- 442,400(b) -- 6,826,232 -- 6,826,232 Mattel 57,900 412,800 -- 470,700 1,124,997 8,020,704 -- 9,145,701 Viacom Cl B 63,100 239,900 93,100 396,100(b) 2,746,112 10,440,448 4,051,712 17,238,272 Total 3,871,109 25,287,384 4,051,712 33,210,205 Machinery (0.7%) Caterpillar 18,656 -- 43,700 62,356 1,258,720 -- 2,948,439 4,207,159 Illinois Tool Works 9,600 -- 27,800 37,400 668,640 -- 1,936,270 2,604,910 Ingersoll-Rand Cl A -- 110,800 -- 110,800(c) -- 6,009,792 -- 6,009,792 SPX 2,500 -- -- 2,500(b) 117,725 -- -- 117,725 Total 2,045,085 6,009,792 4,884,709 12,939,586 Media (2.1%) Amazon.com -- 77,900 -- 77,900(b) -- 3,249,988 -- 3,249,988 Cendant 189,135 -- 114,900 304,035(b) 3,394,973 -- 2,062,455 5,457,428 Clear Channel Communications -- -- 58,100 58,100(b) -- -- 2,379,195 2,379,195 Disney (Walt) 78,300 -- -- 78,300 1,716,336 -- -- 1,716,336 eBay -- -- 9,200 9,200(b) -- -- 986,240 986,240 Fox Entertainment Group Cl A -- 104,500 -- 104,500(b) -- 3,163,215 -- 3,163,215 Interpublic Group of Companies -- 213,900 -- 213,900 -- 2,951,820 -- 2,951,820 Knight-Ridder -- -- 36,000 36,000 -- -- 2,470,680 2,470,680 McGraw-Hill Companies -- 179,600 -- 179,600 -- 10,916,088 -- 10,916,088 Scripps (EW) Cl A 4,700 -- -- 4,700 389,912 -- -- 389,912 Tribune 12,500 -- -- 12,500 590,250 -- -- 590,250 Univision Communications Cl A -- -- 39,900 39,900(b) -- -- 1,244,880 1,244,880 Yahoo! -- 176,000 -- 176,000(b) -- 5,478,880 -- 5,478,880 Total 6,091,471 25,759,991 9,143,450 40,994,912 Metals (0.2%) Alcoa -- -- 92,700 92,700 -- -- 2,574,279 2,574,279 Freeport McMoRan Cooper & Gold Cl B 37,341 -- -- 37,341 1,000,365 -- -- 1,000,365 Phelps Dodge -- -- 14,300 14,300(b) -- -- 603,317 603,317 Total 1,000,365 -- 3,177,596 4,177,961
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Multi-industry (4.6%) 3M -- 75,000 20,800 95,800 $-- $10,515,000 $2,916,160 $13,431,160 Apollo Group Cl A -- 54,300 -- 54,300(b) -- 3,516,468 -- 3,516,468 Cooper Inds Cl A -- 143,300 -- 143,300 -- 6,352,489 -- 6,352,489 Danaher -- -- 19,700 19,700 -- -- 1,422,340 1,422,340 Emerson Electric -- 85,100 -- 85,100 -- 4,569,870 -- 4,569,870 General Electric 137,950 1,442,500 316,000 1,896,450 3,923,298 41,024,700 8,987,040 53,935,038 Grainger (WW) 6,289 -- -- 6,289 309,419 -- -- 309,419 ITT Inds 2,400 -- -- 2,400 160,080 -- -- 160,080 Pentair -- 117,200 -- 117,200 -- 4,729,020 -- 4,729,020 Tyco Intl 17,400 -- 75,500 92,900(c) 323,640 -- 1,404,300 1,727,940 Total 4,716,437 70,707,547 14,729,840 90,153,824 Paper & packaging (0.6%) Avery Dennison 24,100 -- -- 24,100 1,300,436 -- -- 1,300,436 Intl Paper -- -- 22,000 22,000 -- -- 860,640 860,640 Pactiv -- 105,600 -- 105,600(b) -- 2,085,600 -- 2,085,600 Rayonier -- 48,450 -- 48,450 -- 1,687,514 -- 1,687,514 Sealed Air -- 122,600 -- 122,600(b) -- 5,851,698 -- 5,851,698 Total 1,300,436 9,624,812 860,640 11,785,888 Precious metals (0.1%) Newmont Mining -- 68,800 -- 68,800 -- 2,483,680 -- 2,483,680 Real estate investment trust (0.2%) Equity Office Properties Trust -- 70,500 -- 70,500 -- 1,955,670 -- 1,955,670 Equity Residential -- 46,400 -- 46,400 -- 1,294,560 -- 1,294,560 Simon Property Group -- 31,600 -- 31,600 -- 1,338,260 -- 1,338,260 Total -- 4,588,490 -- 4,588,490 Restaurants (0.3%) Darden Restaurants -- -- 77,700 77,700 -- -- 1,453,767 1,453,767 McDonald's 28,100 -- -- 28,100 646,581 -- -- 646,581 Starbucks -- 127,100 38,600 165,700(b) -- 3,473,643 1,054,938 4,528,581 Total 646,581 3,473,643 2,508,705 6,628,929 Retail -- drugstores (0.2%) CVS -- 138,100 -- 138,100 -- 4,141,619 -- 4,141,619 Retail -- general (5.8%) Abercrombie & Fitch -- 75,700 -- 75,700(b) -- 2,429,213 -- 2,429,213 AutoZone -- 63,500 -- 63,500(b) -- 5,287,010 -- 5,287,010 Best Buy 17,700 -- 39,950 57,650(b) 772,605 -- 1,743,818 2,516,423 Dollar General 32,450 -- -- 32,450 597,080 -- -- 597,080 Family Dollar Store -- -- 17,300 17,300 -- -- 648,923 648,923 Gap -- 257,800 -- 257,800 -- 4,637,822 -- 4,637,822 Home Depot 56,116 324,000 -- 380,116 1,750,819 10,108,800 -- 11,859,619 Limited Brands -- 237,300 -- 237,300 -- 3,965,283 -- 3,965,283 Lowe's Companies -- 205,200 65,800 271,000 -- 9,759,312 3,129,448 12,888,760 Penney (JC) -- 148,400 -- 148,400 -- 2,757,272 -- 2,757,272 Staples -- 452,800 -- 452,800(b) -- 9,119,392 -- 9,119,392 Target -- -- 50,900 50,900 -- -- 1,950,488 1,950,488 TJX Companies -- 193,500 -- 193,500 -- 3,763,575 -- 3,763,575 Wal-Mart Stores 33,400 756,100 123,800 913,300 1,867,394 42,273,551 6,921,658 51,062,603 Total 4,987,898 94,101,230 14,394,335 113,483,463 Retail -- grocery (0.7%) Kroger 37,700 578,700 -- 616,400(b) 639,015 9,808,965 -- 10,447,980 SUPERVALU -- -- 65,800 65,800 -- -- 1,549,590 1,549,590 Winn-Dixie Stores -- 148,900 -- 148,900 -- 1,706,394 -- 1,706,394 Total 639,015 11,515,359 1,549,590 13,703,964
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Telecom equipment & services (0.3%) Corning -- 206,700 140,500 347,200(b) $-- $1,682,538 $1,143,670 $2,826,208 JDS Uniphase -- 244,000 -- 244,000(b) -- 734,440 -- 734,440 Lucent Technologies -- 710,700 -- 710,700(b) -- 1,250,832 -- 1,250,832 Nokia ADR -- -- 104,600 104,600(c) -- -- 1,600,380 1,600,380 Total -- 3,667,810 2,744,050 6,411,860 Textiles & apparel (0.7%) Jones Apparel Group -- 270,400 -- 270,400(b) -- 7,828,080 -- 7,828,080 Liz Claiborne -- 146,400 -- 146,400 -- 5,040,552 -- 5,040,552 Total -- 12,868,632 -- 12,868,632 Utilities -- electric (2.2%) AES -- 93,100 -- 93,100(b) -- 585,599 -- 585,599 Ameren -- 32,800 -- 32,800 -- 1,369,728 -- 1,369,728 American Electric Power -- 75,600 -- 75,600 -- 2,121,336 -- 2,121,336 Calpine -- 64,600 -- 64,600(b) -- 368,866 -- 368,866 CenterPoint Energy -- 52,100 -- 52,100 -- 420,447 -- 420,447 Cinergy -- 35,500 -- 35,500 -- 1,207,710 -- 1,207,710 Consolidated Edison -- 42,400 -- 42,400 -- 1,683,704 -- 1,683,704 Dominion Resources -- 56,500 44,400 100,900 -- 3,395,650 2,668,440 6,064,090 DTE Energy -- 34,500 -- 34,500 -- 1,231,995 -- 1,231,995 Duke Energy -- 166,500 -- 166,500 -- 2,922,075 -- 2,922,075 Entergy -- 42,900 -- 42,900 -- 2,209,779 -- 2,209,779 Exelon -- 59,500 35,100 94,600 -- 3,419,465 2,017,197 5,436,662 FirstEnergy 8,700 57,900 -- 66,600 300,063 1,996,971 -- 2,297,034 FPL Group -- 35,100 -- 35,100 -- 2,164,617 -- 2,164,617 Mirant -- 69,300 -- 69,300(b) -- 14,207 -- 14,207 PG&E -- 84,200 -- 84,200(b) -- 1,806,090 -- 1,806,090 PPL -- 34,300 -- 34,300 -- 1,357,937 -- 1,357,937 Progress Energy -- 46,100 -- 46,100 -- 1,878,114 -- 1,878,114 Public Service Enterprise Group -- 44,100 28,200 72,300 -- 1,797,075 1,149,150 2,946,225 Southern Co -- 130,300 -- 130,300 -- 3,705,732 -- 3,705,732 TXU -- 66,800 -- 66,800 -- 1,347,356 -- 1,347,356 Total 300,063 37,004,453 5,834,787 43,139,303 Utilities -- natural gas (0.3%) Dynegy Cl A -- 63,600 -- 63,600(b) -- 201,612 -- 201,612 El Paso -- 102,600 -- 102,600 -- 722,304 -- 722,304 KeySpan -- 26,800 -- 26,800 -- 904,500 -- 904,500 Kinder Morgan -- 20,900 -- 20,900 -- 1,118,150 -- 1,118,150 Nicor -- 7,500 -- 7,500 -- 272,100 -- 272,100 NiSource -- 42,600 -- 42,600 -- 822,180 -- 822,180 Peoples Energy -- 6,100 -- 6,100 -- 250,039 -- 250,039 Sempra Energy -- 35,300 -- 35,300 -- 982,399 -- 982,399 Williams Companies -- 88,500 -- 88,500 -- 561,975 -- 561,975 Total -- 5,835,259 -- 5,835,259
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund
Common stocks (continued) Shares Shares Shares Shares Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Pro Forma Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Combined Fund Fund Portfolio Combined Utilities -- telephone (2.7%) ALLTEL -- 53,300 -- 53,300 $-- $2,493,907 $-- $2,493,907 AT&T -- 132,000 -- 132,000 -- 2,806,320 -- 2,806,320 BellSouth -- 318,700 31,900 350,600 -- 8,117,289 812,493 8,929,782 CenturyTel -- 24,400 -- 24,400 -- 836,676 -- 836,676 Citizens Communications -- 48,300 -- 48,300(b) -- 572,355 -- 572,355 Qwest Communications Intl -- 290,500 -- 290,500(b) -- 1,159,095 -- 1,159,095 SBC Communications -- 568,600 -- 568,600 -- 13,282,496 -- 13,282,496 Sprint (FON Group) -- 153,200 -- 153,200 -- 2,163,184 -- 2,163,184 Sprint (PCS Group) -- 171,000 -- 171,000(b) -- 1,051,650 -- 1,051,650 Verizon Communications -- 468,500 106,700 575,200 -- 16,331,910 3,719,562 20,051,472 Total -- 48,814,882 4,532,055 53,346,937 Total common stocks (Cost: $1,911,127,642) $110,110,316 $1,553,037,656 $233,395,077 $1,896,543,049 Short-term securities (2.9%) Annualized Amount Amount Amount yield on date payable payable payable of purchase at maturity at maturity at maturity Value(a) Value(a) Value(a) Value(a) AXP Large AXP Blue Chip Aggressive AXP Large AXP Blue Chip Aggressive Cap Equity Advantage Growth Cap Equity Advantage Growth Pro Forma Issuer Fund Fund Portfolio Fund Fund Portfolio Combined U.S. government agency (1.1%) Federal Natl Mtge Assn Disc Nts 09/17/03 0.98% $2,900,000 $-- $-- $2,896,506 $-- $-- $2,896,506 09/17/03 1.02 2,900,000 -- -- 2,896,056 -- -- 2,896,056 09/26/03 1.02 -- 10,000,000 -- -- 9,983,320 -- 9,983,320 09/30/03 1.04 -- -- 1,800,000 -- -- 1,796,940 1,796,940 10/01/03 0.97 -- -- 1,000,000 -- -- 998,255 998,255 10/15/03 1.00 -- -- 800,000 -- -- 798,283 798,283 10/22/03 1.00 1,500,000 -- 500,000 1,496,481 -- 498,827 1,995,308 10/29/03 1.06 -- -- 800,000 -- -- 797,963 797,963 Total 7,289,043 9,983,320 4,890,268 22,162,631 Commercial paper (1.8%) Abbey Natl North America LLC 08/01/03 1.11 4,300,000 10,300,000 -- 4,299,867 10,299,682 -- 14,599,549 Barton Capital 08/01/03 1.12 -- -- 1,300,000 -- -- 1,299,960 1,299,960 CAFCO 08/25/03 1.03 -- 5,000,000 -- -- 4,996,424 -- 4,996,424 Charta LLC 08/22/03 1.03 -- 5,000,000 -- -- 4,996,853 -- 4,996,853 HBOS Treasury Services 09/18/03 1.03 -- 8,000,000 -- -- 7,988,711 -- 7,988,711 Total 4,299,867 28,281,670 1,299,960 33,881,497 Total short-term securities (Cost: $56,046,062) $11,588,910 $38,264,990 $6,190,228 $56,044,128 Total investments in securities (prior to pro forma adjustments) (Cost: $1,967,173,704)(d) $121,699,226 $1,591,302,646 $239,585,305 $1,952,587,177 Pro forma adjustments(e) -- -- (61,055) (61,055) Total investments in securities (after pro forma adjustments) (Cost: $1,967,118,596)(e) $121,699,226 $1,591,302,646 $239,524,250 $1,952,526,122
See accompanying notes to combined investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund Notes to combined investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements in the annual report. (b) Non-income producing. (c) Foreign security values are stated in U.S. dollars. As of July 31, 2003, the value of foreign securities represented 1.1% of net assets. (d) At July 31, 2003, the approximate cost of securities for federal income tax purposes and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was:
AXP Large Cap AXP Blue Chip Aggressive Pro forma Pro forma Equity Fund Advantage Fund Growth Portfolio adjustments(e) Combined Cost of securities for federal income tax purposes: $116,841,000 $1,610,935,000 $241,649,000 $(55,000) $1,969,370,000 Unrealized appreciation $ 6,230,000 $ 148,377,000 $ 15,971,000 $ -- $ 170,578,000 Unrealized depreciation (1,372,000) (168,009,000) (18,035,000) (6,000) (187,422,000) ----------- ------------- ------------ ------- -------------- Net unrealized appreciation/depreciation $ 4,858,000 $ (19,632,000) $ (2,064,000) $ (6,000) $ (16,844,000) ------------ -------------- ------------ -------- --------------
(e) To reflect the portion of the Aggressive Growth Portfolio net assets not owned by AXP Research Opportunities Fund. (Cost decreased $55,108). - -------------------------------------------------------------------------------- 15 -- AXP Growth Series, Inc. -- AXP Large Cap Equity Fund S-6303-20 A (3/04) PART C. OTHER INFORMATION Item 15. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940. Item 16. Exhibits. (1)(a) Articles of Incorporation, as amended November 10, 1988, filed as Exhibit 1 to Post-Effective Amendment No. 38 to Registration Statement No. 2-38355, are incorporated by reference. (1)(b) Articles of Amendment to the Articles of Incorporation, dated June 16, 1999, filed electronically as Exhibit (a)(2) to Post-Effective Amendment No. 67 to Registration Statement No. 2-38355, are incorporated by reference. (1)(c) Articles of Amendment to the Articles of Incorporation, dated November 14, 2002, filed electronically as Exhibit (a)(3) to Post-Effective Amendment No. 74 to Registration Statement No. 2-38355, is incorporated by reference. (2) By-laws, as amended January 11, 2001 filed electronically as Exhibit (b) to Post-Effective Amendment No. 67 to Registration Statement No. 2-38355, are incorporated by reference. (3) Not applicable. (4) Form of Agreement and Plan of Reorganization is included herein as Exhibit A of this Registration Statement. (5) Not applicable. (6)(a) Investment Management Services Agreement dated January 10, 2002, between Registrant, on behalf of AXP Large Cap Equity Fund, and American Express Financial Corporation filed electronically as Exhibit (d)(4) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355 filed on or about March 21, 2002 is incorporated by reference. (6)(b) Amendment to Investment Management Services Agreement dated June 3, 2002, between Registrant, on behalf of AXP Large Cap Equity Fund, and American Express Financial Corporation filed electronically as Exhibit (d)(7) to Post-Effective Amendment No. 71 to Registration Statement No. 2-38355, is incorporated by reference. (6)(c) Investment Management Services Agreement, dated December 1, 2002, between Registrant on behalf of AXP Large Cap Equity Fund and AXP Large Cap Value Fund and American Express Financial Corporation, filed electronically as Exhibit (d)(11) to Post-Effective Amendment No. 74 to Registration Statement No. 2-38355, is incorporated by reference. (7) Distribution Agreement dated January 10, 2002, between Registrant, on behalf of AXP Large Cap Equity Fund, and American Express Financial Advisors, Inc. filed electronically as Exhibit (e)(2) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355 filed on or about March 21, 2002 is incorporated by reference. (8) All employees are eligible to participate in a profit sharing plan. Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year an amount up to 15 percent of their annual salaries, the maximum deductible amount permitted under Section 404(a) of the Internal Revenue Code. (9)(a) Custodian Agreement dated January 10, 2002, between Registrant, on behalf of AXP Large Cap Equity Fund, and American Express Trust Company filed electronically as Exhibit (g)(7) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355 filed on or about March 21, 2002 is incorporated by reference. (9)(b) Custodian Agreement dated May 13, 1999 between American Express Trust Company and The Bank of New York is incorporated by reference to Exhibit (g)(3) to IDS Precious Metals Fund, Inc. Post-Effective Amendment No. 33, File No. 2-93745 filed on or about May 24, 1999. (9)(c) Custodian Agreement First Amendment between American Express Trust Company and The Bank of New York, dated December 1, 2000, filed electronically as Exhibit (g)(4) to AXP Precious Metals Fund, Inc. Post-Effective Amendment No. 37 to Registration Statement No. 2-93745, filed on or about May 28, 2002 is incorporated by reference. (9)(d) Custodian Agreement Second Amendment between American Express Trust Company and The Bank of New York, dated June 7, 2001, filed electronically as Exhibit (g)(5) to AXP Precious Metals Fund, Inc. Post-Effective Amendment No. 37 to Registration Statement No. 2-93745, filed on or about May 28, 2002 is incorporated by reference. (9)(e) Custodian Agreement Amendment between American Express Trust Company and The Bank of New York, dated January 31, 2002, filed electronically as Exhibit (g)(6) to AXP Precious Metals Fund, Inc. Post-Effective Amendment No. 37 to Registration Statement No. 2-93745, filed on or about May 28, 2002 is incorporated by reference. (9)(f) Custodian Agreement Amendment between American Express Trust Company and The Bank of New York, dated April 29, 2003, filed electronically as Exhibit (g)(8) to AXP Partners Series, Inc. Post-Effective Amendment No. 7 to Registration Statement No. 333-57852, filed on or about May 22, 2003, is incorporated by reference. (10)(a) Plan and Agreement of Distribution For Class C Shares dated January 10, 2002, between Registrant on behalf of AXP Large Cap Equity Fund, and American Express Financial Advisors, Inc. filed electronically as Exhibit (m)(4) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355, filed on or about March 21, 2002 is incorporated by reference. (10)(b) Rule 18f-3 Plan dated March 9, 2000, as Exhibit (n) to AXP Bond Fund Inc.'s Post-Effective Amendment No. 51 to Registration Statement File No. 2-51586, filed on or about June 26, 2000, is incorporated by reference. (11) Opinion and Consent of Counsel as to the legality of the securities being registered is filed electronically herewith. (12) Tax opinion to be filed by amendment. (13)(a) Administrative Services Agreement dated January 10, 2002, between Registrant, on behalf of AXP Large Cap Equity Fund, and American Express Financial Corporation filed electronically as Exhibit (h)(12) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355 filed on or about March 21, 2002 is incorporated by reference. (13)(b) Amendment to Administrative Services Agreement dated June 3, 2002, between AXP Growth Series, Inc. on behalf of AXP Large Cap Equity Fund and American Express Financial Corporation filed electronically as Exhibit (h)(7) to Post-Effective Amendment No. 71 to Registration Statement No. 2-38355, is incorporated by reference. (13)(c) License Agreement, dated June 17, 1999, between the American Express Funds and American Express Company, filed electronically on or about September 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc.'s Post-Effective Amendment No. 98 to Registration Statement No. 2-11358, is incorporated by reference. (13)(d) Class Y Shareholder Service Agreement dated January 10, 2002, between Registrant, on behalf of AXP Large Cap Equity Fund, and American Express Financial Advisors Inc. filed electronically as Exhibit (h)(13) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355, filed on or about March 21, 2002 is incorporated by reference. (13)(e) Transfer Agency Agreement, dated May 1, 2003 between Registrant on behalf of AXP Growth Fund, AXP Large Cap Equity Fund, AXP Large Cap Value Fund, AXP Quantitative Large Cap Equity Fund and AXP Research Opportunities Fund and American Express Client Service Corporation, filed electronically as Exhibit (h)(20) to Post-Effective Amendment No. 75 to Registration Statement No. 2-38355, is incorporated by reference. (13)(f) Class I Shares Transfer Agency Agreement between the American Express Funds and American Express Client Service Corporation, dated Nov. 13, 2003, filed electronically on or about Nov. 25, 2003 as Exhibit (h)(9), is incorporated by reference to AXP Stock Series, Inc. Post-Effective Amendment No. 105 to Registration Statement No. 2-11358. (14) Independent Auditors' Consent to be filed by amendment. (15) Financial Statements: Not Applicable. (16)(a) Directors' Power of Attorney to sign Amendments to this Registration Statement, dated January 7, 2004, is filed electronically herewith as Exhibit (16)(a). (16)(b) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 9, 2002, filed electronically as Exhibit (q)(2) to Post-Effective Amendment No. 69 to Registration Statement No. 2-38355, filed on or about March 21, 2002 is incorporated by reference. (16)(c) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated Sept. 17, 2002, filed electronically as Exhibit (q)(3) to Post-Effective Amendment No. 72 to Registration Statement No. 2-38355, filed on or about Sept. 27, 2002 is incorporated by reference. (17)(a) Code of Ethics adopted under Rule 17j-1 for Registrant filed electronically on or about March 30, 2000 as Exhibit (p)(1) to AXP Market Advantage Series, Inc.'s Post-Effective Amendment No. 24 to Registration Statement No. 33-30770 is incorporated by reference. (17)(b) Code of Ethics adopted under Rule 17j-1 for Registrant's investment adviser and principal underwriter, dated January 2, 2004, filed electronically on or about January 12, 2004, as Exhibit (p)(2) to AXP Discovery Series, Inc.'s Post-Effective Amendment No. 47 to Registration Statement No. 2-72174 is incorporated by reference. (17)(c) Prospectus, dated Sept. 29, 2003, for AXP Large Cap Equity Fund is filed electronically herewith. (17)(d) Statement of Additional Information, dated Sept. 29, 2003, for AXP Large Cap Equity Fund is filed electronically herewith. (17)(e) Annual Report, dated Sept. 29, 2003 for the period ended July 31, 2003, for AXP Large Cap Equity Fund to be filed by amendment. (17)(f) Prospectus, dated April 1, 2003, for AXP Blue Chip Advantage Fund is filed electronically herewith. (17)(g) Statement of Additional Information, dated April 1, 2003, for AXP Blue Chip Advantage Fund is filed electronically herewith. (17)(h) Annual Report, dated April 1, 2003 for the period ended Jan. 31, 2003, for AXP Blue Chip Advantage Fund to be filed by amendment. (17)(i) Semiannual Report, dated July 31, 2003 for the same period ended, for AXP Blue Chip Advantage Fund to be filed by amendment. (17)(j) Prospectus, dated Sept. 29, 2003, for AXP Research Opportunities Fund is filed electronically herewith. (17)(k) Statement of Additional Information, dated Sept. 29, 2003, for AXP Research Opportunities Fund is filed electronically herewith. (17)(l) Annual Report, dated Sept. 29, 2003 for the period ended July 31, 2003, for AXP Research Opportunities Fund to be filed by amendment. (17)(m) Prospectus Supplement, dated Jan. 20, 2004, for AXP Large Cap Equity Fund, AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund is filed electronically herewith. (17)(n) Prospectus Supplement, dated Nov. 19, 2003, for AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund is filed electronically herewith. (17)(o) Prospectus Supplement, dated Sept. 4, 2003 for AXP Blue Chip Advantage Fund is filed electronically herewith. (17)(p) Prospectus and Statement of Additional Information Supplement, dated May 28, 2003 for AXP Blue Chip Advantage Fund is filed electronically herewith. (17)(q) Statement of Additional Information Supplement, dated May 1, 2003, for AXP Blue Chip Advantage Fund is filed electronically herewith. Item 17. Undertakings. (1) The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act, the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. (3) The Registrant undertakes to file by Post-Effective Amendment an Opinion of Counsel supporting the tax consequences of the proposed reorganization within a reasonable time after receipt of such opinion. SIGNATURES As required by the Securities Act of 1933, as amended, this Registration Statement has been signed on behalf of the Registrant, in the city of Minneapolis, and State of Minnesota on the 2nd day of February, 2004. AXP GROWTH SERIES, INC. By /s/ Paula R. Meyer ---------------------- Paula R. Meyer, President By /s/ Jeffrey P. Fox --------------------- Jeffrey P. Fox, Treasurer As required by the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on the 2nd day of February, 2004. Signature Capacity /s/ Arne H. Carlson* Chair of the Board - --------------------- Arne H. Carlson /s/ Philip J. Carroll, Jr.* Director - ---------------------------- Philip J. Carroll, Jr. /s/ Livio D. DeSimone* Director - ----------------------- Livio D. DeSimone /s/ Barbara H. Fraser* Director - ------------------------ Barbara H. Fraser /s/ Heinz F. Hutter* Director - ---------------------- Heinz F. Hutter /s/ Anne P. Jones* Director - ------------------- Anne P. Jones /s/ Stephen R. Lewis, Jr.* Director - ----------------------------- Stephen R. Lewis, Jr. /s/ Alan G. Quasha* - ---------------------- Director Alan G. Quasha Signature Capacity /s/ Stephen W. Roszell* Director - ------------------------- Stephen W. Roszell /s/ Alan K. Simpson* Director - --------------------- Alan K. Simpson /s/ Alison Taunton-Rigby* Director - --------------------------- Alison Taunton-Rigby /s/ William F. Truscott* Director - ------------------------- William F. Truscott * Signed pursuant to Directors' Power of Attorney, dated January 7, 2004, filed electronically herewith as Exhibit (16)(a) to this Registration Statement, by: /s/ Leslie L. Ogg - ----------------- Leslie L. Ogg EX-99 3 ex-index.txt EXHIBIT INDEX EXHIBIT INDEX (11) Opinion and Consent of Counsel as to the legality of the securities being registered. (16)(a) Directors' Power of Attorney to sign Amendments to this Registration Statement, dated January 7, 2004. (17)(c) Prospectus, dated Sept. 29, 2003, for AXP Large Cap Equity Fund. (17)(d) Statement of Additional Information, dated Sept. 29, 2003, for AXP Large Cap Equity Fund. (17)(f) Prospectus, dated April 1, 2003, for AXP Blue Chip Advantage Fund. (17)(g) Statement of Additional Information, dated April 1, 2003, for AXP Blue Chip Advantage Fund. (17)(j) Prospectus, dated Sept. 29, 2003, for AXP Research Opportunities Fund. (17)(k) Statement of Additional Information, dated Sept. 29, 2003, for AXP Research Opportunities Fund. (17)(m) Prospectus Supplement, dated Jan. 20, 2004, for AXP Large Cap Equity Fund, AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund. (17)(n) Prospectus Supplement, dated Nov. 19, 2003, for AXP Blue Chip Advantage Fund and AXP Research Opportunities Fund. (17)(o) Prospectus Supplement, dated Sept. 4, 2003 for AXP Blue Chip Advantage Fund. (17)(p) Prospectus and Statement of Additional Information Supplement, dated May 28, 2003 for AXP Blue Chip Advantage Fund. (17)(q) Statement of Additional Information Supplement, dated May 1, 2003, for AXP Blue Chip Advantage Fund. EX-99.11 OPIN CONSL 4 ex11-opinion.txt OPINION AND CONSENT OF COUNSEL February 2, 2004 AXP Growth Series, Inc. 200 AXP Financial Center Minneapolis, Minnesota 55474 Gentlemen: I have examined the Articles of Incorporation and the By-Laws of AXP Growth Series, Inc. (the Company) and all necessary certificates, permits, minute books, documents and records of the Company, and the applicable statutes of the State of Minnesota, and it is my opinion that the shares sold in accordance with applicable federal and state securities laws will be legally issued, fully paid, and nonassessable. This opinion may be used in connection with this Registration Statement. Sincerely, /s/ Leslie L. Ogg - ----------------- Leslie L. Ogg Attorney at Law 901 Marquette Ave. S., Suite 2810 Minneapolis, Minnesota 55402-3268 EX-99.16A PWR ATTY 5 ex16-a.txt DIRECTORS' POWER OF ATTORNEY DIRECTORS/TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as directors and trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission: 1933 Act 1940 Act Reg. Number Reg. Number AXP Fixed Income Series, Inc. 2-51586 811-2503 AXP California Tax-Exempt Trust 33-5103 811-4646 AXP Discovery Series, Inc. 2-72174 811-3178 AXP Equity Series, Inc. 2-13188 811-772 AXP High Yield Income Series, Inc. 2-86637 811-3848 AXP Government Income Series, Inc. 2-96512 811-4260 AXP Global Series, Inc. 33-25824 811-5696 AXP Growth Series, Inc. 2-38355 811-2111 AXP High Yield Tax-Exempt Series, Inc. 2-63552 811-2901 AXP International Series, Inc. 2-92309 811-4075 AXP Investment Series, Inc. 2-11328 811-54 AXP Managed Series, Inc. 2-93801 811-4133 AXP Market Advantage Series, Inc. 33-30770 811-5897 AXP Money Market Series, Inc. 2-54516 811-2591 AXP Dimensions Series, Inc. 2-28529 811-1629 AXP Selected Series, Inc. 2-93745 811-4132 AXP Progressive Series, Inc. 2-30059 811-1714 AXP Income Series, Inc. 2-10700 811-499 AXP Special Tax-Exempt Series Trust 33-5102 811-4647 AXP Stock Series, Inc. 2-11358 811-498 AXP Strategy Series, Inc. 2-89288 811-3956 AXP Tax-Exempt Series, Inc. 2-57328 811-2686 AXP Tax-Free Money Series, Inc. 2-66868 811-3003 AXP Sector Series, Inc. 33-20872 811-5522 AXP Partners Series, Inc. 333-57852 811-10321 AXP Partners International Series, Inc. 333-64010 811-10427 AXP Variable Portfolio-Partners Series, Inc 333-61346 811-10383 AXP Variable Portfolio-Investment Series, Inc. 2-73115 811-3218 AXP Variable Portfolio-Managed Series, Inc. 2-96367 811-4252 AXP Variable Portfolio-Money Market Series, Inc. 2-72584 811-3190 AXP Variable Portfolio-Income Series, Inc. 2-73113 811-3219 hereby constitutes and appoints Arne H. Carlson, any other member of the Boards who is not an interested person of the investment manager, and Leslie L. Ogg or any one of these persons individually, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 7th day of January, 2004. /s/ Arne H. Carlson /s/ Stephen R. Lewis, Jr. - ---------------------------- ---------------------------- Arne H. Carlson Stephen R. Lewis, Jr. /s/ Philip J. Carroll, Jr. /s/ Alan G. Quasha - ---------------------------- ---------------------------- Philip J. Carroll, Jr. Alan G. Quasha /s/ Livio D. DeSimone /s/ Stephen W. Roszell - ---------------------------- ---------------------------- Livio D. DeSimone Stephen W. Roszell /s/ Barbara H. Fraser /s/ Alan K. Simpson - ---------------------------- ---------------------------- Barbara H. Fraser Alan K. Simpson /s/ Heinz F. Hutter /s/ Alison Taunton-Rigby - ---------------------------- ---------------------------- Heinz F. Hutter Alison Taunton-Rigby /s/ Anne P. Jones /s/ William F. Truscott - ---------------------------- ---------------------------- Anne P. Jones William F. Truscott EX-99.17C PROSPECTUS 6 ex17-c.txt PROSPECTUS FOR AXP LARGE CAP EQUITY FUND AXP(R) Large Cap Equity Fund AXP Large Cap Equity Fund seeks to provide shareholders with long-term growth of capital. Prospectus Sept. 29, 2003 Please note that this Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goal Like all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- Table of Contents TAKE A CLOSER LOOK AT: The Fund 3p Goal 3p Principal Investment Strategies 3p Principal Risks 4p Past Performance 4p Fees and Expenses 5p Investment Manager 7p Other Securities and Investment Strategies 7p Buying and Selling Shares 8p Valuing Fund Shares 8p Investment Options 8p Purchasing Shares 10p Transactions Through Third Parties 12p Sales Charges 12p Exchanging/Selling Shares 15p Distributions and Taxes 18p Financial Highlights 20p - -------------------------------------------------------------------------------- 2p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS The Fund GOAL AXP Large Cap Equity Fund (the Fund) seeks to provide shareholders with long-term growth of capital. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, at least 80% of the Fund's net assets are invested in equity securities of companies with a market capitalization greater than $5 billion at the time of purchase. The Fund may invest in income-producing equity securities, such as dividend paying stocks, convertible securities and preferred stocks. The Fund will provide shareholders with at least 60 days' notice of any change in the 80% policy. In pursuit of the Fund's goal, American Express Financial Corporation (AEFC), the Fund's investment manager, chooses investments by: o Identifying companies with: o attractive valuations, and o the potential for earnings growth. o Identifying securities that AEFC believes have good potential for capital appreciation. o Evaluating opportunities and risks by reviewing interest rates and economic forecasts. o Buying a diversified portfolio of securities. AEFC may weight certain sectors more heavily than others based on its expectations about growth and market trends. In evaluating whether to sell a security, AEFC considers, among other factors, whether o The security is overvalued relative to other potential investments. o The security has reached AEFC's price objective. o The company has met AEFC's earnings and/or growth expectations. o Political, economic, or other events could affect the company's or security's performance. o Potential losses, due to factors such as a market down-turn, can be minimized. o A more attractive opportunity has been identified. Unusual Market Conditions During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing could prevent the Fund from achieving its investment objective. During these times, the Fund may trade its portfolio securities more frequently. Frequent trading could result in increased fees, expenses, and taxes. - -------------------------------------------------------------------------------- 3p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: Market Risk Style Risk Issuer Risk Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Style Risk The Fund's management strategy will influence performance significantly. Large capitalization stocks as a group could fall out of favor with the market, causing the Fund to underperform funds that invest primarily in small or medium capitalization stocks. If the manager's stock selection strategy does not perform as expected, the Fund could underperform its peers. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. PAST PERFORMANCE The bar chart and past performance table are not presented because the Fund has not had a full calendar year of operations. The Fund began operations on March 28, 2002. When available, the Fund intends to compare its performance to the Russell 1000(R) Index, an unmanaged index that measures the performance of the 1,000 largest companies in the Russell 3000 Index, and represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Fund also intends to compare its performance to the Lipper Large-Cap Core Funds Index, an index published by Lipper Inc., which 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. - -------------------------------------------------------------------------------- 4p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 5.75%(b) none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none 5% 1%(c) none
Annual Fund operating expenses(d) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees(e) 0.61% 0.61% 0.61% 0.61% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(f) 0.99% 1.00% 1.00% 1.06% Total 1.85% 2.61% 2.61% 1.67% Fee waiver/expense reimbursement 0.60% 0.60% 0.60% 0.60% Net expenses 1.25% 2.01% 2.01% 1.07% (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. See "Sales Charges." (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Other expenses are based on estimated amounts for the current fiscal year. AEFC has agreed to waive certain fees and to absorb certain expenses until July 31, 2004. Under this agreement, total expenses will not exceed 1.25% for Class A; 2.01% for Class B; 2.01% for Class C and 1.07% for Class Y. (e) Includes the impact of a performance incentive adjustment fee that increased the management fee by 0.01% for the most recent fiscal year. (f) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. Effective May 2003, the Fund's transfer agency fee increased. The percentages above reflect the increase. - -------------------------------------------------------------------------------- 5p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Examples These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return each year. The operating expenses remain the same each year. You would pay the following expenses if you redeem all of your shares at the end of the time periods indicated: 1 year 3 years 5 years 10 years Class A(a) $695 $1,069 $1,467 $2,578 Class B $604 $1,055 $1,433 $2,718(b) Class C $204 $ 755 $1,333 $2,904 Class Y $109 $ 468 $ 852 $1,931 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares: 1 year 3 years 5 years 10 years Class A(a) $695 $1,069 $1,467 $2,578 Class B $204 $ 755 $1,333 $2,718(b) Class C $204 $ 755 $1,333 $2,904 Class Y $109 $ 468 $ 852 $1,931 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. These examples do not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. - -------------------------------------------------------------------------------- 6p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS INVESTMENT MANAGER Doug Chase, Portfolio Manager o Managed the Fund since 2002. o Joined AEFC in 2002. o Prior to that, Analyst and Portfolio Manager at Fidelity Investments. o Began investment career in 1992. o MBA, University of Michigan. The Fund pays AEFC a fee for managing its assets. Under the Investment Management Services Agreement, the fee for the most recent fiscal year was 0.61% of the Fund's average daily net asstes, including an adjustment under the terms of a performance incentive arrangement. The maximum monthly adjustment (increase or decrease) will be 0.12% of the Fund's average net assets on an annual basis. Under the agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. AEFC or an affiliate may make payments from its own resources, which include profits from management fees paid by the Fund, to compensate broker-dealers or other persons for providing distribution assistance. AEFC, located at 200 AXP Financial Center, Minneapolis, Minnesota 55474, is a wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, New York 10285. The Fund operates under an order from the Securities and Exchange Commission that permits AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may utilize other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, debt securities and foreign securities. Additionally, the Fund may use derivative instruments such as futures, options and forward contracts to produce incremental earnings, to hedge existing positions and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. - -------------------------------------------------------------------------------- 7p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Buying and Selling Shares The public offering price for Class A shares of the Fund is the net asset value (NAV) plus a sales charge, and for Class B, C, and Y shares, the NAV. In addition to buying and selling shares through the Fund's distributor, American Express Financial Advisors Inc., you may buy or sell shares through third parties, including 401(k) plans, banks, brokers, and investment advisers. Where authorized by the Fund, orders in good form are priced using the NAV next determined after your order is placed with the third party. If you buy or redeem shares through a third party, consult that firm to determine whether your order will be priced at the time it is placed with the third party or at the time it is placed with the Fund. The third party may charge a fee for its services. VALUING FUND SHARES The NAV is the value of a single share of the Fund. The NAV is determined by dividing the value of the Fund's assets, minus any liabilities, by the number of shares outstanding. AEFC calculates the NAV as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The Fund's assets are valued primarily on the basis of market quotations. Certain short-term securities are valued at amortized cost. Foreign investments are valued in U.S. dollars. AEFC will price a security at fair value in accordance with procedures adopted by the Fund's Board of Directors if a reliable market quotation is not readily available. AEFC also may use fair value if a security's value has been materially affected by events after the close of the primary exchanges or markets on which the security is traded and before the NAV is calculated. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution fee of 1.00% (may be subject to a CDSC). 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee. Please see the SAI for information on eligibility to purchase Class Y shares. - -------------------------------------------------------------------------------- 8p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Investment options summary The Fund offers four different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision. The following table shows the key features of each class: Class A Class B Class C Class Y - --------------- ------------------ -------------- --------------- -------------- Availability Available to Available to Available to Limited to all investors. all all investors. qualifying investors. institutional investors. - --------------- ------------------ -------------- --------------- -------------- Initial Sales Yes. Payable No. Entire No. Entire No. Entire Charge at time of purchase purchase purchase price purchase. price is price is is invested in Lower sales invested in invested in shares of the charge for shares of shares of the Fund. larger the Fund. Fund. investments. - --------------- ------------------ -------------- --------------- -------------- Deferred Sales On purchases Maximum 5% 1% CDSC None. Charge over $1,000,000, CDSC during applies if 1% CDSC the first you sell your applies if you year shares less sell your decreasing than one year shares less to 0% after after than one year six years. purchase. after purchase. - --------------- ------------------ -------------- --------------- -------------- Distribution Yes.* 0.25% Yes.* 1.00% Yes.* 1.00% Yes. 0.10% and/or Shareholder Service Fee - --------------- ------------------ -------------- --------------- -------------- Conversion to N/A Yes, No. No. Class A automatically in ninth calendar year of ownership. - --------------- ------------------ -------------- --------------- -------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $250,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $250,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. - -------------------------------------------------------------------------------- 9p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS PURCHASING SHARES To purchase shares through entities other than American Express Financial Advisors Inc. (the Distributor), please consult your selling agent. The following section explains how you can purchase shares from the Distributor. If you do not have an existing American Express mutual fund account, you will need to establish a brokerage account. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - --------------------------------------------- ---------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - --------------------------------------------- ---------------------------------- Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - --------------------------------------------- ---------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - --------------------------------------------- ---------------------------------- An irrevocable trust, pension trust or The legal entity (not the personal estate representative or trustee, unless no legal entity is designated in the account title) - --------------------------------------------- ---------------------------------- Sole proprietorship or single-owner LLC The owner - --------------------------------------------- ---------------------------------- Partnership or multi-member LLC The partnership - --------------------------------------------- ---------------------------------- Corporate or LLC electing corporate status The corporation on Form 8837 - --------------------------------------------- ---------------------------------- Association, club or tax-exempt organization The organization - --------------------------------------------- ---------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (www.irs.gov). - -------------------------------------------------------------------------------- 10p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Methods of purchasing shares By mail Once your account has been established, send your check to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000* Additional investments: $500** Fund minimum balances: $300 Qualified minimum account balances: none * $1,000 for tax qualified accounts. ** $100 minimum add-on for existing mutual fund accounts outside of a brokerage account (direct at fund accounts). If your Fund balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. By scheduled investment plan Minimum amounts Initial investment: $2,000* Additional investments: $100** Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. * $100 for direct at fund accounts. ** $50 minimum per payment for qualified accounts in a direct at fund account. By wire or electronic funds transfer Please contact your financial advisor or selling agent for specific instructions. Minimum wire purchase amount: $1,000 or new account minimum, as applicable. By telephone If you have a brokerage account, you may use the money in your account to make initial and subsequent purchases. To place your order, call: (800) 872-4377 for brokerage accounts (800) 967-4377 for wrap accounts - -------------------------------------------------------------------------------- 11p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS TRANSACTIONS THROUGH THIRD PARTIES You may buy or sell shares through certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through third parties or to determine if there are policy differences, please consult your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. SALES CHARGES Class A -- initial sales charge alternative When you purchase Class A shares, you pay a sales charge as shown in the following table: Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 * Offering price includes the sales charge. The sales charge on Class A shares may be lower than 5.75%, based on the combined market value of: o your current investment in this Fund, o your previous investment in this Fund, and o investments you and your primary household group have made in other American Express mutual funds that have a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. For purposes of this policy, domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do not have sales charges. - -------------------------------------------------------------------------------- 12p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Other Class A sales charge policies o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, and o if you intend to invest more than $50,000 over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. If purchasing shares in a brokerage account or through a third party, you must request the reduced sales charge when you buy shares. For more details, please contact your financial advisor or see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired American Express financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. o registered representatives and other employees of brokers, dealers or other financial institutions having a sales agreement with the Distributor, including their spouses, domestic partners, children and parents. o investors who have a business relationship with a newly associated financial advisor who joined the Distributor from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with the Distributor, (2) the purchase is made with proceeds of shares sold that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds are the result of a sale of an equal or greater value where a sales load was assessed. o qualified employee benefit plans offering participants daily access to American Express mutual funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. o shareholders who have at least $1 million in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived only in the circumstances described for waivers for Class B and Class C shares. o purchases made within 90 days after a sale of American Express Fund shares (up to the amount sold). Send the Fund a written request along with your payment, indicating the date and the amount of the sale. - -------------------------------------------------------------------------------- 13p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS o purchases made: o with dividend or capital gain distributions from this Fund or from the same class of another American Express mutual fund, o through or under a wrap fee product or other investment product sponsored by the Distributor or another authorized broker-dealer, investment advisor, bank or investment professional, o within the University of Texas System ORP, o within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, o within the University of Massachusetts After-Tax Savings Program, or o through or under a subsidiary of AEFC offering Personal Trust Services' Asset-Based pricing alternative. o shareholders whose original purchase was in a Strategist fund merged into an American Express fund in 2000. Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of calendar years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline after a purchase: If the sale is made during the: The CDSC percentage rate is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% For Class C, a 1% CDSC is charged if you sell your shares less than one year after purchase. For both Class B and Class C, if the amount you are selling causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC is based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you never have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. - -------------------------------------------------------------------------------- 14p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Example Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. Waivers of the sales charge for Class B and Class C shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if American Express Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: o at least 59 1/2 years old AND o taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR o selling under an approved substantially equal periodic payment arrangement. EXCHANGING/SELLING SHARES Exchanges You may exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. The Fund does not permit market-timing. Do not invest in the Fund if you are a market timer. Excessive trading (market-timing) or other abusive short-term trading practices may disrupt portfolio management strategies, harm performance and increase fund expenses. To prevent abuse or adverse effects on the Fund and its shareholders, the Distributor and the Fund reserve the right to reject any purchase orders, including exchanges, limit the amount, modify or discontinue the exchange privilege, or charge a fee to any investor we believe has a history of abusive trading or whose trading, in our judgement has been disruptive to the Fund. For example, we may exercise these rights if exchanges are too numerous or too large. - -------------------------------------------------------------------------------- 15p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is received from the secured party. Selling Shares You may sell your shares at any time. The payment will be mailed within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. To sell or exchange shares held with entities other than the Distributor, please consult your selling agent. The following section explains how you can exchange or sell shares held with the Distributor. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. Payment may be made earlier if your bank provides evidence satisfactory to the Fund and the Distributor that your check has cleared. - -------------------------------------------------------------------------------- 16p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Ways to request an exchange or sale of shares By regular or express mail American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 Include in your letter: o your account number o the name of the fund(s) o the class of shares to be exchanged or sold o your Social Security number or Employer Identification number o the dollar amount or number of shares you want to exchange or sell o specific instructions regarding delivery or exchange destination o signature(s) of registered account owner(s) (All signatures may be required. Contact your financial advisor for more information.) o delivery instructions, if applicable o any paper certificates of shares you hold Payment will be mailed to the address of record and made payable to the names listed on the account, unless specified differently and signed by all owners. The express mail delivery charges you pay will vary depending on domestic or international delivery instructions. By telephone (800) 872-4377 for brokerage accounts (800) 437-3133 for direct at fund accounts (800) 967-4377 for wrap accounts o The Fund and the Distributor will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing the Distributor. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- 17p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS By wire Money can be wired from your account to your bank account. Contact your financial advisor or the Distributor at the above numbers for additional information. o Minimum amount: $1,000 o Pre-authorization is required. o A service fee may be charged against your account for each wire sent. By scheduled payout plan o Minimum payment: $100*. o Contact your financial advisor or the Distributor to set up regular payments. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. * Minimum is $50 in a direct at fund account. Electronic transactions The ability to initiate transactions via the internet may be unavailable or delayed at certain times (for example, during periods of unusual market activity). The Fund and the Distributor are not responsible for any losses associated with unexecuted transactions. In addition, the Fund and the Distributor are not responsible for any losses resulting from unauthorized transactions if reasonable security measures are followed to validate the investor's identity. The Fund may modify or discontinue electronic privileges at any time. Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. - -------------------------------------------------------------------------------- 18p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered American Express mutual fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. - -------------------------------------------------------------------------------- 19p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS Financial Highlights The financial highlights tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by KPMG LLP, whose report, along with the Fund's financial statements, is included in the annual report which, if not included with this prospectus, is available upon request.
Class A Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.11 $5.00 Income from investment operations: Net investment income (loss) .01 -- Net gains (losses) (both realized and unrealized) .41 (.89) Total from investment operations .42 (.89) Net asset value, end of period $4.53 $4.11 Ratios/supplemental data Net assets, end of period (in millions) $83 $11 Ratio of expenses to average daily net assets(c),(e) 1.25% 1.25%(d) Ratio of net investment income (loss) to average daily net assets .24% (.11%)(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 10.22% (17.80%)(j)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 20p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS
Class B Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.10 $5.00 Income from investment operations: Net investment income (loss) (.01) (.01) Net gains (losses) (both realized and unrealized) .39 (.89) Total from investment operations .38 (.90) Net asset value, end of period $4.48 $4.10 Ratios/supplemental data Net assets, end of period (in millions) $36 $5 Ratio of expenses to average daily net assets(c),(f) 2.01% 2.01%(d) Ratio of net investment income (loss) to average daily net assets (.52%) (.86%)(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 9.27% (18.00%)(j) Class C Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.10 $5.00 Income from investment operations: Net investment income (loss) (.01) (.01) Net gains (losses) (both realized and unrealized) .40 (.89) Total from investment operations .39 (.90) Net asset value, end of period $4.49 $4.10 Ratios/supplemental data Net assets, end of period (in millions) $2 $-- Ratio of expenses to average daily net assets(c),(g) 2.01% 2.01%(d) Ratio of net investment income (loss) to average daily net assets (.53%) (.92%)(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 9.51% (18.00%)(j)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 21p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS
Class Y Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002(b) Net asset value, beginning of period $4.11 $5.00 Income from investment operations: Net investment income (loss) .01 -- Net gains (losses) (both realized and unrealized) .42 (.89) Total from investment operations .43 (.89) Net asset value, end of period $4.54 $4.11 Ratios/supplemental data Net assets, end of period (in millions) $-- $-- Ratio of expenses to average daily net assets(c),(h) 1.07% 1.07%(d) Ratio of net investment income (loss) to average daily net assets .45% .09%(d) Portfolio turnover rate (excluding short-term securities) 135% 88% Total return(i) 10.46% (17.80%)(j) Notes to financial highlights
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) For the period from March 28, 2002 (when shares became publicly available) to July 31, 2002. (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) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class A would have been 1.84% and 5.12% for the periods ended July 31, 2003 and 2002, respectively. (f) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class B would have been 2.60% and 5.88% for the periods ended July 31, 2003 and 2002, respectively. (g) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class C would have been 2.60% and 5.88% for the periods ended July 31, 2003 and 2002, respectively. (h) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratios of expenses for Class Y would have been 1.66% and 4.94% for the periods ended July 31, 2003 and 2002, respectively. (i) Total return does not reflect payment of a sales charge. (j) Not annualized. - -------------------------------------------------------------------------------- 22p -- AXP LARGE CAP EQUITY FUND -- 2003 PROSPECTUS This Fund, along with the other American Express mutual funds, is distributed by American Express Financial Advisors Inc. and can be purchased from an American Express financial advisor or from other authorized broker-dealers or third parties. The Funds can be found under the "Amer Express" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's Statement of Additional Information (SAI), annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund during its last fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report or the semiannual report, contact your selling agent or American Express Client Service Corporation. American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 Web site address: americanexpress.com/funds You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at (http://www.sec.gov). Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-2111 Ticker Symbol Class A: ALEAX Class B:ALEBX Class C: -- Class Y:-- - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS (R) - -------------------------------------------------------------------------------- American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 S-6244-99 D (9/03) EX-99.17D SAI 7 ex17-d.txt STATEMENT OF ADDITIONAL INFORMATION FOR AXP LARGE CAP EQUITY FUND AXP(R) GROWTH SERIES, INC. STATEMENT OF ADDITIONAL INFORMATION FOR AXP(R) LARGE CAP EQUITY FUND (the Fund) SEPT. 29, 2003 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the financial statements contained in the most recent Annual Report to shareholders (Annual Report) that may be obtained from your financial advisor or by writing to American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474 or by calling (800) 862-7919. The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report are incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. The prospectus for the Fund, dated the same date as this SAI, also is incorporated in this SAI by reference. Table of Contents Mutual Fund Checklist p. 3 Fundamental Investment Policies p. 4 Investment Strategies and Types of Investments p. 5 Information Regarding Risks and Investment Strategies p. 6 Security Transactions p. 22 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation p. 24 Performance Information p. 24 Valuing Fund Shares p. 27 Proxy Voting p. 28 Investing in the Fund p. 29 Selling Shares p. 31 Pay-out Plans p. 31 Capital Loss Carryover p. 32 Taxes p. 32 Agreements p. 33 Organizational Information p. 36 Board Members and Officers p. 40 Independent Auditors p. 43 Appendix: Description of Ratings p. 44 - -------------------------------------------------------------------------------- 2 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Mutual Fund Checklist [X] Mutual funds are NOT guaranteed or insured by any bank or government agency. You can lose money. [X] Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. [X] A higher rate of return typically involves a higher risk of loss. [X] Past performance is not a reliable indicator of future performance. [X] ALL mutual funds have costs that lower investment return. [X] You can buy some mutual funds by contacting them directly. Others, like this one, are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay a sales charge. [X] Shop around. Compare a mutual fund with others of the same type before you buy. OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING Develop a Financial Plan Have a plan -- even a simple plan can help you take control of your financial future. Review your plan with your advisor at least once a year or more frequently if your circumstances change. Dollar-Cost Averaging An investment technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing through changing market conditions to accumulate shares to meet long-term goals. Dollar-cost averaging Regular Market price Shares investment of a share acquired $100 $ 6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5) The average price you paid for each share: $4.84 ($500 divided by 103.4) Diversify Diversify your portfolio. By investing in different asset classes and different economic environments you help protect against poor performance in one type of investment while including investments most likely to help you achieve your important goals. Understand Your Investment Know what you are buying. Make sure you understand the potential risks, rewards, costs, and expenses associated with each of your investments. - -------------------------------------------------------------------------------- 3 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Fundamental Investment Policies Fundamental investment policies adopted by the Fund cannot be changed without the approval of a majority of the outstanding voting securities of the Fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. The policies below are fundamental policies that apply to the Fund and may be changed only with shareholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund will not: o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Issue senior securities, except as permitted under the 1940 Act. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer except that up to 25% of the Fund's assets may be invested without regard to this 10% limitation. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. Except for the fundamental investment policies listed above, the other investment policies described in the prospectus and in this SAI are not fundamental and may be changed by the board at any time. - -------------------------------------------------------------------------------- 4 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Investment Strategies and Types of Investments This table shows various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager may make on behalf of the Fund. For a description of principal risks, please see the prospectus. Notwithstanding the Fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager's sole discretion. Investment strategies and types of investments Allowable for the Fund? Agency and Government Securities yes Borrowing yes Cash/Money Market Instruments yes Collateralized Bond Obligations yes Commercial Paper yes Common Stock yes Convertible Securities yes Corporate Bonds yes Debt Obligations yes Depositary Receipts yes Derivative Instruments (including Options and Futures) yes Foreign Currency Transactions yes Foreign Securities yes High-Yield (High-Risk) Securities (Junk Bonds) yes Illiquid and Restricted Securities yes Indexed Securities yes Inverse Floaters no Investment Companies yes Lending of Portfolio Securities yes Loan Participations yes Mortgage- and Asset-Backed Securities yes Mortgage Dollar Rolls no Municipal Obligations yes Preferred Stock yes Real Estate Investment Trusts yes Repurchase Agreements yes Reverse Repurchase Agreements yes Short Sales no Sovereign Debt yes Structured Products yes Swap Agreements no Variable- or Floating-Rate Securities yes Warrants yes When-Issued Securities and Forward Commitments yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes - -------------------------------------------------------------------------------- 5 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND The following are guidelines that may be changed by the board at any time: o Under normal market conditions, at least 80% of the Fund's net assets (including the amount of any borrowings for investment purposes) will be invested in equity securities of companies with a market capitalization greater than $5 billion. The Fund will provide shareholders with at least 60 days notice of any change in the 80% policy. o The Fund will not invest more than 5% of its net assets in bonds below investment grade. o The Fund may invest up to 20% of its total assets in foreign investments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not invest more than 10% of its net assets in securities of investment companies. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest in a company to control or manage it. Information Regarding Risks and Investment Strategies RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). Please remember that a mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with the Fund at any time (for a description of principal risks, please see the prospectus): Call/Prepayment Risk The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk. Correlation Risk The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. Credit Risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. Event Risk Occasionally, the value of a security may be seriously and unexpectedly changed by a natural or industrial accident or occurrence. Foreign/Emerging Markets Risk The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. - -------------------------------------------------------------------------------- 6 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. Inflation Risk Also known as purchasing power risk, inflation risk measures the effects of continually rising prices on investments. If an investment's yield is lower than the rate of inflation, your money will have less purchasing power as time goes on. Interest Rate Risk The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the higher its yield and the greater its sensitivity to changes in interest rates. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Legal/Legislative Risk Congress and other governmental units have the power to change existing laws affecting securities. A change in law might affect an investment adversely. Leverage Risk Some derivative investments (such as options, futures, or options on futures) require little or no initial payment and base their price on a security, a currency, or an index. A small change in the value of the underlying security, currency, or index may cause a sizable gain or loss in the price of the instrument. Liquidity Risk Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. Management Risk The risk that a strategy or selection method utilized by the investment manager may fail to produce the intended result. When all other factors have been accounted for and the investment manager chooses an investment, there is always the possibility that the choice will be a poor one. Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Reinvestment Risk The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. Sector/Concentration Risk Investments that are concentrated in a particular issuer, geographic region, or industry will be more susceptible to changes in price (the more you diversify, the more you spread risk). Small and Medium Company Risk Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. - -------------------------------------------------------------------------------- 7 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND INVESTMENT STRATEGIES The following information supplements the discussion of the Fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes many strategies that many mutual funds use and types of securities that they purchase. Please refer to the section titled Investment Strategies and Types of Investments to see which are applicable to the Fund. Agency and Government Securities The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities including mortgage pass through certificates of the Government National Mortgage Association (GNMA) are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and Reinvestment Risk. Borrowing The Fund may borrow money for temporary or emergency purposes and make other investments or engage in other transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce the Fund's total return. Except as qualified above, however, the Fund will not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Inflation Risk and Management Risk. Cash/Money Market Instruments The Fund may maintain a portion of its assets in cash and cash-equivalent investments. Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. The Fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject the Fund to certain costs and expenses. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk, Inflation Risk, and Management Risk. Collateralized Bond Obligations Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments -- money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, earns them investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield (High-Risk) Securities (Junk Bonds).) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 8 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Commercial Paper Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk, Liquidity Risk, and Management Risk. Common Stock Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Event Risk, Issuer Risk, Legal/Legislative Risk, Management Risk, Market Risk, and Small and Medium Company Risk. Convertible Securities Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Call/Prepayment Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and Reinvestment Risk. Corporate Bonds Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield (High-Risk) Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. - -------------------------------------------------------------------------------- 9 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Debt Obligations Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a specified rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield (High-Risk) Securities (Junk Bonds).) All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating organization or their rating systems, the Fund will attempt to use comparable ratings as standards for selecting investments. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Depositary Receipts Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, Management Risk, and Market Risk. Derivative Instruments Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. - -------------------------------------------------------------------------------- 10 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If the Fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indices (such as the S&P 500 Index), foreign currencies and other financial instruments and indices. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An - -------------------------------------------------------------------------------- 11 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax and Accounting Treatment. As permitted under federal income tax laws and to the extent the Fund is allowed to invest in futures contracts, the Fund intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If the Fund is using short futures contracts for hedging purposes, the Fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, the Fund will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (See also Foreign Currency Transactions.) - -------------------------------------------------------------------------------- 12 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Leverage Risk, Liquidity Risk, and Management Risk. Foreign Currency Transactions Investments in foreign countries usually involve currencies of foreign countries. In addition, the Fund may hold cash and cash-equivalent investments in foreign currencies. As a result, the value of the Fund's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, the Fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing the Fund's NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Spot Rates and Derivative Instruments. The Fund conducts its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts) as a hedge against fluctuations in future foreign exchange rates. (See also Derivative Instruments). These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, the Fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. The Fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. The Fund also may enter into forward contracts when management of the Fund believes the currency of a particular foreign country may change in relationship to another currency. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. The Fund will not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's securities or other assets denominated in that currency. The Fund will designate cash or securities in an amount equal to the value of the Fund's total assets committed to consummating forward contracts entered into under the second circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the Fund's commitments on such contracts. At maturity of a forward contract, the Fund may either sell the security and make delivery of the foreign currency or retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to buy, on the same maturity date, the same amount of foreign currency. If the Fund retains the security and engages in an offsetting transaction, the Fund will incur a gain or loss (as described below) to the extent there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline between the date the Fund enters into a forward contract for selling foreign currency and the date it enters into an offsetting contract for purchasing the foreign currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell. It is impossible to forecast what the market value of securities will be at the expiration of a contract. Accordingly, it may be necessary for the Fund to buy additional foreign currency on the spot market (and bear the expense of that purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received on the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. - -------------------------------------------------------------------------------- 13 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND The Fund's dealing in forward contracts will be limited to the transactions described above. This method of protecting the value of the Fund's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. Although the Fund values its assets each business day in terms of U.S. dollars, it does not intend to convert its foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. Options on Foreign Currencies. The Fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, the Fund may buy put options on the foreign currency. If the value of the currency does decline, the Fund will have the right to sell the currency for a fixed amount in dollars and will offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities the Fund plans to buy, the Fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates. As in the case of other types of options, however, the benefit to the Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates. The Fund may write options on foreign currencies for the same types of hedging purposes. For example, when the Fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of securities will be fully or partially offset by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency. If rates move in the manner projected, the put option will expire unexercised and allow the Fund to hedge increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if the Fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic - -------------------------------------------------------------------------------- 14 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. The Fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. The Fund may use currency futures for the same purposes as currency forward contracts, subject to Commodity Futures Trading Commission (CFTC) limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the Fund's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect the Fund against price decline if the issuer's creditworthiness deteriorates. Because the value of the Fund's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of the Fund's investments denominated in that currency over time. The Fund will hold securities or other options or futures positions whose values are expected to offset its obligations. The Fund will not enter into an option or futures position that exposes the Fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Correlation Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk. Foreign Securities Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. - -------------------------------------------------------------------------------- 15 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND The introduction of a single currency, the euro, on January 1, 1999 for participating European nations in the Economic and Monetary Union ("EU") presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other EU countries such as the United Kingdom and Denmark into the euro and the admission of other non-EU countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk, Issuer Risk, and Management Risk. High-Yield (High-Risk) Securities (Junk Bonds) High yield (high-risk) securities are sometimes referred to as junk bonds. They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield (high-risk) securities include: Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and Management Risk. Illiquid and Restricted Securities The Fund may invest in illiquid securities (i.e., securities that are not readily marketable). These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent the Fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for such securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for the Fund to sell such an investment promptly and at an acceptable price. - -------------------------------------------------------------------------------- 16 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk and Management Risk. Indexed Securities The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk, Management Risk, and Market Risk. Inverse Floaters Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with inverse floaters include: Interest Rate Risk and Management Risk. Investment Companies Investing in securities issued by registered and unregistered investment companies may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Management Risk and Market Risk. Lending of Portfolio Securities The Fund may lend certain of its portfolio securities to broker-dealers. The current policy of the Fund's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Fund receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Fund will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Fund receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk and Management Risk. Loan Participations Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk and Management Risk. Mortgage- and Asset-Backed Securities Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. - -------------------------------------------------------------------------------- 17 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage- and asset-backed securities include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and Management Risk. Mortgage Dollar Rolls Mortgage dollar rolls are investments whereby an investor would sell mortgage-backed securities for delivery in the current month and simultaneously contract to purchase substantially similar securities on a specified future date. While an investor would forego principal and interest paid on the mortgage-backed securities during the roll period, the investor would be compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk, Interest Rate Risk, and Management Risk. Municipal Obligations Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must - -------------------------------------------------------------------------------- 18 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Event Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market Risk. Preferred Stock Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk, Management Risk, and Market Risk. Real Estate Investment Trusts Real estate investment trusts (REITs) are entities that manage a portfolio of real estate to earn profits for their shareholders. REITs can make investments in real estate such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Additionally, the failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Issuer Risk, Management Risk, and Market Risk. Repurchase Agreements The Fund may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement, the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk and Management Risk. Reverse Repurchase Agreements In a reverse repurchase agreement, the investor would sell a security and enter into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 19 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Short Sales With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to utilize short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to the Fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Management Risk and Market Risk. Sovereign Debt A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk, Foreign/Emerging Markets Risk, and Management Risk. Structured Products Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option, or a forward contract embedded in a note or any of a wide variety of debt, equity, and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market, and defaults by other parties. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured products include: Credit Risk, Liquidity Risk, and Management Risk. Swap Agreements Swap agreements obligate one party to make payments to the other party based on the change in the market value of an index or other asset. In return, the other party agrees to make payments to the first party based on the return of another index or asset. Swap agreements entail the risk that a party will default on its payment obligations. Interest Rate Swaps. Interest rate swap agreements are used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. Swaps also may protect against changes in the price of securities that an investor anticipates buying or selling at a later date. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard interest rate swap transaction, two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined notional amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. - -------------------------------------------------------------------------------- 20 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Swap agreements are usually entered into at a zero net market value of the swap agreement commitments. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty to the other. Swap agreements may include embedded interest rate caps, floor and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts. Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. The Fund will enter into interest rate swap agreements only if the claims-paying ability of the other party or its guarantor is considered to be investment grade by the Advisor. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one NRSRO at the time of entering into the transaction. If there is a default by the other party to such a transaction, the Fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, the Fund may seek to minimize counterparty risk by requiring the counterparty to post collateral. Currency Swaps. Currency swaps are similar to interest rate swaps, except that they involve currencies instead of interest rates. Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Liquidity Risk, Credit Risk and Correlation Risk. Variable- or Floating-Rate Securities The Fund may invest in securities that offer a variable- or floating-rate of interest. Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (e.g., daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the Fund to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the Fund as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk and Management Risk. Warrants Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Management Risk and Market Risk. - -------------------------------------------------------------------------------- 21 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND When-Issued Securities and Forward Commitments When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, the Fund may lose the opportunity to obtain a price and yield considered to be advantageous. Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk and Management Risk. Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk, Interest Rate Risk, and Management Risk. The Fund cannot issue senior securities but this does not prohibit certain investment activities for which assets of the Fund are set aside, or margin, collateral or escrow arrangements are established, to cover the related obligations. Examples of those activities include borrowing money, delayed-delivery and when-issued securities transactions, and contracts to buy or sell options, derivatives, and hedging instruments. Security Transactions Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's investment goal and policies, which securities will be purchased, held, or sold. The description of policies and procedures in this section also applies to any Fund subadviser. In determining where the buy and sell orders are to be placed, AEFC has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the board. In selecting broker-dealers to execute transactions, AEFC may consider the price of the security, including commission or mark-up, the size and difficulty of the order, the reliability, integrity, financial soundness, and general operation and execution capabilities of the broker, the broker's expertise in particular markets, and research services provided by the broker. The Fund, AEFC, any subadviser and American Express Financial Advisors Inc. (the Distributor) each have a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the Fund. The Fund's securities may be traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The board has adopted a policy authorizing AEFC to do so to the extent authorized by law, if AEFC determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or AEFC's overall responsibilities with respect to the Fund and the other American Express mutual funds for which it acts as investment manager. Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business, and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software, or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management, and trading functions and other services to the extent permitted under an interpretation by the SEC. - -------------------------------------------------------------------------------- 22 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Fund to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Fund that it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this arrangement, some portfolio transactions may not be effected at the lowest commission, but AEFC believes it may obtain better overall execution. AEFC has represented that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. All other transactions will be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by AEFC in providing advice to all American Express mutual funds even though it is not possible to relate the benefits to any particular fund. Each investment decision made for the Fund is made independently from any decision made for another portfolio, fund, or other account advised by AEFC or any of its subsidiaries. When the Fund buys or sells the same security as another portfolio, fund, or account, AEFC carries out the purchase or sale in a way the Fund agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Fund, the Fund hopes to gain an overall advantage in execution. On occasion, the Fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency, and research services. The Fund paid total brokerage commissions of $311,242 for fiscal year ended July 31, 2003 and $27,862 for fiscal period from March 28, 2002 (when shares became publicly available) to July 31, 2002. Substantially all firms through whom transactions were executed provide research services. In fiscal year 2003, transactions amounting to $2,021,620, on which $3,731 in commissions were imputed or paid, were specifically directed to firms in exchange for research services. No transactions were directed to brokers because of research services they provided to the Fund except for the affiliates as noted below. As of the end of the most recent fiscal year, the Fund held securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below: Value of securities Name of issuer owned at end of fiscal year Citigroup $4,767,078 J.P. Morgan Chase 585,335 Merrill Lynch 880,848 Morgan Stanley 735,320 The portfolio turnover rate was 135% in the most recent fiscal year, and 88% in the fiscal period before. Higher turnover rates may result in higher brokerage expenses and taxes. The variation in turnover rate can be attributed to the fact that the fiscal year which ended July 31, 2003 was the Fund's full fiscal year. - -------------------------------------------------------------------------------- 23 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation Affiliates of American Express Company (of which AEFC is a wholly-owned subsidiary) may engage in brokerage and other securities transactions on behalf of the Fund according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. AEFC will use an American Express affiliate only if (i) AEFC determines that the Fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Fund and (ii) the affiliate charges the Fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. Information about brokerage commissions paid by the Fund for the last three fiscal years to brokers affiliated with AEFC is contained in the following table:
As of the end of fiscal year 2003 2002 Percent of aggregate dollar amount of Aggregate dollar Percent of transactions Aggregate dollar amount of aggregate involving amount of Nature of commissions brokerage payment of commissions Broker affiliation paid to broker commissions commissions paid to broker American Enterprise Wholly-owned $ 353* 0.11% 0.21% $0 Investment Services Inc. subsidiary of AEFC
* Represents brokerage clearing fees. Performance Information The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations, if applicable, used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the methods used by the Fund to compute performance follows below.
1 year Since inception Class A Return before taxes +3.90% -11.04%(a) Return after taxes on distributions +3.52% -11.06%(a) Return after taxes on distributions and sale of fund shares +2.42% -9.37%(a) Class B Return before taxes +5.27% -10.61%(a) Class C Return before taxes +9.51% -7.70%(a) Class Y Return before taxes +10.46% -6.87%(a)
(a) Inception date was March 28, 2002. Before-Tax Returns This table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. The performance of different classes varies because of differences in sales charges and fees. - -------------------------------------------------------------------------------- 24 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The Return After Taxes on Distributions for a period may be the same as the Return Before Taxes for the same period if there are no distributions or if the distributions are small. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return Before Taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. AVERAGE ANNUAL TOTAL RETURN The Fund may calculate average annual total return for a class for certain periods by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)(to the power of n) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) AFTER TAX RETURNS The Fund may calculate estimated after tax returns based on the highest historical individual federal marginal income tax rates, the estimates do not reflect the effect of state and local taxes, according to the following formulas: Average Annual Total Returns (after taxes on distributions) P(1 + T)(to the power of n) = ATVD where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATVD = ending after tax value on distributions of a hypothetical $1,000 payment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemptions. Average Annual Total Returns (after taxes on distributions and redemptions) P(1 + T)(to the power of n) = ATVDR where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions and redemptions) n = number of years ATVDR = ending after tax value on distributions of a hypothetical $1,000 payment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions and redemptions. - -------------------------------------------------------------------------------- 25 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND AGGREGATE TOTAL RETURN The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the Fund over a specified period of time according to the following formula: ERV - P ---------- P where: P = a hypothetical initial payment of $1,000 ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) In its sales material and other communications, the Fund may quote, compare or refer to rankings, yields, or returns as published by independent statistical services or publishers and publications such as The Bank Rate Monitor National Index, Barron's, Business Week, CDA Technologies, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, iMoneyNet Money Market Fund Report, Institutional Investor, Investor's Business Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger Investment Companies Service. The Fund also may compare its performance to a wide variety of indexes or averages. There are similarities and differences between the investments that the Fund may purchase and the investments measured by the indexes or averages and the composition of the indexes or averages will differ from that of the Fund. Ibbotson Associates provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the CPI) and combinations of various capital markets. The performance of these capital markets is based on the returns of different indexes. The Fund may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. The Fund may quote various measures of volatility in advertising. Measures of volatility seek to compare a fund's historical share price fluctuations or returns to those of a benchmark. The Distributor may provide information designed to help individuals understand their investment goals and explore various financial strategies. Materials may include discussions of asset allocation, retirement investing, brokerage products and services, model portfolios, saving for college or other goals, and charitable giving. - -------------------------------------------------------------------------------- 26 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Valuing Fund Shares As of the end of the most recent fiscal year, the computation looked like this:
Net assets Shares outstanding Net asset value of one share Class A $83,257,409 divided by 18,374,049 equals $4.53 Class B 35,551,265 7,929,314 4.48 Class C 2,052,118 456,827 4.49 Class Y 61,252 13,477 4.54
In determining net assets before shareholder transactions, the Fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): o Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. o Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. o Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. o Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. o Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. o Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. o Occasionally, events affecting the value of securities occur between the time the primary market on which the securities are traded closes and the close of the Exchange. If events materially affect the value of securities, the securities will be valued at their fair value according to procedures decided upon in good faith by the board. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. o Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. o Securities without a readily available market price and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Fund. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. - -------------------------------------------------------------------------------- 27 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Proxy Voting GENERAL GUIDELINES The Fund upholds a long tradition of sound and principled corporate governance. For approximately 30 years, the Board of Directors, which consists of a majority of independent directors, has voted proxies. General guidelines are: o Corporate governance matters -- The board supports proxy proposals that require changes or encourage decisions that have been shown to add shareholder value over time and votes against proxy proposals that entrench management. o Changes in capital structure -- The board votes for amendments to corporate documents that strengthen the financial condition of a business. o Stock option plans and other management compensation issues -- The board expects thoughtful consideration to be given by a company's management to developing a balanced compensation structure providing competitive current income with long-term employee incentives directly tied to the interest of shareholders and votes against proxy proposals that dilute shareholder value excessively. o Social and corporate policy issues -- The board believes that proxy proposals should address the business interests of the corporation. Each proposal is viewed in light of the circumstances of the company submitting the proposal. POLICY AND PROCEDURES The policy of the board is to vote all proxies of the companies in which the Fund holds investments, ensuring there are no conflicts between interests of Fund shareholders and those of the Fund's investment manager, AEFC. The recommendation of the management of a company as set out in the company's proxy statement is considered. In each instance in which the Fund votes against the recommendation, the board sends a letter to senior management of the company explaining the basis for its vote. This has permitted both the company's management and the Fund's board to gain better insight into issues presented by proxy proposals. In the case of foreign corporations, proxies of companies located in some countries may not be voted due to requirements of locking up the voting shares and when time constraints prohibit the processing of proxies. From time to time a proxy proposal is presented that has not been previously considered by the board or that AEFC recommends be voted different from the votes cast for similar proposals. In making recommendations to the board about voting on a proposal, AEFC relies on its own investment personnel and information obtained from outside resources, including Institutional Shareholder Services (ISS). AEFC makes the recommendation in writing. The process established by the board to vote proxies requires that either board members or officers who are independent from AEFC consider the recommendation and decide how to vote the proxy proposal. PROXY VOTING RECORD The proxy voting record will be made available on a quarterly basis after the end of the quarter for all companies whose shareholders meetings were completed during the quarter. The information is on a Web site maintained by ISS and can be accessed through the American Express Company's web page, www.americanexpress.com beginning Jan. 1, 2004. For anyone seeking information on how the Fund voted all proxies during a year, the information can be obtained after Aug. 1, 2004 without cost: o On the ISS Web site www.americanexpress.com/funds o On a Web site maintained by the Securities and Exchange Commission, www.sec.gov o By calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. - -------------------------------------------------------------------------------- 28 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Investing in the Fund SALES CHARGE Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the CDSC and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of the Fund. Shares of the Fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C and Class Y, there is no initial sales charge so the public offering price is the same as the NAV. Using the sales charge schedule in the table below, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal year, was determined by dividing the NAV of one share, $4.53, by 0.9425 (1.00 - 0.0575) for a maximum 5.75% sales charge for a public offering price of $4.81. The sales charge is paid to the Distributor by the person buying the shares. Class A -- Calculation of the Sales Charge Sales charges are determined as follows: Sales charge as a percentage of: Total market value Public offering price Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 The initial sales charge is waived for certain qualified plans. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The Fund will waive the deferred sales charge on certain redemptions if the redemption is a result of a participant's death, disability, retirement, attaining age 59 1/2, loans, or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of participants Total plan assets 1-99 100 or more Less than $1 million 4% 0% $1 million or more 0% 0% Class A -- Reducing the Sales Charge The market value of your investments in the Fund determines your sales charge. For example, suppose you have made an investment that now has a value of $20,000 and you later decide to invest $40,000 more. The value of your investments would be $60,000. As a result, your $40,000 investment qualifies for the lower 4.75% sales charge that applies to investments of more than $50,000 and up to $100,000. If you qualify for a reduced sales charge and purchase shares through different channels (for example, in a brokerage account and also directly from the Fund), you must inform the Distributor of your total holdings when placing any purchase orders. Class A -- Letter of Intent (LOI) If you intend to invest more than $50,000 over a period of time, you can reduce the sales charge in Class A by filing a LOI and committing to invest a certain amount. The agreement can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days. Your holdings in American Express mutual funds acquired more than 90 days before receipt of your signed LOI in the corporate office will not be counted towards the completion of the LOI. Your investments will be charged the sales charge that applies to the amount you have committed to invest. Five percent of the commitment amount will be placed in escrow. If your commitment amount is reached within the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by the total value of the new investment combined with the market value of the existing American Express mutual fund investments. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of - -------------------------------------------------------------------------------- 29 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND American Express mutual funds other than Class A; purchases in American Express mutual funds held within a wrap product; and purchases of AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are subsequently exchanged to Class A shares of an American Express mutual fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares through different channels, for example in a brokerage account or through a third party, you must inform the Distributor about the LOI when placing any purchase orders during the period of the LOI. Class Y Shares Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: o uses a daily transfer recordkeeping service offering participants daily access to American Express mutual funds and has o at least $10 million in plan assets or o 500 or more participants; or o does not use daily transfer recordkeeping and has o at least $3 million invested in American Express mutual funds or o 500 or more participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These institutions must have at least $10 million in American Express mutual funds. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. o State sponsored college savings plans established under Section 529 of the Internal Revenue Code. * Eligibility must be determined in advance. To do so, contact your financial advisor. SYSTEMATIC INVESTMENT PROGRAMS You decide how often to make payments -- monthly, quarterly, or semiannually. Provided your account meets the minimum balance requirement, you are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. The Fund also can change the program or end it at any time. AUTOMATIC DIRECTED DIVIDENDS Dividends, including capital gain distributions, paid by another American Express mutual fund may be used to automatically purchase shares in the same class of this Fund. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to this Fund the following day. Dividends can be exchanged into the same class of another American Express mutual fund but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: o Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which American Express Trust Company acts as custodian; o Between two American Express Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); and o Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA or UTMA accounts with identical ownership. The Fund's investment goal is described in its prospectus along with other information, including fees and expense ratios. Before exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REJECTION OF BUSINESS The Fund or AECSC reserves the right to reject any business, in its sole discretion. - -------------------------------------------------------------------------------- 30 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Selling Shares You have a right to sell your shares at any time. For an explanation of sales procedures, please see the prospectus. During an emergency, the board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of the Fund to redeem shares for more than seven days. Such emergency situations would occur if: o The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or o Disposal of the Fund's securities is not reasonably practicable or it is not reasonably practicable for the Fund to determine the fair value of its net assets, or o The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all shareholders. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. Pay-out Plans You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which American Express Trust Company acts as custodian, you can elect to receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of the Fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your selling agent or write American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474, or call (800) 437-3133. Your authorization must be received at least five days before the date you want your payments to begin. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way AEFC can handle efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. The Fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $100 if the value of your account is $20,000 on the payment date. - -------------------------------------------------------------------------------- 31 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Capital Loss Carryover For federal income tax purposes, the Fund had total capital loss carryovers of $2,279 at the end of the most recent fiscal year, that if not offset by subsequent capital gains will expire in 2012. It is unlikely that the board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. Taxes For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For example You purchase 100 shares of one fund having a public offering price of $10.00 per share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of $9.425 per share, the value of your investment is $942.50. Within 91 days of purchasing that fund, you decide to exchange out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.425, and purchase into a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain ($1,100.00 - $942.50). You can include the $57.50 sales load in the calculation of your tax gain or loss when you sell shares in the second fund. If you have a nonqualified investment in the Fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the Fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged exceeds annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. For the most recent fiscal year, 38.07% of the Fund's net investment income dividends qualified for the corporate deduction. Under provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Act), the maximum tax paid on dividends by individuals is reduced to 15% (5% for taxpayers in the 10% and 15% brackets) for tax years 2003 through 2008. The Act also reduces the maximum capital gain rate for securities sold on or after May 6, 2003 through 2008 from 20% to 15% (5% for taxpayers in the 10% and 15% brackets). The Act provides that only certain qualified dividend income (QDI) will be subject to the 15% and 5% tax rates. QDI is dividends earned from domestic corporations and qualified foreign corporations. Qualified foreign corporations are corporations incorporated in a U.S. possession, corporations whose stock is readily tradable on an established U.S. securities market (ADRs), and certain other corporations eligible for relief under an income tax treaty with the U.S. that includes an exchange of information agreement (except Barbados). Excluded are passive foreign investment companies (PFICs), foreign investment companies and foreign personal holding companies. Holding periods for shares must also be met to be eligible for QDI treatment (60 days for stock and 90 days for preferreds). The QDI for individuals for the most recent fiscal year was 0%. The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Income earned by the Fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of the Fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the Fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the Fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be - -------------------------------------------------------------------------------- 32 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the Fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long shareholders owned their shares. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. Special rates on capital gains may apply to sales of precious metals, if any, owned directly by the Fund and to investments in REITs. Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of the Fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year the Fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. The Internal Revenue Code imposes two asset diversification rules that apply to the Fund as of the close of each quarter. First, as to 50% of its holdings, the Fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, the Fund cannot have more than 25% of its assets in any one issuer. For purposes of the excise tax distributions, "section 988" ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to the stock, the dividend will be included in gross income by the Fund as of the later of (1) the date the share became ex-dividend or (2) the date the Fund acquired the share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the Fund, this rule may cause the Fund to pay income to its shareholders that it has not actually received. To the extent that the dividend is never received, the Fund will take a loss at the time that a determination is made that the dividend will not be received. Distributions, if any, that are in excess of the Fund's current or accumulated earnings and profits will first reduce a shareholder's tax basis in the Fund and, after the basis is reduced to zero, will generally result in capital gains to a shareholder when the shares are sold. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to Fund distributions. Agreements INVESTMENT MANAGEMENT SERVICES AGREEMENT AEFC, a wholly-owned subsidiary of American Express Company, is the investment manager for the Fund. Under the Investment Management Services Agreement, AEFC, subject to the policies set by the board, provides investment management services. For its services, AEFC is paid a fee based on the following schedule. Each class of the Fund pays its proportionate share of the fee. Assets (billions) Annual rate at each asset level First $ 1.0 0.600% Next 1.0 0.575 Next 1.0 0.550 Next 3.0 0.525 Next 6.0 0.500 Next 12.0 0.490 Over 24.0 0.480 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.600% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. - -------------------------------------------------------------------------------- 33 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Before the fee based on the asset charge is paid, it is adjusted for investment performance. The adjustment, determined monthly, will be determined by measuring the percentage difference over a rolling 12-month period between the performance of one Class A share of the Fund and the change in the Lipper Large-Cap Core Funds Index (Index). The performance difference is then used to determine the adjustment rate. The adjustment rate, computed to five decimal places, is determined in accordance with the following table: Performance difference Adjustment rate 0.00%-0.50% 0 0.50%-1.00% 6 basis points times the performance difference over 0.50% (maximum of 3 basis points if a 1% performance difference) 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference over 1.00% (maximum 6 basis points if a 2% performance difference) 2.00%-4.00% 6 basis points, plus 2 basis points times the performance difference over 2.00% (maximum 10 basis points if a 4% performance difference) 4.00%-6.00% 10 basis points, plus 1 basis point times the performance difference over 4.00% (maximum 12 basis points if a 6% performance difference) 6.00% or more 12 basis points For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the Fund is 0.0012 per year. Where the Fund's Class A performance exceeds that of the Index, the fee paid to AEFC will increase. Where the performance of the Index exceeds the performance of the Fund's Class A shares, the fee paid to AEFC will decrease. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. The adjustment increased the fee by $5,623 for fiscal year 2003. The management fee is paid monthly. Under the agreement, the total amount paid was $342,000 for fiscal year 2003 and $20,304 for fiscal period 2002. Under the agreement, the Fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; postage of confirmations except purchase confirmations; consultants' fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; and expenses properly payable by the Fund, approved by the board. Under the agreement, nonadvisory expenses, net of earnings credits, waivers and expenses reimbursed by AEFC, paid by the Fund were $40,890 for fiscal year 2003 and $3,787 for fiscal period 2002. Basis for board approving the investment advisory contract Based on its work throughout the year and detailed analysis by the Contracts Committee of reports provided by AEFC, the independent board members determined to renew the Investment Management Services Agreement and Subadvisory Agreements (where applicable) based on: o tangible steps AEFC has taken to improve the competitive ranking and consistency of the investment performance of the Fund, including changes in leadership, portfolio managers, compensation structures, and the implementation of management practices, o continued commitment to expand the range of investment options that it offers investors, through repositioning existing funds and creating new funds, o consistent effort to provide a management structure that imposes disciplines that ensure adherence to stated management style and expected risk characteristics, o additional time needed to evaluate the efficacy of the new AEFC management structure that has produced improved performance results in the short term, o benefit of economy of scale that results from the graduated fee structure and the reasonableness of fees in light of the fees paid by similar funds in the industry, o competitive total expenses that are either at or only slightly above the median expenses of a group of comparable funds based on a report prepared by Lipper Inc., and o reasonable level of AEFC's profitability from its mutual fund operations. - -------------------------------------------------------------------------------- 34 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND ADMINISTRATIVE SERVICES AGREEMENT The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets (billions) Annual rate at each asset level First $1.0 0.050% Next 1.0 0.045 Next 1.0 0.040 Next 3.0 0.035 Next 6.0 0.030 Next 12.0 0.025 Over 24.0 0.020 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.050% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. Under the agreement, the Fund paid fees of $27,560 for fiscal year 2003 and $1,692 for fiscal period 2002. TRANSFER AGENCY AGREEMENT The Fund has a Transfer Agency Agreement with American Express Client Service Corporation (AECSC). This agreement governs AECSC's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the Fund's shares. Under the agreement, AECSC will earn a fee from the Fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The rate for Class A is $19.50 per year, for Class B is $20.50 per year, for Class C is $20.00 per year and for Class Y is $17.50 per year. In addition, there is an annual closed-account fee of $5.00 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system, generally within one year. The fees paid to AECSC may be changed by the board without shareholder approval. DISTRIBUTION AGREEMENT American Express Financial Advisors Inc. is the Fund's principal underwriter (the Distributor). The Fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to the Distributor daily. These charges amounted to $592,326 for fiscal year 2003. After paying commissions to personal financial advisors, and other expenses, the amount retained was $76,721. The amounts were $71,293 and $(27,042) for fiscal period 2002. Part of the sales charge may be paid to selling dealers who have agreements with the Distributor. The Distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. SHAREHOLDER SERVICE AGREEMENT With respect to Class Y shares, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of average daily net assets. PLAN AND AGREEMENT OF DISTRIBUTION For Class A, Class B and Class C shares, to help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, the Fund and the Distributor entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, of the type known as a reimbursement plan, the Fund pays a fee up to actual expenses incurred at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material change to expenses charged under the Class A plan. Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of Class A, Class B and Class C shares; and overhead appropriately allocated to the sale of Class A, Class B and Class C shares. These expenses also include costs of providing personal service to shareholders. A substantial portion of the costs are not specifically identified to any one of the American Express mutual funds. - -------------------------------------------------------------------------------- 35 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the relevant class of shares or by the Distributor. The Plan (or any agreement related to it) will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the board members, including a majority of the board members who are not interested persons of the Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement. For the most recent fiscal year, the Fund paid fees of $94,937 for Class A shares, $171,345 for Class B shares and $9,241 for Class C shares. The fee is not allocated to any one service (such as advertising, payments to underwriters, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. CUSTODIAN AGREEMENT The Fund's securities and cash are held by American Express Trust Company, 200 AXP Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. The custodian may enter into a sub-custodian agreement with the Bank of New York, 90 Washington Street, New York, NY 10286. As part of this arrangement, securities purchased outside the United States are maintained in the custody of various foreign branches of Bank of New York or in other financial institutions as permitted by law and by the Fund's sub-custodian agreement. Organizational Information The Fund is an open-end management investment company. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The shares of the Fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of the Fund would have the same rights to dividends and assets as every other share of that Fund. VOTING RIGHTS As a shareholder in the Fund, you have voting rights over the Fund's management and fundamental policies. You are entitled to vote based on your total dollar interest in the Fund. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of board members. This means that you have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. DIVIDEND RIGHTS Dividends paid by the Fund, if any, with respect to each class of shares, if applicable, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures. AMERICAN EXPRESS FINANCIAL CORPORATION AEFC has been a provider of financial services since 1894. Its family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. In addition to managing assets of more than $66 billion for the publicly offered American Express Funds, AEFC manages investments for itself and its subsidiaries, American Express Certificate Company and IDS Life Insurance Company. Total assets owned and managed as of the end of the most recent fiscal year were more than $207 billion. The Distributor serves individuals and businesses through its nationwide network of more than 3,700 registered branch offices and more than 10,200 financial advisors. - -------------------------------------------------------------------------------- 36 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) California Tax-Exempt Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) California Tax-Exempt Fund No AXP(R) Dimensions Series, Inc.(4) 2/20/68, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Dimensions Fund Yes AXP(R) New Dimensions Fund Yes AXP(R) Discovery Series, Inc.(4) 4/29/81, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Core Bond Fund Yes AXP(R) Discovery Fund Yes AXP(R) Income Opportunities Fund Yes AXP(R) Limited Duration Bond Fund Yes AXP(R) Equity Series, Inc.(4) 3/18/57, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Equity Select Fund Yes AXP(R) Fixed Income Series, Inc.(4) 6/27/74, 6/31/86(1) Corporation NV/MN 8/31 AXP(R) Diversified Bond Fund(5) Yes AXP(R) Global Series, Inc. 10/28/88 Corporation MN 10/31 AXP(R) Emerging Markets Fund Yes AXP(R) Global Balanced Fund Yes AXP(R) Global Bond Fund No AXP(R) Global Growth Fund Yes AXP(R) Global Technology Fund(3) No AXP(R) Government Income Series, Inc.(4) 3/12/85 Corporation MN 5/31 AXP(R) Short Duration U.S. Government Fund(5) Yes AXP(R) U.S. Government Mortgage Fund Yes AXP(R) Growth Series, Inc. 5/21/70, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Fund Yes AXP(R) Large Cap Equity Fund Yes AXP(R) Large Cap Value Fund Yes AXP(R) Quantitative Large Cap Equity Fund Yes AXP(R) Research Opportunities Fund Yes AXP(R) High Yield Income Series, Inc.(4) 8/17/83 Corporation MN 5/31 AXP(R) High Yield Bond Fund(5) Yes AXP(R) High Yield Tax-Exempt Series, Inc.(4) 12/21/78, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) High Yield Tax-Exempt Fund Yes AXP(R) Income Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 5/31 AXP(R) Selective Fund Yes AXP(R) International Series, Inc.(4) 7/18/84 Corporation MN 10/31 AXP(R) European Equity Fund No AXP(R) International Fund Yes AXP(R) Investment Series, Inc. 1/18/40, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Diversified Equity Income Fund Yes AXP(R) Mid Cap Value Fund Yes AXP(R) Mutual Yes
- -------------------------------------------------------------------------------- 37 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Managed Series, Inc. 10/9/84 Corporation MN 9/30 AXP(R) Managed Allocation Fund Yes AXP(R) Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31 AXP(R) Blue Chip Advantage Fund Yes AXP(R) Mid Cap Index Fund No AXP(R) S&P 500 Index Fund No AXP(R) Small Company Index Fund Yes AXP(R) Money Market Series, Inc. 8/22/75, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Cash Management Fund Yes AXP(R) Partners Series, Inc. 3/20/01 Corporation MN 5/31 AXP(R) Partners Aggressive Growth Fund Yes AXP(R) Partners Fundamental Value Fund Yes AXP(R) Partners Growth Fund Yes AXP(R) Partners Select Value Fund Yes AXP(R) Partners Small Cap Core Fund Yes AXP(R) Partners Small Cap Value Fund No AXP(R) Partners Value Fund Yes AXP(R) Partners International Series, Inc. 5/9/01 Corporation MN 10/31 AXP(R) Partners International Aggressive Growth Fund Yes AXP(R) Partners International Core Fund Yes AXP(R) Partners International Select Value Fund Yes AXP(R) Partners International Small Cap Fund Yes AXP(R) Progressive Series, Inc.(4) 4/23/68, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Progressive Fund Yes AXP(R) Sector Series, Inc.(3),(4) 3/25/88 Corporation MN 6/30 AXP(R) Utilities Fund Yes AXP(R) Selected Series, Inc.(4) 10/5/84 Corporation MN 3/31 AXP(R) Precious Metals Fund No AXP(R) Special Tax-Exempt Series Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) Insured Tax-Exempt Fund Yes AXP(R) Massachusetts Tax-Exempt Fund No AXP(R) Michigan Tax-Exempt Fund No AXP(R) Minnesota Tax-Exempt Fund No AXP(R) New York Tax-Exempt Fund No AXP(R) Ohio Tax-Exempt Fund No AXP(R) Stock Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Stock Fund Yes AXP(R) Strategy Series, Inc. 1/24/84 Corporation MN 3/31 AXP(R) Equity Value Fund Yes AXP(R) Focused Growth Fund(3) No AXP(R) Partners Small Cap Growth Fund(3) Yes AXP(R) Small Cap Advantage Fund Yes AXP(R) Strategy Aggressive Fund Yes
- -------------------------------------------------------------------------------- 38 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Tax-Exempt Series, Inc. 9/30/76, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Intermediate Tax-Exempt Fund Yes AXP(R) Tax-Exempt Bond Fund Yes AXP(R)Tax-Free Money Series, Inc.(4) 2/29/80, 6/13/86(1) Corporation NV/MN 12/31 AXP(R)Tax-Free Money Fund Yes
(1) Date merged into a Minnesota corporation incorporated on April 7, 1986. (2) Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. (3) Effective Feb. 7, 2002, AXP(R) Focus 20 Fund changed its name to AXP(R) Focused Growth Fund, AXP(R) Innovations Fund changed its name to AXP(R) Global Technology Fund, AXP(R) Small Cap Growth Fund changed its name to AXP(R) Partners Small Cap Growth Fund and AXP(R) Utilities Income Fund, Inc. created a series, AXP(R) Utilities Fund. (4) Effective Nov. 13, 2002, AXP(R) Bond Fund, Inc. changed its name to AXP(R) Fixed Income Series, Inc. and created a series, AXP(R) Bond Fund, AXP(R) Discovery Fund, Inc. changed its name to AXP(R) Discovery Series, Inc. and created a series, AXP(R) Discovery Fund, AXP(R) Equity Select Fund, Inc. changed its name to AXP(R) Equity Series, Inc. and created a series, AXP(R) Equity Select Fund, AXP(R) Extra Income Fund, Inc. changed its name to AXP(R) High Yield Income Series, Inc. and created a series, AXP(R) Extra Income Fund, AXP(R) Federal Income Fund, Inc. changed its name to AXP(R) Government Income Series, Inc., AXP(R) High Yield Tax-Exempt Fund, Inc. changed its name to AXP(R) High Yield Tax-Exempt Series, Inc. and created a series, AXP(R) High Yield Tax-Exempt Fund, AXP(R) International Fund, Inc. changed its name to AXP(R) International Series, Inc., AXP(R) New Dimensions Fund, Inc. changed its name to AXP(R) Dimensions Series, Inc., AXP(R) Precious Metals Fund, Inc. changed its name to AXP(R) Selected Series, Inc. and created a series, AXP(R) Precious Metals Fund, AXP(R) Progressive Fund, Inc. changed its name to AXP(R) Progressive Series, Inc. and created a series, AXP(R) Progressive Fund, AXP(R) Selective Fund, Inc. changed its name to AXP(R) Income Series, Inc. and created a series, AXP(R) Selective Fund, AXP(R) Stock Fund, Inc. changed its name to AXP(R) Stock Series, Inc. and created a series, AXP(R) Stock Fund, AXP(R) Tax-Free Money Fund, Inc. changed its name to AXP(R) Tax-Free Money Series, Inc. and created a series, AXP(R) Tax-Free Money Fund, and AXP(R) Utilities Income Fund, Inc. changed its name to AXP(R) Sector Series, Inc. (5) Effective June 27, 2003, AXP(R) Bond Fund changed its name to AXP(R) Diversified Bond Fund, AXP(R) Federal Income Fund changed its name to AXP(R) Short Duration U.S. Government Fund and AXP(R) Extra Income Fund changed its name to AXP(R) High Yield Bond Fund. - -------------------------------------------------------------------------------- 39 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 83 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Name, Position held with Principal occupation during Other Committee memberships address, Fund and length of past five years directorships age service - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Arne H. Carlson Board member Chair, Board Services Joint Audit, 901 S. Marquette Ave. since 1999 Corporation (provides Contracts, Executive, Minneapolis, MN 55402 administrative services to Investment Review, Age 68 boards). Former Governor of Board Effectiveness Minnesota - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power 901 S. Marquette Ave. since 2002 Fluor Corporation PLC, Vulcan Minneapolis, MN 55402 (engineering and Materials Age 65 construction) since 1998 Company, Inc. (construction materials/chemicals) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Livio D. DeSimone Board member Retired Chair of the Board Cargill, Joint Audit, 30 Seventh Street East since 2001 and Chief Executive Officer, Incorporated Contracts, Executive Suite 3050 Minnesota Mining and (commodity St. Paul, MN 55101-4901 Manufacturing (3M) merchants and Age 69 processors), General Mills, Inc. (consumer foods), Vulcan Materials Company (construction materials/chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Heinz F. Hutter* Board member Retired President and Chief Board Effectiveness, 901 S. Marquette Ave. since 1994 Operating Officer, Cargill, Executive, Investment Minneapolis, MN 55402 Incorporated (commodity Review Age 74 merchants and processors) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Anne P. Jones Board member Attorney and Consultant Joint Audit, Board 901 S. Marquette Ave. since 1985 Effectiveness, Minneapolis, MN 55402 Executive Age 68 - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Stephen R. Lewis, Jr.** Board member Retired President and Valmont Contracts, Investment 901 S. Marquette Ave. since 2002 Professor of Economics, Industries, Inc. Review, Executive Minneapolis, MN 55402 Carleton College (manufactures Age 64 irrigation systems) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Alan G. Quasha Board member President, Quadrant Compagnie Joint Audit, 901 S. Marquette Ave. since 2002 Management, Inc. (management Financiere Board Effectiveness Minneapolis, MN 55402 of private equities) Richemont AG Age 53 (luxury goods) Harken Energy Corporation (oil and gas exploration) and SIRIT Inc. (radio frequency identification technology) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Alan K. Simpson Board member Former three-term United Biogen, Inc. Investment Review, 1201 Sunshine Ave. since 1997 States Senator for Wyoming (biopharmaceuticals) Board Effectiveness Cody, WY 82414 Age 71 - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Alison Taunton-Rigby Board member President, Forester Biotech Investment Review, 901 S. Marquette Ave. since 2002 since 2000. Former President Contracts Minneapolis, MN 55402 and CEO, Aquila Age 59 Biopharmaceuticals, Inc. - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------
* Interested person of AXP Partners International Aggressive Growth Fund and AXP Partners Aggressive Growth Fund by reason of being a security holder of J P Morgan Chase & Co., which has a 45% interest in American Century Companies, Inc., the parent company of the subadviser of two of the AXP Partners Funds, American Century Investment Management, Inc. ** Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Liberty Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 40 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND
Board Members Affiliated with AEFC*** - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Name, Position held with Principal occupation during Other Committee memberships address, Fund and length of past five years directorships age service - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Barbara H. Fraser Board member Executive Vice President - 1546 AXP Financial Center since 2002 AEFA Products and Corporate Minneapolis, MN 55474 Marketing of AEFC since Age 53 2002. President - Travelers Check Group, American Express Company, 2001-2002. Management Consultant, Reuters, 2000-2001. Managing Director - International Investments, Citibank Global, 1999-2000. Chairman and CEO, Citicorp Investment Services and Citigroup Insurance Group, U.S., 1998-1999 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Stephen W. Roszell Board member Senior Vice President - 50238 AXP Financial Center since 2002; Vice Institutional Group of AEFC Minneapolis, MN 55474 President since Age 54 2002 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- William F. Truscott Board member Senior Vice President - 53600 AXP Financial Center since 2001, Vice Chief Investment Officer of Minneapolis, MN 55474 President since AEFC since 2001. Former Age 42 2002 Chief Investment Officer and Managing Director, Zurich Scudder Investments - ------------------------------- -------------------- ------------------------------ ------------------- -----------------------
*** Interested person by reason of being an officer, director and/or employee of AEFC. The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Roszell, who is vice president, and Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Name, Position held with Principal occupation during Other Committee memberships address, Fund and length of past five years directorships age service - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Jeffrey P. Fox Treasurer Vice President - Investment 50005 AXP Financial Center since 2002 Accounting, AEFC, since Minneapolis, MN 55474 Age 48 2002; Vice President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Paula R. Meyer President Senior Vice President and 596 AXP Financial Center since 2002 General Manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Age 49 Vice President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Leslie L. Ogg Vice President, President of Board Services 901 S. Marquette Ave. General Counsel, Corporation Minneapolis, MN 55402 and Secretary Age 64 since 1978 - ------------------------------- -------------------- ------------------------------ ------------------- -----------------------
- -------------------------------------------------------------------------------- 41 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Responsibilities of board with respect to Fund's management The board initially approves an Investment Management Services Agreement and other contracts with American Express Financial Corporation (AEFC), one of AEFC's subsidiaries, and other service providers. Once the contracts are approved, the board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts of interest. Annually, the board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and AEFC's profitability in order to determine whether to continue existing contracts or negotiate new contracts. Several committees facilitate its work Executive Committee -- Acts for the board between meetings of the board. The committee held two meetings during the last fiscal year. Joint Audit Committee -- Meets with the independent public accountant, internal auditors and corporate officers to review financial statements, reports, and compliance matters. Reports significant issues to the board and makes recommendations to the independent directors regarding the selection of the independent public accountant. The committee held four meetings during the last fiscal year. Investment Review Committee -- Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the board. The committee held four meetings during the last fiscal year. Board Effectiveness Committee -- Recommends to the board the size, structure and composition for the board; the compensation to be paid to members of the board; and a process for evaluating the board's performance. The committee also reviews candidates for board membership including candidates recommended by shareholders. To be considered, recommendations must include a curriculum vita and be mailed to the Chairman of the Board, American Express Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The committee held four meetings during the last fiscal year. Contracts Committee -- Receives and analyzes reports covering the level and quality of services provided under contracts with the Fund and advises the board regarding actions taken on these contracts during the annual review process. The committee held four meetings during the last fiscal year. BOARD MEMBERS' HOLDINGS The following table shows the Fund Board Members' ownership of American Express Funds. Dollar range of equity securities beneficially owned on Dec. 31, 2002 Based on net asset values as of Dec. 31, 2002 Aggregate dollar range of Dollar range of equity securities of all equity securities American Express Funds in the Fund overseen by Board Member Range Range Arne H. Carlson none over $100,000 Philip J. Carroll, Jr. none none Livio D. DeSimone none over $100,000 Heinz F. Hutter none over $100,000 Anne P. Jones none over $100,000 Stephen R. Lewis, Jr. none $1-$10,000 Alan G. Quasha none none Alan K. Simpson none $50,001-$100,000 Alison Taunton-Rigby none none - -------------------------------------------------------------------------------- 42 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND COMPENSATION FOR BOARD MEMBERS During the most recent fiscal year, the independent members of the Fund board, for attending up to 28 meetings, received the following compensation: Compensation Table Total cash compensation from Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $275 $ 44,183 Livio D. DeSimone 714 137,942 Heinz F. Hutter 614 142,242 Anne P. Jones 664 146,692 Stephen R. Lewis, Jr. 714 133,642 Alan G. Quasha 608 124,292 Alan K. Simpson 558 119,642 Alison Taunton-Rigby 658 106,450 * Arne H. Carlson, Chair of the Board, is compensated by Board Services Corporation. As of 30 days prior to the date of this SAI, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. Independent Auditors The financial statements contained in the Annual Report were audited by independent auditors, KPMG LLP, 4200 Wells Fargo Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also provide other accounting and tax-related services as requested by the Fund. - -------------------------------------------------------------------------------- 43 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Appendix DESCRIPTION OF RATINGS Standard & Poor's Long-term Debt Ratings A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: o Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. o Nature of and provisions of the obligation. o Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Investment Grade Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. Speculative Grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. - -------------------------------------------------------------------------------- 44 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Moody's Long-Term Debt Ratings Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A -- Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa -- Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds that are rated Ba are judged to have speculative elements -- their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Fitch's Long-Term Debt Ratings Fitch's bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature of taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. Investment Grade AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. - -------------------------------------------------------------------------------- 45 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Speculative Grade BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest potential for recovery. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. Standard & Poor's Muni Bond and Note Ratings An S&P municipal bond or note rating reflects the liquidity factors and market-access risks unique to these instruments. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Municipal bond rating symbols and definitions are as follows: Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. - -------------------------------------------------------------------------------- 46 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. Moody's Short-Term Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are rated by Moody's. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. Fitch's Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D: Default. Issues assigned this rating are in actual or imminent payment default. - -------------------------------------------------------------------------------- 47 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) LARGE CAP EQUITY FUND S-6244-20 D (9/03) EX-99.17F PROSPECTUS 8 ex17-f.txt PROSPECTUS FOR AXP BLUE CHIP ADVANTAGE FUND AXP(R) Blue Chip Advantage Fund AXP Blue Chip Advantage Fund seeks to provide shareholders with a long-term total return exceeding that of the U.S. stock market. PROSPECTUS APRIL 1, 2003 Please note that this Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goal Like all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- Table of Contents TAKE A CLOSER LOOK AT: The Fund 3p Goal 3p Principal Investment Strategies 3p Principal Risks 4p Past Performance 5p Fees and Expenses 7p Investment Manager 8p Other Securities and Investment Strategies 9p Buying and Selling Shares 9p Valuing Fund Shares 9p Investment Options 9p Purchasing Shares 11p Transactions Through American Express Brokerage or Third Parties 13p Sales Charges 14p Exchanging/Selling Shares 17p Distributions and Taxes 20p Financial Highlights 21p - -------------------------------------------------------------------------------- 2p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS The Fund GOAL AXP Blue Chip Advantage Fund (the Fund) seeks to provide shareholders with a long-term total return exceeding that of the U.S. stock market. Because any investment involves risk, achieving this goal cannot be guaranteed. PRINCIPAL INVESTMENT STRATEGIES Under normal market conditions, at least 80% of the Fund's net assets are invested in blue chip stocks. Blue chip stocks are issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. A common measure of blue chip stocks is the S&P 500 Index. The S&P 500 Index is an unmanaged market index used to measure the total return of the U.S. stock market (the Fund may change this market index from time to time). While the Fund invests in stocks included in the S&P 500 Index, it is not an index fund, it may own companies not included in the index, and its results will likely differ from the index. Selecting blue chip stocks is the primary decision in building the investment portfolio. In pursuit of the Fund's goal, American Express Financial Corporation (AEFC), the Fund's investment manager, chooses equity investments by: o Identifying companies with: o attractive valuations, o financial strength, o strong, sustainable earnings growth, and o improving growth dynamics. o Buying a diversified portfolio of securities. o Buying equity securities not included in the S&P 500 Index if those securities meet the standards described above. In evaluating whether to sell a security, AEFC considers, among other factors, whether: o The security is overvalued relative to alternative investments. o Political, economic, or other events could affect the company's performance. o Potential losses can be minimized (i.e., in a market down-turn). o A more attractive opportunity exists. o The company or the security continues to meet the other standards described above. During weak or declining markets, the Fund may invest more of its assets in money market securities. Although the Fund primarily will invest in these securities to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees, expenses, and taxes. - -------------------------------------------------------------------------------- 3p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: Market Risk Issuer Risk Style Risk Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. Style Risk The objective of the Fund is to provide shareholders with a long-term return exceeding that of the U.S. stock market. Currently, the S&P 500 Index is the market index used to measure total return of the U.S. stock market. However, unlike the unmanaged index, the Fund's performance is affected by factors such as the size of the Fund's portfolio, transaction costs, management fees and expenses, brokerage commissions and fees, the extent and timing of cash flows in and out of the Fund, stock selection, sector weightings, and other such factors. As a result, once these factors are accounted for, the Fund may under-perform the market index. - -------------------------------------------------------------------------------- 4p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: o how the Fund's performance has varied for each full calendar year shown on the chart below, and o how the Fund's average annual total returns compare to recognized indexes. How the Fund has performed in the past does not indicate how the Fund will perform in the future. CLASS A PERFORMANCE (based on calendar years) 40% 35% +36.57% 30% 25% +26.18% 20% +21.43% +22.91% +20.42% 15% +12.15% -17.03% 10% 5% 0% +1.27% -5% - -10% -11.52% - -15% - -20% -22.77% - -25% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 During the period shown in the bar chart, the highest return for a calendar quarter was +20.14% (quarter ending December 1998) and the lowest return for a calendar quarter was -18.02% (quarter ending September 2002). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in sales charges and fees. The Fund's Class A year to date return as of Dec. 31, 2002 was -22.77%. - -------------------------------------------------------------------------------- 5p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS
Average Annual Total Returns (as of Dec. 31, 2002) Since Since 1 year 5 years 10 years inception (B&Y) inception (C) Blue Chip Advantage: Class A Return before taxes -27.22% -4.58% +6.52% N/A N/A Return after taxes on distributions -27.35% -5.76% +4.09% N/A N/A Return after taxes on distributions and sale of fund shares -16.71% -3.50% +4.49% N/A N/A Class B Return before taxes -26.47% -4.34% N/A +5.70%(a) N/A Class C Return before taxes -23.47% N/A N/A N/A -20.26%(c) Class Y Return before taxes -22.61% -3.31% N/A +6.66%(a) N/A S&P 500 Index -22.10% -0.59% +9.34% +9.33%(b) -17.06%(d) Lipper Large-Cap Core Funds Index -21.23% -0.74% +8.04% +8.05%(b) -17.18%(d)
(a) Inception date was March 20, 1995. (b) Measurement period started April 1, 1995. (c) Inception date was June 26, 2000. (d) Measurement period started July 1, 2000. Before-Tax Returns This table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. These returns are compared to the indexes shown for the same periods. The performance of different classes varies because of differences in sales charges and fees. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, although not for other differences in expenses. After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The Return After Taxes on Distributions for a period may be the same as the Return Before Taxes for the same period if there are no distributions or if the distributions are small. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return Before Taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. - -------------------------------------------------------------------------------- 6p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. Standard & Poor's 500 Index (S&P 500 Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. The Lipper Large-Cap Core Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 5.75%(b) none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none 5% 1%(c) none
Annual Fund operating expenses (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees(d) 0.45% 0.45% 0.45% 0.45% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(e) 0.30% 0.32% 0.34% 0.37% Total 1.00% 1.77% 1.79% 0.82% (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. See "Sales Charges." (b) For Class A purchases over $500,000 on which the sales charge is waived, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.02% for the most recent fiscal year. (e) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. - -------------------------------------------------------------------------------- 7p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS Example This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return. The operating expenses remain the same each year. If you hold your shares until the end of the years shown, your costs would be: 1 year 3 years 5 years 10 years Class A(a) $671 $875 $1,097 $1,734 Class B(b) $580 $857 $1,060 $1,885(d) Class B(c) $180 $557 $ 960 $1,885(d) Class C $182 $564 $ 971 $2,110 Class Y $ 84 $262 $ 456 $1,018 (a) Includes a 5.75% sales charge. (b) Assumes you sold your Class B shares at the end of the period and incurred the applicable CDSC. (c) Assumes you did not sell your Class B shares at the end of the period. (d) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. This example does not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. INVESTMENT MANAGER James M. Johnson Jr., portfolio manager, joined AEFC in 1994 as an equity quantitative analyst. He began managing portfolios for American Express Asset Management in 1996. He is portfolio manager of Total Return Portfolio and AXP Variable Portfolio - Blue Chip Advantage Fund. He also serves as co-portfolio manager of AXP Small Company Index Fund, AXP S&P 500 Index Fund, AXP Mid Cap Index Fund, and AXP Variable Portfolio - S&P 500 Index Fund. The Fund pays AEFC a fee for managing its assets. Under the Investment Management Services Agreement, the fee for the most recent fiscal year was 0.45% of the Fund's average daily net assets, including an adjustment under the terms of a performance incentive arrangement. The maximum monthly adjustment (increase or decrease) will be 0.12% of the Fund's average net assets on an annual basis. Under the agreement, the Fund also pays taxes, brokerage commissions, and nonadvisory expenses. AEFC or an affiliate may make payments from its own resources, which include profits from management fees paid by the Fund, to compensate broker-dealers or other persons for providing distribution assistance. AEFC, located at 200 AXP Financial Center, Minneapolis, Minnesota 55474, is a wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, New York 10285. The Fund operates under an order from the Securities and Exchange Commission that permits AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. - -------------------------------------------------------------------------------- 8p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments such as money market securities. Additionally, the Fund may utilize derivative instruments (such as futures, options and forward contracts) to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. Buying and Selling Shares VALUING FUND SHARES The public offering price for Class A is the net asset value (NAV) adjusted for the sales charge. For Class B, Class C and Class Y, it is the NAV. The NAV is the value of a single Fund share. The NAV usually changes daily, and is calculated at the close of business of the New York Stock Exchange, normally 3 p.m. Central Time (CT), each business day (any day the New York Stock Exchange is open). Fund shares may be purchased through various third-party organizations, including 401(k) plans, banks, brokers and investment advisers. Where authorized by the Fund, orders will be priced at the NAV next computed after receipt by the organization or their selected agent. The Fund's investments are valued based on market quotations, or where market quotations are not readily available, based on methods selected in good faith by the board. If the Fund's investment policies permit it to invest in securities that are listed on foreign stock exchanges that trade on weekends or other days when the Fund does not price its shares, the value of the Fund's underlying investments may change on days when you could not buy or sell shares of the Fund. Please see the SAI for further information. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution fee of 1.00% (may be subject to a CDSC). 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee. Please see the SAI for information on eligibility to purchase Class Y shares. - -------------------------------------------------------------------------------- 9p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS Investment options summary The Fund offers four different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision. The following table shows the key features of each class: Class A Class B Class C Class Y - --------------- ---------------- -------------- --------------- ---------------- Availability Available to Available to Available to Limited to all investors. all all investors. qualifying investors. institutional investors. - --------------- ---------------- -------------- --------------- ---------------- Initial Sales Yes. Payable No. Entire No. Entire No. Entire Charge at time of purchase purchase purchase price purchase. price is price is is invested in Lower sales invested in invested in shares of the charge for shares of shares of the Fund. larger the Fund. Fund. investments. - --------------- ---------------- -------------- --------------- ---------------- Deferred Sales On purchases Maximum 5% 1% CDSC None. Charge over $500,000, CDSC during applies if 1% CDSC the first you sell your applies if you year shares less sell your decreasing than one year shares less to 0% after after than one year six years. purchase. after purchase. - --------------- ---------------- -------------- --------------- ---------------- Distribution Yes.* 0.25% Yes.* 1.00% Yes.* 1.00% Yes. 0.10% and/or Shareholder Service Fee - --------------- ---------------- -------------- --------------- ---------------- Conversion to N/A Yes, No. No. Class A automatically in ninth calendar year of ownership. - --------------- ---------------- -------------- --------------- ---------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $250,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $250,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. - -------------------------------------------------------------------------------- 10p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS PURCHASING SHARES To purchase shares through an American Express Brokerage Account or entities other than American Express Financial Advisors Inc., please refer to the American Express Brokerage Web site or consult your selling agent. The following section explains how you can purchase shares from American Express Financial Advisors (the Distributor). If you do not have a mutual fund account, you need to establish one. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase shares for a new or existing account, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 30% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - ------------------------------------ ---------------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - ------------------------------------ ---------------------------------------- Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - ------------------------------------ ---------------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - ------------------------------------ ---------------------------------------- An irrevocable trust, pension The legal entity (not the personal trust or estate representative or trustee, unless no legal entity is designated in the account title) - ------------------------------------ ---------------------------------------- Sole proprietorship The owner - ------------------------------------ ---------------------------------------- Partnership The partnership - ------------------------------------ ---------------------------------------- Corporate The corporation - ------------------------------------ ---------------------------------------- Association, club or tax-exempt The organization organization - ------------------------------------ ---------------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (www.irs.gov). - -------------------------------------------------------------------------------- 11p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS Three ways to invest 1 By mail Once your account has been established, send your check with the account number on it to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000 Additional investments: $100 Account balances: $300 Qualified accounts: none If your account balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. 2 By scheduled investment plan Contact your financial advisor for assistance in setting up one of the following scheduled plans: o automatic payroll deduction, o bank authorization, o direct deposit of Social Security check, or o other plan approved by the Fund. Minimum amounts Initial investment: $100 Additional investments: $50 per payment for qualified accounts; $100 per payment for nonqualified accounts Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. - -------------------------------------------------------------------------------- 12p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS 3 By wire or electronic funds transfer If you have an established account, you may wire money to: Wells Fargo Bank Minnesota, N.A. Minneapolis, MN 55479 Routing Transit No. 091000019 Give these instructions: Credit American Express Financial Advisors Account #0000030015 for personal account # (your account number) for (your name). Please be sure to include all 10 digits of the American Express Financial Advisors account number, including the zeros. If this information is not included, the order may be rejected, and all money received by the Fund, less any costs the Fund or American Express Client Service Corporation (AECSC) incurs, will be returned promptly. Minimum amounts Each wire investment: $1,000 TRANSACTIONS THROUGH AMERICAN EXPRESS BROKERAGE OR THIRD PARTIES You may buy or sell shares through American Express Brokerage, certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through American Express Brokerage or third parties or to determine if there are policy differences, please consult the American Express Brokerage Web site or your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. - -------------------------------------------------------------------------------- 13p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS SALES CHARGES Class A -- initial sales charge alternative When you purchase Class A shares, you pay a sales charge as shown in the following table: Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.75 3.90 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00** 2.04** $1,000,000 or more 0.00 0.00 * Offering price includes the sales charge. ** The sales charge will be waived until further notice. The sales charge on Class A shares may be lower than 5.75%, based on the combined market value of: o your current investment in this Fund, o your previous investment in this Fund, and o investments you and your primary household group have made in other American Express mutual funds that have a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. For purposes of this policy, domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do not have sales charges. Other Class A sales charge policies o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, and o if you intend to invest more than $50,000 over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. If purchasing shares in a brokerage account or through a third party, you must request the reduced sales charge when you buy shares. For more details, please contact your financial advisor or see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired American Express financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. - -------------------------------------------------------------------------------- 14p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS o registered representatives and other employees of brokers, dealers or other financial institutions having a sales agreement with the Distributor, including their spouses, domestic partners, children and parents. o investors who have a business relationship with a newly associated financial advisor who joined the Distributor from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with the Distributor, (2) the purchase is made with proceeds of shares sold that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds are the result of a sale of an equal or greater value where a sales load was assessed. o qualified employee benefit plans offering participants daily access to American Express mutual funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. o shareholders who have at least $1 million in American Express mutual funds. Until further notice, the sales charge does not apply to shareholders who have at least $500,000 in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived only in the circumstances described for waivers for Class B and Class C shares. o purchases made within 90 days after a sale of shares (up to the amount sold): o of American Express mutual funds in a qualified plan subject to a deferred sales charge, or o in a qualified plan or account where American Express Trust Company has a recordkeeping, trustee, investment management, or investment servicing relationship. Send the Fund a written request along with your payment, indicating the date and the amount of the sale. o purchases made: o with dividend or capital gain distributions from this Fund or from the same class of another American Express mutual fund, o through or under a wrap fee product or other investment product sponsored by the Distributor or another authorized broker-dealer, investment advisor, bank or investment professional, o within the University of Texas System ORP, o within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, o within the University of Massachusetts After-Tax Savings Program, or o through or under a subsidiary of AEFC offering Personal Trust Services' Asset-Based pricing alternative. o shareholders whose original purchase was in a Strategist fund merged into an American Express fund in 2000. - -------------------------------------------------------------------------------- 15p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of calendar years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline after a purchase: If the sale is made during the: The CDSC percentage rate is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% For Class C, a 1% CDSC is charged if you sell your shares less than one year after purchase. For both Class B and Class C, if the amount you are selling causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC is based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you never have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. Example Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. Waivers of the sales charge for Class B and Class C shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if American Express Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: o at least 59 1/2 years old AND o taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR o selling under an approved substantially equal periodic payment arrangement. - -------------------------------------------------------------------------------- 16p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS EXCHANGING/SELLING SHARES Exchanges You can exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. The Fund does not permit market-timing. Do not invest in the Fund if you are a market timer. Excessive trading (market-timing) or other abusive short-term trading practices may disrupt portfolio management strategies, harm performance and increase fund expenses. To prevent abuse or adverse effects on the Fund and its shareholders, AECSC and the Fund reserve the right to reject any purchase orders, including exchanges, limit the amount, modify or discontinue the exchange privilege, or charge a fee to any investor we believe has a history of abusive trading or whose trading, in our judgement has been disruptive to the Fund. For example, we may exercise these rights if exchanges are too numerous or too large. Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until AECSC receives written approval from the secured party. Selling Shares You can sell your shares at any time. The payment will be mailed within seven days after accepting your request. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is accepted by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. - -------------------------------------------------------------------------------- 17p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS To sell or exchange shares held through an American Express Brokerage Account or with entities other than American Express Financial Advisors, please consult your selling agent. The following section explains how you can exchange or sell shares held with American Express Financial Advisors. Requests to sell shares of the Fund are not allowed within 30 days of a telephoned-in address change. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. Payment may be made earlier if your bank provides evidence satisfactory to the Fund and AECSC that your check has cleared. Two ways to request an exchange or sale of shares 1 By letter Include in your letter: o the name of the fund(s), o the class of shares to be exchanged or sold, o your mutual fund account number(s) (for exchanges, both funds must be registered in the same ownership), o your Social Security number or Employer Identification number, o the dollar amount or number of shares you want to exchange or sell, o signature(s) of registered account owner(s) (All signatures may be required. Contact AECSC for more information.), o for sales, indicate how you want your money delivered to you, and o any paper certificates of shares you hold. Regular or express mail: American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 - -------------------------------------------------------------------------------- 18p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS 2 By telephone American Express Client Service Corporation Telephone Transaction Service (800) 437-3133 o The Fund and AECSC will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing AECSC. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 Four ways to receive payment when you sell shares 1 By regular or express mail o Mailed to the address on record. o Payable to names listed on the account. o The express mail delivery charges you pay will vary depending on the courier you select. 2 By electronic funds transfer (EFT or ACH) o Minimum redemption: $100. o Funds are deposited electronically into your bank account. o No charge. o Bank account must be in the same ownership as the American Express mutual fund account. o Allow two to five business days from request to deposit. o Pre-authorization required. For instructions, contact your financial advisor or AECSC. 3 By wire o Minimum redemption: $1,000. o Funds are wired electronically into your bank account. o Applicable wire charges will vary depending on service provided. o Bank account must be in the same ownership as the American Express mutual fund account. o Allow one to two business days from request to deposit for domestic wires. o Pre-authorization required. For instructions, contact your financial advisor or AECSC. - -------------------------------------------------------------------------------- 19p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS 4 By scheduled payout plan o Minimum payment: $50. o Contact your financial advisor or AECSC to set up regular payments on a monthly, bimonthly, quarterly, semiannual or annual basis. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered American Express mutual fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. - -------------------------------------------------------------------------------- 20p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. Financial Highlights
Class A Per share income and capital changes(a) Fiscal period ended Jan. 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 7.94 $ 9.92 $11.80 $11.88 $ 9.49 Income from investment operations: Net investment income (loss) .04 .03 .05 .03 .06 Net gains (losses) (both realized and unrealized) (1.92) (1.95) (.76) 1.11 2.55 Total from investment operations (1.88) (1.92) (.71) 1.14 2.61 Less distributions: Dividends from net investment income (.03) (.04) (.04) (.03) (.06) Distributions from realized gains -- (.02) (1.13) (1.19) (.16) Total distributions (.03) (.06) (1.17) (1.22) (.22) Net asset value, end of period $ 6.03 $ 7.94 $ 9.92 $11.80 $11.88 Ratios/supplemental data Net assets, end of period (in millions) $852 $1,533 $2,247 $2,455 $1,863 Ratio of expenses to average daily net assets(c) 1.00% .89% .85% .83% .73% Ratio of net investment income (loss) to average daily net assets .61% .54% .50% .40% .69% Portfolio turnover rate (excluding short-term securities) 104% 135% 140% 81% 105% Total return(e) (23.70%) (19.38%) (5.34%) 9.30% 27.71%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 21p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS
Class B Per share income and capital changes(a) Fiscal period ended Jan. 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 7.76 $ 9.72 $11.63 $11.79 $ 9.43 Income from investment operations: Net investment income (loss) -- -- -- -- -- Net gains (losses) (both realized and unrealized) (1.89) (1.94) (.78) 1.03 2.52 Total from investment operations (1.89) (1.94) (.78) 1.03 2.52 Less distributions: Dividends from net investment income -- -- -- -- -- Distributions from realized gains -- (.02) (1.13) (1.19) (.16) Total distributions -- (.02) (1.13) (1.19) (.16) Net asset value, end of period $ 5.87 $ 7.76 $ 9.72 $11.63 $11.79 Ratios/supplemental data Net assets, end of period (in millions) $568 $1,047 $1,530 $1,588 $1,109 Ratio of expenses to average daily net assets(c) 1.77% 1.65% 1.60% 1.59% 1.49% Ratio of net investment income (loss) to average daily net assets (.16%) (.22%) (.25%) (.36%) (.07%) Portfolio turnover rate (excluding short-term securities) 104% 135% 140% 81% 105% Total return(e) (24.36%) (19.98%) (6.01%) 8.45% 26.75%
Class C Per share income and capital changes(a) Fiscal period ended Jan. 31, 2003 2002 2001(b) Net asset value, beginning of period $ 7.74 $ 9.70 $11.99 Income from investment operations: Net investment income (loss) -- -- .03 Net gains (losses) (both realized and unrealized) (1.88) (1.94) (1.16) Total from investment operations (1.88) (1.94) (1.13) Less distributions: Dividends from net investment income -- -- (.03) Distributions from realized gains -- (.02) (1.13) Total distributions -- (.02) (1.16) Net asset value, end of period $ 5.86 $ 7.74 $ 9.70 Ratios/supplemental data Net assets, end of period (in millions) $4 $5 $4 Ratio of expenses to average daily net assets(c) 1.79% 1.67% 1.60%(d) Ratio of net investment income (loss) to average daily net assets (.16%) (.26%) .04%(d) Portfolio turnover rate (excluding short-term securities) 104% 135% 140% Total return(e) (24.29%) (19.98%) (8.79%)(f)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 22p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS
Class Y Per share income and capital changes(a) Fiscal period ended Jan. 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 7.96 $ 9.94 $11.81 $11.89 $ 9.50 Income from investment operations: Net investment income (loss) .05 .04 .06 .04 .07 Net gains (losses) (both realized and unrealized) (1.93) (1.95) (.75) 1.11 2.55 Total from investment operations (1.88) (1.91) (.69) 1.15 2.62 Less distributions: Dividends from net investment income (.04) (.05) (.05) (.04) (.07) Distributions from realized gains -- (.02) (1.13) (1.19) (.16) Total distributions (.04) (.07) (1.18) (1.23) (.23) Net asset value, end of period $ 6.04 $ 7.96 $ 9.94 $11.81 $11.89 Ratios/supplemental data Net assets, end of period (in millions) $124 $291 $362 $369 $323 Ratio of expenses to average daily net assets(c) .82% .72% .68% .69% .66% Ratio of net investment income (loss) to average daily net assets .76% .70% .67% .54% .77% Portfolio turnover rate (excluding short-term securities) 104% 135% 140% 81% 105% Total return(e) (23.63%) (19.23%) (5.16%) 9.44% 27.82%
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. The information in these tables has been audited by KPMG LLP, independent auditors. The independent auditors' report and additional information about the performance of the Fund are contained in the Fund's annual report which, if not included with this prospectus, may be obtained without charge. - -------------------------------------------------------------------------------- 23p -- AXP BLUE CHIP ADVANTAGE FUND -- 2003 PROSPECTUS - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- This Fund, along with the other American Express mutual funds, is distributed by American Express Financial Advisors Inc. and can be purchased from an American Express financial advisor or from other authorized broker-dealers or third parties. The Funds can be found under the "Amer Express" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's Statement of Additional Information (SAI), annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund during its last fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report or the semiannual report, contact your selling agent or American Express Client Service Corporation. American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 Web site address: americanexpress.com You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at (http://www.sec.gov). Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-5897 Ticker Symbol Class A: IBLUX Class B:IDBCX Class C: AXACX Class Y:IBCYX S-6025-99 V (4/03) EX-99.17G SAI 9 ex17-g.txt STATEMENT OF ADDITIONAL INFORMATION FOR AXP BLUE CHIP ADVANTAGE FUND AXP(R) MARKET ADVANTAGE SERIES, INC. STATEMENT OF ADDITIONAL INFORMATION FOR AXP(R) BLUE CHIP ADVANTAGE FUND (the Fund) APRIL 1, 2003 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the financial statements contained in the most recent Annual Report to shareholders (Annual Report) that may be obtained from your financial advisor or by writing to American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474 or by calling (800) 862-7919. The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report are incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. The prospectus for the Fund, dated the same date as this SAI, also is incorporated in this SAI by reference. Table of Contents Mutual Fund Checklist p. 3 Fundamental Investment Policies p. 4 Investment Strategies and Types of Investments p. 5 Information Regarding Risks and Investment Strategies p. 6 Security Transactions p. 22 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation p. 24 Performance Information p. 25 Valuing Fund Shares p. 26 Investing in the Fund p. 26 Selling Shares p. 29 Pay-out Plans p. 29 Capital Loss Carryover p. 30 Taxes p. 30 Agreements p. 31 Organizational Information p. 34 Board Members and Officers p. 38 Independent Auditors p. 41 Appendix: Description of Ratings p. 42 - -------------------------------------------------------------------------------- 2 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Mutual Fund Checklist [X] Mutual funds are NOT guaranteed or insured by any bank or government agency. You can lose money. [X] Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. [X] A higher rate of return typically involves a higher risk of loss. [X] Past performance is not a reliable indicator of future performance. [X] ALL mutual funds have costs that lower investment return. [X] You can buy some mutual funds by contacting them directly. Others, like this one, are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay a sales charge. [X] Shop around. Compare a mutual fund with others of the same type before you buy. OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING Develop a Financial Plan Have a plan -- even a simple plan can help you take control of your financial future. Review your plan with your advisor at least once a year or more frequently if your circumstances change. Dollar-Cost Averaging An investment technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing through changing market conditions to accumulate shares to meet long-term goals. Dollar-cost averaging Regular Market price Shares investment of a share acquired $100 $ 6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5) The average price you paid for each share: $4.84 ($500 divided by 103.4) Diversify Diversify your portfolio. By investing in different asset classes and different economic environments you help protect against poor performance in one type of investment while including investments most likely to help you achieve your important goals. Understand Your Investment Know what you are buying. Make sure you understand the potential risks, rewards, costs, and expenses associated with each of your investments. - -------------------------------------------------------------------------------- 3 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Fundamental Investment Policies Fundamental investment policies adopted by the Fund cannot be changed without the approval of a majority of the outstanding voting securities of the Fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. The policies below are fundamental policies that apply to the Fund and may be changed only with shareholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund will not: o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Lend Fund securities in excess of 30% of its net assets. o Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. Except for the fundamental investment policies listed above, the other investment policies described in the prospectus and in this SAI are not fundamental and may be changed by the board at any time. - -------------------------------------------------------------------------------- 4 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Investment Strategies and Types of Investments This table shows various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager may make on behalf of the Fund. For a description of principal risks, please see the prospectus. Notwithstanding the Fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager's sole discretion. Investment strategies and types of investments Allowable for the Fund? Agency and Government Securities yes Borrowing yes Cash/Money Market Instruments yes Collateralized Bond Obligations yes Commercial Paper yes Common Stock yes Convertible Securities yes Corporate Bonds yes Debt Obligations yes Depositary Receipts yes Derivative Instruments (including Options and Futures) yes Foreign Currency Transactions yes Foreign Securities yes High-Yield (High-Risk) Securities (Junk Bonds) no* Illiquid and Restricted Securities yes Indexed Securities yes Inverse Floaters no Investment Companies yes Lending of Portfolio Securities yes Loan Participations yes Mortgage- and Asset-Backed Securities no Mortgage Dollar Rolls no Municipal Obligations yes Preferred Stock yes Real Estate Investment Trusts yes Repurchase Agreements yes Reverse Repurchase Agreements yes Short Sales no Sovereign Debt yes Structured Products yes Swap Agreements no Variable- or Floating-Rate Securities yes Warrants yes When-Issued Securities and Forward Commitments yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes * The Fund may hold bonds that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase. - -------------------------------------------------------------------------------- 5 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND The following are guidelines that may be changed by the board at any time: o Under normal market conditions, at least 80% of the Fund's net assets are invested in blue chip stocks. Blue chip stocks are issued by companies with a market capitalization of at least $1 billion, an established management, a history of consistent earnings and a leading position within their respective industries. The Fund will provide shareholders with at least 60 days notice of any change in the 80% policy. o The Fund may invest up to 20% of its total assets in foreign investments included in the market index. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in stock index futures contracts. o The Fund will not invest in a company to control or manage it. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. Information Regarding Risks and Investment Strategies RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). Please remember that a mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with the Fund at any time (for a description of principal risks, please see the prospectus): Call/Prepayment Risk The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to "reinvestment risk." Company Risk The prospects for a company may vary because of a variety of factors, including the success of the company, disappointing earnings, or changes in the competitive environment. As a result, the success of the companies in which the Fund invests will affect the Fund's performance. Correlation Risk The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. Credit Risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. Event Risk Occasionally, the value of a security may be seriously and unexpectedly changed by a natural or industrial accident or occurrence. Foreign/Emerging Markets Risk The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. - -------------------------------------------------------------------------------- 6 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. Inflation Risk Also known as purchasing power risk, inflation risk measures the effects of continually rising prices on investments. If an investment's yield is lower than the rate of inflation, your money will have less purchasing power as time goes on. Interest Rate Risk The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the higher its yield and the greater its sensitivity to changes in interest rates. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Legal/Legislative Risk Congress and other governmental units have the power to change existing laws affecting securities. A change in law might affect an investment adversely. Leverage Risk Some derivative investments (such as options, futures, or options on futures) require little or no initial payment and base their price on a security, a currency, or an index. A small change in the value of the underlying security, currency, or index may cause a sizable gain or loss in the price of the instrument. Liquidity Risk Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. Management Risk The risk that a strategy or selection method utilized by the investment manager may fail to produce the intended result. When all other factors have been accounted for and the investment manager chooses an investment, there is always the possibility that the choice will be a poor one. Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Reinvestment Risk The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. Sector/Concentration Risk Investments that are concentrated in a particular issuer, geographic region, or industry will be more susceptible to changes in price (the more you diversify, the more you spread risk). - -------------------------------------------------------------------------------- 7 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Small Company Risk Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. INVESTMENT STRATEGIES The following information supplements the discussion of the Fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes many strategies that many mutual funds use and types of securities that they purchase. Please refer to the section entitled Investment Strategies and Types of Investments to see which are applicable to the Fund. Agency and Government Securities The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities including mortgage pass through certificates of the Government National Mortgage Association (GNMA) are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and Reinvestment Risk. Borrowing The Fund may borrow money for temporary or emergency purposes and make other investments or engage in other transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce the Fund's total return. Except as qualified above, however, the Fund will not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Inflation Risk and Management Risk. Cash/Money Market Instruments The Fund may maintain a portion of its assets in cash and cash-equivalent investments. Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. The Fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject the Fund to certain costs and expenses. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk, Inflation Risk, and Management Risk. Collateralized Bond Obligations Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments -- money that is left - -------------------------------------------------------------------------------- 8 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, earns them investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield (High-Risk) Securities (Junk Bonds).) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, and Management Risk. Commercial Paper Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk, Liquidity Risk, and Management Risk. Common Stock Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Issuer Risk, Management Risk, Market Risk, and Small Company Risk. Convertible Securities Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Call/Prepayment Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and Reinvestment Risk. Corporate Bonds Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield (High-Risk) Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See the appendix for a discussion of securities ratings. - -------------------------------------------------------------------------------- 9 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Debt Obligations Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a specified rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield (High-Risk) Securities (Junk Bonds).) All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating organization or their rating systems, the Fund will attempt to use comparable ratings as standards for selecting investments. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Depositary Receipts Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, Management Risk, and Market Risk. Derivative Instruments Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. - -------------------------------------------------------------------------------- 10 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If the Fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indices (such as the S&P 500 Index), foreign currencies and other financial instruments and indices. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to - -------------------------------------------------------------------------------- 11 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax Treatment. As permitted under federal income tax laws and to the extent the Fund is allowed to invest in futures contracts, the Fund intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If the Fund is using short futures contracts for hedging purposes, the Fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, the Fund will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (See also Foreign Currency Transactions.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Leverage Risk, Liquidity Risk, and Management Risk. - -------------------------------------------------------------------------------- 12 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Foreign Currency Transactions Investments in foreign countries usually involve currencies of foreign countries. In addition, the Fund may hold cash and cash-equivalent investments in foreign currencies. As a result, the value of the Fund's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, the Fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing the Fund's NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Spot Rates and Derivative Instruments. The Fund conducts its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts) as a hedge against fluctuations in future foreign exchange rates. (See also Derivative Instruments). These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, the Fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. The Fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. The Fund also may enter into forward contracts when management of the Fund believes the currency of a particular foreign country may change in relationship to another currency. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. The Fund will not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's securities or other assets denominated in that currency. The Fund will designate cash or securities in an amount equal to the value of the Fund's total assets committed to consummating forward contracts entered into under the second circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the Fund's commitments on such contracts. At maturity of a forward contract, the Fund may either sell the security and make delivery of the foreign currency or retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to buy, on the same maturity date, the same amount of foreign currency. If the Fund retains the security and engages in an offsetting transaction, the Fund will incur a gain or loss (as described below) to the extent there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline between the date the Fund enters into a forward contract for selling foreign currency and the date it enters into an offsetting contract for purchasing the foreign currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell. It is impossible to forecast what the market value of securities will be at the expiration of a contract. Accordingly, it may be necessary for the Fund to buy additional foreign currency on the spot market (and bear the expense of that purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received on the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. The Fund's dealing in forward contracts will be limited to the transactions described above. This method of protecting the value of the Fund's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. - -------------------------------------------------------------------------------- 13 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Although the Fund values its assets each business day in terms of U.S. dollars, it does not intend to convert its foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. Options on Foreign Currencies. The Fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, the Fund may buy put options on the foreign currency. If the value of the currency does decline, the Fund will have the right to sell the currency for a fixed amount in dollars and will offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities the Fund plans to buy, the Fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates. As in the case of other types of options, however, the benefit to the Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates. The Fund may write options on foreign currencies for the same types of hedging purposes. For example, when the Fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of securities will be fully or partially offset by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency. If rates move in the manner projected, the put option will expire unexercised and allow the Fund to hedge increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if the Fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. - -------------------------------------------------------------------------------- 14 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Foreign Currency Futures and Related Options. The Fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. The Fund may use currency futures for the same purposes as currency forward contracts, subject to Commodity Futures Trading Commission (CFTC) limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the Fund's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect the Fund against price decline if the issuer's creditworthiness deteriorates. Because the value of the Fund's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of the Fund's investments denominated in that currency over time. The Fund will hold securities or other options or futures positions whose values are expected to offset its obligations. The Fund will not enter into an option or futures position that exposes the Fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Correlation Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk. Foreign Securities Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. The introduction of a single currency, the euro, on January 1, 1999 for participating European nations in the Economic and Monetary Union ("EU") presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies during the transition period from January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other EU countries such as the United Kingdom and Greece into the euro and the admission of other non-EU countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. - -------------------------------------------------------------------------------- 15 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk, Issuer Risk, and Management Risk. High-Yield (High-Risk) Securities (Junk Bonds) High yield (high-risk) securities are sometimes referred to as "junk bonds." They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) The lower-quality and comparable unrated security market is relatively new and its growth has paralleled a long economic expansion. As a result, it is not clear how this market may withstand a prolonged recession or economic downturn. Such conditions could severely disrupt the market for and adversely affect the value of such securities. All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield (high-risk) securities include: Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and Management Risk. Illiquid and Restricted Securities The Fund may invest in illiquid securities (i.e., securities that are not readily marketable). These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent the Fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for such securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for the Fund to sell such an investment promptly and at an acceptable price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk and Management Risk. - -------------------------------------------------------------------------------- 16 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Indexed Securities The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk, Management Risk, and Market Risk. Inverse Floaters Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with inverse floaters include: Interest Rate Risk and Management Risk. Investment Companies The Fund may invest in securities issued by registered and unregistered investment companies. These investments may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Management Risk and Market Risk. Lending of Portfolio Securities The Fund may lend certain of its portfolio securities to broker-dealers. The current policy of the Fund's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Fund receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Fund will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Fund receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk and Management Risk. Loan Participations Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk and Management Risk. Mortgage- and Asset-Backed Securities Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. - -------------------------------------------------------------------------------- 17 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage- and asset-backed securities include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and Management Risk. Mortgage Dollar Rolls Mortgage dollar rolls are investments whereby an investor would sell mortgage-backed securities for delivery in the current month and simultaneously contract to purchase substantially similar securities on a specified future date. While an investor would forego principal and interest paid on the mortgage-backed securities during the roll period, the investor would be compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk, Interest Rate Risk, and Management Risk. Municipal Obligations Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks - -------------------------------------------------------------------------------- 18 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Event Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market Risk. Preferred Stock Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk, Management Risk, and Market Risk. Real Estate Investment Trusts Real estate investment trusts (REITs) are entities that manage a portfolio of real estate to earn profits for their shareholders. REITs can make investments in real estate such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Additionally, the failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Issuer Risk, Management Risk, and Market Risk. Repurchase Agreements The Fund may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement, the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk and Management Risk. Reverse Repurchase Agreements In a reverse repurchase agreement, the investor would sell a security and enter into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 19 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Short Sales With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to utilize short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to the Fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Management Risk and Market Risk. Sovereign Debt A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk, Foreign/Emerging Markets Risk, and Management Risk. Structured Products Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option, or a forward contract embedded in a note or any of a wide variety of debt, equity, and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market, and defaults by other parties. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured products include: Credit Risk, Liquidity Risk, and Management Risk. Swap Agreements Swap agreements obligate one party to make payments to the other party based on the change in the market value of an index or other asset. In return, the other party agrees to make payments to the first party based on the return of another index or asset. Swap agreements entail the risk that a party will default on its payment obligations. Interest Rate Swaps. Interest rate swap agreements are used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. Swaps also may protect against changes in the price of securities that an investor anticipates buying or selling at a later date. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard interest rate swap transaction, two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined notional amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. Swap agreements are usually entered into at a zero net market value of the swap agreement commitments. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty to the other. - -------------------------------------------------------------------------------- 20 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Swap agreements may include embedded interest rate caps, floor and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts. Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. The Fund will enter into interest rate swap agreements only if the claims-paying ability of the other party or its guarantor is considered to be investment grade by the Advisor. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one NRSRO at the time of entering into the transaction. If there is a default by the other party to such a transaction, the Fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, the Fund may seek to minimize counterparty risk by requiring the counterparty to post collateral. Currency Swaps. Currency swaps are similar to interest rate swaps, except that they involve currencies instead of interest rates. Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Liquidity Risk, Credit Risk and Correlation Risk. Variable- or Floating-Rate Securities The Fund may invest in securities that offer a variable- or floating-rate of interest. Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (e.g., daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the Fund to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the Fund as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk and Management Risk. Warrants Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Management Risk and Market Risk. When-Issued Securities and Forward Commitments When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, the Fund may lose the opportunity to obtain a price and yield considered to be advantageous. - -------------------------------------------------------------------------------- 21 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk and Management Risk. Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk, Interest Rate Risk, and Management Risk. Security Transactions Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's investment goal and policies, which securities will be purchased, held, or sold. The description of policies and procedures in this section also applies to any Fund subadviser. In determining where the buy and sell orders are to be placed, AEFC has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the board. In selecting broker-dealers to execute transactions, AEFC may consider the price of the security, including commission or mark-up, the size and difficulty of the order, the reliability, integrity, financial soundness, and general operation and execution capabilities of the broker, the broker's expertise in particular markets, and research services provided by the broker. The Fund, AEFC, any subadviser and American Express Financial Advisors Inc. (the Distributor) each have a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the Fund. The Fund's securities may be traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The board has adopted a policy authorizing AEFC to do so to the extent authorized by law, if AEFC determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or AEFC's overall responsibilities with respect to the Fund and the other American Express mutual funds for which it acts as investment manager. Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business, and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software, or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management, and trading functions and other services to the extent permitted under an interpretation by the SEC. When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Fund to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Fund that it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this arrangement, some portfolio transactions may not be effected at the lowest commission, but AEFC believes it may obtain better overall execution. AEFC has represented that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. - -------------------------------------------------------------------------------- 22 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND All other transactions will be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by AEFC in providing advice to all American Express mutual funds even though it is not possible to relate the benefits to any particular fund. Each investment decision made for the Fund is made independently from any decision made for another portfolio, fund, or other account advised by AEFC or any of its subsidiaries. When the Fund buys or sells the same security as another portfolio, fund, or account, AEFC carries out the purchase or sale in a way the Fund agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Fund, the Fund hopes to gain an overall advantage in execution. On occasion, the Fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency, and research services. The Fund paid total brokerage commissions of $3,868,493 for fiscal year ended Jan. 31, 2003, $6,955,866 for fiscal year 2002, and $8,140,683 for fiscal year 2001. Substantially all firms through whom transactions were executed provide research services. No transactions were directed to brokers because of research services they provided to the Fund. As of the end of the most recent fiscal year, the Fund held securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below: Value of securities Name of issuer owned at end of fiscal year Bank of America $25,042,875 FleetBoston Financial 6,125,406 J.P. Morgan Chase 7,737,210 Morgan Stanley 6,204,230 Citigroup 33,754,284 The portfolio turnover rate was 104% in the most recent fiscal year, and 135% in the year before. Higher turnover rates may result in higher brokerage expenses and taxes. - -------------------------------------------------------------------------------- 23 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation Affiliates of American Express Company (of which AEFC is a wholly-owned subsidiary) may engage in brokerage and other securities transactions on behalf of the Fund according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. AEFC will use an American Express affiliate only if (i) AEFC determines that the Fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Fund and (ii) the affiliate charges the Fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. Information about brokerage commissions paid by the Fund for the last three fiscal years to brokers affiliated with AEFC is contained in the following table:
As of the end of fiscal year 2003 2002 2001 Percent of aggregate dollar amount of Aggregate dollar Percent of transactions Aggregate dollar Aggregate dollar amount of aggregate involving amount of amount of Nature of commissions brokerage payment of commissions commissions Broker affiliation paid to broker commissions commissions paid to broker paid to broker American Enterprise Wholly-owned $0 0% 0% $23,611 $196,829 Investment subsidiary of Services Inc. AEFC
- -------------------------------------------------------------------------------- 24 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Performance Information The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations, if applicable, used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the methods used by the Fund to compute performance follows below. AVERAGE ANNUAL TOTAL RETURN The Fund may calculate average annual total return for a class for certain periods by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)(to the power of n) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) AGGREGATE TOTAL RETURN The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the Fund over a specified period of time according to the following formula: ERV - P ------------- P where: P = a hypothetical initial payment of $1,000 ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) The total return of the S&P 500 is calculated by several sources. The Fund will use the total return as calculated by Standard & Poor's Corporation (S&P) to measure the U.S. stock market. The total return is calculated by adding dividend income to price appreciation. For periods after 1987, total return on the S&P 500 is determined by reinvesting cash dividends paid on stocks on the ex-dividend date - that is, the date on or after which a sale of stock does not carry with it the right to a dividend already declared. For periods before 1988, S&P calculated total return by compiling actual dividends on a quarterly basis and assumed they were reinvested as of the end of a particular quarter. S&P also makes adjustments for special dividends, such as stock dividends. The percentage changes for the indexes other than the S&P 500 reflect reinvestment of all distributions on a quarterly basis and changes in market prices. The percentage changes for all the indexes exclude brokerage commissions or other fees. By comparison, the Fund will incur such fees and other expenses. In its sales material and other communications, the Fund may quote, compare or refer to rankings, yields, or returns as published by independent statistical services or publishers and publications such as The Bank Rate Monitor National Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund Report, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, Institutional Investor, Investor's Business Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger Investment Companies Service. The Fund also may compare its performance to a wide variety of indexes or averages. There are similarities and differences between the investments that the Fund may purchase and the investments measured by the indexes or averages and the composition of the indexes or averages will differ from that of the Fund. Ibbotson Associates provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the CPI) and combinations of various capital markets. The performance of these capital markets is based on the returns of different indexes. The Fund may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. The Fund may quote various measures of volatility in advertising. Measures of volatility seek to compare a fund's historical share price fluctuations or returns to those of a benchmark. The Distributor may provide information designed to help individuals understand their investment goals and explore various financial strategies. Materials may include discussions of asset allocation, retirement investing, brokerage products and services, model portfolios, saving for college or other goals, and charitable giving. - -------------------------------------------------------------------------------- 25 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Valuing Fund Shares As of the end of the most recent fiscal year, the computation looked like this:
Net assets Shares outstanding Net asset value of one share Class A $851,734,412 divided by 141,214,574 equals $6.03 Class B 567,569,527 96,629,896 5.87 Class C 4,045,423 690,661 5.86 Class Y 124,497,416 20,599,647 6.04
In determining net assets before shareholder transactions, the Fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): o Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. o Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. o Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. o Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. o Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. o Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange that will not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities occur during such period, these securities will be valued at their fair value according to procedures decided upon in good faith by the board. o Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. o Securities without a readily available market price and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Fund. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. Investing in the Fund SALES CHARGE Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the CDSC and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of the Fund. Shares of the Fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C and Class Y, there is no initial sales charge so the public offering price is the same as the NAV. Using the sales charge schedule in the table below, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal year, was determined by dividing the NAV of one share, $6.03, by 0.9425 (1.00 - 0.0575) for a maximum 5.75% sales charge for a public offering price of $6.40. The sales charge is paid to the Distributor by the person buying the shares. - -------------------------------------------------------------------------------- 26 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Class A -- Calculation of the Sales Charge Sales charges are determined as follows: Sales charge as a percentage of: Total market value Public offering price Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.75 3.90 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00* 2.04* $1,000,000 or more 0.00 0.00 * The sales charge will be waived until further notice. The initial sales charge is waived for certain qualified plans. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The Fund will waive the deferred sales charge on certain redemptions if the redemption is a result of a participant's death, disability, retirement, attaining age 591/2, loans, or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of participants Total plan assets 1-99 100 or more Less than $1 million 4% 0% $1 million or more 0% 0% Class A -- Reducing the Sales Charge The market value of your investments in the Fund determines your sales charge. For example, suppose you have made an investment that now has a value of $20,000 and you later decide to invest $40,000 more. The value of your investments would be $60,000. As a result, your $40,000 investment qualifies for the lower 4.75% sales charge that applies to investments of more than $50,000 and up to $100,000. If you qualify for a reduced sales charge and purchase shares through different channels (for example, in a brokerage account and also directly from the Fund), you must inform the Distributor of your total holdings when placing any purchase orders. Class A -- Letter of Intent (LOI) If you intend to invest more than $50,000 over a period of time, you can reduce the sales charge in Class A by filing a LOI and committing to invest a certain amount. The agreement can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days. Your holdings in American Express mutual funds acquired more than 90 days before receipt of your signed LOI in the home office will not be counted towards the completion of the LOI. Your investments will be charged the sales charge that applies to the amount you have committed to invest. Five percent of the commitment amount will be placed in escrow. If your commitment amount is reached within the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by the total value of the new investment combined with the market value of the existing American Express mutual fund investments. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of American Express mutual funds other than Class A; purchases in American Express mutual funds held within a wrap product; and purchases of AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are subsequently exchanged to Class A shares of an American Express mutual fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares in an American Express brokerage account or through a third party, you must inform the Distributor about the LOI when placing any purchase orders during the period of the LOI. - -------------------------------------------------------------------------------- 27 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Class Y Shares Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: o uses a daily transfer recordkeeping service offering participants daily access to American Express mutual funds and has o at least $10 million in plan assets or o 500 or more participants; or o does not use daily transfer recordkeeping and has o at least $3 million invested in American Express mutual funds or o 500 or more participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These institutions must have at least $10 million in American Express mutual funds. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. o State sponsored college savings plans established under Section 529 of the Internal Revenue Code. * Eligibility must be determined in advance. To do so, contact your financial advisor. SYSTEMATIC INVESTMENT PROGRAMS After you make your initial investment of $100 or more, you must make additional payments of $100 or more on at least a monthly basis until your balance reaches $2,000. These minimums do not apply to all systematic investment programs. You decide how often to make payments -- monthly, quarterly, or semiannually. You are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. The Fund also can change the program or end it at any time. AUTOMATIC DIRECTED DIVIDENDS Dividends, including capital gain distributions, paid by another American Express mutual fund may be used to automatically purchase shares in the same class of this Fund. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to this Fund the following day. Dividends can be exchanged into the same class of another American Express mutual fund but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: o Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which American Express Trust Company acts as custodian; o Between two American Express Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); and o Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA or UTMA accounts with identical ownership. The Fund's investment goal is described in its prospectus along with other information, including fees and expense ratios. Before exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REJECTION OF BUSINESS The Fund or AECSC reserves the right to reject any business, in its sole discretion. - -------------------------------------------------------------------------------- 28 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Selling Shares You have a right to sell your shares at any time. For an explanation of sales procedures, please see the prospectus. During an emergency, the board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of the Fund to redeem shares for more than seven days. Such emergency situations would occur if: o The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or o Disposal of the Fund's securities is not reasonably practicable or it is not reasonably practicable for the Fund to determine the fair value of its net assets, or o The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all shareholders. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. Pay-out Plans You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which American Express Trust Company acts as custodian, you can elect to receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of the Fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your selling agent or write American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474, or call (800) 437-3133. Your authorization must be received at least five days before the date you want your payments to begin. The initial payment must be at least $50. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way AEFC can handle efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. The Fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $50 if the value of your account is $10,000 on the payment date. - -------------------------------------------------------------------------------- 29 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Capital Loss Carryover For federal income tax purposes, the Fund had total capital loss carryovers of $1,038,694,670 at the end of the most recent fiscal year, that if not offset by subsequent capital gains will expire as follows: 2010 2011 2012 $574,177,366 $388,591,595 $75,925,709 It is unlikely that the board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. Taxes For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For example You purchase 100 shares of one fund having a public offering price of $10.00 per share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of $9.425 per share, the value of your investment is $942.50. Within 91 days of purchasing that fund, you decide to exchange out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.425, and purchase into a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain ($1,100.00 - $942.50). You can include the $57.50 sales load in the basis of your shares in the second fund. If you have a nonqualified investment in the Fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the Fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged plus the amount of the initial sales charge applied to the amount exchanged exceeds annual contribution limitations. For example: If you were to exchange $2,000 in Class A shares from a nonqualified account to an IRA without considering the 5.75% ($115) initial sales charge applicable to that $2,000, you may be deemed to have exceeded current IRA annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. For the most recent fiscal year, 100% of the Fund's net investment income dividends qualified for the corporate deduction. The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Income earned by the Fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of the Fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the Fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the Fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the Fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long they owned their shares. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. A special 28% rate on capital gains may apply to sales of precious metals, if any, owned directly by the Fund. A special 25% rate on capital gains may apply to investments in REITs. - -------------------------------------------------------------------------------- 30 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of the Fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year the Fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. The Internal Revenue Code imposes two asset diversification rules that apply to the Fund as of the close of each quarter. First, as to 50% of its holdings, the Fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, the Fund cannot have more than 25% of its assets in any one issuer. For purposes of the excise tax distributions, "section 988" ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to the stock, the dividend will be included in gross income by the Fund as of the later of (1) the date the share became ex-dividend or (2) the date the Fund acquired the share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the Fund, this rule may cause the Fund to pay income to its shareholders that it has not actually received. To the extent that the dividend is never received, the Fund will take a loss at the time that a determination is made that the dividend will not be received. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to Fund distributions. Agreements INVESTMENT MANAGEMENT SERVICES AGREEMENT AEFC, a wholly-owned subsidiary of American Express Company, is the investment manager for the Fund. Under the Investment Management Services Agreement, AEFC, subject to the policies set by the board, provides investment management services. For its services, AEFC is paid a fee based on the following schedule. Each class of the Fund pays its proportionate share of the fee. Assets (billions) Annual rate at each asset level First $0.25 0.540% Next 0.25 0.515 Next 0.25 0.490 Next 0.25 0.465 Next 1.00 0.440 Next 1.00 0.410 Next 3.00 0.380 Over 6.00 0.350 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.480% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. - -------------------------------------------------------------------------------- 31 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Before the fee based on the asset charge is paid, it is adjusted for investment performance. The adjustment, determined monthly, will be determined by measuring the percentage difference over a rolling 12-month period between the performance of one Class A share of the Fund and the change in the Lipper Large-Cap Core Funds Index (Index). The performance difference is then used to determine the adjustment rate. Beginning on Dec. 1, 2002, the adjustment rate, computed to five decimal places, is determined in accordance with the following table: Performance difference Adjustment rate 0.00%-0.50% 0 0.50%-1.00% 6 basis points times the performance difference over 0.50% (maximum of 3 basis points if a 1% performance difference) 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference over 1.00% (maximum 6 basis points if a 2% performance difference) 2.00%-4.00% 6 basis points, plus 2 basis points times the performance difference over 2.00% (maximum 10 basis points if a 4% performance difference) 4.00%-6.00% 10 basis points, plus 1 basis point times the performance difference over 4.00% (maximum 12 basis points if a 6% performance difference) 6.00% or more 12 basis points For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the Fund is 0.00120 per year. Where the Fund's Class A performance exceeds that of the Index, the fee paid to AEFC will increase. Where the performance of the Index exceeds the performance of the Fund's Class A shares, the fee paid to AEFC will decrease. For a period of six months beginning Dec. 1, 2002, the adjustment will be calculated based on the lesser of the amount due under the new adjustment or under the adjustment used prior to Dec. 1, 2002. Prior to Dec. 1, 2002, the adjustment, determined monthly, was calculated using the percentage point difference between the change in the net asset value of one Class A share of the Fund and the change in the Index. One percentage point was subtracted from the calculation to help assure that incentive adjustments were attributable to AEFC's management abilities rather than random fluctuations and the result multiplied by 0.01%. That number was multiplied times the Fund's average net assets for the comparison period and then divided by the number of months in the comparison period to determine the monthly adjustment. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. The adjustment decreased the fee by $495,250 for fiscal year 2003. The management fee is paid monthly. Under the agreement, the total amount paid was $9,411,815 for fiscal year 2003, $13,295,269 for fiscal year 2002, and $18,296,636 for fiscal year 2001. Under the agreement, the Fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; postage of confirmations except purchase confirmations; consultants' fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; and expenses properly payable by the Fund, approved by the board. Under the agreement, nonadvisory expenses, net of earnings credits, paid by the Fund were $766,040 for fiscal year 2003, $735,762 for fiscal year 2002, and $923,004 for fiscal year 2001. Basis for board approving the investment advisory contract Based on its work throughout the year and detailed analysis by the Contracts Committee of reports provided by AEFC, the independent board members determined to renew the Investment Management Services Agreement and Subadvisory Agreements (where applicable) based on: o tangible steps AEFC has taken to improve the competitive ranking and consistency of the investment performance of the Fund, including changes in leadership, portfolio managers, compensation structures, and the implementation of management practices, o continued commitment to expand the range of investment options that it offers investors, through repositioning existing funds and creating new funds, o consistent effort to provide a management structure that imposes disciplines that ensure adherence to stated management style and expected risk characteristics, o additional time needed to evaluate the efficacy of the new AEFC management structure that has produced improved performance results in the short term, o benefit of economy of scale that results from the graduated fee structure and the reasonableness of fees in light of the fees paid by similar funds in the industry, - -------------------------------------------------------------------------------- 32 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND o competitive total expenses that are either at or only slightly above the median expenses of a group of comparable funds based on a report prepared by Lipper Inc., and o reasonable level of AEFC's profitability from its mutual fund operations. ADMINISTRATIVE SERVICES AGREEMENT The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets (billions) Annual rate at each asset level First $0.25 0.040% Next 0.25 0.035 Next 0.25 0.030 Next 0.25 0.025 Over 1.00 0.020 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.028% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. Under the agreement, the Fund paid fees of $587,696 for fiscal year 2003, $839,722 for fiscal year 2002, and $1,072,481 for fiscal year 2001. Third parties with which AEFC contracts to provide services for the Fund or its shareholders may pay a fee to AEFC to help defray the cost of providing administrative and accounting services. The amount of any such fee is negotiated separately with each service provider and does not constitute compensation for investment advisory, distribution, or other services. Payment of any such fee neither increases nor reduces fees or expenses paid by shareholders of the Fund. TRANSFER AGENCY AGREEMENT The Fund has a Transfer Agency Agreement with American Express Client Service Corporation (AECSC). This agreement governs AECSC's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the Fund's shares. Under the agreement, AECSC will earn a fee from the Fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The rate for Class A is $19 per year, for Class B is $20 per year, for Class C is $19.50 per year and for Class Y is $17 per year. The fees paid to AECSC may be changed by the board without shareholder approval. DISTRIBUTION AGREEMENT American Express Financial Advisors Inc. is the Fund's principal underwriter (the Distributor). The Fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to the Distributor daily. These charges amounted to $2,328,044 for fiscal year 2003. After paying commissions to personal financial advisors, and other expenses, the amount retained was $1,052,379. The amounts were $4,197,241 and $1,456,326 for fiscal year 2002, and $8,345,221 and $1,536,453 for fiscal year 2001. Part of the sales charge may be paid to selling dealers who have agreements with the Distributor. The Distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. SHAREHOLDER SERVICE AGREEMENT With respect to Class Y shares, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of average daily net assets. PLAN AND AGREEMENT OF DISTRIBUTION For Class A, Class B and Class C shares, to help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, the Fund and the Distributor entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays a fee up to actual expenses incurred at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material change to expenses charged under the Class A plan. - -------------------------------------------------------------------------------- 33 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of Class A, Class B and Class C shares; and overhead appropriately allocated to the sale of Class A, Class B and Class C shares. These expenses also include costs of providing personal service to shareholders. A substantial portion of the costs are not specifically identified to any one of the American Express mutual funds. The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the relevant class of shares or by the Distributor. The Plan (or any agreement related to it) will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the board members, including a majority of the board members who are not interested persons of the Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement. For the most recent fiscal year, the Fund paid fees of $2,869,500 for Class A shares, $7,755,749 for Class B shares and $46,784 for Class C shares. The fee is not allocated to any one service (such as advertising, payments to underwriters, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. CUSTODIAN AGREEMENT The Fund's securities and cash are held by American Express Trust Company, 200 AXP Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. Organizational Information The Fund is an open-end management investment company. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The shares of the Fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of the Fund would have the same rights to dividends and assets as every other share of that Fund. VOTING RIGHTS As a shareholder in the Fund, you have voting rights over the Fund's management and fundamental policies. You are entitled to vote based on your total dollar interest in the Fund. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of board members. This means that you have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. DIVIDEND RIGHTS Dividends paid by the Fund, if any, with respect to each class of shares, if applicable, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures. AMERICAN EXPRESS FINANCIAL CORPORATION AEFC has been a provider of financial services since 1894. Its family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. In addition to managing assets of more than $62 billion for the American Express Funds, AEFC manages investments for itself and its subsidiaries, American Express Certificate Company and IDS Life Insurance Company. Total assets owned and managed as of the end of the most recent fiscal year were more than $193 billion. The Distributor serves individuals and businesses through its nationwide network of more than 600 supervisory offices, more than 3,800 branch offices and more than 10,300 financial advisors. - -------------------------------------------------------------------------------- 34 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) California Tax-Exempt Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) California Tax-Exempt Fund No AXP(R) Dimensions Series, Inc.(4) 2/20/68, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Dimensions Fund Yes AXP(R) New Dimensions Fund Yes AXP(R) Discovery Series, Inc.(4) 4/29/81, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Discovery Fund Yes AXP(R) Equity Series, Inc.(4) 3/18/57, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Equity Select Fund Yes AXP(R) Fixed Income Series, Inc.(4) 6/27/74, 6/31/86(1) Corporation NV/MN 8/31 AXP(R) Bond Fund Yes AXP(R) Global Series, Inc. 10/28/88 Corporation MN 10/31 AXP(R) Emerging Markets Fund Yes AXP(R) Global Balanced Fund Yes AXP(R) Global Bond Fund No AXP(R) Global Growth Fund Yes AXP(R) Global Technology Fund(3) No AXP(R) Government Income Series, Inc.(4) 3/12/85 Corporation MN 5/31 AXP(R) Federal Income Fund Yes AXP(R) U.S. Government Mortgage Fund Yes AXP(R) Growth Series, Inc. 5/21/70, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Fund Yes AXP(R) Large Cap Equity Fund Yes AXP(R) Large Cap Value Fund Yes AXP(R) Research Opportunities Fund Yes AXP(R) High Yield Income Series, Inc.(4) 8/17/83 Corporation MN 5/31 AXP(R) Extra Income Fund Yes AXP(R) High Yield Tax-Exempt Series, Inc.(4) 12/21/78, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) High Yield Tax-Exempt Fund Yes AXP(R) Income Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 5/31 AXP(R) Selective Fund Yes AXP(R) International Series, Inc.(4) 7/18/84 Corporation MN 10/31 AXP(R) European Equity Fund No AXP(R) International Fund Yes AXP(R) Investment Series, Inc. 1/18/40, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Diversified Equity Income Fund Yes AXP(R) Mid Cap Value Fund Yes AXP(R) Mutual Yes AXP(R) Managed Series, Inc. 10/9/84 Corporation MN 9/30 AXP(R) Managed Allocation Fund Yes AXP(R) Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31 AXP(R) Blue Chip Advantage Fund Yes AXP(R) Mid Cap Index Fund No AXP(R) S&P 500 Index Fund No AXP(R) Small Company Index Fund Yes
- -------------------------------------------------------------------------------- 35 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS (continued) Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Money Market Series, Inc. 8/22/75, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Cash Management Fund Yes AXP(R) Partners Series, Inc. 3/20/01 Corporation MN 5/31 AXP(R) Partners Fundamental Value Fund Yes AXP(R) Partners Select Value Fund Yes AXP(R) Partners Small Cap Core Fund Yes AXP(R) Partners Small Cap Value Fund No AXP(R) Partners Value Fund Yes AXP(R) Partners International Series, Inc. 5/9/01 Corporation MN 10/31 AXP(R) Partners International Aggressive Growth Fund Yes AXP(R) Partners International Core Fund Yes AXP(R) Partners International Select Value Fund Yes AXP(R) Partners International Small Cap Fund Yes AXP(R) Progressive Series, Inc.(4) 4/23/68, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Progressive Fund Yes AXP(R) Sector Series, Inc.(3),(4) 3/25/88 Corporation MN 6/30 AXP(R) Utilities Fund Yes AXP(R) Selected Series, Inc.(4) 10/5/84 Corporation MN 3/31 AXP(R) Precious Metals Fund No AXP(R) Special Tax-Exempt Series Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) Insured Tax-Exempt Fund Yes AXP(R) Massachusetts Tax-Exempt Fund No AXP(R) Michigan Tax-Exempt Fund No AXP(R) Minnesota Tax-Exempt Fund No AXP(R) New York Tax-Exempt Fund No AXP(R) Ohio Tax-Exempt Fund No AXP(R) Stock Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Stock Fund Yes AXP(R) Strategy Series, Inc. 1/24/84 Corporation MN 3/31 AXP(R) Equity Value Fund Yes AXP(R) Focused Growth Fund(3) No AXP(R) Partners Small Cap Growth Fund(3) Yes AXP(R) Small Cap Advantage Fund Yes AXP(R) Strategy Aggressive Fund Yes AXP(R) Tax-Exempt Series, Inc. 9/30/76, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Intermediate Tax-Exempt Fund Yes AXP(R) Tax-Exempt Bond Fund Yes AXP(R) Tax-Free Money Series, Inc.(4) 2/29/80, 6/13/86(1) Corporation NV/MN 12/31 AXP(R) Tax-Free Money Fund Yes
- -------------------------------------------------------------------------------- 36 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND (1) Date merged into a Minnesota corporation incorporated on April 7, 1986. (2) Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. (3) Effective Feb. 7, 2002, AXP(R) Focus 20 Fund changed its name to AXP(R) Focused Growth Fund, AXP(R) Innovations Fund changed its name to AXP(R) Global Technology Fund, AXP(R) Small Cap Growth Fund changed its name to AXP(R) Partners Small Cap Growth Fund and AXP(R) Utilities Income Fund, Inc. created a series, AXP(R) Utilities Fund. (4) Effective Nov. 13, 2002, AXP(R) Bond Fund, Inc. changed its name to AXP(R) Fixed Income Series, Inc. and created a series, AXP(R) Bond Fund, AXP(R) Discovery Fund, Inc. changed its name to AXP(R) Discovery Series, Inc. and created a series, AXP(R) Discovery Fund, AXP(R) Equity Select Fund, Inc. changed its name to AXP(R) Equity Series, Inc. and created a series, AXP(R) Equity Select Fund, AXP(R) Extra Income Fund, Inc. changed its name to AXP(R) High Yield Income Series, Inc. and created a series, AXP(R) Extra Income Fund, AXP(R) Federal Income Fund, Inc. changed its name to AXP(R) Government Income Series, Inc., AXP(R) High Yield Tax-Exempt Fund, Inc. changed its name to AXP(R) High Yield Tax-Exempt Series, Inc. and created a series, AXP(R) High Yield Tax-Exempt Fund, AXP(R) International Fund, Inc. changed its name to AXP(R) International Series, Inc., AXP(R) New Dimensions Fund, Inc. changed its name to AXP(R) Dimensions Series, Inc., AXP(R) Precious Metals Fund, Inc. changed its name to AXP(R) Selected Series, Inc. and created a series, AXP(R) Precious Metals Fund, AXP(R) Progressive Fund, Inc. changed its name to AXP(R) Progressive Series, Inc. and created a series, AXP(R) Progressive Fund, AXP(R) Selective Fund, Inc. changed its name to AXP(R) Income Series, Inc. and created a series, AXP(R) Selective Fund, AXP(R) Stock Fund, Inc. changed its name to AXP(R) Stock Series, Inc. and created a series, AXP(R) Stock Fund, AXP(R) Tax-Free Money Fund, Inc. changed its name to AXP(R) Tax-Free Money Series, Inc. and created a series, AXP(R) Tax-Free Money Fund, and AXP(R) Utilities Income Fund, Inc. changed its name to AXP(R) Sector Series, Inc. - -------------------------------------------------------------------------------- 37 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 77 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 Other directorships Committee memberships address, with Fund and during past five years age length of service - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Arne H. Carlson Board member Chair, Board Services Joint Audit, Contracts, 901 S. Marquette Ave. since 1999 Corporation (provides Executive, Investment Minneapolis, MN 55402 administrative services Review, Board Born in 1934 to boards). Former Effectiveness Governor of Minnesota - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, Joint Audit, Contracts 901 S. Marquette Ave. since 2002 Fluor Corporation Vulcan Materials Minneapolis, MN 55402 (engineering and Company, Inc. Born in 1937 construction) since 1998. (construction Former President and CEO, materials/chemicals) Shell Oil Company - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Livio D. DeSimone Board member Retired Chair of the Cargill, Incorporated Joint Audit, Contracts, 30 Seventh Street East since 2001 Board and Chief Executive (commodity merchants and Executive Suite 3050 Officer, Minnesota Mining processors), General St. Paul, MN 55101-4901 and Manufacturing (3M) Mills, Inc. (consumer Born in 1936 foods), Vulcan Materials Company (construction materials/chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Heinz F. Hutter* Board member Retired President and Board Effectiveness, P.O. Box 2187 since 1994 Chief Operating Officer, Executive, Investment Minneapolis, MN 55402 Cargill, Incorporated Review Born in 1929 (commodity merchants and processors) - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Anne P. Jones Board member Attorney and Consultant Motorola, Inc. Joint Audit, Board 5716 Bent Branch Rd. since 1985 (electronics) Effectiveness, Executive Bethesda, MD 20816 Born in 1935 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Stephen R. Lewis, Jr.** Board member Retired President and Valmont Industries, Inc. Contracts, Investment 222 South 9th Street #440 since 2002 Professor of Economics, (manufactures irrigation Review, Executive Minneapolis, MN 55402 Carleton College systems) Born in 1939 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Alan G. Quasha Board member President, Quadrant Compagnie Financiere Joint Audit, Board 720 Fifth Avenue since 2002 Management, Inc. Richemont AG (luxury Effectiveness New York, NY 10019 (management of private goods) Born in 1949 equities) - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Alan K. Simpson Board member Former three-term United Biogen, Inc. Investment Review, 1201 Sunshine Ave. since 1997 States Senator for Wyoming (biopharmaceuticals) Board Effectiveness Cody, WY 82414 Born in 1931 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Alison Taunton-Rigby Board member President, Forester Synaptic Pharmaceuticals Investment Review, 901 S. Marquette Ave. since 2002 Biotech since 2000. Corporation Contracts Minneapolis, MN 55402 Former President and CEO, Born in 1944 Aquila Biopharmaceuticals, Inc. - ---------------------------- ---------------- --------------------------- -------------------------- --------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of J P Morgan Chase & Co., which has a 45% interest in American Century Companies, Inc., the parent company of one of the fund's subadvisers, American Century Investment Management, Inc. ** Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Liberty Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 38 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Board Members Affiliated with AEFC*** Name, Position held Principal occupation Other directorships Committee memberships address, with Fund and during past five years age length of service - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Barbara H. Fraser Board member Executive Vice President 1546 AXP Financial Center since 2002 - AEFA Products and Minneapolis, MN 55474 Corporate Marketing of Born in 1949 AEFC since 2002. President - Travelers Check Group, American Express Company, 2001-2002. Management Consultant, Reuters, 2000-2001. Managing Director - International Investments, Citibank Global, 1999-2000. Chairman and CEO, Citicorp Investment Services and Citigroup Insurance Group, U.S., 1998-1999 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Stephen W. Roszell Board member Senior Vice President - 50238 AXP Financial Center since 2002, Institutional Group of Minneapolis, MN 55474 Vice AEFC Born in 1949 President since 2002 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- William F. Truscott Board member Senior Vice President - 53600 AXP Financial Center since 2001, Chief Investment Officer Minneapolis, MN 55474 Vice of AEFC since 2001. Born in 1960 President Former Chief Investment since 2002 Officer and Managing Director, Zurich Scudder Investments - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- *** Interested person by reason of being an officer, director and/or employee of AEFC. The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Roszell, who is vice president, and Mr. Truscott, who is vice president, the Fund's other officers are: Other Officers Name, Position held Principal occupation Other directorships Committee memberships address, with Fund and during past five years age length of service - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Jeffrey P. Fox Treasurer Vice President - 50005 AXP Financial Center since 2002 Investment Accounting, Minneapolis, MN 55474 AEFC, since 2002; Vice Born in 1955 President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Paula R. Meyer President Senior Vice President and 596 AXP Financial Center since 2002 General Manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Born in 1954 Vice President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - ---------------------------- ---------------- --------------------------- -------------------------- -------------------------- Leslie L. Ogg Vice President of Board 901 S. Marquette Ave. President, Services Corporation Minneapolis, MN 55402 General Born in 1938 Counsel, and Secretary since 1978 - ---------------------------- ---------------- --------------------------- -------------------------- --------------------------
- -------------------------------------------------------------------------------- 39 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Responsibilities of board with respect to Fund's management The board initially approves an Investment Management Services Agreement and other contracts with American Express Financial Corporation (AEFC), one of AEFC's subsidiaries, and other service providers. Once the contracts are approved, the board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts of interest. Annually, the board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and AEFC's profitability in order to determine whether to continue existing contracts or negotiate new contracts. Several committees facilitate its work Executive Committee -- Acts for the board between meetings of the board. The committee held three meetings during the last fiscal year. Joint Audit Committee -- Meets with the independent public accountant, internal auditors and corporate officers to review financial statements, reports, and compliance matters. Reports significant issues to the board and makes recommendations to the independent directors regarding the selection of the independent public accountant. The committee held four meetings during the last fiscal year. Investment Review Committee -- Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the board. The committee held four meetings during the last fiscal year. Board Effectiveness Committee -- Recommends to the board the size, structure and composition for the board; the compensation to be paid to members of the board; and a process for evaluating the board's performance. The committee also reviews candidates for board membership including candidates recommended by shareholders. To be considered, recommendations must include a curriculum vita and be mailed to the Chairman of the Board, American Express Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The committee held five meetings during the last fiscal year. Contracts Committee -- Receives and analyzes reports covering the level and quality of services provided under contracts with the Fund and advises the board regarding actions taken on these contracts during the annual review process. The committee held four meetings during the last fiscal year. BOARD MEMBERS' HOLDINGS The following table shows the Fund Board Members' ownership of American Express Funds. Dollar range of equity securities beneficially owned on Dec. 31, 2002 Based on net asset values as of Dec. 31, 2002 Aggregate dollar range of Dollar range of equity securities of all equity securities American Express Funds in the Fund overseen by Board Member Range Range Arne H. Carlson $1-$10,000 over $100,000 Philip J. Carroll, Jr. none none Livio D. DeSimone none over $100,000 Heinz F. Hutter none over $100,000 Anne P. Jones none over $100,000 Stephen R. Lewis, Jr. none $1-$10,000 Alan G. Quasha none none Alan K. Simpson none $50,001-$100,000 Alison Taunton-Rigby none none - -------------------------------------------------------------------------------- 40 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND COMPENSATION FOR BOARD MEMBERS During the most recent fiscal year, the independent members of the Fund board, for attending up to 32 meetings, received the following compensation: Compensation Table Total cash compensation from Aggregate American Express Funds and Board member* compensation from the Fund Preferred Master Trust Group Philip J. Carroll, Jr. $ 492 $ 30,917 Livio D. DeSimone 2,458 144,583 Heinz F. Hutter 2,466 145,433 Anne P. Jones 2,616 158,583 Stephen R. Lewis, Jr. 2,208 123,083 Alan G. Quasha 1,942 114,283 Alan K. Simpson 2,258 127,133 Alison Taunton-Rigby 592 39,867 * Arne H. Carlson, Chair of the Board, is compensated by Board Services Corporation. As of 30 days prior to the date of this SAI, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. Independent Auditors The financial statements contained in the Annual Report were audited by independent auditors, KPMG LLP, 4200 Wells Fargo Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also provide other accounting and tax-related services as requested by the Fund. - -------------------------------------------------------------------------------- 41 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Appendix DESCRIPTION OF RATINGS Standard & Poor's Debt Ratings A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: o Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. o Nature of and provisions of the obligation. o Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Investment Grade Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. Speculative Grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. - -------------------------------------------------------------------------------- 42 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Moody's Long-Term Debt Ratings Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A -- Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa -- Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds that are rated Ba are judged to have speculative elements -- their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. - -------------------------------------------------------------------------------- 43 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND Standard & Poor's Note Ratings An S&P note rating reflects the liquidity factors and market-access risks unique to notes. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Moody's Short-Term Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's & S&P's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are rated by Moody's and by S&P. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. - -------------------------------------------------------------------------------- 44 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND S-6025-20 V (4/03) EX-99.17J PROSPECTUS 10 ex17-j.txt PROSPECTUS FOR AXP RESEARCH OPPORTUNITIES FUND AXP(R) Research Opportunities Fund AXP Research Opportunities Fund seeks to provide shareholders with long-term capital growth. Prospectus Sept. 29, 2003 Please note that this Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goal Like all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) - -------------------------------------------------------------------------------- Table of Contents TAKE A CLOSER LOOK AT: The Fund 3p Goal 3p Principal Investment Strategies 3p Principal Risks 4p Past Performance 5p Fees and Expenses 8p Investment Manager 9p Other Securities and Investment Strategies 10p Buying and Selling Shares 11p Valuing Fund Shares 11p Investment Options 11p Purchasing Shares 13p Transactions Through Third Parties 15p Sales Charges 15p Exchanging/Selling Shares 18p Distributions and Taxes 21p Master/Feeder Structure 23p Financial Highlights 24p - -------------------------------------------------------------------------------- 2p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS The Fund GOAL AXP Research Opportunities Fund (the Fund) seeks to provide shareholders with long-term capital growth. Because any investment involves risk, achieving this goal cannot be guaranteed. The Fund seeks to achieve its goal by investing all of its assets in a master portfolio rather than by directly investing in and managing its own portfolio of securities. The master portfolio has the same goal and investment policies as the Fund. PRINCIPAL INVESTMENT STRATEGIES The Fund invests primarily in securities of companies included in the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The S&P 500 Index is an unmanaged market index used to measure the total return of the U.S. stock market. The Fund invests in those securities that are believed to offer the potential for long-term growth. In pursuit of the Fund's goal, American Express Financial Corporation (AEFC), the Fund's investment manager, chooses investments by: o Utilizing a proprietary research rating system that AEFC has developed to rate securities on a daily basis based on each company's merits, the stock's relative attractiveness, and its industry grouping(s). o Focusing on fundamental analysis to identify companies with: o effective management, o financial strength, o competitive market and industry position, and o growth potential. o Buying those securities that AEFC's research analysts believe offer the greatest potential for long-term growth. o Aligning the Fund's sector weightings with those of the S&P 500 Index. In evaluating whether to sell a security, AEFC considers, among other factors, whether: o The security is no longer attractive relative to other investments. o The security has reached AEFC's price objective, earnings and/or growth expectations. o Political, economic, market downturn or other events could affect the company's performance. o The company continues to meet the other standards described above. Unusual Market Conditions During unusual market conditions, the Fund may invest more of its assets in money market securities. Although investing in these securities would serve primarily to avoid losses, this type of investing could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees, expenses, and taxes. - -------------------------------------------------------------------------------- 3p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS PRINCIPAL RISKS This Fund is designed for investors with above-average risk tolerance. Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: Market Risk Issuer Risk Style Risk Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Style Risk The Fund purchases growth stocks based on the expectation that the companies will have strong growth in earnings. The price paid often reflects an expected rate of growth. If that growth fails to occur, the price of the stock may decline quickly. - -------------------------------------------------------------------------------- 4p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: o how the Fund's performance has varied for each full calendar year that the Fund has existed, and o how the Fund's average annual total returns compare to recognized indexes. How the Fund has performed in the past does not indicate how the Fund will perform in the future. (bar chart) CLASS A PERFORMANCE (based on calendar years) 30% +26.20% 25% +23.37% +22.03% 20% 15% 10% 5% 0% -5% - -10% -10.10% - -15% - -20% -19.95% - -25% -24.54% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 During the period shown in the bar chart, the highest return for a calendar quarter was +24.86% (quarter ending December 1998) and the lowest return for a calendar quarter was -18.33% (quarter ending September 2001). The 5.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in expenses. The Fund's Class A year to date return as of June 30, 2003 was +10.21%. - -------------------------------------------------------------------------------- 5p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS
Average Annual Total Returns (as of Dec. 31, 2002) Since Since 1 year 5 years inception (A,B&Y) inception (C) Research Opportunities: Class A Return before taxes -28.89% -5.08% +0.84%(a) N/A Return after taxes on distributions -28.89% -7.06% -1.33%(a) N/A Return after taxes on distributions and sale of fund shares -17.74% -4.26% +0.20%(a) N/A Class B Return before taxes -28.15% -4.83% +1.00%(a) N/A Class C Return before taxes -25.16% N/A N/A -21.12%(c) Class Y Return before taxes -24.55% -3.82% +1.93%(a) N/A S&P 500 Index -22.10% -0.59% +6.41%(b) -17.06%(d) Lipper Large-Cap Core Funds Index -21.23% -0.74% +5.41%(b) -17.18%(d)
(a) Inception date was Aug. 19, 1996. (b) Measurement period started Sept. 1, 1996. (c) Inception date was June 26, 2000. (d) Measurement period started July 1, 2000. Before-Tax Returns This table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. These returns are compared to the indexes shown for the same periods. The performance of different classes varies because of differences in sales charges and fees. - -------------------------------------------------------------------------------- 6p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The Return After Taxes on Distributions for a period may be the same as the Return Before Taxes for the same period if there are no distributions or if the distributions are small. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return Before Taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. S&P 500 Index, an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the S&P 500 companies may be generally larger than those in which the Fund invests. The Lipper Large-Cap Core Funds Index, published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies or objectives. - -------------------------------------------------------------------------------- 7p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of (as a percentage of offering price) 5.75%(b) none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none 5% 1%(c) none
Annual Fund operating expenses(d) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees(e) 0.58% 0.58% 0.58% 0.58% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(f) 0.52% 0.53% 0.53% 0.60% Total 1.35% 2.11% 2.11% 1.18% (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. See "Sales Charges." (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Both in this table and the following example, fund operating expenses include expenses charged by both the Fund and its Master Portfolio as described under "Management." Other expenses are based on estimated amounts for the current fiscal year. AEFC has agreed to waive certain fees and to absorb certain expenses until July 31, 2004, Under this agreement, total expenses will not exceed 1.35% for Class A; 2.11% for Class B; 2.11% for Class C and 1.18% for Class Y. (e) Includes the impact of a performance incentive adjustment fee that decreased the management fee by 0.07% for the most recent fiscal year. (f) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. Effective May 2003, the Fund's transfer agency fee increased. The percentages above reflect the increase. - -------------------------------------------------------------------------------- 8p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Examples These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return each year. The operating expenses remain the same each year. You would pay the following expenses if you redeem all of your shares at the end of the time periods indicated: 1 year 3 years 5 years 10 years Class A(a) $705 $978 $1,273 $2,110 Class B $614 $961 $1,235 $2,252(b) Class C $214 $661 $1,135 $2,446 Class Y $120 $375 $ 650 $1,437 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. You would pay the following expenses if you did not redeem your shares: 1 year 3 years 5 years 10 years Class A(a) $705 $978 $1,273 $2,110 Class B $214 $661 $1,135 $2,252(b) Class C $214 $661 $1,135 $2,446 Class Y $120 $375 $ 650 $1,437 (a) Includes a 5.75% sales charge. (b) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. These examples do not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. INVESTMENT MANAGER The Fund's assets are invested in the Aggressive Growth Portfolio (the Portfolio), which is managed by AEFC. Joan Kampmeyer, CFA, Co-Portfolio Manager o Managed the Portfolio since 2002. o Joined AEFC in 1992. o Began investment career in 1985. o MBA, University of Minnesota. Tom Mahowald, CFA, Co-Portfolio Manager o Managed the Portfolio since 2002. o Director of Equity Research. o Joined AEFC in 1997. o Began investment career in 1990. o MS, University of Wisconsin-Milwaukee. - -------------------------------------------------------------------------------- 9p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS The Portfolio pays AEFC a fee for managing its assets. The Fund pays its proportionate share of the fee. Under the Investment Management Services Agreement, the fee for the most recent fiscal year was 0.58% of the Portfolio's average daily net assets, including an adjustment under the terms of a performance incentive arrangement. The maximum monthly adjustment (increase or decrease) will be 0.12% of the Portfolio's average net assets on an annual basis. Under the agreement, the Portfolio also pays taxes, brokerage commissions, and nonadvisory expenses. AEFC or an affiliate may make payments from its own resources, which include profits from management fees paid by the Portfolio, to compensate broker-dealers or other persons for providing distribution assistance. AEFC, located at 200 AXP Financial Center, Minneapolis, Minnesota 55474, is a wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, New York 10285. The Fund operates under an order from the Securities and Exchange Commission that permits AEFC, subject to the approval of the Board of Directors, to appoint a subadviser or change the terms of a subadvisory agreement for the Fund without first obtaining shareholder approval. The order permits the Fund to add or change unaffiliated subadvisers or the fees paid to subadvisers from time to time without the expense and delays associated with obtaining shareholder approval of the change. OTHER SECURITIES AND INVESTMENT STRATEGIES The Fund may invest in other securities and may employ other investment strategies that are not principal investment strategies. The Fund's policies permit investment in other instruments, such as money market securities, debt securities and foreign securities. Additionally, the Fund may use derivative instruments such as futures, options, and forward contracts to produce incremental earnings, to hedge existing positions, and to increase flexibility. Even though the Fund's policies permit the use of derivatives in this manner, the portfolio manager is not required to use derivatives. For more information on strategies and holdings, see the Fund's Statement of Additional Information (SAI) and its annual and semiannual reports. - -------------------------------------------------------------------------------- 10p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Buying and Selling Shares The public offering price for Class A shares of the Fund is the net asset value (NAV) plus a sales charge, and for Class B, C, and Y shares, the NAV. In addition to buying and selling shares through the Fund's distributor, American Express Financial Advisors Inc., you may buy or sell shares through third parties, including 401(k) plans, banks, brokers, and investment advisers. Where authorized by the Fund, orders in good form are priced using the NAV next determined after your order is placed with the third party. If you buy or redeem shares through a third party, consult that firm to determine whether your order will be priced at the time it is placed with the third party or at the time it is placed with the Fund. The third party may charge a fee for its services. VALUING FUND SHARES The NAV is the value of a single share of the Fund. The NAV is determined by dividing the value of the Fund's assets, minus any liabilities, by the number of shares outstanding. AEFC calculates the NAV as of the close of business on the New York Stock Exchange (NYSE), normally 4:00 p.m. Eastern time, on each day that the NYSE is open. The Fund's assets are valued primarily on the basis of market quotations. Certain short-term securities are valued at amortized cost. Foreign investments are valued in U.S. dollars. AEFC will price a security at fair value in accordance with procedures adopted by the Fund's Board of Directors if a reliable market quotation is not readily available. AEFC also may use fair value if a security's value has been materially affected by events after the close of the primary exchanges or markets on which the security is traded and before the NAV is calculated. This occurs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution fee of 1.00% (may be subject to a CDSC). 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee. Please see the SAI for information on eligibility to purchase Class Y shares. - -------------------------------------------------------------------------------- 11p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Investment options summary The Fund offers four different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision. The following table shows the key features of each class: Class A Class B Class C Class Y - --------------- ------------------ -------------- --------------- -------------- Availability Available to Available to Available to Limited to all investors. all all investors. qualifying investors. institutional investors. - --------------- ------------------ -------------- --------------- -------------- Initial Sales Yes. Payable No. Entire No. Entire No. Entire Charge at time of purchase purchase purchase price purchase. price is price is is invested in Lower sales invested in invested in shares of the charge for shares of shares of the Fund. larger the Fund. Fund. investments. - --------------- ------------------ -------------- --------------- -------------- Deferred Sales On purchases Maximum 5% 1% CDSC None. Charge over $1,000,000, CDSC during applies if 1% CDSC the first you sell your applies if you year shares less sell your decreasing than one year shares less to 0% after after than one year six years. purchase. after purchase. - --------------- ------------------ -------------- --------------- -------------- Distribution Yes.* 0.25% Yes.* 1.00% Yes.* 1.00% Yes. 0.10% and/or Shareholder Service Fee - --------------- ------------------ -------------- --------------- -------------- Conversion to N/A Yes, No. No. Class A automatically in ninth calendar year of ownership. - --------------- ------------------ -------------- --------------- -------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $250,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $250,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. - -------------------------------------------------------------------------------- 12p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS PURCHASING SHARES To purchase shares through entities other than American Express Financial Advisors Inc. (the Distributor), please consult your selling agent. The following section explains how you can purchase shares from the Distributor. If you do not have an existing American Express mutual fund account, you will need to establish a brokerage account. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - --------------------------------------------- ---------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - --------------------------------------------- ---------------------------------- Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - --------------------------------------------- ---------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - --------------------------------------------- ---------------------------------- An irrevocable trust, pension trust or The legal entity (not the personal estate representative or trustee, unless no legal entity is designated in the account title) - --------------------------------------------- ---------------------------------- Sole proprietorship or single-owner LLC The owner - --------------------------------------------- ---------------------------------- Partnership or multi-member LLC The partnership - --------------------------------------------- ---------------------------------- Corporate or LLC electing corporate status The corporation on Form 8837 - --------------------------------------------- ---------------------------------- Association, club or tax-exempt organization The organization - --------------------------------------------- ---------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (www.irs.gov). - -------------------------------------------------------------------------------- 13p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Methods of purchasing shares By mail Once your account has been established, send your check to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000* Additional investments: $500** Fund minimum balances: $300 Qualified minimum account balances: none * $1,000 for tax qualified accounts. ** $100 minimum add-on for existing mutual fund accounts outside of a brokerage account (direct at fund accounts). If your Fund balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. By scheduled investment plan Minimum amounts Initial investment: $2,000* Additional investments: $100** Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. * $100 for direct at fund accounts. ** $50 minimum per payment for qualified accounts in a direct at fund account. By wire or electronic funds transfer Please contact your financial advisor or selling agent for specific instructions. Minimum wire purchase amount: $1,000 or new account minimum, as applicable. By telephone If you have a brokerage account, you may use the money in your account to make initial and subsequent purchases. To place your order, call: (800) 872-4377 for brokerage accounts (800) 967-4377 for wrap accounts - -------------------------------------------------------------------------------- 14p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS TRANSACTIONS THROUGH THIRD PARTIES You may buy or sell shares through certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through third parties or to determine if there are policy differences, please consult your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. SALES CHARGES Class A -- initial sales charge alternative When you purchase Class A shares, you pay a sales charge as shown in the following table: Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 * Offering price includes the sales charge. The sales charge on Class A shares may be lower than 5.75%, based on the combined market value of: o your current investment in this Fund, o your previous investment in this Fund, and o investments you and your primary household group have made in other American Express mutual funds that have a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. For purposes of this policy, domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do not have sales charges. - -------------------------------------------------------------------------------- 15p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Other Class A sales charge policies o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, and o if you intend to invest more than $50,000 over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. If purchasing shares in a brokerage account or through a third party, you must request the reduced sales charge when you buy shares. For more details, please contact your financial advisor or see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired American Express financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. o registered representatives and other employees of brokers, dealers or other financial institutions having a sales agreement with the Distributor, including their spouses, domestic partners, children and parents. o investors who have a business relationship with a newly associated financial advisor who joined the Distributor from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with the Distributor, (2) the purchase is made with proceeds of shares sold that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds are the result of a sale of an equal or greater value where a sales load was assessed. o qualified employee benefit plans offering participants daily access to American Express mutual funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor. Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%. o shareholders who have at least $1 million in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived only in the circumstances described for waivers for Class B and Class C shares. o purchases made within 90 days after a sale of American Express Fund shares (up to the amount sold). Send the Fund a written request along with your payment, indicating the date and the amount of the sale. - -------------------------------------------------------------------------------- 16p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS o purchases made: o with dividend or capital gain distributions from this Fund or from the same class of another American Express mutual fund, o through or under a wrap fee product or other investment product sponsored by the Distributor or another authorized broker-dealer, investment advisor, bank or investment professional, o within the University of Texas System ORP, o within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, o within the University of Massachusetts After-Tax Savings Program, or o through or under a subsidiary of AEFC offering Personal Trust Services' Asset-Based pricing alternative. o shareholders whose original purchase was in a Strategist fund merged into an American Express fund in 2000. Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of calendar years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline after a purchase: If the sale is made during the: The CDSC percentage rate is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% For Class C, a 1% CDSC is charged if you sell your shares less than one year after purchase. For both Class B and Class C, if the amount you are selling causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC is based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you never have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. - -------------------------------------------------------------------------------- 17p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Example Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 3 1/2 years, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 3% because the sale was made during the fourth year after the purchase. Waivers of the sales charge for Class B and Class C shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if American Express Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: o at least 59 1/2 years old AND o taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR o selling under an approved substantially equal periodic payment arrangement. EXCHANGING/SELLING SHARES Exchanges You may exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. The Fund does not permit market-timing. Do not invest in the Fund if you are a market timer. Excessive trading (market-timing) or other abusive short-term trading practices may disrupt portfolio management strategies, harm performance and increase fund expenses. To prevent abuse or adverse effects on the Fund and its shareholders, the Distributor and the Fund reserve the right to reject any purchase orders, including exchanges, limit the amount, modify or discontinue the exchange privilege, or charge a fee to any investor we believe has a history of abusive trading or whose trading, in our judgement has been disruptive to the Fund. For example, we may exercise these rights if exchanges are too numerous or too large. - -------------------------------------------------------------------------------- 18p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is received from the secured party. Selling Shares You may sell your shares at any time. The payment will be mailed within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. To sell or exchange shares held with entities other than the Distributor, please consult your selling agent. The following section explains how you can exchange or sell shares held with the Distributor. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. Payment may be made earlier if your bank provides evidence satisfactory to the Fund and the Distributor that your check has cleared. - -------------------------------------------------------------------------------- 19p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Ways to request an exchange or sale of shares By regular or express mail American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 Include in your letter: o your account number o the name of the fund(s) o the class of shares to be exchanged or sold o your Social Security number or Employer Identification number o the dollar amount or number of shares you want to exchange or sell o specific instructions regarding delivery or exchange destination o signature(s) of registered account owner(s) (All signatures may be required. Contact your financial advisor for more information.) o delivery instructions, if applicable o any paper certificates of shares you hold Payment will be mailed to the address of record and made payable to the names listed on the account, unless specified differently and signed by all owners. The express mail delivery charges you pay will vary depending on domestic or international delivery instructions. By telephone (800) 872-4377 for brokerage accounts (800) 437-3133 for direct at fund accounts (800) 967-4377 for wrap accounts o The Fund and the Distributor will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing the Distributor. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- 20p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS By wire Money can be wired from your account to your bank account. Contact your financial advisor or the Distributor at the above numbers for additional information. o Minimum amount: $1,000 o Pre-authorization is required. o A service fee may be charged against your account for each wire sent. By scheduled payout plan o Minimum payment: $100*. o Contact your financial advisor or the Distributor to set up regular payments. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. * Minimum is $50 in a direct at fund account. Electronic transactions The ability to initiate transactions via the internet may be unavailable or delayed at certain times (for example, during periods of unusual market activity). The Fund and the Distributor are not responsible for any losses associated with unexecuted transactions. In addition, the Fund and the Distributor are not responsible for any losses resulting from unauthorized transactions if reasonable security measures are followed to validate the investor's identity. The Fund may modify or discontinue electronic privileges at any time. Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. As a result of the Fund's goal and investment strategies, distributions from the Fund may consist of a significant amount of capital gains. - -------------------------------------------------------------------------------- 21p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered American Express mutual fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. - -------------------------------------------------------------------------------- 22p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Master/Feeder Structure This Fund uses a master/feeder structure. This means that the Fund (a feeder fund) invests all of its assets in the Portfolio (the master fund). The master/feeder structure offers the potential for reduced costs because it spreads fixed costs of portfolio management over a larger pool of assets. The Fund may withdraw its assets from the Portfolio at any time if the Fund's board determines that it is best. In that event, the board would consider what action should be taken, including whether to hire an investment advisor to manage the Fund's assets directly or to invest all of the Fund's assets in another pooled investment entity. Here is an illustration of the structure: Investors buy shares in the Fund The Fund buys units in the Portfolio The Portfolio invests in securities, such as stocks or bonds Other feeders may include mutual funds and institutional accounts. These feeders buy the Portfolio's securities on the same terms and conditions as the Fund and pay their proportionate share of the Portfolio's expenses. However, their operating costs and sales charges are different from those of the Fund. Therefore, the investment returns for other feeders are different from the returns of the Fund. - -------------------------------------------------------------------------------- 23p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS Financial Highlights The financial highlights tables are intended to help you understand the Fund's financial performance. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by KPMG LLP, whose report, along with the Fund's financial statements, is included in the annual report which, if not included with this prospectus, is available upon request.
Class A Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $3.90 $ 5.37 $ 7.61 $7.94 $6.98 Income from investment operations: Net investment income (loss) .02 -- .02 -- (.01) Net gains (losses) (both realized and unrealized) .23 (1.46) (1.27) .66 1.32 Total from investment operations .25 (1.46) (1.25) .66 1.31 Less distributions: Dividends from net investment income -- (.01) -- -- -- Distributions from realized gains -- -- (.99) (.99) (.35) Total distributions -- (.01) (.99) (.99) (.35) Net asset value, end of period $4.15 $ 3.90 $ 5.37 $7.61 $7.94 Ratios/supplemental data Net assets, end of period (in millions) $149 $189 $365 $540 $481 Ratio of expenses to average daily net assets(c) 1.35% 1.22% 1.16% 1.14% 1.12% Ratio of net investment income (loss) to average daily net assets .43% .15% .37% .02% .04% Portfolio turnover rate (excluding short-term securities) 82% 144% 234% 160% 143% Total return(e) 6.41% (27.24%) (17.54%) 7.73% 19.21%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 24p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS
Class B Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $3.69 $ 5.12 $ 7.36 $7.76 $6.88 Income from investment operations: Net investment income (loss) (.02) (.01) (.02) (.05) (.02) Net gains (losses) (both realized and unrealized) .23 (1.42) (1.23) .64 1.25 Total from investment operations .21 (1.43) (1.25) .59 1.23 Less distributions: Distributions from realized gains -- -- (.99) (.99) (.35) Net asset value, end of period $3.90 $ 3.69 $ 5.12 $7.36 $7.76 Ratios/supplemental data Net assets, end of period (in millions) $91 $119 $235 $336 $276 Ratio of expenses to average daily net assets(c) 2.11% 1.98% 1.92% 1.91% 1.88% Ratio of net investment income (loss) to average daily net assets (.33%) (.62%) (.39%) (.73%) (.72%) Portfolio turnover rate (excluding short-term securities) 82% 144% 234% 160% 143% Total return(e) 5.69% (27.93%) (18.19%) 7.03% 18.31%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 25p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS
Class C Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002 2001 2000(b) Net asset value, beginning of period $3.69 $ 5.13 $ 7.36 $7.50 Income from investment operations: Net investment income (loss) (.01) (.02) (.02) .02 Net gains (losses) (both realized and unrealized) .23 (1.42) (1.22) (.16) Total from investment operations 0.22 (1.44) (1.24) (.14) Less distributions: Distributions from realized gains -- -- (.99) -- Net asset value, end of period $3.91 $ 3.69 $ 5.13 $7.36 Ratios/supplemental data Net assets, end of period (in millions) $-- $-- $-- $-- Ratio of expenses to average daily net assets(c) 2.11% 1.99% 1.92% 1.91%(d) Ratio of net investment income (loss) to average daily net assets (.34%) (.61%) (.36%) (.50%)(d) Portfolio turnover rate (excluding short-term securities) 82% 144% 234% 160% Total return(e) 5.96% (28.05%) (18.03%) (1.87%)(f)
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 26p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS
Class Y Per share income and capital changes(a) Fiscal period ended July 31, 2003 2002 2001 2000 1999 Net asset value, beginning of period $3.93 $ 5.42 $ 7.65 $7.96 $7.01 Income from investment operations: Net investment income (loss) .04 -- .04 .01 -- Net gains (losses) (both realized and unrealized) .23 (1.48) (1.28) .67 1.32 Total from investment operations 0.27 (1.48) (1.24) .68 1.32 Less distributions: Dividends from net investment income -- (.01) -- -- (.02) Distributions from realized gains -- -- (.99) (.99) (.35) Total distributions -- (.01) (.99) (.99) (.37) Net asset value, end of period $4.20 $ 3.93 $ 5.42 $7.65 $7.96 Ratios/supplemental data Net assets, end of period (in millions) $-- $-- $-- $-- $-- Ratio of expenses to average daily net assets(c) 1.13% 1.04% 1.00% .97% 1.02% Ratio of net investment income (loss) to average daily net assets .64% .33% .54% .17% .12% Portfolio turnover rate (excluding short-term securities) 82% 144% 234% 160% 143% Total return(e) 6.87% (27.30%) (17.29%) 7.99% 19.34%
Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 27p -- AXP RESEARCH OPPORTUNITIES FUND -- 2003 PROSPECTUS This Fund, along with the other American Express mutual funds, is distributed by American Express Financial Advisors Inc. and can be purchased from an American Express financial advisor or from other authorized broker-dealers or third parties. The Funds can be found under the "Amer Express" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's Statement of Additional Information (SAI), annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund during its last fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report or the semiannual report, contact your selling agent or American Express Client Service Corporation. American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 Web site address: americanexpress.com/funds You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at (http://www.sec.gov). Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-2111 Ticker Symbol Class A: IRDAX Class B:IROBX Class C: -- Class Y:-- - -------------------------------------------------------------------------------- (logo) AMERICAN EXPRESS (R) - -------------------------------------------------------------------------------- American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 S-6356-99 L (9/03) EX-99.17K SAI 11 ex17-k.txt STATEMENT OF ADDITIONAL INFORMATION FOR AXP RESEARCH OPPORTUNITIES FUND RESEARCH OPPORTUNITIES FUND. AXP(R) GROWTH SERIES, INC. STATEMENT OF ADDITIONAL INFORMATION FOR AXP(R) RESEARCH OPPORTUNITIES FUND (the Fund) SEPT. 29, 2003 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the financial statements contained in the most recent Annual Report to shareholders (Annual Report) that may be obtained from your financial advisor or by writing to American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474 or by calling (800) 862-7919. The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report are incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. The prospectus for the Fund, dated the same date as this SAI, also is incorporated in this SAI by reference. Table of Contents Mutual Fund Checklist p. 3 Fundamental Investment Policies p. 4 Investment Strategies and Types of Investments p. 5 Information Regarding Risks and Investment Strategies p. 6 Security Transactions p. 22 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation p. 24 Performance Information p. 24 Valuing Fund Shares p. 27 Proxy Voting p. 28 Investing in the Fund p. 29 Selling Shares p. 31 Pay-out Plans p. 31 Capital Loss Carryover p. 32 Taxes p. 32 Agreements p. 33 Organizational Information p. 36 Board Members and Officers p. 40 Principal Holders of Securities p. 43 Independent Auditors p. 43 Appendix A: Description of Ratings p. 44 Appendix B: Utilities and Energy Industries p. 48 - -------------------------------------------------------------------------------- 2 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Mutual Fund Checklist [X] Mutual funds are NOT guaranteed or insured by any bank or government agency. You can lose money. [X] Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. [X] A higher rate of return typically involves a higher risk of loss. [X] Past performance is not a reliable indicator of future performance. [X] ALL mutual funds have costs that lower investment return. [X] You can buy some mutual funds by contacting them directly. Others, like this one, are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay a sales charge. [X] Shop around. Compare a mutual fund with others of the same type before you buy. OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING Develop a Financial Plan Have a plan -- even a simple plan can help you take control of your financial future. Review your plan with your advisor at least once a year or more frequently if your circumstances change. Dollar-Cost Averaging An investment technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing through changing market conditions to accumulate shares to meet long-term goals. Dollar-cost averaging Regular Market price Shares investment of a share acquired $100 $ 6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5) The average price you paid for each share: $4.84 ($500 divided by 103.4) Diversify Diversify your portfolio. By investing in different asset classes and different economic environments you help protect against poor performance in one type of investment while including investments most likely to help you achieve your important goals. Understand Your Investment Know what you are buying. Make sure you understand the potential risks, rewards, costs, and expenses associated with each of your investments. - -------------------------------------------------------------------------------- 3 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Fundamental Investment Policies The Fund pursues its investment objective by investing all of its assets in Aggressive Growth Portfolio (the Portfolio) of Growth Trust (the Trust), a separate investment company, rather than by directly investing in and managing its own portfolio of securities. The Portfolio has the same investment objectives, policies, and restrictions as the Fund. References to "Fund" in this SAI, where applicable, refer to the Fund and Portfolio, collectively, to the Fund, singularly, or to the Portfolio, singularly. Fundamental investment policies adopted by the Fund cannot be changed without the approval of a majority of the outstanding voting securities of the Fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. The policies below are fundamental policies that apply to the Fund and may be changed only with shareholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund will not: o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Concentrate in any industry except in either or both the energy or utilities industries. According to the present interpretation by the Securities and Exchange Commission (SEC), this means up to 25% of the Fund's total assets, based on current market value, can be invested in any one industry other than the energy and/or utility industries. Except for the fundamental investment policies listed above, the other investment policies described in the prospectus and in this SAI are not fundamental and may be changed by the board at any time. - -------------------------------------------------------------------------------- 4 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Investment Strategies and Types of Investments This table shows various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager may make on behalf of the Fund. For a description of principal risks, please see the prospectus. Notwithstanding the Fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager's sole discretion. AXP Research Opportunities Investment strategies and types of investments Allowable for the Fund? Agency and Government Securities yes Borrowing yes Cash/Money Market Instruments yes Collateralized Bond Obligations yes Commercial Paper yes Common Stock yes Convertible Securities yes Corporate Bonds yes Debt Obligations yes Depositary Receipts yes Derivative Instruments (including Options and Futures) yes Foreign Currency Transactions no Foreign Securities yes High-Yield (High-Risk) Securities (Junk Bonds) no* Illiquid and Restricted Securities yes Indexed Securities yes Inverse Floaters no Investment Companies yes Lending of Portfolio Securities yes Loan Participations yes Mortgage- and Asset-Backed Securities yes Mortgage Dollar Rolls no Municipal Obligations yes Preferred Stock yes Real Estate Investment Trusts yes Repurchase Agreements yes Reverse Repurchase Agreements yes Short Sales no Sovereign Debt yes Structured Products yes Swap Agreements no Variable- or Floating-Rate Securities yes Warrants yes When-Issued Securities and Forward Commitments yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes * The Fund may hold bonds that are downgraded to junk bond status, if the bonds were rated investment grade at the time of purchase. - -------------------------------------------------------------------------------- 5 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND The following are guidelines that may be changed by the board at any time: o Ordinarily, at least 65% of the Fund's total assets will be invested in equity securities comprising the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). o The Fund will not invest in bonds rated below investment grade. o The Fund may invest up to 20% of its total assets in foreign securities that are included in the S&P 500 (or that will be included in the S&P 500 Index in the near future) or in Canadian money market instruments. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin or sell short, except the Fund may make margin payments in connection with transactions in options, futures contracts and other financial instruments. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. For a discussion of the energy and utility industries, see Appendix B. Information Regarding Risks and Investment Strategies RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). Please remember that a mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with the Fund at any time (for a description of principal risks, please see the prospectus): Call/Prepayment Risk The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk. Correlation Risk The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. Credit Risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. Event Risk Occasionally, the value of a security may be seriously and unexpectedly changed by a natural or industrial accident or occurrence. Foreign/Emerging Markets Risk The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. - -------------------------------------------------------------------------------- 6 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. Inflation Risk Also known as purchasing power risk, inflation risk measures the effects of continually rising prices on investments. If an investment's yield is lower than the rate of inflation, your money will have less purchasing power as time goes on. Interest Rate Risk The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the higher its yield and the greater its sensitivity to changes in interest rates. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Legal/Legislative Risk Congress and other governmental units have the power to change existing laws affecting securities. A change in law might affect an investment adversely. Leverage Risk Some derivative investments (such as options, futures, or options on futures) require little or no initial payment and base their price on a security, a currency, or an index. A small change in the value of the underlying security, currency, or index may cause a sizable gain or loss in the price of the instrument. Liquidity Risk Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. Management Risk The risk that a strategy or selection method utilized by the investment manager may fail to produce the intended result. When all other factors have been accounted for and the investment manager chooses an investment, there is always the possibility that the choice will be a poor one. Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Reinvestment Risk The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. Sector/Concentration Risk Investments that are concentrated in a particular issuer, geographic region, or industry will be more susceptible to changes in price (the more you diversify, the more you spread risk). Small and Medium Company Risk Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. - -------------------------------------------------------------------------------- 7 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND INVESTMENT STRATEGIES The following information supplements the discussion of the Fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes many strategies that many mutual funds use and types of securities that they purchase. Please refer to the section titled Investment Strategies and Types of Investments to see which are applicable to the Fund. Agency and Government Securities The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities including mortgage pass through certificates of the Government National Mortgage Association (GNMA) are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and Reinvestment Risk. Borrowing The Fund may borrow money for temporary or emergency purposes and make other investments or engage in other transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce the Fund's total return. Except as qualified above, however, the Fund will not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Inflation Risk and Management Risk. Cash/Money Market Instruments The Fund may maintain a portion of its assets in cash and cash-equivalent investments. Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. The Fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject the Fund to certain costs and expenses. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk, Inflation Risk, and Management Risk. Collateralized Bond Obligations Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments -- money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, earns them investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield (High-Risk) Securities (Junk Bonds).) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 8 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Commercial Paper Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk, Liquidity Risk, and Management Risk. Common Stock Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Event Risk, Issuer Risk, Legal/Legislative Risk, Management Risk, Market Risk, and Small and Medium Company Risk. Convertible Securities Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Call/Prepayment Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and Reinvestment Risk. Corporate Bonds Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield (High-Risk) Securities (Junk Bonds).) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. - -------------------------------------------------------------------------------- 9 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Debt Obligations Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a specified rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield (High-Risk) Securities (Junk Bonds).) All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating organization or their rating systems, the Fund will attempt to use comparable ratings as standards for selecting investments. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Depositary Receipts Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, Management Risk, and Market Risk. Derivative Instruments Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. - -------------------------------------------------------------------------------- 10 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If the Fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indices (such as the S&P 500 Index), foreign currencies and other financial instruments and indices. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to - -------------------------------------------------------------------------------- 11 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax and Accounting Treatment. As permitted under federal income tax laws and to the extent the Fund is allowed to invest in futures contracts, the Fund intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If the Fund is using short futures contracts for hedging purposes, the Fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, the Fund will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (See also Foreign Currency Transactions.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Leverage Risk, Liquidity Risk, and Management Risk. - -------------------------------------------------------------------------------- 12 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Foreign Currency Transactions Investments in foreign countries usually involve currencies of foreign countries. In addition, the Fund may hold cash and cash-equivalent investments in foreign currencies. As a result, the value of the Fund's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, the Fund may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing the Fund's NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Spot Rates and Derivative Instruments. The Fund conducts its foreign currency exchange transactions either at the spot (cash) rate prevailing in the foreign currency exchange market or by entering into forward currency exchange contracts (forward contracts) as a hedge against fluctuations in future foreign exchange rates. (See also Derivative Instruments). These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivative instruments, the Fund could be disadvantaged by having to deal in the odd lot market for the underlying foreign currencies at prices that are less favorable than for round lots. The Fund may enter into forward contracts to settle a security transaction or handle dividend and interest collection. When the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency or has been notified of a dividend or interest payment, it may desire to lock in the price of the security or the amount of the payment in dollars. By entering into a forward contract, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between different currencies from the date the security is purchased or sold to the date on which payment is made or received or when the dividend or interest is actually received. The Fund also may enter into forward contracts when management of the Fund believes the currency of a particular foreign country may change in relationship to another currency. The precise matching of forward contract amounts and the value of securities involved generally will not be possible since the future value of securities in foreign currencies more than likely will change between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movements is extremely difficult and successful execution of a short-term hedging strategy is highly uncertain. The Fund will not enter into such forward contracts or maintain a net exposure to such contracts when consummating the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's securities or other assets denominated in that currency. The Fund will designate cash or securities in an amount equal to the value of the Fund's total assets committed to consummating forward contracts entered into under the second circumstance set forth above. If the value of the securities declines, additional cash or securities will be designated on a daily basis so that the value of the cash or securities will equal the amount of the Fund's commitments on such contracts. At maturity of a forward contract, the Fund may either sell the security and make delivery of the foreign currency or retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract with the same currency trader obligating it to buy, on the same maturity date, the same amount of foreign currency. If the Fund retains the security and engages in an offsetting transaction, the Fund will incur a gain or loss (as described below) to the extent there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline between the date the Fund enters into a forward contract for selling foreign currency and the date it enters into an offsetting contract for purchasing the foreign currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell. It is impossible to forecast what the market value of securities will be at the expiration of a contract. Accordingly, it may be necessary for the Fund to buy additional foreign currency on the spot market (and bear the expense of that purchase) if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received on the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. - -------------------------------------------------------------------------------- 13 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND The Fund's dealing in forward contracts will be limited to the transactions described above. This method of protecting the value of the Fund's securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange that can be achieved at some point in time. Although forward contracts tend to minimize the risk of loss due to a decline in value of hedged currency, they tend to limit any potential gain that might result should the value of such currency increase. Although the Fund values its assets each business day in terms of U.S. dollars, it does not intend to convert its foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and shareholders should be aware of currency conversion costs. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. Options on Foreign Currencies. The Fund may buy put and call options and write covered call and cash-secured put options on foreign currencies for hedging purposes. For example, a decline in the dollar value of a foreign currency in which securities are denominated will reduce the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against the diminutions in the value of securities, the Fund may buy put options on the foreign currency. If the value of the currency does decline, the Fund will have the right to sell the currency for a fixed amount in dollars and will offset, in whole or in part, the adverse effect on its portfolio that otherwise would have resulted. Conversely, where a change in the dollar value of a currency would increase the cost of securities the Fund plans to buy, the Fund may buy call options on the foreign currency. The purchase of the options could offset, at least partially, the changes in exchange rates. As in the case of other types of options, however, the benefit to the Fund derived from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions in foreign currency options that would require it to forego a portion or all of the benefits of advantageous changes in rates. The Fund may write options on foreign currencies for the same types of hedging purposes. For example, when the Fund anticipates a decline in the dollar value of foreign-denominated securities due to adverse fluctuations in exchange rates it could, instead of purchasing a put option, write a call option on the relevant currency. If the expected decline occurs, the option will most likely not be exercised and the diminution in value of securities will be fully or partially offset by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against an anticipated increase in the dollar cost of securities to be acquired, the Fund could write a put option on the relevant currency. If rates move in the manner projected, the put option will expire unexercised and allow the Fund to hedge increased cost up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option will constitute only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur, the option may be exercised and the Fund would be required to buy or sell the underlying currency at a loss that may not be offset by the amount of the premium. Through the writing of options on foreign currencies, the Fund also may be required to forego all or a portion of the benefits that might otherwise have been obtained from favorable movements on exchange rates. All options written on foreign currencies will be covered. An option written on foreign currencies is covered if the Fund holds currency sufficient to cover the option or has an absolute and immediate right to acquire that currency without additional cash consideration upon conversion of assets denominated in that currency or exchange of other currency held in its portfolio. An option writer could lose amounts substantially in excess of its initial investments, due to the margin and collateral requirements associated with such positions. Options on foreign currencies are traded through financial institutions acting as market-makers, although foreign currency options also are traded on certain national securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In an over-the-counter trading environment, many of the protections afforded to exchange participants will not be available. For example, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Foreign currency option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby reducing the risk of counterparty default. Further, a liquid secondary market in options traded on a national securities exchange may be more readily available than in the over-the-counter market, potentially permitting the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses in the event of adverse market movements. - -------------------------------------------------------------------------------- 14 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND The purchase and sale of exchange-traded foreign currency options, however, is subject to the risks of availability of a liquid secondary market described above, as well as the risks regarding adverse market movements, margining of options written, the nature of the foreign currency market, possible intervention by governmental authorities and the effects of other political and economic events. In addition, exchange-traded options on foreign currencies involve certain risks not presented by the over-the-counter market. For example, exercise and settlement of such options must be made exclusively through the OCC, which has established banking relationships in certain foreign countries for that purpose. As a result, the OCC may, if it determines that foreign governmental restrictions or taxes would prevent the orderly settlement of foreign currency option exercises, or would result in undue burdens on OCC or its clearing member, impose special procedures on exercise and settlement, such as technical changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or prohibitions on exercise. Foreign Currency Futures and Related Options. The Fund may enter into currency futures contracts to buy or sell currencies. It also may buy put and call options and write covered call and cash-secured put options on currency futures. Currency futures contracts are similar to currency forward contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract size and delivery date. Most currency futures call for payment of delivery in U.S. dollars. The Fund may use currency futures for the same purposes as currency forward contracts, subject to Commodity Futures Trading Commission (CFTC) limitations. Currency futures and options on futures values can be expected to correlate with exchange rates, but will not reflect other factors that may affect the value of the Fund's investments. A currency hedge, for example, should protect a Yen-denominated bond against a decline in the Yen, but will not protect the Fund against price decline if the issuer's creditworthiness deteriorates. Because the value of the Fund's investments denominated in foreign currency will change in response to many factors other than exchange rates, it may not be possible to match the amount of a forward contract to the value of the Fund's investments denominated in that currency over time. The Fund will hold securities or other options or futures positions whose values are expected to offset its obligations. The Fund will not enter into an option or futures position that exposes the Fund to an obligation to another party unless it owns either (i) an offsetting position in securities or (ii) cash, receivables and short-term debt securities with a value sufficient to cover its potential obligations. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Correlation Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk. Foreign Securities Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). - -------------------------------------------------------------------------------- 15 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. The introduction of a single currency, the euro, on January 1, 1999 for participating European nations in the Economic and Monetary Union ("EU") presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other EU countries such as the United Kingdom and Denmark into the euro and the admission of other non-EU countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk, Issuer Risk, and Management Risk. High-Yield (High-Risk) Securities (Junk Bonds) High yield (high-risk) securities are sometimes referred to as junk bonds. They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield (high-risk) securities include: Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and Management Risk. - -------------------------------------------------------------------------------- 16 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Illiquid and Restricted Securities The Fund may invest in illiquid securities (i.e., securities that are not readily marketable). These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent the Fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for such securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for the Fund to sell such an investment promptly and at an acceptable price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk and Management Risk. Indexed Securities The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk, Management Risk, and Market Risk. Inverse Floaters Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with inverse floaters include: Interest Rate Risk and Management Risk. Investment Companies Investing in securities issued by registered and unregistered investment companies may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Management Risk and Market Risk. Lending of Portfolio Securities The Fund may lend certain of its portfolio securities to broker-dealers. The current policy of the Fund's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Fund receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Fund will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Fund receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk and Management Risk. Loan Participations Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk and Management Risk. - -------------------------------------------------------------------------------- 17 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Mortgage- and Asset-Backed Securities Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage- and asset-backed securities include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and Management Risk. Mortgage Dollar Rolls Mortgage dollar rolls are investments whereby an investor would sell mortgage-backed securities for delivery in the current month and simultaneously contract to purchase substantially similar securities on a specified future date. While an investor would forego principal and interest paid on the mortgage-backed securities during the roll period, the investor would be compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk, Interest Rate Risk, and Management Risk. Municipal Obligations Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." - -------------------------------------------------------------------------------- 18 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Event Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market Risk. Preferred Stock Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk, Management Risk, and Market Risk. Real Estate Investment Trusts Real estate investment trusts (REITs) are entities that manage a portfolio of real estate to earn profits for their shareholders. REITs can make investments in real estate such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Additionally, the failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Issuer Risk, Management Risk, and Market Risk. Repurchase Agreements The Fund may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement, the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk and Management Risk. - -------------------------------------------------------------------------------- 19 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Reverse Repurchase Agreements In a reverse repurchase agreement, the investor would sell a security and enter into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk, Interest Rate Risk, and Management Risk. Short Sales With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to utilize short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to the Fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Management Risk and Market Risk. Sovereign Debt A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk, Foreign/Emerging Markets Risk, and Management Risk. Structured Products Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option, or a forward contract embedded in a note or any of a wide variety of debt, equity, and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market, and defaults by other parties. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured products include: Credit Risk, Liquidity Risk, and Management Risk. Swap Agreements Swap agreements obligate one party to make payments to the other party based on the change in the market value of an index or other asset. In return, the other party agrees to make payments to the first party based on the return of another index or asset. Swap agreements entail the risk that a party will default on its payment obligations. Interest Rate Swaps. Interest rate swap agreements are used to obtain or preserve a desired return or spread at a lower cost than through a direct investment in an instrument that yields the desired return or spread. Swaps also may protect against changes in the price of securities that an investor anticipates buying or selling at a later date. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard interest rate swap transaction, - -------------------------------------------------------------------------------- 20 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND two parties agree to exchange their respective commitments to pay fixed or floating rates on a predetermined notional amount. The swap agreement notional amount is the predetermined basis for calculating the obligations that the swap counterparties have agreed to exchange. Under most swap agreements, the obligations of the parties are exchanged on a net basis. The two payment streams are netted out, with each party receiving or paying, as the case may be, only the net amount of the two payments. Swap agreements are usually entered into at a zero net market value of the swap agreement commitments. The market values of the underlying commitments will change over time resulting in one of the commitments being worth more than the other and the net market value creating a risk exposure for one counterparty to the other. Swap agreements may include embedded interest rate caps, floor and collars. In interest rate cap transactions, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap. Interest rate floor transactions require one party, in exchange for a premium to agree to make payments to the other to the extent that interest rates fall below a specified level, or floor. In interest rate collar transactions, one party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels or collar amounts. Swap agreements are traded in the over-the-counter market and may be considered to be illiquid. The Fund will enter into interest rate swap agreements only if the claims-paying ability of the other party or its guarantor is considered to be investment grade by the Advisor. Generally, the unsecured senior debt or the claims-paying ability of the other party or its guarantor must be rated in one of the three highest rating categories of at least one NRSRO at the time of entering into the transaction. If there is a default by the other party to such a transaction, the Fund will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. In certain circumstances, the Fund may seek to minimize counterparty risk by requiring the counterparty to post collateral. Currency Swaps. Currency swaps are similar to interest rate swaps, except that they involve currencies instead of interest rates. Although one or more of the other risks described in this SAI may apply, the largest risks associated with swaps include: Liquidity Risk, Credit Risk and Correlation Risk. Variable- or Floating-Rate Securities The Fund may invest in securities that offer a variable- or floating-rate of interest. Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (e.g., daily, monthly, semiannually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the Fund to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the Fund as lender, and the borrower. The interest rates on these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk and Management Risk. Warrants Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Management Risk and Market Risk. - -------------------------------------------------------------------------------- 21 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND When-Issued Securities and Forward Commitments When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, the Fund may lose the opportunity to obtain a price and yield considered to be advantageous. Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk and Management Risk. Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk, Interest Rate Risk, and Management Risk. The Fund cannot issue senior securities but this does not prohibit certain investment activities for which assets of the Fund are set aside, or margin, collateral or escrow arrangements are established, to cover the related obligations. Examples of those activities include borrowing money, delayed-delivery and when-issued securities transactions, and contracts to buy or sell options, derivatives, and hedging instruments. Security Transactions Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's investment goal and policies, which securities will be purchased, held, or sold. The description of policies and procedures in this section also applies to any Fund subadviser. In determining where the buy and sell orders are to be placed, AEFC has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the board. In selecting broker-dealers to execute transactions, AEFC may consider the price of the security, including commission or mark-up, the size and difficulty of the order, the reliability, integrity, financial soundness, and general operation and execution capabilities of the broker, the broker's expertise in particular markets, and research services provided by the broker. The Fund, AEFC, any subadviser and American Express Financial Advisors Inc. (the Distributor) each have a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the Fund. The Fund's securities may be traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The board has adopted a policy authorizing AEFC to do so to the extent authorized by law, if AEFC determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or AEFC's overall responsibilities with respect to the Fund and the other American Express mutual funds for which it acts as investment manager. - -------------------------------------------------------------------------------- 22 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business, and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software, or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management, and trading functions and other services to the extent permitted under an interpretation by the SEC. When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Fund to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Fund that it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this arrangement, some portfolio transactions may not be effected at the lowest commission, but AEFC believes it may obtain better overall execution. AEFC has represented that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. All other transactions will be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by AEFC in providing advice to all American Express mutual funds even though it is not possible to relate the benefits to any particular fund. Each investment decision made for the Fund is made independently from any decision made for another portfolio, fund, or other account advised by AEFC or any of its subsidiaries. When the Fund buys or sells the same security as another portfolio, fund, or account, AEFC carries out the purchase or sale in a way the Fund agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Fund, the Fund hopes to gain an overall advantage in execution. On occasion, the Fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency, and research services. The Fund paid total brokerage commissions of $510,968 for fiscal year ended July 31, 2003, $1,300,511 for fiscal year 2002, and $2,454,635 for fiscal year 2001. Substantially all firms through whom transactions were executed provide research services. In fiscal year 2003, transactions amounting to $8,764,591, on which $15,781 in commissions were imputed or paid, were specifically directed to firms in exchange for research services. No transactions were directed to brokers because of research services they provided to the Fund except for the affiliates as noted below. As of the end of the most recent fiscal year, the Fund held securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities as presented below: Value of securities Name of issuer owned at end of fiscal year Citigroup $8,292,480 Merrill Lynch 1,962,757 Morgan Stanley 1,228,696 The portfolio turnover rate was 82% in the most recent fiscal year, and 144% in the year before. Higher turnover rates may result in higher brokerage expenses and taxes. - -------------------------------------------------------------------------------- 23 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation Affiliates of American Express Company (of which AEFC is a wholly-owned subsidiary) may engage in brokerage and other securities transactions on behalf of the Fund according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. AEFC will use an American Express affiliate only if (i) AEFC determines that the Fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Fund and (ii) the affiliate charges the Fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. Information about brokerage commissions paid by the Fund for the last three fiscal years to brokers affiliated with AEFC is contained in the following table:
As of the end of fiscal year 2003 2002 2001 Percent of aggregate dollar amount of Aggregate dollar Percent of transactions Aggregate dollar Aggregate dollar amount of aggregate involving amount of amount of Nature of commissions brokerage payment of commissions commissions Broker affiliation paid to broker commissions commissions paid to broker paid to broker American Enterprise Wholly-owned $46,054* 9.01% 9.28% $51,732 $40,815 Investment subsidiary of Services Inc. AEFC
* Represents brokerage clearing fees. Performance Information The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations, if applicable, used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the methods used by the Fund to compute performance follows below. The Fund's average annual total returns (both before and after taxes) for the one-, five-, and ten-year periods, or since inception, as applicable, ended July 31, 2003, are set forth below:
Since Since 1 year 5 years inception (A,B&Y) inception (C) Class A Return before taxes +0.29% -5.02% +2.37%(a) N/A Return after taxes on distributions +0.29% -7.01% +0.34%(a) N/A Return after taxes on distributions and sale of fund shares +0.19% -4.98% +1.10%(a) N/A Class B Return before taxes +1.69% -4.76% +2.46%(a) N/A Class C Return before taxes +5.96% N/A N/A -14.61%(b) Class Y Return before taxes +6.87% -3.70% +3.44%(a) N/A
(a) Inception date was Aug. 19, 1996. (b) Inception date was June 26, 2000. Before-Tax Returns This table shows total returns from hypothetical investments in Class A, Class B, Class C and Class Y shares of the Fund. The performance of different classes varies because of differences in sales charges and fees. - -------------------------------------------------------------------------------- 24 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND After-Tax Returns After-tax returns are shown only for Class A shares. After-tax returns for the other classes will vary. After-tax returns are calculated using the highest historical individual federal marginal income tax rate and do not reflect the impact of state and local taxes. Actual after-tax returns will depend on your tax situation and most likely will differ from the returns shown in the table. If you hold your shares in a tax-deferred account, such as a 401(k) plan or an IRA, the after-tax returns do not apply to you since you will not incur taxes until you begin to withdraw from your account. The Return After Taxes on Distributions for a period may be the same as the Return Before Taxes for the same period if there are no distributions or if the distributions are small. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return Before Taxes for the same period if there was a tax loss realized on sale of Fund shares. The benefit of the tax loss (since it can be used to offset other gains) may result in a higher return. For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class C shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. AVERAGE ANNUAL TOTAL RETURN The Fund may calculate average annual total return for a class for certain periods by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1 + T)(to the power of n) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) AFTER TAX RETURNS The Fund may calculate estimated after tax returns based on the highest historical individual federal marginal income tax rates, the estimates do not reflect the effect of state and local taxes, according to the following formulas: Average Annual Total Returns (after taxes on distributions) P(1 + T)(to the power of n) = ATVD where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATVD = ending after tax value on distributions of a hypothetical $1,000 payment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemptions. Average Annual Total Returns (after taxes on distributions and redemptions) P(1 + T)(to the power of n) = ATVDR where: P = a hypothetical initial investment of $1,000 T = average annual total return (after taxes on distributions and redemptions) n = number of years ATVDR = ending after tax value on distributions of a hypothetical $1,000 payment made at the beginning of the period, at the end of the period (or fractional portion thereof), after taxes on fund distributions and redemptions. - -------------------------------------------------------------------------------- 25 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND AGGREGATE TOTAL RETURN The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the Fund over a specified period of time according to the following formula: ERV - P ---------- P where: P = a hypothetical initial payment of $1,000 ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) In its sales material and other communications, the Fund may quote, compare or refer to rankings, yields, or returns as published by independent statistical services or publishers and publications such as The Bank Rate Monitor National Index, Barron's, Business Week, CDA Technologies, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, iMoneyNet Money Market Fund Report, Institutional Investor, Investor's Business Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger Investment Companies Service. The Fund also may compare its performance to a wide variety of indexes or averages. There are similarities and differences between the investments that the Fund may purchase and the investments measured by the indexes or averages and the composition of the indexes or averages will differ from that of the Fund. Ibbotson Associates provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the CPI) and combinations of various capital markets. The performance of these capital markets is based on the returns of different indexes. The Fund may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. The Fund may quote various measures of volatility in advertising. Measures of volatility seek to compare a fund's historical share price fluctuations or returns to those of a benchmark. The Distributor may provide information designed to help individuals understand their investment goals and explore various financial strategies. Materials may include discussions of asset allocation, retirement investing, brokerage products and services, model portfolios, saving for college or other goals, and charitable giving. - -------------------------------------------------------------------------------- 26 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Valuing Fund Shares As of the end of the most recent fiscal year, the computation looked like this:
Net assets Shares outstanding Net asset value of one share Class A $149,101,302 divided by 35,889,959 equals $4.15 Class B 91,325,311 23,387,745 3.90 Class C 275,194 70,413 3.91 Class Y 1,261 300 4.20
In determining net assets before shareholder transactions, the Fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): o Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. o Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. o Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. o Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. o Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. o Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. o Occasionally, events affecting the value of securities occur between the time the primary market on which the securities are traded closes and the close of the Exchange. If events materially affect the value of securities, the securities will be valued at their fair value according to procedures decided upon in good faith by the board. This occrs most commonly with foreign securities, but may occur in other cases. The fair value of a security is different from the quoted or published price. o Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. o Securities without a readily available market price and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Fund. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. - -------------------------------------------------------------------------------- 27 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Proxy Voting GENERAL GUIDELINES The Fund upholds a long tradition of sound and principled corporate governance. For approximately 30 years, the Board of Directors, which consists of a majority of independent directors, has voted proxies. General guidelines are: o Corporate governance matters -- The board supports proxy proposals that require changes or encourage decisions that have been shown to add shareholder value over time and votes against proxy proposals that entrench management. o Changes in capital structure -- The board votes for amendments to corporate documents that strengthen the financial condition of a business. o Stock option plans and other management compensation issues -- The board expects thoughtful consideration to be given by a company's management to developing a balanced compensation structure providing competitive current income with long-term employee incentives directly tied to the interest of shareholders and votes against proxy proposals that dilute shareholder value excessively. o Social and corporate policy issues -- The board believes that proxy proposals should address the business interests of the corporation. Each proposal is viewed in light of the circumstances of the company submitting the proposal. POLICY AND PROCEDURES The policy of the board is to vote all proxies of the companies in which the Fund holds investments, ensuring there are no conflicts between interests of Fund shareholders and those of the Fund's investment manager, AEFC. The recommendation of the management of a company as set out in the company's proxy statement is considered. In each instance in which the Fund votes against the recommendation, the board sends a letter to senior management of the company explaining the basis for its vote. This has permitted both the company's management and the Fund's board to gain better insight into issues presented by proxy proposals. In the case of foreign corporations, proxies of companies located in some countries may not be voted due to requirements of locking up the voting shares and when time constraints prohibit the processing of proxies. From time to time a proxy proposal is presented that has not been previously considered by the board or that AEFC recommends be voted different from the votes cast for similar proposals. In making recommendations to the board about voting on a proposal, AEFC relies on its own investment personnel and information obtained from outside resources, including Institutional Shareholder Services (ISS). AEFC makes the recommendation in writing. The process established by the board to vote proxies requires that either board members or officers who are independent from AEFC consider the recommendation and decide how to vote the proxy proposal. PROXY VOTING RECORD The proxy voting record will be made available on a quarterly basis after the end of the quarter for all companies whose shareholders meetings were completed during the quarter. The information is on a Web site maintained by ISS and can be accessed through the American Express Company's web page, www.americanexpress.com beginning Jan. 1, 2004. For anyone seeking information on how the Fund voted all proxies during a year, the information can be obtained after Aug. 1, 2004 without cost: o On the ISS Web site www.americanexpress.com/funds o On a Web site maintained by the Securities and Exchange Commission, www.sec.gov o By calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. - -------------------------------------------------------------------------------- 28 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Investing in the Fund SALES CHARGE Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the CDSC and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of the Fund. Shares of the Fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C and Class Y, there is no initial sales charge so the public offering price is the same as the NAV. Using the sales charge schedule in the table below, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal year, was determined by dividing the NAV of one share, $4.15, by 0.9425 (1.00 - 0.0575) for a maximum 5.75% sales charge for a public offering price of $4.40. The sales charge is paid to the Distributor by the person buying the shares. Class A -- Calculation of the Sales Charge Sales charges are determined as follows: Sales charge as a percentage of: Total market value Public offering price Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 or more 0.00 0.00 The initial sales charge is waived for certain qualified plans. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The Fund will waive the deferred sales charge on certain redemptions if the redemption is a result of a participant's death, disability, retirement, attaining age 59 1/2, loans, or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of participants Total plan assets 1-99 100 or more Less than $1 million 4% 0% $1 million or more 0% 0% Class A -- Reducing the Sales Charge The market value of your investments in the Fund determines your sales charge. For example, suppose you have made an investment that now has a value of $20,000 and you later decide to invest $40,000 more. The value of your investments would be $60,000. As a result, your $40,000 investment qualifies for the lower 4.75% sales charge that applies to investments of more than $50,000 and up to $100,000. If you qualify for a reduced sales charge and purchase shares through different channels (for example, in a brokerage account and also directly from the Fund), you must inform the Distributor of your total holdings when placing any purchase orders. Class A -- Letter of Intent (LOI) If you intend to invest more than $50,000 over a period of time, you can reduce the sales charge in Class A by filing a LOI and committing to invest a certain amount. The agreement can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days. Your holdings in American Express mutual funds acquired more than 90 days before receipt of your signed LOI in the corporate office will not be counted towards the completion of the LOI. Your investments will be charged the sales charge that applies to the amount you have committed to invest. Five percent of the commitment amount will be placed in escrow. If your commitment amount is reached within the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by the total value of the new investment combined with the market value of the existing American Express mutual fund investments. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of - -------------------------------------------------------------------------------- 29 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND American Express mutual funds other than Class A; purchases in American Express mutual funds held within a wrap product; and purchases of AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are subsequently exchanged to Class A shares of an American Express mutual fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares through different channels, for example in a brokerage account or through a third party, you must inform the Distributor about the LOI when placing any purchase orders during the period of the LOI. Class Y Shares Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: o uses a daily transfer recordkeeping service offering participants daily access to American Express mutual funds and has o at least $10 million in plan assets or o 500 or more participants; or o does not use daily transfer recordkeeping and has o at least $3 million invested in American Express mutual funds or o 500 or more participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These institutions must have at least $10 million in American Express mutual funds. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. o State sponsored college savings plans established under Section 529 of the Internal Revenue Code. * Eligibility must be determined in advance. To do so, contact your financial advisor. SYSTEMATIC INVESTMENT PROGRAMS You decide how often to make payments -- monthly, quarterly, or semiannually. Provided your account meets the minimum balance requirement, you are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. The Fund also can change the program or end it at any time. AUTOMATIC DIRECTED DIVIDENDS Dividends, including capital gain distributions, paid by another American Express mutual fund may be used to automatically purchase shares in the same class of this Fund. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to this Fund the following day. Dividends can be exchanged into the same class of another American Express mutual fund but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: o Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which American Express Trust Company acts as custodian; o Between two American Express Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); and o Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA or UTMA accounts with identical ownership. The Fund's investment goal is described in its prospectus along with other information, including fees and expense ratios. Before exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REJECTION OF BUSINESS The Fund or AECSC reserves the right to reject any business, in its sole discretion. - -------------------------------------------------------------------------------- 30 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Selling Shares You have a right to sell your shares at any time. For an explanation of sales procedures, please see the prospectus. During an emergency, the board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of the Fund to redeem shares for more than seven days. Such emergency situations would occur if: o The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or o Disposal of the Fund's securities is not reasonably practicable or it is not reasonably practicable for the Fund to determine the fair value of its net assets, or o The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all shareholders. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. Pay-out Plans You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which American Express Trust Company acts as custodian, you can elect to receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of the Fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your selling agent or write American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474, or call (800) 437-3133. Your authorization must be received at least five days before the date you want your payments to begin. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way AEFC can handle efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. The Fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $100 if the value of your account is $20,000 on the payment date. - -------------------------------------------------------------------------------- 31 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Capital Loss Carryover For federal income tax purposes, the Fund had total capital loss carryovers of $272,229,915 at the end of the most recent fiscal year, that if not offset by subsequent capital gains will expire as follows: 2009 2010 2011 2012 $20,209,593 $127,246,260 $97,936,244 $26,837,818 It is unlikely that the board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. Taxes For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For example You purchase 100 shares of one fund having a public offering price of $10.00 per share. With a sales load of 5.75%, you pay $57.50 in sales load. With a NAV of $9.425 per share, the value of your investment is $942.50. Within 91 days of purchasing that fund, you decide to exchange out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.425, and purchase into a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $57.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 - $1,000.00), you have a $157.50 gain ($1,100.00 - $942.50). You can include the $57.50 sales load in the calculation of your tax gain or loss when you sell shares in the second fund. If you have a nonqualified investment in the Fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the Fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged exceeds annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. Under provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Act), the maximum tax paid on dividends by individuals is reduced to 15% (5% for taxpayers in the 10% and 15% brackets) for tax years 2003 through 2008. The Act also reduces the maximum capital gain rate for securities sold on or after May 6, 2003 through 2008 from 20% to 15% (5% for taxpayers in the 10% and 15% brackets). The Act provides that only certain qualified dividend income (QDI) will be subject to the 15% and 5% tax rates. QDI is dividends earned from domestic corporations and qualified foreign corporations. Qualified foreign corporations are corporations incorporated in a U.S. possession, corporations whose stock is readily tradable on an established U.S. securities market (ADRs), and certain other corporations eligible for relief under an income tax treaty with the U.S. that includes an exchange of information agreement (except Barbados). Excluded are passive foreign investment companies (PFICs), foreign investment companies and foreign personal holding companies. Holding periods for shares must also be met to be eligible for QDI treatment (60 days for stock and 90 days for preferreds). The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Income earned by the Fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of the Fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the Fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the Fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be - -------------------------------------------------------------------------------- 32 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the Fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long shareholders owned their shares. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. Special rates on capital gains may apply to sales of precious metals, if any, owned directly by the Fund and to investments in REITs. Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of the Fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year the Fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. The Internal Revenue Code imposes two asset diversification rules that apply to the Fund as of the close of each quarter. First, as to 50% of its holdings, the Fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, the Fund cannot have more than 25% of its assets in any one issuer. For purposes of the excise tax distributions, "section 988" ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to the stock, the dividend will be included in gross income by the Fund as of the later of (1) the date the share became ex-dividend or (2) the date the Fund acquired the share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the Fund, this rule may cause the Fund to pay income to its shareholders that it has not actually received. To the extent that the dividend is never received, the Fund will take a loss at the time that a determination is made that the dividend will not be received. Distributions, if any, that are in excess of the Fund's current or accumulated earnings and profits will first reduce a shareholder's tax basis in the Fund and, after the basis is reduced to zero, will generally result in capital gains to a shareholder when the shares are sold. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to Fund distributions. Agreements INVESTMENT MANAGEMENT SERVICES AGREEMENT AEFC, a wholly-owned subsidiary of American Express Company, is the investment manager for the Fund. Under the Investment Management Services Agreement, AEFC, subject to the policies set by the board, provides investment management services. For its services, AEFC is paid a fee based on the following schedule. Each class of the Fund pays its proportionate share of the fee. Assets (billions) Annual rate at each asset level First $0.25 0.650% Next 0.25 0.625 Next 0.50 0.600 Next 1.00 0.575 Next 1.00 0.550 Next 3.00 0.525 Over 6.00 0.500 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.650% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. - -------------------------------------------------------------------------------- 33 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Before the fee based on the asset charge is paid, it is adjusted for investment performance. The adjustment, determined monthly, will be determined by measuring the percentage difference over a rolling 12-month period between the performance of one Class A share of the Fund and the change in the Lipper Large-Cap Core Funds Index (Index). The performance difference is then used to determine the adjustment rate. The adjustment rate, computed to five decimal places, is determined in accordance with the following table: Performance difference Adjustment rate 0.00%-0.50% 0 0.50%-1.00% 6 basis points times the performance difference over 0.50% (maximum of 3 basis points if a 1% performance difference) 1.00%-2.00% 3 basis points, plus 3 basis points times the performance difference over 1.00% (maximum 6 basis points if a 2% performance difference) 2.00%-4.00% 6 basis points, plus 2 basis points times the performance difference over 2.00% (maximum 10 basis points if a 4% performance difference) 4.00%-6.00% 10 basis points, plus 1 basis point times the performance difference over 4.00% (maximum 12 basis points if a 6% performance difference) 6.00% or more 12 basis points For example, if the performance difference is 2.38%, the adjustment rate is 0.000676 (0.0006 [6 basis points] plus 0.0038 [the 0.38% performance difference over 2.00%] x 0.0002 [2 basis points] x 100 (0.000076)). Rounded to five decimal places, the adjustment rate is 0.00068. The maximum adjustment rate for the Fund is 0.0012 per year. Where the Fund's Class A performance exceeds that of the Index, the fee paid to AEFC will increase. Where the performance of the Index exceeds the performance of the Fund's Class A shares, the fee paid to AEFC will decrease. The 12-month comparison period rolls over with each succeeding month, so that it always equals 12 months, ending with the month for which the performance adjustment is being computed. The adjustment decreased the fee by $181,188 for fiscal year 2003. The management fee is paid monthly. Under the agreement, the total amount paid was $1,484,028 for fiscal year 2003, $2,638,359 for fiscal year 2002, and $4,445,702 for fiscal year 2001. Under the agreement, the Fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; postage of confirmations except purchase confirmations; consultants' fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; and expenses properly payable by the Fund, approved by the board. Under the agreement, nonadvisory expenses, net of earnings credits, waivers and expenses reimbursed by AEFC, paid by the Fund were $287,808 for fiscal year 2003, $311,912 for fiscal year 2002, and $404,909 for fiscal year 2001. Basis for board approving the investment advisory contract Based on its work throughout the year and detailed analysis by the Contracts Committee of reports provided by AEFC, the independent board members determined to renew the Investment Management Services Agreement and Subadvisory Agreements (where applicable) based on: o tangible steps AEFC has taken to improve the competitive ranking and consistency of the investment performance of the Fund, including changes in leadership, portfolio managers, compensation structures, and the implementation of management practices, o continued commitment to expand the range of investment options that it offers investors, through repositioning existing funds and creating new funds, o consistent effort to provide a management structure that imposes disciplines that ensure adherence to stated management style and expected risk characteristics, o additional time needed to evaluate the efficacy of the new AEFC management structure that has produced improved performance results in the short term, o benefit of economy of scale that results from the graduated fee structure and the reasonableness of fees in light of the fees paid by similar funds in the industry, o competitive total expenses that are either at or only slightly above the median expenses of a group of comparable funds based on a report prepared by Lipper Inc., and o reasonable level of AEFC's profitability from its mutual fund operations. - -------------------------------------------------------------------------------- 34 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND ADMINISTRATIVE SERVICES AGREEMENT The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets (billions) Annual rate at each asset level First $0.25 0.060% Next 0.25 0.055 Next 0.50 0.050 Next 1.00 0.045 Next 1.00 0.040 Next 3.00 0.035 Over 6.00 0.030 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.060% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of the preceding business day. Under the agreement, the Fund paid fees of $154,538 for fiscal year 2003, $263,650 for fiscal year 2002, and $412,205 for fiscal year 2001. TRANSFER AGENCY AGREEMENT The Fund has a Transfer Agency Agreement with American Express Client Service Corporation (AECSC). This agreement governs AECSC's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the Fund's shares. Under the agreement, AECSC will earn a fee from the Fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and dividing by the number of days in the year. The rate for Class A is $19.50 per year, for Class B is $20.50 per year, for Class C is $20.00 per year and for Class Y is $17.50 per year. In addition, there is an annual closed-account fee of $5.00 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system, generally within one year. The fees paid to AECSC may be changed by the board without shareholder approval. DISTRIBUTION AGREEMENT American Express Financial Advisors Inc. is the Fund's principal underwriter (the Distributor). The Fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to the Distributor daily. These charges amounted to $295,124 for fiscal year 2003. After paying commissions to personal financial advisors, and other expenses, the amount retained was $130,848. The amounts were $550,882 and $244,436 for fiscal year 2002, and $904,117 and $339,503 for fiscal year 2001. Part of the sales charge may be paid to selling dealers who have agreements with the Distributor. The Distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. SHAREHOLDER SERVICE AGREEMENT With respect to Class Y shares, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of average daily net assets. PLAN AND AGREEMENT OF DISTRIBUTION For Class A, Class B and Class C shares, to help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, the Fund and the Distributor entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, of the type known as a reimbursement plan, the Fund pays a fee up to actual expenses incurred at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material change to expenses charged under the Class A plan. Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of Class A, Class B and Class C shares; and overhead appropriately allocated to the sale of Class A, Class B and Class C shares. These expenses also include costs of providing personal service to shareholders. A substantial portion of the costs are not specifically identified to any one of the American Express mutual funds. - -------------------------------------------------------------------------------- 35 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the relevant class of shares or by the Distributor. The Plan (or any agreement related to it) will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the board members, including a majority of the board members who are not interested persons of the Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person has any direct or indirect financial interest in the operation of the Plan or any related agreement. For the most recent fiscal year, the Fund paid fees of $392,605 for Class A shares, $990,618 for Class B shares and $2,630 for Class C shares. The fee is not allocated to any one service (such as advertising, payments to underwriters, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. CUSTODIAN AGREEMENT The Fund's securities and cash are held by American Express Trust Company, 200 AXP Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. The custodian may enter into a sub-custodian agreement with the Bank of New York, 90 Washington Street, New York, NY 10286. As part of this arrangement, securities purchased outside the United States are maintained in the custody of various foreign branches of Bank of New York or in other financial institutions as permitted by law and by the Fund's sub-custodian agreement. Organizational Information The Fund is an open-end management investment company. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The shares of the Fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of the Fund would have the same rights to dividends and assets as every other share of that Fund. VOTING RIGHTS As a shareholder in the Fund, you have voting rights over the Fund's management and fundamental policies. You are entitled to vote based on your total dollar interest in the Fund. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of board members. This means that you have as many votes as the dollar amount you own, including the fractional amount, multiplied by the number of members to be elected. DIVIDEND RIGHTS Dividends paid by the Fund, if any, with respect to each class of shares, if applicable, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures. AMERICAN EXPRESS FINANCIAL CORPORATION AEFC has been a provider of financial services since 1894. Its family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. In addition to managing assets of more than $66 billion for the publicly offered American Express Funds, AEFC manages investments for itself and its subsidiaries, American Express Certificate Company and IDS Life Insurance Company. Total assets owned and managed as of the end of the most recent fiscal year were more than $207 billion. The Distributor serves individuals and businesses through its nationwide network of more than 3,700 registered branch offices and more than 10,200 financial advisors. - -------------------------------------------------------------------------------- 36 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) California Tax-Exempt Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) California Tax-Exempt Fund No AXP(R) Dimensions Series, Inc.(4) 2/20/68, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Dimensions Fund Yes AXP(R) New Dimensions Fund Yes AXP(R) Discovery Series, Inc.(4) 4/29/81, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Core Bond Fund Yes AXP(R) Discovery Fund Yes AXP(R) Income Opportunities Fund Yes AXP(R) Limited Duration Bond Fund Yes AXP(R) Equity Series, Inc.(4) 3/18/57, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Equity Select Fund Yes AXP(R) Fixed Income Series, Inc.(4) 6/27/74, 6/31/86(1) Corporation NV/MN 8/31 AXP(R) Diversified Bond Fund(5) Yes AXP(R) Global Series, Inc. 10/28/88 Corporation MN 10/31 AXP(R) Emerging Markets Fund Yes AXP(R) Global Balanced Fund Yes AXP(R) Global Bond Fund No AXP(R) Global Growth Fund Yes AXP(R) Global Technology Fund(3) No AXP(R) Government Income Series, Inc.(4) 3/12/85 Corporation MN 5/31 AXP(R) Short Duration U.S. Government Fund(5) Yes AXP(R) U.S. Government Mortgage Fund Yes AXP(R) Growth Series, Inc. 5/21/70, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Growth Fund Yes AXP(R) Large Cap Equity Fund Yes AXP(R) Large Cap Value Fund Yes AXP(R) Quantitative Large Cap Equity Fund Yes AXP(R) Research Opportunities Fund Yes AXP(R) High Yield Income Series, Inc.(4) 8/17/83 Corporation MN 5/31 AXP(R) High Yield Bond Fund(5) Yes AXP(R) High Yield Tax-Exempt Series, Inc.(4) 12/21/78, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) High Yield Tax-Exempt Fund Yes AXP(R) Income Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 5/31 AXP(R) Selective Fund Yes AXP(R) International Series, Inc.(4) 7/18/84 Corporation MN 10/31 AXP(R) European Equity Fund No AXP(R) International Fund Yes AXP(R) Investment Series, Inc. 1/18/40, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Diversified Equity Income Fund Yes AXP(R) Mid Cap Value Fund Yes AXP(R) Mutual Yes
- -------------------------------------------------------------------------------- 37 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Managed Series, Inc. 10/9/84 Corporation MN 9/30 AXP(R) Managed Allocation Fund Yes AXP(R) Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31 AXP(R) Blue Chip Advantage Fund Yes AXP(R) Mid Cap Index Fund No AXP(R) S&P 500 Index Fund No AXP(R) Small Company Index Fund Yes AXP(R) Money Market Series, Inc. 8/22/75, 6/13/86(1) Corporation NV/MN 7/31 AXP(R) Cash Management Fund Yes AXP(R) Partners Series, Inc. 3/20/01 Corporation MN 5/31 AXP(R) Partners Aggressive Growth Fund Yes AXP(R) Partners Fundamental Value Fund Yes AXP(R) Partners Growth Fund Yes AXP(R) Partners Select Value Fund Yes AXP(R) Partners Small Cap Core Fund Yes AXP(R) Partners Small Cap Value Fund No AXP(R) Partners Value Fund Yes AXP(R) Partners International Series, Inc. 5/9/01 Corporation MN 10/31 AXP(R) Partners International Aggressive Growth Fund Yes AXP(R) Partners International Core Fund Yes AXP(R) Partners International Select Value Fund Yes AXP(R) Partners International Small Cap Fund Yes AXP(R) Progressive Series, Inc.(4) 4/23/68, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Progressive Fund Yes AXP(R) Sector Series, Inc.(3),(4) 3/25/88 Corporation MN 6/30 AXP(R) Utilities Fund Yes AXP(R) Selected Series, Inc.(4) 10/5/84 Corporation MN 3/31 AXP(R) Precious Metals Fund No AXP(R) Special Tax-Exempt Series Trust 4/7/86 Business Trust(2) MA 6/30 AXP(R) Insured Tax-Exempt Fund Yes AXP(R) Massachusetts Tax-Exempt Fund No AXP(R) Michigan Tax-Exempt Fund No AXP(R) Minnesota Tax-Exempt Fund No AXP(R) New York Tax-Exempt Fund No AXP(R) Ohio Tax-Exempt Fund No AXP(R) Stock Series, Inc.(4) 2/10/45, 6/13/86(1) Corporation NV/MN 9/30 AXP(R) Stock Fund Yes AXP(R) Strategy Series, Inc. 1/24/84 Corporation MN 3/31 AXP(R) Equity Value Fund Yes AXP(R) Focused Growth Fund(3) No AXP(R) Partners Small Cap Growth Fund(3) Yes AXP(R) Small Cap Advantage Fund Yes AXP(R) Strategy Aggressive Fund Yes
- -------------------------------------------------------------------------------- 38 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS Date of Form of State of Fiscal Fund organization organization organization year end Diversified AXP(R) Tax-Exempt Series, Inc. 9/30/76, 6/13/86(1) Corporation NV/MN 11/30 AXP(R) Intermediate Tax-Exempt Fund Yes AXP(R) Tax-Exempt Bond Fund Yes AXP(R)Tax-Free Money Series, Inc.(4) 2/29/80, 6/13/86(1) Corporation NV/MN 12/31 AXP(R)Tax-Free Money Fund Yes
(1) Date merged into a Minnesota corporation incorporated on April 7, 1986. (2) Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. (3) Effective Feb. 7, 2002, AXP(R) Focus 20 Fund changed its name to AXP(R) Focused Growth Fund, AXP(R) Innovations Fund changed its name to AXP(R) Global Technology Fund, AXP(R) Small Cap Growth Fund changed its name to AXP(R) Partners Small Cap Growth Fund and AXP(R) Utilities Income Fund, Inc. created a series, AXP(R) Utilities Fund. (4) Effective Nov. 13, 2002, AXP(R) Bond Fund, Inc. changed its name to AXP(R) Fixed Income Series, Inc. and created a series, AXP(R) Bond Fund, AXP(R) Discovery Fund, Inc. changed its name to AXP(R) Discovery Series, Inc. and created a series, AXP(R) Discovery Fund, AXP(R) Equity Select Fund, Inc. changed its name to AXP(R) Equity Series, Inc. and created a series, AXP(R) Equity Select Fund, AXP(R) Extra Income Fund, Inc. changed its name to AXP(R) High Yield Income Series, Inc. and created a series, AXP(R) Extra Income Fund, AXP(R) Federal Income Fund, Inc. changed its name to AXP(R) Government Income Series, Inc., AXP(R) High Yield Tax-Exempt Fund, Inc. changed its name to AXP(R) High Yield Tax-Exempt Series, Inc. and created a series, AXP(R) High Yield Tax-Exempt Fund, AXP(R) International Fund, Inc. changed its name to AXP(R) International Series, Inc., AXP(R) New Dimensions Fund, Inc. changed its name to AXP(R) Dimensions Series, Inc., AXP(R) Precious Metals Fund, Inc. changed its name to AXP(R) Selected Series, Inc. and created a series, AXP(R) Precious Metals Fund, AXP(R) Progressive Fund, Inc. changed its name to AXP(R) Progressive Series, Inc. and created a series, AXP(R) Progressive Fund, AXP(R) Selective Fund, Inc. changed its name to AXP(R) Income Series, Inc. and created a series, AXP(R) Selective Fund, AXP(R) Stock Fund, Inc. changed its name to AXP(R) Stock Series, Inc. and created a series, AXP(R) Stock Fund, AXP(R) Tax-Free Money Fund, Inc. changed its name to AXP(R) Tax-Free Money Series, Inc. and created a series, AXP(R) Tax-Free Money Fund, and AXP(R) Utilities Income Fund, Inc. changed its name to AXP(R) Sector Series, Inc. (5) Effective June 27, 2003, AXP(R) Bond Fund changed its name to AXP(R) Diversified Bond Fund, AXP(R) Federal Income Fund changed its name to AXP(R) Short Duration U.S. Government Fund and AXP(R) Extra Income Fund changed its name to AXP(R) High Yield Bond Fund. - -------------------------------------------------------------------------------- 39 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 83 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Name, Position held with Principal occupation during Other Committee memberships address, Fund and length of past five years directorships age service - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Arne H. Carlson Board member Chair, Board Services Joint Audit, 901 S. Marquette Ave. since 1999 Corporation (provides Contracts, Executive, Minneapolis, MN 55402 administrative services to Investment Review, Age 68 boards). Former Governor of Board Effectiveness Minnesota - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power 901 S. Marquette Ave. since 2002 Fluor Corporation PLC, Vulcan Minneapolis, MN 55402 (engineering and Materials Age 65 construction) since 1998 Company, Inc. (construction materials/chemicals) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Livio D. DeSimone Board member Retired Chair of the Board Cargill, Joint Audit, 30 Seventh Street East since 2001 and Chief Executive Officer, Incorporated Contracts, Executive Suite 3050 Minnesota Mining and (commodity St. Paul, MN 55101-4901 Manufacturing (3M) merchants and Age 69 processors), General Mills, Inc. (consumer foods), Vulcan Materials Company (construction materials/chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Heinz F. Hutter* Board member Retired President and Chief Board Effectiveness, 901 S. Marquette Ave. since 1994 Operating Officer, Cargill, Executive, Investment Minneapolis, MN 55402 Incorporated (commodity Review Age 74 merchants and processors) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Anne P. Jones Board member Attorney and Consultant Joint Audit, Board 901 S. Marquette Ave. since 1985 Effectiveness, Minneapolis, MN 55402 Executive Age 68 - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Stephen R. Lewis, Jr.** Board member Retired President and Valmont Contracts, Investment 901 S. Marquette Ave. since 2002 Professor of Economics, Industries, Inc. Review, Executive Minneapolis, MN 55402 Carleton College (manufactures Age 64 irrigation systems) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Alan G. Quasha Board member President, Quadrant Compagnie Joint Audit, 901 S. Marquette Ave. since 2002 Management, Inc. (management Financiere Board Effectiveness Minneapolis, MN 55402 of private equities) Richemont AG Age 53 (luxury goods) Harken Energy Corporation (oil and gas exploration) and SIRIT Inc. (radio frequency identification technology) - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Alan K. Simpson Board member Former three-term United Biogen, Inc. Investment Review, 1201 Sunshine Ave. since 1997 States Senator for Wyoming (biopharmaceuticals) Board Effectiveness Cody, WY 82414 Age 71 - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------ Alison Taunton-Rigby Board member President, Forester Biotech Investment Review, 901 S. Marquette Ave. since 2002 since 2000. Former President Contracts Minneapolis, MN 55402 and CEO, Aquila Age 59 Biopharmaceuticals, Inc. - ------------------------------- -------------------- ------------------------------ -------------------- ------------------------
* Interested person of AXP Partners International Aggressive Growth Fund and AXP Partners Aggressive Growth Fund by reason of being a security holder of J P Morgan Chase & Co., which has a 45% interest in American Century Companies, Inc., the parent company of the subadviser of two of the AXP Partners Funds, American Century Investment Management, Inc. ** Interested person of AXP Partners International Aggressive Growth Fund by reason of being a security holder of FleetBoston Financial Corporation, parent company of Liberty Wanger Asset Management, L.P., one of the fund's subadvisers. - -------------------------------------------------------------------------------- 40 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND
Board Members Affiliated with AEFC*** - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Name, Position held with Principal occupation during Other Committee memberships address, Fund and length of past five years directorships age service - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Barbara H. Fraser Board member Executive Vice President - 1546 AXP Financial Center since 2002 AEFA Products and Corporate Minneapolis, MN 55474 Marketing of AEFC since Age 53 2002. President - Travelers Check Group, American Express Company, 2001-2002. Management Consultant, Reuters, 2000-2001. Managing Director - International Investments, Citibank Global, 1999-2000. Chairman and CEO, Citicorp Investment Services and Citigroup Insurance Group, U.S., 1998-1999 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Stephen W. Roszell Board member Senior Vice President - 50238 AXP Financial Center since 2002; Vice Institutional Group of AEFC Minneapolis, MN 55474 President since Age 54 2002 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- William F. Truscott Board member Senior Vice President - 53600 AXP Financial Center since 2001, Vice Chief Investment Officer of Minneapolis, MN 55474 President since AEFC since 2001. Former Age 42 2002 Chief Investment Officer and Managing Director, Zurich Scudder Investments - ------------------------------- -------------------- ------------------------------ ------------------- -----------------------
*** Interested person by reason of being an officer, director and/or employee of AEFC. The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Roszell, who is vice president, and Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Name, Position held with Principal occupation during Other Committee memberships address, Fund and length of past five years directorships age service - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Jeffrey P. Fox Treasurer Vice President - Investment 50005 AXP Financial Center since 2002 Accounting, AEFC, since Minneapolis, MN 55474 Age 48 2002; Vice President - Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Paula R. Meyer President Senior Vice President and 596 AXP Financial Center since 2002 General Manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Age 49 Vice President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - ------------------------------- -------------------- ------------------------------ ------------------- ----------------------- Leslie L. Ogg Vice President, President of Board Services 901 S. Marquette Ave. General Counsel, Corporation Minneapolis, MN 55402 and Secretary Age 64 since 1978 - ------------------------------- -------------------- ------------------------------ ------------------- -----------------------
- -------------------------------------------------------------------------------- 41 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Responsibilities of board with respect to Fund's management The board initially approves an Investment Management Services Agreement and other contracts with American Express Financial Corporation (AEFC), one of AEFC's subsidiaries, and other service providers. Once the contracts are approved, the board monitors the level and quality of services including commitments of service providers to achieve expected levels of investment performance and shareholder services. In addition, the board oversees that processes are in place to assure compliance with applicable rules, regulations and investment policies and addresses possible conflicts of interest. Annually, the board evaluates the services received under the contracts by receiving reports covering investment performance, shareholder services, marketing, and AEFC's profitability in order to determine whether to continue existing contracts or negotiate new contracts. Several committees facilitate its work Executive Committee -- Acts for the board between meetings of the board. The committee held two meetings during the last fiscal year. Joint Audit Committee -- Meets with the independent public accountant, internal auditors and corporate officers to review financial statements, reports, and compliance matters. Reports significant issues to the board and makes recommendations to the independent directors regarding the selection of the independent public accountant. The committee held four meetings during the last fiscal year. Investment Review Committee -- Considers investment management policies and strategies; investment performance; risk management techniques; and securities trading practices and reports areas of concern to the board. The committee held four meetings during the last fiscal year. Board Effectiveness Committee -- Recommends to the board the size, structure and composition for the board; the compensation to be paid to members of the board; and a process for evaluating the board's performance. The committee also reviews candidates for board membership including candidates recommended by shareholders. To be considered, recommendations must include a curriculum vita and be mailed to the Chairman of the Board, American Express Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. The committee held four meetings during the last fiscal year. Contracts Committee -- Receives and analyzes reports covering the level and quality of services provided under contracts with the Fund and advises the board regarding actions taken on these contracts during the annual review process. The committee held four meetings during the last fiscal year. BOARD MEMBERS' HOLDINGS The following table shows the Fund Board Members' ownership of American Express Funds. Dollar range of equity securities beneficially owned on Dec. 31, 2002 Based on net asset values as of Dec. 31, 2002 Aggregate dollar range of Dollar range of equity securities of all equity securities American Express Funds in the Fund overseen by Board Member Range Range Arne H. Carlson none over $100,000 Philip J. Carroll, Jr. none none Livio D. DeSimone none over $100,000 Heinz F. Hutter none over $100,000 Anne P. Jones none over $100,000 Stephen R. Lewis, Jr. none $1-$10,000 Alan G. Quasha none none Alan K. Simpson none $50,001-$100,000 Alison Taunton-Rigby none none - -------------------------------------------------------------------------------- 42 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND COMPENSATION FOR BOARD MEMBERS During the most recent fiscal year, the independent members of the Fund and Portfolio boards, for attending up to 28 meetings, received the following compensation:
Compensation Table Total cash compensation from Aggregate Aggregate American Express Funds and Board member* compensation from the Fund compensation from the Portfolio Preferred Master Trust Group Philip J. Carroll, Jr. $ 292 $ 292 $ 44,183 Livio D. DeSimone 1,023 1,056 137,942 Heinz F. Hutter 1,073 1,106 142,242 Anne P. Jones 1,123 1,156 146,692 Stephen R. Lewis, Jr. 973 1,006 133,642 Alan G. Quasha 867 900 124,292 Alan K. Simpson 817 850 119,642 Alison Taunton-Rigby 792 825 106,450
* Arne H. Carlson, Chair of the Board, is compensated by Board Services Corporation. As of 30 days prior to the date of this SAI, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. Principal Holders of Securities As of 30 days prior to the date of this SAI, Shirley Ann Balliet, San Diego, CA held 13.77% of the Fund's Class C shares; Rita M. LaFond, Mishicot, WI held 8.05% of the Fund's Class C shares; and Michael C. Farah and Katrina L. Farah, Bloomfield, MI held as trustees 7.07% of the Fund's Class C shares. Independent Auditors The financial statements contained in the Annual Report were audited by independent auditors, KPMG LLP, 4200 Wells Fargo Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also provide other accounting and tax-related services as requested by the Fund. - -------------------------------------------------------------------------------- 43 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Appendix A DESCRIPTION OF RATINGS Standard & Poor's Long-term Debt Ratings A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: o Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. o Nature of and provisions of the obligation. o Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Investment Grade Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. Speculative Grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. - -------------------------------------------------------------------------------- 44 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Moody's Long-Term Debt Ratings Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A -- Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa -- Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds that are rated Ba are judged to have speculative elements -- their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Fitch's Long-Term Debt Ratings Fitch's bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue in a timely manner. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guaranties unless otherwise indicated. Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature of taxability of payments made in respect of any security. Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. Investment Grade AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA: Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A: Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. - -------------------------------------------------------------------------------- 45 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Speculative Grade BB: Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements. B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C: Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D: Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on these bonds, and D represents the lowest potential for recovery. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. Standard & Poor's Muni Bond and Note Ratings An S&P municipal bond or note rating reflects the liquidity factors and market-access risks unique to these instruments. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Municipal bond rating symbols and definitions are as follows: Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. - -------------------------------------------------------------------------------- 46 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. Moody's Short-Term Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are rated by Moody's. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. Fitch's Short-Term Ratings Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. Fitch short-term ratings are as follows: F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. D: Default. Issues assigned this rating are in actual or imminent payment default. - -------------------------------------------------------------------------------- 47 -- AXP(R) GROWTH SERIES, INC. -- AXP(R) RESEARCH OPPORTUNITIES FUND Appendix B UTILITIES AND ENERGY INDUSTRIES Utilities industry: Utility stocks, including electric, gas, telephone, and other energy-related (e.g., nuclear) utilities stocks, generally offer dividend yields that exceed those of industrial companies and their prices tend to be less volatile than stocks of industrial companies. However, utility companies are often highly leveraged and utility stocks can be affected by the risks of the stock market in general, as well as factors specific to public utilities companies. Many utility companies, especially electric utility companies, historically have been subject to the risk of increases in fuel and other operating costs, changes in interest rates on borrowing for capital improvement programs, changes in applicable laws and regulations, and costs and operating constraints associated with compliance with environmental regulations. In addition, because securities issued by utility companies are particularly sensitive to movements in interest rates, the equity securities of these companies are more affected by movements in interest rates than the equity securities of other companies. Each of these risks could adversely affect the ability of public utilities companies to declare or pay dividends and the ability of holders of common stock, such as the Fund, to realize any value from the assets of the company upon liquidation or bankruptcy. Energy industry: Energy companies include the conventional areas of oil, gas, electricity and coal, as well as newer sources of energy such as geothermal, nuclear, oil shale and solar power. These companies include those that produce, transmit, market or measure energy, as well as those companies involved in exploring for new sources of energy. Securities of companies in the energy field are subject to changes in value and dividend yield which depend largely on the price and supply of energy fuels. Swift price and supply fluctuations may be caused by events relating to international politics, energy conservation, the success of exploration projects and tax or other governmental regulatory policies. S-6356-20 L (9/03) EX-99.17M SUPPLEMENT 12 ex17-m.txt PROSPECTUS SUPPLEMENT FOR AXP LARGE CAP EQUITY, AXP BLUE CHIP ADVANTAGE FUND, AND AXP BLUE CHIP ADVANTAGE FUND Prospectus Supplement -- Jan. 20, 2004* Fund Name (Date) Prospectus Form # AXP Blue Chip Advantage Fund (April 1, 2003) S-6025-99 V AXP Diversified Bond Fund (Oct. 30, 2003) S-6495-99 W AXP California Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Core Bond Fund (Sept. 29, 2003) S-6267-99 C AXP Discovery Fund (Sept. 29, 2003) S-6457-99 Y AXP Diversified Equity Income Fund (Nov. 28, 2003) S-6475-99 W AXP Emerging Markets Fund (Dec. 30, 2003) S-6354-99 L AXP Equity Select Fund (Jan. 29, 2003) S-6426-99 W AXP Equity Select Fund (Jan. 29, 2004) S-6426-99 X AXP Equity Value Fund (May 30, 2003) S-6382-99 N AXP European Equity Fund (Dec. 30, 2003) S-6006-99 F AXP Focused Growth Fund (May 30, 2003) S-6003-99 E AXP Global Balanced Fund (Dec. 30, 2003) S-6352-99 J AXP Global Bond Fund (Dec. 30, 2003) S-6309-99 X AXP Global Equity Fund (Dec. 30, 2003) S-6334-99 W AXP Global Technology Fund (Dec. 30, 2003) S-6395-99 G AXP Growth Dimensions Fund (Sept. 29, 2003) S-6004-99 F AXP Growth Fund (Sept. 29, 2003) S-6455-99 X AXP High Yield Bond Fund (July 30, 2003) S-6370-99 W AXP High Yield Tax-Exempt Fund (Jan. 29, 2003) S-6430-99 X AXP High Yield Tax-Exempt Fund (Jan. 29, 2004) S-6430-99 Y AXP Income Opportunities Fund (Sept. 29, 2003) S-6266-99 C AXP Inflation Protected Securities Fund (Jan. 12, 2004) S-6280-99 A AXP Insured Tax-Exempt Fund (Aug. 29, 2003) S-6327-99 Y AXP Intermediate Tax-Exempt Fund (Jan. 29, 2003) S-6355-99 K AXP Intermediate Tax-Exempt Fund (Jan. 29, 2004) S-6355-99 L AXP International Fund (Dec. 30, 2003) S-6140-99 Y AXP Large Cap Equity Fund (Sept. 29, 2003) S-6244-99 D AXP Large Cap Value Fund (Sept. 29, 2003) S-6246-99 D AXP Limited Duration Bond Fund (Sept. 29, 2003) S-6265-99 C AXP Managed Allocation Fund (Nov. 28, 2003) S-6141-99 X AXP Massachusetts Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Michigan Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Mid Cap Value Fund (Nov. 28, 2003) S-6241-99 D AXP Minnesota Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Mutual (Nov. 28, 2003) S-6326-99 X AXP New Dimensions Fund (Sept. 29, 2003) S-6440-99 W AXP New York Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Ohio Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Partners Aggressive Growth Fund (July 30, 2003) S-6260-99 C AXP Partners Fundamental Value Fund (July 30, 2003) S-6236-99 E AXP Partners Growth Fund (July 30, 2003) S-6261-99 C AXP Partners International Aggressive Growth Fund (Dec. 30, 2003) S-6243-99 F AXP Partners International Core Fund (Dec. 30, 2003) S-6259-99 D AXP Partners International Select Value Fund (Dec. 30, 2003) S-6242-99 F AXP Partners International Small Cap Fund (Dec. 30, 2003) S-6258-99 D AXP Partners Select Value Fund (July 30, 2003) S-6240-99 D AXP Partners Small Cap Core Fund (July 30, 2003) S-6237-99 E AXP Partners Small Cap Growth Fund (May 30, 2003) S-6301-99 E AXP Partners Small Cap Value Fund (July 30, 2003) S-6239-99 E AXP Partners Value Fund (July 30, 2003) S-6238-99 E AXP Precious Metals Fund (May 30, 2003) S-6142-99 X AXP Progressive Fund (Nov. 28, 2003) S-6449-99 X AXP Quantitative Large Cap Equity Fund (Sept. 29, 2003) S-6263-99 C AXP Real Estate Fund (Jan. 6, 2004) S-6281-99 A AXP Research Opportunities Fund (Sept. 29, 2003) S-6356-99LK AXP Selective Fund (July 30, 2003) S-6376-99 X AXP Short Duration U.S. Government Fund (July 30, 2003) S-6042-99 X AXP Small Cap Advantage Fund (May 30, 2003) S-6427-99 G AXP Small Company Index Fund (April 1, 2003) S-6357-99 L AXP Stock Fund (Nov. 28, 2003) S-6351-99 X AXP Strategy Aggressive Fund (May 30, 2003) S-6381-99 N AXP Tax-Exempt Bond Fund (Jan. 29, 2003) S-6310-99 X AXP Tax-Exempt Bond Fund (Jan. 29, 2004) S-6310-99 Y AXP U.S. Government Mortgage Fund (July 30, 2003) S-6245-99 D AXP Utilities Fund (Aug. 29, 2003) S-6341-99 X For the prospectus Under the heading "Buying and Selling Shares," the section titled "Should you purchase Class A, Class B or Class C shares" has been revised to read as follows: Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $100,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $100,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. Under the heading "Sales Charges," the first bullet in the section titled "Other Class A sales charge policies" has been revised to read as follows: o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, provided that the plan uses the Distributor's group billing services, and S-6426-24 C (1/04) * Valid until next prospectus update. Destroy - Jan. 30, 2005 EX-99.17N SUPPLEMENT 13 ex17-n.txt PROSPECTUS SUPPLEMENT FOR AXP BLUE CHIP ADVANTAGE FUND AND AXP RESEARCH OPPORTUNITIES FUND Prospectus Supplement -- Nov. 19, 2003* Fund Name Prospectus Form # AXP(R) Blue Chip Advantage Fund (April 1, 2003) S-6025-99 V AXP(R) Research Opportunities Fund (Sept. 29, 2003) S-6356-99 L The Funds' Directors have approved in principle the merger of each of the Funds into AXP(R) Large Cap Equity Fund, a Fund that seeks to provide shareholders with long-term growth of capital by investing at least 80% of its net assets in equity securities with a market capitalization greater than $5 billion at the time of the purchase. Unlike AXP(R) Blue Chip Advantage Fund, AXP(R) Large Cap Equity Fund does not limit its investments to those defined as "blue chip." Unlike AXP(R) Research Opportunities Fund, AXP(R) Large Cap Equity Fund does not necessarily focus its investment in securities of companies included in the S&P 500 Index. Effective immediately for AXP(R) Research Opportunities Fund and effective Jan. 1, 2004 for AXP(R) Blue Chip Advantage Fund, the portfolio manager will be Doug Chase, who is also the portfolio manager for AXP(R) Large Cap Equity Fund. The two funds will be managed in a style substantially similar to that of AXP(R) Large Cap Equity Fund. The section titled OInvestment ManagerO is revised to read as follows: Doug Chase, Portfolio Manager o Joined AEFC in 2002. o Prior to that, Analyst and Portfolio Manager at Fidelity Investments. o Began investment career in 1992. o MBA, University of Michigan. For more information about AXP(R) Large Cap Equity Fund, please call (800) 862-7919 for a prospectus. Completion of the merger is subject to a number of conditions, including final approval by the Funds' Directors and approval by shareholders of the Funds at a shareholder meeting expected to be held within approximately the next six months. It is anticipated that AXP(R) Blue Chip Advantage Fund and AXP(R) Research Opportunities Fund will be closed to new investors during the second quarter of 2004. S-6025-23 A (11/03) * Valid until further notice EX-99.17O SUPPLEMENT 14 ex17-o.txt PROSPECTUS SUPPLEMENT FOR AXP BLUE CHIP ADVANTAGE FUND Prospectus Supplement -- Sept. 4, 2003* Fund Name (Date) Prospectus Form # AXP Blue Chip Advantage Fund (April 1, 2003) S-6025-99 V AXP California Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W AXP Core Bond Fund (May 28, 2003) S-6267-99 A AXP Discovery Fund (Sept. 27, 2002) S-6457-99 X AXP Diversified Bond Fund (Oct. 30, 2002) S-6495-99 V AXP Diversified Equity Income Fund (Nov. 29, 2002) S-6475-99 V AXP Emerging Markets Fund (Dec. 30, 2002) S-6354-99 K AXP Equity Select Fund (Jan. 29, 2003) S-6426-99 W AXP Equity Value Fund (May 30, 2003) S-6382-99 N AXP European Equity Fund (Dec. 30, 2002) S-6006-99 E AXP Focused Growth Fund (May 30, 2003) S-6003-99 E AXP Global Balanced Fund (Dec. 30, 2002) S-6352-99 J AXP Global Bond Fund (Dec. 30, 2002) S-6309-99 W AXP Global Growth Fund (Dec. 30, 2002) S-6334-99 V AXP Global Technology Fund (Dec. 30, 2002) S-6395-99 F AXP Growth Dimensions Fund (Sept. 27, 2002) S-6004-99 E AXP Growth Fund (Sept. 27, 2002) S-6455-99 W AXP High Yield Bond Fund (July 30, 2003) S-6370-99 W AXP High Yield Tax-Exempt Fund (Jan. 29, 2003) S-6430-99 X AXP Income Opportunities Fund (May 28, 2003) S-6266-99 A AXP Insured Tax-Exempt Fund (Aug. 29, 2003) S-6327-99 Y AXP Intermediate Tax-Exempt Fund (Jan. 29, 2003) S-6355-99 K AXP International Fund (Dec. 30, 2002) S-6140-99 X AXP Large Cap Equity Fund (Sept. 27, 2002) S-6244-99 C AXP Large Cap Value Fund (Sept. 27, 2002) S-6246-99 C AXP Limited Duration Bond Fund (May 28, 2003) S-6265-99 A AXP Managed Allocation Fund (Nov. 29, 2002) S-6141-99 W AXP Massachusetts Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Michigan Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Mid Cap Value Fund (Nov. 29, 2002) S-6241-99 C AXP Minnesota Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Mutual (Nov. 29, 2002) S-6326-99 W AXP New Dimensions Fund (Sept. 27, 2002) S-6440-99 V AXP New York Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Ohio Tax-Exempt Fund (Aug. 29, 2003) S-6328-99 X AXP Partners Aggressive Growth Fund (July 30, 2003) S-6260-99 C AXP Partners Fundamental Value Fund (July 30, 2003) S-6236-99 E AXP Partners Growth Fund (July 30, 2003) S-6261-99 C AXP Partners International Aggressive Growth Fund (Dec. 30, 2002) S-6243-99 E - -------------------------------------------------------------------------------- 1 -- PROSPECTUS SUPPLEMENT Prospectus Supplement -- Sept. 4, 2003* (continued) Fund Name (Date) Prospectus Form # AXP Partners International Core Fund (Dec. 30, 2002) S-6259-99 C AXP Partners International Select Value Fund (Dec. 30, 2002) S-6242-99 E AXP Partners International Small Cap Fund (Dec. 30, 2002) S-6258-99 C AXP Partners Select Value Fund (July 30, 2003) S-6240-99 D AXP Partners Small Cap Core Fund (July 30, 2003) S-6237-99 E AXP Partners Small Cap Growth Fund (May 30, 2003) S-6301-99 E AXP Partners Small Cap Value Fund (July 30, 2003) S-6239-99 E AXP Partners Value Fund (July 30, 2003) S-6238-99 E AXP Precious Metals Fund (May 30, 2003) S-6142-99 X AXP Progressive Fund (Nov. 29, 2002) S-6449-99 W AXP Quantitative Large Cap Equity Fund (March 5, 2003) S-6263-99 A AXP Research Opportunities Fund (Sept. 27, 2002) S-6356-99 K AXP Selective Fund (July 30, 2003) S-6376-99 X AXP Short Duration U.S. Government Fund (July 30, 2003) S-6042-99 X AXP Small Cap Advantage Fund (May 30, 2003) S-6427-99 G AXP Small Company Index Fund (April 1, 2003) S-6357-99 L AXP Stock Fund (Nov. 29, 2002) S-6351-99 W AXP Strategy Aggressive Fund (May 30, 2003) S-6381-99 N AXP Tax-Exempt Bond Fund (Jan. 29, 2003) S-6310-99 X AXP U.S. Government Mortgage Fund (July 30, 2003) S-6245-99 D AXP Utilities Fund (Aug. 29, 2003) S-6341-99 X The section titled "Purchasing Shares" is revised to read as follows: PURCHASING SHARES To purchase shares through entities other than American Express Financial Advisors Inc. (the Distributor), please consult your selling agent. The following section explains how you can purchase shares from the Distributor. If you do not have an existing American Express mutual fund account, you will need to establish a brokerage account. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. - -------------------------------------------------------------------------------- 2 -- PROSPECTUS SUPPLEMENT If you do not provide and certify the correct TIN, you could be subject to backup withholding of 28% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. How to determine the correct TIN For this type of account: Use the Social Security or Employer Identification number of: - -------------------------------------------- ----------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - -------------------------------------------- ----------------------------------- Custodian account of a minor (Uniform The minor Gifts/Transfers to Minors Act) - -------------------------------------------- ----------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - -------------------------------------------- ----------------------------------- An irrevocable trust, pension trust or The legal entity (not the personal estate representative or trustee, unless no legal entity is designated in the account title) - -------------------------------------------- ----------------------------------- Sole proprietorship or single-owner LLC The owner - -------------------------------------------- ----------------------------------- Partnership or multi-member LLC The partnership - -------------------------------------------- ----------------------------------- Corporate or LLC electing corporate status The corporation on Form 8837 - -------------------------------------------- ----------------------------------- Association, club or tax-exempt The organization organization - -------------------------------------------- ----------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (www.irs.gov). - -------------------------------------------------------------------------------- 3 -- PROSPECTUS SUPPLEMENT The section "Three ways to invest" has been revised to read as follows: Methods of purchasing shares By mail Once your account has been established, send your check to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000* Additional investments: $500** Fund minimum balances: $300 Qualified minimum account balances: none If your Fund balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. * $1,000 for tax qualified accounts. ** $100 minimum add-on for existing mutual fund accounts outside of a brokerage account (direct at fund accounts). By scheduled investment plan Minimum amounts Initial investment: $2,000* Additional investments: $100** Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. * $100 for direct at fund accounts. ** $50 minimum per payment for qualified accounts in a direct at fund account. By wire or electronic funds transfer Please contact your financial advisor or selling agent for specific instructions. Minimum wire purchase amount: $1,000 or new account minimum, as applicable. - -------------------------------------------------------------------------------- 4 -- PROSPECTUS SUPPLEMENT By telephone If you have a brokerage account, you may use the money in your account to make initial and subsequent purchases. To place your order, call: (800) 872-4377 for brokerage accounts (800) 967-4377 for wrap accounts TRANSACTIONS THROUGH THIRD PARTIES You may buy or sell shares through certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through third parties or to determine if there are policy differences, please consult your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. The section titled "Exchanging/Selling Shares" is revised to read as follows: EXCHANGING/SELLING SHARES Exchanges You may exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. The Fund does not permit market-timing. Do not invest in the Fund if you are a market timer. Excessive trading (market-timing) or other abusive short-term trading practices may disrupt portfolio management strategies, harm performance and increase fund expenses. To prevent abuse or adverse effects on the Fund and its shareholders, the Distributor and the Fund reserve the right to reject any purchase orders, including exchanges, limit the amount, modify or discontinue the exchange privilege, or charge a fee to any investor we believe has a history of abusive trading or whose - -------------------------------------------------------------------------------- 5 -- PROSPECTUS SUPPLEMENT trading, in our judgment has been disruptive to the Fund. For example, we may exercise these rights if exchanges are too numerous or too large. Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until written approval is received from the secured party. Selling Shares You may sell your shares at any time. The payment will be mailed within seven days after your request is received in good order. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is received in good order by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and use of this option may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. To sell or exchange shares held with entities other than the Distributor, please consult your selling agent. The following section explains how you can exchange or sell shares held with the Distributor. If you decide to sell your shares within 30 days of a telephoned-in address change, a written request is required. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. Payment may be made earlier if your bank provides evidence satisfactory to the Fund and the Distributor that your check has cleared. - -------------------------------------------------------------------------------- 6 -- PROSPECTUS SUPPLEMENT The section "Two ways to request an exchange or sale of shares" has been revised to read as follows: Ways to request an exchange or sale of shares By regular or express mail American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 Include in your letter: o your account number o the name of the fund(s) o the class of shares to be exchanged or sold o your Social Security number or Employer Identification number o the dollar amount or number of shares you want to exchange or sell o specific instructions regarding delivery or exchange destination o signature(s) of registered account owner(s) (All signatures may be required. Contact your financial advisor for more information.) o delivery instructions, if applicable o any paper certificates of shares you hold Payment will be mailed to the address of record and made payable to the names listed on the account, unless specified differently and signed by all owners. The express mail delivery charges you pay will vary depending on domestic or international delivery instructions. By telephone (800) 872-4377 for brokerage accounts (800) 437-3133 for direct at fund accounts (800) 967-4377 for wrap accounts o The Fund and the Distributor will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing the Distributor. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- 7 -- PROSPECTUS SUPPLEMENT By wire Money can be wired from your account to your bank account. Contact your financial advisor or the Distributor at the above numbers for additional information. o Minimum amount: $1,000 o Pre-authorization is required. o A service fee may be charged against your account for each wire sent. By scheduled payout plan o Minimum payment: $100*. o Contact your financial advisor or the Distributor to set up regular payments. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. * Minimum is $50 in a direct at fund account. Electronic transactions The ability to initiate transactions via the internet may be unavailable or delayed at certain times (for example, during periods of unusual market activity). The Fund and the Distributor are not responsible for any losses associated with unexecuted transactions. In addition, the Fund and the Distributor are not responsible for any losses resulting from unauthorized transactions if reasonable security measures are followed to validate the investor's identity. The Fund may modify or discontinue electronic privileges at any time. S-6328-3 A (9/03) * Valid until next prospectus update. Destroy Aug. 27, 2004 EX-99.17P SUPPLEMENT 15 ex17-p.txt PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION SUPPLEMENT FOR BLUE CHIP ADVANTAGE FUND Prospectus and Statement of Additional Information Supplement -- May 28, 2003*
Fund Name (Date) Prospectus Form # SAI Form # AXP Blue Chip Advantage Fund (April 1, 2003) S-6025-99 V S-6025-20 V AXP Bond Fund (Oct. 30, 2002) S-6495-99 V S-6495-20 V AXP California Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W S-6328-20 W AXP Discovery Fund (Sept. 27, 2002) S-6457-99 X S-6457-20 X AXP Diversified Equity Income Fund (Nov. 29, 2002) S-6475-99 V S-6475-20 V AXP Emerging Markets Fund (Dec. 30, 2002) S-6354-99 K S-6354-20 K AXP Equity Select Fund (Jan. 29, 2003) S-6426-99 W S-6426-20 W AXP Equity Value Fund (May 30, 2002) S-6382-99 M S-6382-20 M AXP Equity Value Fund (May 30, 2003) S-6382-99 N S-6382-20 N AXP European Equity Fund (Dec. 30, 2002) S-6006-99 E S-6006-20 E AXP Extra Income Fund (July 30, 2002) S-6370-99 V S-6370-20 V AXP Federal Income Fund (July 30, 2002) S-6042-99 W S-6042-20 W AXP Focused Growth Fund (May 30, 2002) S-6003-99 D S-6003-20 D AXP Focused Growth Fund (May 30, 2003) S-6003-99 E S-6003-20 E AXP Global Balanced Fund (Dec. 30, 2002) S-6352-99 J S-6352-20 J AXP Global Bond Fund (Dec. 30, 2002) S-6309-99 W S-6309-20 W AXP Global Growth Fund (Dec. 30, 2002) S-6334-99 V S-6334-20 V AXP Global Technology Fund (Dec. 30, 2002) S-6395-99 F S-6395-20 F AXP Growth Dimensions Fund (Sept. 27, 2002) S-6004-99 E S-6004-20 E AXP Growth Fund (Sept. 27, 2002) S-6455-99 W S-6455-20 W AXP High Yield Tax-Exempt Fund (Jan. 29, 2003) S-6430-99 X S-6430-20 X AXP Insured Tax-Exempt Fund (Aug. 29, 2002) S-6327-99 X S-6327-20 X AXP Intermediate Tax-Exempt Fund (Jan. 29, 2003) S-6355-99 K S-6355-20 K AXP International Fund (Dec. 30, 2002) S-6140-99 X S-6140-20 X AXP Large Cap Equity Fund (Sept. 27, 2002) S-6244-99 C S-6244-20 C AXP Large Cap Value Fund (Sept. 27, 2002) S-6246-99 C S-6246-20 C AXP Managed Allocation Fund (Nov. 29, 2002) S-6141-99 W S-6141-20 W AXP Massachusetts Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W S-6328-20 W AXP Michigan Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W S-6328-20 W AXP Mid Cap Value Fund (Nov. 29, 2002) S-6241-99 C S-6241-20 C AXP Minnesota Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W S-6328-20 W AXP Mutual (Nov. 29, 2002) S-6326-99 W S-6326-20 W AXP New Dimensions Fund (Sept. 27, 2002) S-6440-99 V S-6440-20 V AXP New York Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W S-6328-20 W AXP Ohio Tax-Exempt Fund (Aug. 29, 2002) S-6328-99 W S-6328-20 W AXP Partners Aggressive Growth Fund (March 5, 2003) S-6260-99 A S-6260-20 A AXP Partners Fundamental Value Fund (July 30, 2002) S-6236-99 D S-6236-20 D AXP Partners Growth Fund (March 5, 2003) S-6261-99 A S-6261-20 A AXP Partners International Aggressive Growth Fund (Dec. 30, 2002) S-6243-99 E S-6243-20 E AXP Partners International Core Fund (Dec. 30, 2002) S-6259-99 C S-6259-20 C AXP Partners International Select Value Fund (Dec. 30, 2002) S-6242-99 E S-6242-20 E AXP Partners International Small Cap Fund (Dec. 30, 2002) S-6258-99 C S-6258-20 C AXP Partners Select Value Fund (July 30, 2002) S-6240-99 C S-6240-20 C AXP Partners Small Cap Core Fund (July 30, 2002) S-6237-99 D S-6237-20 D AXP Partners Small Cap Growth Fund (May 30, 2002) S-6301-99 D S-6301-20 D AXP Partners Small Cap Growth Fund (May 30, 2003) S-6301-99 E S-6301-20 E AXP Partners Small Cap Value Fund (July 30, 2002) S-6239-99 D S-6239-20 D AXP Partners Value Fund (July 30, 2002) S-6238-99 D S-6238-20 D AXP Precious Metals Fund (May 30, 2002) S-6142-99 W S-6142-20 W AXP Precious Metals Fund (May 30, 2003) S-6142-99 X S-6142-20 X AXP Progressive Fund (Nov. 29, 2002) S-6449-99 W S-6449-20 W AXP Quantitative Large Cap Equity Fund (March 5, 2003) S-6263-99 A S-6263-20 A AXP Research Opportunities Fund (Sept. 27, 2002) S-6356-99 K S-6356-20 K
S-6381-2 A (5/03) * Valid until next prospectus and Statement of Additional Information update. Destroy May 28, 2004
Fund Name (Date) Prospectus Form # SAI Form # AXP Selective Fund (July 30, 2002) S-6376-99 W S-6376-20 W AXP Small Cap Advantage Fund (May 30, 2002) S-6427-99 F S-6427-20 F AXP Small Cap Advantage Fund (May 30, 2003) S-6427-99 G S-6427-20 G AXP Small Company Index Fund (April 1, 2003) S-6357-99 L S-6357-20 L AXP Stock Fund (Nov. 29, 2002) S-6351-99 W S-6351-20 W AXP Strategy Aggressive Fund (May 30, 2002) S-6381-99 M S-6381-20 M AXP Strategy Aggressive Fund (May 30, 2003) S-6381-99 N S-6381-20 N AXP Tax-Exempt Bond Fund (Jan. 29, 2003) S-6310-99 X S-6310-20 X AXP U.S. Government Mortgage Fund (July 30, 2002) S-6245-99 C S-6245-20 C AXP Utilities Fund (Aug. 29, 2002) S-6341-99 W S-6341-20 W
For the prospectus Under the heading "Fees and Expenses," footnote "b" has been modified to read as follows: [For All Funds] (b) For Class A purchases over $1,000,000 on which no sales charge is assessed, a 1% sales charge applies if you sell your shares less than one year after purchase. The table under "Investment Options" has been modified to read as follows: [For Blue Chip Advantage, Bond, Discovery, Diversified Equity Income, Emerging Markets, Equity Select, Equity Value, European Equity, Extra Income, Federal Income, Focused Growth, Global Balanced, Global Bond, Global Growth, Global Technology, Growth, Growth Dimensions, High Yield Tax-Exempt, International, Insured Tax-Exempt, Intermediate Tax-Exempt, Large Cap Equity, Large Cap Value, Managed Allocation, Mid Cap Value, Mutual, New Dimensions, Partners Aggressive Growth, Partners Fundamental Value, Partners Growth, Partners International Aggressive Growth, Partners International Core, Partners International Select Value, Partners International Small Cap, Partners Select Value, Partners Small Cap Core, Partners Small Cap Growth, Partners Small Cap Value, Partners Value, Precious Metals, Progressive, Quantitative Large Cap Equity, Research Opportunities, Small Cap Advantage, Stock, Strategy Aggressive, Tax-Exempt Bond, U.S. Government Mortgage and Utilities] Class A Class B Class C Class Y - --------------- ----------------- ---------------- --------------- ------------- Availability Available to Available to Available to Limited to all investors. all investors. all investors. qualifying institutional investors. - --------------- ----------------- ---------------- --------------- ------------- Initial Sales Yes. Payable at No. Entire No. Entire No. Entire Charge time of purchase price purchase purchase purchase. Lower is invested in price is price is sales charge shares of the invested in invested in for larger Fund. shares of the shares of the investments. Fund. Fund. - --------------- ----------------- ---------------- --------------- ------------- Deferred Sales On purchases Maximum 5% 1% CDSC None. Charge over CDSC during applies if $1,000,000, 1% the first year you sell your CDSC applies if decreasing to shares less you sell your 0% after six than one year shares less years. after than one year purchase. after purchase. - --------------- ----------------- ---------------- --------------- ------------- Distribution Yes.* 0.25% Yes.* 1.00% Yes.* 1.00% Yes. 0.10% and/or Shareholder Service Fee - --------------- ----------------- ---------------- --------------- ------------- Conversion to N/A Yes, No. No. Class A automatically in ninth calendar year of ownership. - --------------- ----------------- ---------------- --------------- ------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. [For California Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax-Exempt, Minnesota Tax-Exempt, New York Tax-Exempt and Ohio Tax-Exempt] Class A Class B Class C - ------------------ ----------------- ---------------- ----------------- Availability Available to Available to Available to all investors. all investors. all investors. - ------------------ ----------------- ---------------- ----------------- Initial Sales Yes. Payable at No. Entire No. Entire Charge time of purchase price purchase price purchase. Lower is invested in is invested in sales charge shares of the shares of the for larger Fund. Fund. investments. - ------------------ ----------------- ---------------- ----------------- Deferred Sales On purchases Maximum 5% 1% CDSC applies Charge over CDSC during if you sell $1,000,000, 1% the first year your shares CDSC applies if decreasing to less than one you sell your 0% after six year after shares less years. purchase. than one year after purchase. - ------------------ ----------------- ---------------- ----------------- Distribution Yes.* 0.25% Yes.* 1.00% Yes.* 1.00% and/or Shareholder Service Fee - ------------------ ----------------- ---------------- ----------------- Conversion to N/A Yes, No. Class A automatically in ninth calendar year of ownership. - ------------------ ----------------- ---------------- ----------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds. 2 The table under "Sales Charges" has been modified to read as follows: [For Blue Chip Advantage, Discovery, Diversified Equity Income, Emerging Markets, Equity Select, Equity Value, European Equity, Focused Growth, Global Balanced, Global Growth, Global Technology, Growth, Growth Dimensions, International, Large Cap Equity, Large Cap Value, Managed Allocation, Mid Cap Value, Mutual, New Dimensions, Partners Aggressive Growth, Partners Fundamental Value, Partners Growth, Partners International Aggressive Growth, Partners International Core, Partners International Select Value, Partners International Small Cap, Partners Select Value, Partners Small Cap Core, Partners Small Cap Growth, Partners Small Cap Value, Partners Value, Precious Metals, Progressive, Quantitative Large Cap Equity, Research Opportunities, Small Cap Advantage, Small Company Index, Stock, Strategy Aggressive and Utilities] Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000-$2,999,999 0.00 0.00 $3,000,000-$9,999,999 0.00 0.00 $10,000,000 or more 0.00 0.00 * Offering price includes the sales charge. [For Bond, California Tax-Exempt, Extra Income, Federal Income, Global Bond, High Yield Tax-Exempt, Insured Tax-Exempt, Intermediate Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax-Exempt, Minnesota Tax-Exempt, New York Tax-Exempt, Ohio Tax-Exempt, Selective, Tax-Exempt Bond and U.S. Government Mortgage] Sales charge as percentage of: Total market value Public offering price* Net amount invested Up to $49,999 4.75% 4.99% $50,000-$99,999 4.25 4.44 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000 -$2,999,999 0.00 0.00 $3,000,000-$9,999,999 0.00 0.00 $10,000,000 or more 0.00 0.00 * Offering price includes the sales charge. For the "Sales Charge" section under the heading "Waivers of the sales charge for Class A shares," the sixth and seventh bullet points have been modified to read as follows: [For All Funds] o Shareholders who have at least $1 million in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived for Class B and Class C shares. o Purchases made within 90 days after a sale of American Express Fund shares (up to the amount sold). Send the Fund a written request along with your payment, indicating the date and the amount of the sale. 3 For the Statement of Additional Information The "Sales Charge" information has been modified to read as follows: [For Blue Chip Advantage, Discovery, Diversified Equity Income, Emerging Markets, Equity Select, Equity Value, European Equity, Focused Growth, Global Balanced, Global Growth, Global Technology, Growth, Growth Dimensions, International, Large Cap Equity, Large Cap Value, Managed Allocation, Mid Cap Value, Mutual, New Dimensions, Partners Aggressive Growth, Partners Fundamental Value, Partners Growth, Partners International Aggressive Growth, Partners International Core, Partners International Select Value, Partners International Small Cap, Partners Select Value, Partners Small Cap Core, Partners Small Cap Growth, Partners Small Cap Value, Partners Value, Precious Metals, Progressive, Quantitative Large Cap Equity, Research Opportunities, Small Cap Advantage, Small Company Index, Stock, Strategy Aggressive and Utilities] Class A -- Calculation of the Sales Charge Sales charges are determined as follows: Sales charge as a percentage of: Total market value Public offering price Net amount invested Up to $49,999 5.75% 6.10% $50,000-$99,999 4.75 4.99 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000-$2,999,999 0.00 0.00 $3,000,000-$9,999,999 0.00 0.00 $10,000,000 or more 0.00 0.00 [For Bond, California Tax-Exempt, Extra Income, Federal Income, Global Bond, High Yield Tax-Exempt, Insured Tax-Exempt, Intermediate Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax-Exempt, Minnesota Tax-Exempt, New York Tax-Exempt, Ohio Tax-Exempt, Selective, Tax-Exempt Bond and U.S. Government Mortgage] Class A -- Calculation of the Sales Charge Sales charges are determined as follows: Sales charge as a percentage of: Total market value Public offering price Net amount invested Up to $49,999 4.75% 4.99% $50,000-$99,999 4.25 4.44 $100,000-$249,999 3.50 3.63 $250,000-$499,999 2.50 2.56 $500,000-$999,999 2.00 2.04 $1,000,000-$2,999,999 0.00 0.00 $3,000,000-$9,999,999 0.00 0.00 $10,000,000 or more 0.00 0.00 S-6381-2 A (5/03) * Valid until next prospectus and Statement of Additional Information update. Destroy May 28, 2004 4 EX-99.17Q SUPPLEMENT 16 ex17-q.txt STATEMENT OF ADDITIONAL INFORMATION SUPPLEMENT-AXP BLUE CHIP ADVANTAGE FUND Statement of Additional Information Supplement -- May 1, 2003* AXP(R) Blue Chip Advantage Fund (April 1, 2003) S-6025-20 V AXP Bond Fund (Oct. 30, 2002) S-6495-20 V AXP California Tax-Exempt Fund (Aug. 29, 2002) S-6328-20 W AXP Cash Management Fund (Sept. 27, 2002) S-6320-20 Y AXP Discovery Fund (Sept. 27, 2002) S-6457-20 X AXP Diversified Equity Income Fund (Nov. 29, 2002) S-6475-20 V AXP Emerging Markets Fund (Dec. 30, 2002) S-6354-20 K AXP Equity Select Fund (Jan. 29, 2003) S-6426-20 W AXP Equity Value Fund (May 30, 2002) S-6382-20 M AXP European Equity Fund (Dec. 30, 2002) S-6006-20 E AXP Extra Income Fund (July 30, 2002) S-6370-20 V AXP Federal Income Fund (July 30, 2002) S-6042-20 W AXP Focused Growth Fund (May 30, 2002) S-6003-20 D AXP Global Balanced Fund (Dec. 30, 2002) S-6352-20 J AXP Global Bond Fund (Dec. 30, 2002) S-6309-20 W AXP Global Growth Fund (Dec. 30, 2002) S-6334-20 V AXP Global Technology Fund (Dec. 30, 2002) S-6395-20 F AXP Growth Dimensions Fund (Sept. 27, 2002) S-6004-20 E AXP Growth Fund (Sept. 27, 2002) S-6455-20 W AXP High Yield Tax-Exempt Fund (Jan. 29, 2003) S-6430-20 X AXP Insured Tax-Exempt Fund (Aug. 29, 2002) S-6327-20 X AXP Intermediate Tax-Exempt Fund (Jan. 29, 2003) S-6355-20 K AXP International Fund (Dec. 30, 2002) S-6140-20 X AXP Large Cap Equity Fund (Sept. 27, 2002) S-6244-20 C AXP Large Cap Value Fund (Sept. 27, 2002) S-6246-20 C AXP Managed Allocation Fund (Nov. 29, 2002) S-6141-20 W AXP Massachusetts Tax-Exempt Fund (Aug. 29, 2002) S-6328-20 W AXP Michigan Tax-Exempt Fund (Aug. 29, 2002) S-6328-20 W AXP Mid Cap Index Fund (April 1, 2003) S-6434-20 G AXP Mid Cap Value Fund (Nov. 29, 2002) S-6241-20 C AXP Minnesota Tax-Exempt Fund (Aug. 29, 2002) S-6328-20 W AXP Mutual (Nov. 29, 2002) S-6326-20 W AXP New Dimensions Fund (Sept. 27, 2002) S-6440-20 V AXP New York Tax-Exempt Fund (Aug. 29, 2002) S-6328-20 W AXP Ohio Tax-Exempt Fund (Aug. 29, 2002) S-6328-20 W AXP Partners Aggressive Growth Fund (March 5, 2003) S-6260-20 A AXP Partners Fundamental Value Fund (July 30, 2002) S-6236-20 D AXP Partners Growth Fund (March 5, 2003) S-6261-20 A AXP Partners International Aggressive Growth Fund (Dec. 30, 2002) S-6243-20 E AXP Partners International Core Fund (Dec. 30, 2002) S-6259-20 C AXP Partners International Select Value Fund (Dec. 30, 2002) S-6242-20 E AXP Partners International Small Cap Fund (Dec. 30, 2002) S-6258-20 C AXP Partners Select Value Fund (July 30, 2002) S-6240-20 C AXP Partners Small Cap Core Fund (July 30, 2002) S-6237-20 D AXP Partners Small Cap Growth Fund (May 30, 2002) S-6301-20 D AXP Partners Small Cap Value Fund (July 30, 2002) S-6239-20 D AXP Partners Value Fund (July 30, 2002) S-6238-20 D AXP Precious Metals Fund (May 30, 2002) S-6142-20 W AXP Progressive Fund (Nov. 29, 2002) S-6449-20 W AXP Quantitative Large Cap Equity Fund (March 5, 2003) S-6263-20 A AXP Research Opportunities Fund (Sept. 27, 2002) S-6356-20 K AXP Selective Fund (July 30, 2002) S-6376-20 W AXP S&P 500 Index Fund (April 1, 2003) S-6434-20 G AXP Small Cap Advantage Fund (May 30, 2002) S-6427-20 F AXP Small Company Index Fund (April 1, 2003) S-6357-20 L AXP Stock Fund (Nov. 29, 2002) S-6351-20 W AXP Strategy Aggressive Fund (May 30, 2002) S-6381-20 M AXP Tax-Exempt Bond Fund (Jan. 29, 2003) S-6310-20 X AXP Tax-Free Money Fund (Feb. 28, 2003) S-6433-20 X AXP U.S. Government Mortgage Fund (July 30, 2002) S-6245-20 C AXP Utilities Fund (Aug. 29, 2002) S-6341-20 W The second to the last sentence of the paragraph titled "Transfer Agency Agreement" is modified to read as follows: [For Blue Chip Advantage, Discovery, Diversified Equity Income, Emerging Markets, Equity Select, Equity Value, European Equity, Focused Growth, Global Balanced, Global Growth, Global Technology, Growth, Growth Dimensions, International, Large Cap Equity, Large Cap Value, Managed Allocation, Mid Cap Value, Mutual, New Dimensions, Partners Aggressive Growth, Partners Fundamental Value, Partners Growth, Partners International Aggressive Growth, Partners International Core, Partners International Select Value, Partners International Small Cap, Partners Select Value, Partners Small Cap Core, Partners Small Cap Growth, Partners Small Cap Value, Partners Value, Precious Metals, Progressive, Quantitative Large Cap Equity, Research Opportunities, Small Cap Advantage, Stock, Strategy Aggressive and Utilities] The rate for Class A is $19.50 per year, for Class B is $20.50 per year, for Class C is $20.00 per year and for Class Y is $17.50 per year. [For Bond, Extra Income, Federal Income, Global Bond, High Yield Tax-Exempt, Insured Tax-Exempt, Intermediate Tax-Exempt, Selective, Tax-Exempt Bond and U.S. Government Mortgage] The rate for Class A is $20.50 per year, for Class B is $21.50 per year, for Class C is $21.00 per year and for Class Y is $18.50 per year. [For California Tax-Exempt, Massachusetts Tax-Exempt, Michigan Tax-Exempt, Minnesota Tax-Exempt, New York Tax-Exempt and Ohio Tax-Exempt] The rate for Class A is $20.50 per year, for Class B is $21.50 per year and for Class C is $21.00 per year. [For Cash Management and Tax-Free Money] The rate for Class A is $22.00 per year, for Class B is $23.00 per year, for Class C is $22.50 per year and for Class Y is $20.00 per year. [For Mid Cap Index and S&P 500 Index] The rate for Class D and for Class E is $19.50 per year. [For Small Company Index] The rate for Class A is $19.50 per year, for Class B is $20.50 per year and for Class Y is $17.50 per year. S-6025-2 A (5/03) *Valid until next Statement of Additional Information update. Destroy - April 1, 2004 -----END PRIVACY-ENHANCED MESSAGE-----