AXP(R) MARKET ADVANTAGE SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXP(R) BLUE CHIP ADVANTAGE FUND (the Fund)
MARCH 31, 2004
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. 23
Brokerage Commissions Paid to Brokers Affiliated with
American Express Financial Corporation p. 25
Valuing Fund Shares p. 26
Proxy Voting p. 27
Investing in the Fund p. 28
Selling Shares p. 30
Pay-out Plans p. 30
Capital Loss Carryover p. 31
Taxes p. 31
Agreements p. 33
Organizational Information p. 36
Board Members and Officers p. 40
Independent Auditors p. 44
Appendix: Description of Ratings p. 45
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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.
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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 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.
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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
Exchange-Traded Funds yes
Foreign Currency Transactions yes
Foreign Securities yes
High-Yield (High-Risk) Securities (Junk Bonds) no*
Illiquid and Restricted Securities yes
Indexed Securities yes
Inflation Protected 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.
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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 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.
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.
Derivatives Risk
Just as with securities in which the Fund invests directly, derivatives are
subject to a number of risks, including market, correlation, liquidity, interest
rate, and credit risk. In addition, gains or losses involving derivatives may be
substantial, because a relatively small price movement in the underlying
security, currency or index may result in a substantial gain or loss for the
Fund.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
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6 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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 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.
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7 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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, Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (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
A fund may borrow money for temporary or emergency purposes, to make other
investments or to 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 a fund's total return. Except as qualified above, however, a
fund may 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
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. A 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 a 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.
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8 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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.
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9 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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.
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10 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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.
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11 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
The Fund will engage in futures and related options transactions to produce
incremental earnings, to hedge existing positions, and to increase flexibility.
The Fund intends to comply with Rule 4.5 of the Commodity Futures Trading
Commission (CFTC), under which a mutual fund is exempt from the definition of a
"commodity pool operator." The Fund, therefore, is not subject to registration
or regulation as a pool operator, meaning that the Fund may invest in futures
contracts without registering with the CFTC.
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 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.
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12 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
Exchange-Traded Funds
Exchange-traded funds (ETFs) represent shares of ownership in mutual funds, unit
investment trusts or depositary receipts. ETFs hold portfolios of securities
that closely track the performance and dividend yield of specific domestic or
foreign market indexes.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with ETFs include: Management Risk and Market 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). (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.
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13 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
The Fund may enter into forward contracts for a variety of reasons. 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 may enter into forward contracts when management of the Fund believes
the currency of a particular foreign country may decline in value relative to
another currency. When selling currencies forward in this fashion, the Fund will
seek to hedge the value of foreign securities held by the Fund against an
adverse move in exchange rates. 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 circumstance set forth immediately 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.
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.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular country will increase in value relative to
another currency. The Fund may buy currencies forward to gain exposure to a
currency without incurring the additional costs of purchasing securities
denominated in that currency. When buying a currency forward in this fashion,
the Fund will hold cash or cash equivalents equal to the value of the forward
contract in order to avoid the use of leverage.
At maturity of a forward contract, the Fund may either deliver (if a contract to
sell) or take delivery of (if a contract to buy) the foreign currency or
terminate its contractual obligation by entering into an offsetting contract
with the same currency trader, the same maturity date, and covering the same
amount of foreign currency.
If the Fund engages in an offsetting transaction, the Fund will incur a gain or
loss 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 buy or sell the foreign currency.
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 and to gain exposure to foreign currencies. 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, or where the Fund would benefit from
increased exposure to the currency, 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.
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14 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
The Fund may write options on foreign currencies for the same types of 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 when a foreign currency is
expected to appreciate, 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.
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.
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15 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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 Jan. 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 Jan. 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.
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16 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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
Illiquid securities are 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 a fund invests in illiquid
or restricted securities, it may encounter difficulty in determining a market
value for the securities. Disposing of illiquid or restricted securities may
involve time-consuming negotiations and legal expense, and it may be difficult
or impossible for a fund to sell the 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.
Inflation Protected Securities
Inflation is a general rise in prices of goods and services. Inflation erodes
the purchasing power of an investor's assets. For example, if an investment
provides a total return of 7% in a given year and inflation is 3% during that
period, the inflation-adjusted, or real, return is 4%. Inflation protected
securities are debt securities whose principal and/or interest payments are
adjusted for inflation, unlike debt securities that make fixed principal and
interest payments. One type of inflation-protected debt security is issued by
the U.S. Treasury. The principal of these securities is adjusted for inflation
as indicated by the Consumer Price Index for Urban Consumers (CPI) and interest
is paid on the adjusted amount. The CPI is a measurement of changes in the cost
of living, made up of components such as housing, food, transportation and
energy.
If the CPI falls, the principal value of inflation-protected securities will be
adjusted downward, and consequently the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced.
Conversely, if the CPI rises, the principal value of inflation-protected
securities will be adjusted upward, and consequently the interest payable on
these securities will be increased. Repayment of the original bond principal
upon maturity is guaranteed in the case of U.S. Treasury inflation-protected
securities, even during a period of deflation. However, the current market value
of the inflation-protected securities is not guaranteed and will fluctuate.
Other inflation-indexed securities include inflation-related bonds, which may or
may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal.
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17 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Other issuers of inflation-protected debt securities include other U.S.
government agencies or instrumentalities, corporations and foreign governments.
There can be no assurance that the CPI or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
If interest rates rise due to reasons other than inflation (for example, due to
changes in currency exchange rates), investors in these securities may not be
protected to the extent that the increase is not reflected in the bond's
inflation measure.
Any increase in principal for an inflation-protected security resulting from
inflation adjustments is considered by IRS regulations to be taxable income in
the year it occurs. For direct holders of an inflation-protected security, this
means that taxes must be paid on principal adjustments even though these amounts
are not received until the bond matures. By contrast, a fund holding these
securities distributes both interest income and the income attributable to
principal adjustments in the form of cash or reinvested shares, which are
taxable to shareholders.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inflation-protected securities include: Interest
Rate 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
A fund may lend certain of its portfolio securities. 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 lender 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 lender 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 lender receives cash payments equivalent to all
interest or other distributions paid on the loaned securities. The lender 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 lender
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.
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18 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE 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."
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19 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE 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 pooled investment vehicles that manage
a portfolio of real estate or real estate related loans to earn profits for
their shareholders. REITs are generally classified as equity REITs, mortgage
REITs or a combination of equity and mortgage REITs. Equity REITs invest the
majority of their assets directly in real property, such as shopping centers,
nursing homes, office buildings, apartment complexes, and hotels, and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs can be subject to extreme
volatility due to fluctuations in the demand for real estate, changes in
interest rates, and adverse economic conditions. Similar to investment
companies, REITs are not taxed on income distributed to shareholders provided
they comply with certain requirements under the tax law. The failure of a REIT
to continue to qualify as a REIT for tax purposes can materially affect its
value. A fund will indirectly bear its proportionate share of any expenses paid
by a REIT in which it invests.
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,
Market Risk and Interest Rate Risk.
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20 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Repurchase Agreements
Repurchase agreements may be entered into with certain banks or non-bank
dealers. In a repurchase agreement, the purchaser 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 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 purchaser'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.
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.
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21 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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
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 investor to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements between
the investor 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 lender'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.
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22 -- 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 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.
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.
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23 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
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 $4,334,167 for fiscal year ended
Jan. 31, 2004, $3,868,493 for fiscal year 2003, and $6,955,866 for fiscal year
2002. Substantially all firms through whom transactions were executed provide
research services.
In fiscal year 2004, transactions amounting to $181,738,508, on which $300,187
in commissions were imputed or paid, were specifically directed to firms in
exchange for research services.
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24 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE 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
Citigroup $81,488,612
Fleet Funding 2,499,461
Merrill Lynch & Co. 13,780,376
Morgan Stanley 15,227,736
The portfolio turnover rate was 149% in the most recent fiscal year, and 104% in
the year before. Higher turnover rates may result in higher brokerage expenses
and taxes.
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 2004 2003 2002
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
IDSS American Wholly-owned $36,538* 0.84% 1.98% $0* $23,611*
Enterprise subsidiary of
Investment AEFC
Services Inc.
* Represents brokerage clearing fees.
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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 $913,221,327 divided by 116,142,338 equals $7.86
Class B 567,680,792 74,241,206 7.65
Class C 4,677,635 613,490 7.62
Class Y 99,025,519 12,566,854 7.88
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.
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26 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE 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 is available on a quarterly basis after the end of the
quarter for all companies whose shareholders meetings were completed during the
quarter. The information is on a website maintained by ISS and can be accessed
through the American Express Company's web page, www.americanexpress.com. For
anyone seeking information on how the Fund voted all proxies during a year, the
information can be obtained after Aug. 1, 2004 without cost:
o On the ISS website accessible through 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.
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27 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE 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, $7.86, by 0.9425 (1.00 - 0.0575)
for a maximum 5.75% sales charge for a public offering price of $8.34. 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 $60,000
and you later decide to invest $40,000 more. The value of your investments would
be $100,000. As a result, your $40,000 investment qualifies for the lower 3.5%
sales charge that applies to investments of at least $100,000 and up to
$249,999. 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
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28 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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 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.
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29 -- 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. 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.
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30 -- 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
$974,278,148 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 $11,509,187
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, 100% 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 100%.
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.
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31 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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 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.
- --------------------------------------------------------------------------------
32 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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 Annual rate at
(billions) 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 0.479% 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.
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 $57,205 for
fiscal year 2004.
The management fee is paid monthly. Under the agreement, the total amount paid
was $7,547,131 for fiscal year 2004, $9,411,815 for fiscal year 2003, and
$13,295,269 for fiscal year 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, paid by the
Fund were $729,803 for fiscal year 2004, $766,040 for fiscal year 2003, and
$735,762 for fiscal year 2002.
- --------------------------------------------------------------------------------
33 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Basis for board approving the investment advisory contract
Based on its work throughout the year and detailed analysis by the Contracts
Committee of reports provided by AEFC, the independent board members determined
to renew the Investment Management Services Agreement and Subadvisory Agreements
(where applicable) based on:
o tangible steps AEFC has taken to improve the competitive ranking and
consistency of the investment performance of the Fund, including changes in
leadership, portfolio managers, compensation structures, and the
implementation of management practices,
o continued commitment to expand the range of investment options that it
offers investors, through repositioning existing funds and creating new
funds,
o consistent effort to provide a management structure that imposes
disciplines that ensure adherence to stated management style and expected
risk characteristics,
o additional time needed to evaluate the efficacy of the new AEFC management
structure that has produced improved performance results in the short term,
o benefit of economy of scale that results from the graduated fee structure
and the reasonableness of fees in light of the fees paid by similar funds
in the industry,
o competitive total expenses that are either at or only slightly above the
median expenses of a group of comparable funds based on a report prepared
by Lipper Inc., and
o reasonable level of AEFC's profitability from its mutual fund operations.
ADMINISTRATIVE SERVICES AGREEMENT
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC for providing administration and accounting
services. The fee is calculated as follows:
Assets (billions) Annual rate at each asset level
First $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 $465,352 for
fiscal year 2004, $587,696 for fiscal year 2003, and $839,722 for fiscal year
2002.
TRANSFER AGENCY AGREEMENT
The Fund has a Transfer Agency Agreement with American Express Client Service
Corporation (AECSC) located at 70100 AXPFinancial Center, Minneapolis, MN 55474.
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, an annual closed-account fee of $5.00
per inactive account may be 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. located at 70100 AXPFinancial Center,
Minneapolis, MN 55474 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 $1,517,413 for fiscal year 2004. After paying
commissions to personal financial advisors, and other expenses, the amount
retained was $635,358. The amounts were $2,328,044 and $1,052,379 for fiscal
year 2003, and $4,197,241 and $1,456,326 for fiscal year 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.
- --------------------------------------------------------------------------------
34 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
SHAREHOLDER SERVICE AGREEMENT
With respect to Class Y shares, the Fund pays the Distributor a fee for service
provided to shareholders by financial advisors and other servicing agents. The
fee is calculated at a rate of 0.10% of average daily net assets.
PLAN AND AGREEMENT OF DISTRIBUTION
For Class A, Class B and Class C shares, to help defray the cost of distribution
and servicing not covered by the sales charges received under the Distribution
Agreement, the Fund and the Distributor entered into a Plan and Agreement of
Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
of the type known as a reimbursement plan, the Fund pays a fee up to actual
expenses incurred at an annual rate of up to 0.25% of the Fund's average daily
net assets attributable to Class A shares and up to 1.00% for Class B and Class
C shares. Each class has exclusive voting rights on the Plan as it applies to
that class. In addition, because Class B shares convert to Class A shares, Class
B shareholders have the right to vote on any material change to expenses charged
under the Class A plan.
Expenses covered under this Plan include sales commissions; business, employee
and financial advisor expenses charged to distribution of Class A, Class B and
Class C shares; and overhead appropriately allocated to the sale of Class A,
Class B and Class C shares. These expenses also include costs of providing
personal service to shareholders. A substantial portion of the costs are not
specifically identified to any one of the American Express mutual funds.
The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the relevant class of shares or by the Distributor. The
Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be amended
to increase the amount to be spent for distribution without shareholder
approval, and all material amendments to the Plan must be approved by a majority
of the board members, including a majority of the board members who are not
interested persons of the Fund and who do not have a financial interest in the
operation of the Plan or any agreement related to it. The selection and
nomination of disinterested board members is the responsibility of the other
disinterested board members. No board member who is not an interested person has
any direct or indirect financial interest in the operation of the Plan or any
related agreement. For the most recent fiscal year, the Fund paid fees of
$2,192,461 for Class A shares, $5,564,674 for Class B shares and $42,586 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.
- --------------------------------------------------------------------------------
35 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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.
- --------------------------------------------------------------------------------
36 -- 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) Core Bond Fund Yes
AXP(R) Discovery Fund Yes
AXP(R) Income Opportunities Fund Yes
AXP(R) Inflation Protected Securities Fund No
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 Equity Fund(6) 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 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) 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) Portfolio Builder Conservative Fund No
AXP(R) Portfolio Builder Moderate
Conservative Fund No
AXP(R) Portfolio Builder Moderate Fund No
AXP(R) Portfolio Builder Moderate
Aggressive Fund No
AXP(R) Portfolio Builder Aggressive Fund No
AXP(R) Portfolio Builder Total Equity 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) Dividend Opportunity Fund(7) Yes
AXP(R) Real Estate Fund No
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
- --------------------------------------------------------------------------------
38 -- 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) Strategy Series, Inc. 1/24/84 Corporation MN 3/31
AXP(R) Equity Value Fund Yes
AXP(R) Focused Growth Fund(3) No
AXP(R) Partners Small Cap Growth Fund(3) Yes
AXP(R) Small Cap Advantage Fund Yes
AXP(R) Strategy Aggressive Fund Yes
AXP(R) Tax-Exempt Series, Inc. 9/30/76, 6/13/86(1) Corporation NV/MN 11/30
AXP(R) Intermediate Tax-Exempt Fund Yes
AXP(R) Tax-Exempt Bond Fund Yes
AXP(R) Tax-Free Money Series, Inc.(4) 2/29/80, 6/13/86(1) Corporation NV/MN 12/31
AXP(R) Tax-Free Money Fund Yes
(1) Date merged into a Minnesota corporation incorporated on April 7, 1986.
(2) Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the
trust itself is unable to meet its obligations.
(3) Effective Feb. 7, 2002, AXP(R) Focus 20 Fund changed its name to AXP(R)
Focused Growth Fund, AXP(R) Innovations Fund changed its name to AXP(R)
Global Technology Fund, AXP(R) Small Cap Growth Fund changed its name to
AXP(R) Partners Small Cap Growth Fund and AXP(R) Utilities Income Fund,
Inc. created a series, AXP(R) Utilities Fund.
(4) Effective Nov. 13, 2002, AXP(R) Bond Fund, Inc. changed its name to AXP(R)
Fixed Income Series, Inc. and created a series, AXP(R) Bond Fund, AXP(R)
Discovery Fund, Inc. changed its name to AXP(R) Discovery Series, Inc. and
created a series, AXP(R) Discovery Fund, AXP(R) Equity Select Fund, Inc.
changed its name to AXP(R) Equity Series, Inc. and created a series, AXP(R)
Equity Select Fund, AXP(R) Extra Income Fund, Inc. changed its name to
AXP(R) High Yield Income Series, Inc. and created a series, AXP(R) Extra
Income Fund, AXP(R) Federal Income Fund, Inc. changed its name to AXP(R)
Government Income Series, Inc., AXP(R) High Yield Tax-Exempt Fund, Inc.
changed its name to AXP(R) High Yield Tax-Exempt Series, Inc. and created a
series, AXP(R) High Yield Tax-Exempt Fund, AXP(R) International Fund, Inc.
changed its name to AXP(R) International Series, Inc., AXP(R) New
Dimensions Fund, Inc. changed its name to AXP(R) Dimensions Series, Inc.,
AXP(R) Precious Metals Fund, Inc. changed its name to AXP(R) Selected
Series, Inc. and created a series, AXP(R) Precious Metals Fund, AXP(R)
Progressive Fund, Inc. changed its name to AXP(R) Progressive Series, Inc.
and created a series, AXP(R) Progressive Fund, AXP(R) Selective Fund, Inc.
changed its name to AXP(R) Income Series, Inc. and created a series, AXP(R)
Selective Fund, AXP(R) Stock Fund, Inc. changed its name to AXP(R) Stock
Series, Inc. and created a series, AXP(R) Stock Fund, AXP(R) Tax-Free Money
Fund, Inc. changed its name to AXP(R) Tax-Free Money Series, Inc. and
created a series, AXP(R) Tax-Free Money Fund, and AXP(R) Utilities Income
Fund, Inc. changed its name to AXP(R) Sector Series, Inc.
(5) Effective June 27, 2003, AXP(R) Bond Fund changed its name to AXP(R)
Diversified Bond Fund, AXP(R) Federal Income Fund changed its name to
AXP(R) Short Duration U.S. Government Fund and AXP(R) Extra Income Fund
changed its name to AXP(R) High Yield Bond Fund.
(6) Effective Oct. 20, 2003 AXP(R) Global Growth Fund changed its name to
AXP(R) Global Equity Fund.
(7) Effective Feb. 18, 2004, AXP(R) Utilities Fund changed its name to AXP(R)
Dividend Opportunity Fund.
- --------------------------------------------------------------------------------
39 -- 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 94 American Express mutual funds. Board members
serve until the next regular shareholders' meeting or until he or she reaches
the mandatory retirement age established by the board.
Independent Board Members
Name, address, age Position held Principal occupation during Other directorships Committee
with Fund and past five years memberships
length of service
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Arne H. Carlson Board member Chair, Board Services Joint Audit,
901 S. Marquette Ave. since 1999 Corporation (provides Contracts,
Minneapolis, MN 55402 administrative services to Executive,
Age 69 boards). Former Governor of Investment
Minnesota Review, Board
Effectiveness
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, Vulcan Joint Audit,
901 S. Marquette Ave. since 2002 Fluor Corporation Materials Company, Inc. Contracts
Minneapolis, MN 55402 (engineering and (construction
Age 66 construction) since 1998 materials/chemicals)
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Livio D. DeSimone Board member Retired Chair of the Board Cargill, Incorporated Joint Audit,
30 Seventh Street East since 2001 and Chief Executive Officer, (commodity merchants and Contracts,
Suite 3050 Minnesota Mining and processors), General Mills, Executive
St. Paul, MN 55101-4901 Manufacturing (3M) Inc. (consumer foods), Vulcan
Age 69 Materials Company
(construction
materials/chemicals),
Milliken & Company (textiles
and chemicals), and Nexia
Biotechnologies, Inc.
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Heinz F. Hutter* Board member Retired President and Chief Board
901 S. Marquette Ave. since 1994 Operating Officer, Cargill, Effectiveness,
Minneapolis, MN 55402 Incorporated (commodity Executive,
Age 74 merchants and processors) Investment
Review
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Anne P. Jones Board member Attorney and Consultant Joint Audit,
901 S. Marquette Ave. since 1985 Board
Minneapolis, MN 55402 Effectiveness,
Age 69 Executive
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Stephen R. Lewis, Jr.** Board member Retired President and Valmont Industries, Inc. Contracts,
901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation Investment
Minneapolis, MN 55402 Carleton College systems) Review,
Age 65 Executive
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Alan G. Quasha Board member President, Quadrant Compagnie Financiere Joint Audit,
901 S. Marquette Ave. since 2002 Management, Inc. (management Richemont AG (luxury goods), Investment
Minneapolis, MN 55402 of private equities) Harken Energy Corporation Review
Age 54 (oil and gas exploration) and
SIRIT Inc. (radio frequency
identification technology)
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Alan K. Simpson Board member Former three-term United Biogen, Inc. Investment
1201 Sunshine Ave. since 1997 States Senator for Wyoming (biopharmaceuticals) Review, Board
Cody, WY 82414 Effectiveness
Age 72
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Alison Taunton-Rigby Board member President, Forester Biotech Investment
901 S. Marquette Ave. since 2002 since 2000. Former President Review,
Minneapolis, MN 55402 and CEO, Aquila Contracts
Age 59 Biopharmaceuticals, Inc.
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
* Interested person of AXP Partners International Aggressive Growth Fund, AXP
Partners Aggressive Growth Fund, AXP Partners Small Cap Core Fund and AXP
Discovery 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 four AXP 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 Columbia Wanger Asset Management, L.P., one of the fund's
subadvisers.
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40 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Board Members Affiliated with AEFC***
Name, address, age Position held Principal occupation during Other directorships Committee
with Fund and past five years memberships
length of service
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Barbara H. Fraser Board member Executive Vice President -
1546 AXP Financial Center since 2002 Chief Marketing Officer,
Minneapolis, MN 55474 AEFC, since 2003. Executive
Age 54 Vice President - AEFA
Products and Corporate
Marketing, AEFC, 2002-2003.
President - Travelers Check
Group, American Express
Company, 2001-2002.
Management Consultant,
Reuters, 2000-2001. Managing
Director - International
Investments, Citibank
Global, 1999-2000.
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
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 55 2002
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
William F. Truscott Board member Senior Vice President -
53600 AXP Financial Center since 2001, Chief Investment Officer of
Minneapolis, MN 55474 Vice President AEFC since 2001. Former
Age 43 since 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, address, age Position held Principal occupation during Other directorships Committee
with Fund and past five years memberships
length of service
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Jeffrey P. Fox Treasurer since Vice President - Investment
50005 AXP Financial Center 2002 Accounting, AEFC, since
Minneapolis, MN 55474 2002; Vice President -
Age 48 Finance, American Express
Company, 2000-2002; Vice
President - Corporate
Controller, AEFC, 1996-2000
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
Paula R. Meyer President since Senior Vice President and
596 AXP Financial Center 2002 General Manager - Mutual
Minneapolis, MN 55474 Funds, AEFC, since 2002;
Age 50 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 65 since 1978
- ----------------------------------- ------------------ ------------------------------ ------------------------------- --------------
- --------------------------------------------------------------------------------
41 -- 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 one meeting 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 three 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 seven meetings during the last fiscal year.
- --------------------------------------------------------------------------------
42 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
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, 2003
Based on net asset values as of Dec. 31, 2003
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
Barbara H. Fraser 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
Stephen W. Roszell none over $100,000
Alan K. Simpson none $50,001-$100,000
Alison Taunton-Rigby none none
William F. Truscott none over $100,000
* Three independent directors have deferred compensation and invested in share
equivalents. As of Dec. 31, 2003, each owned
Phillip J. Carroll, Jr. Global Technology $10,001-$50,000
Livio D. DeSimone High Yield Bond Fund $1-$10,000
Partners Small Cap Value $1-$10,000
Small Cap Advantage $1-$10,000
Stephen R. Lewis, Jr. Equity Select $1-$10,000
Diversified Equity Income $1-$10,000
- --------------------------------------------------------------------------------
43 -- 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 29 meetings, received the following compensation:
Compensation Table
Total cash compensation from
American Express Funds and
Aggregate Preferred Master Trust Group
Board member* compensation from the Fund paid to Board member
Philip J. Carroll, Jr. $ 750** $ 13,267
Livio D. DeSimone 2,048*** 71,675
Heinz F. Hutter 1,998 138,767
Anne P. Jones 2,048 143,467
Stephen R. Lewis, Jr. 2,198**** 113,276
Alan G. Quasha 1,992 138,467
Alan K. Simpson 1,892 129,317
Alison Taunton-Rigby 2,142 151,717
* Arne H. Carlson, Chair of the Board, is compensated by Board Services
Corporation.
** Includes the deferred compensation in the amount of $517 from the Fund.
*** Includes the deferred compensation in the amount of $967 from the Fund.
**** Includes the deferred compensation in the amount of $577 from the Fund.
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.
- --------------------------------------------------------------------------------
44 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE 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.
- --------------------------------------------------------------------------------
45 -- 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.
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.
- --------------------------------------------------------------------------------
46 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Investment Grade
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Speculative Grade
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
- --------------------------------------------------------------------------------
47 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Standard & Poor's Muni Bond and Note Ratings
An S&P municipal bond or note rating reflects the liquidity factors and
market-access risks unique to these instruments. Notes maturing in three years
or less will likely receive a note rating. Notes maturing beyond three years
will most likely receive a long-term debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
Municipal bond rating symbols and definitions are as follows:
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-l repayment
ability will often be evidenced by many of the following characteristics:
(i) leading market positions in well-established industries, (ii) high
rates of return on funds employed, (iii) conservative capitalization
structure with moderate reliance on debt and ample asset protection, (iv)
broad margins in earnings coverage of fixed financial charges and high
internal cash generation, and (v) well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above, but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Moody's Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's. The ratings reflect
the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody's MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as
required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
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48 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
Fitch's Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate,
however, near-term adverse changes could cause these securities to be rated
below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent payment
default.
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49 -- AXP MARKET ADVANTAGE SERIES, INC. -- AXP BLUE CHIP ADVANTAGE FUND
S-6025-20 W (3/04)