UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-2503
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AXP FIXED INCOME SERIES, INC.
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(Exact name of registrant as specified in charter)
50606 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip code)
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268
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(Name and address of agent for service)
Registrant's telephone number, including area code: (612) 330-9283
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31/04
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AXP(R)
Diversified
Bond
Fund
Annual Report
for the Period Ended
Aug. 31, 2004
AXP Diversified Bond Fund seeks to provide shareholders with a high level of
current income while conserving the value of the investment for the longest
period of time.
(logo) (logo)
American AMERICAN
Express(R) EXPRESS
Funds (R)
Table of Contents
Fund Snapshot 3
Performance Summary 4
Questions & Answers with Portfolio Management 5
The Fund's Long-term Performance 10
Investments in Securities 12
Financial Statements 24
Notes to Financial Statements 27
Report of Independent Registered Public Accounting Firm 40
Federal Income Tax Information 41
Fund Expenses Example 43
Board Members and Officers 45
Proxy Voting 47
[dalbar logo]
American Express(R) Funds' reports to shareholders have been awarded the
Communications Seal from Dalbar Inc., an independent financial services research
firm. The Seal recognizes communications demonstrating a level of excellence in
the industry.
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2 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Fund Snapshot AS OF AUG. 31, 2004
PORTFOLIO MANAGERS
Portfolio managers Since Years in industry
Jamie Jackson, CFA 6/03 16
Scott Kirby 2/03 25
Tom Murphy, CFA 2/03 18
Nic Pifer 2/03 14
Jennifer Ponce de Leon 2/03 15
FUND OBJECTIVE
For investors seeking a high level of current income while conserving the value
of the investment for the longest period of time.
Inception dates by class:
A: 10/3/74 B: 3/20/95 C: 6/26/00 Y: 3/20/95
Ticker symbols
A: INBNX B: ININX C: AXBCX Y: IDBYX
Total net assets $2.785 billion
Number of holdings 406
Weighted average life(1) 6.9 years
Effective duration(2) 4.0 years
Weighted average bond rating(3) AA
STYLE MATRIX
Shading within the style matrix indicates areas in which the Fund generally
invests.
DURATION
SHORT INT LONG
X HIGH
X MEDIUM QUALITY
X LOW
SECTOR COMPOSITION
Percentage of portfolio assets
[pie chart]
Mortgage-backed securities 38.5%
Corporate bonds* 23.0%
U.S. government obligations & agencies 19.3%
CMBS/ABS** 9.6%
Short-term securities*** 7.0%
Foreign government bonds 2.5%
Other 0.1%
* Includes 4.4% Communications, 3.3% Consumer cyclical, 3.1% Utilities, 2.9%
Banks and brokers, 1.7% Energy, 1.6% Other financial, 1.4% Insurance, 1.3%
Technology, 1.2% Capital goods, 1.0% Basic industries, 1.0% Consumer
non-cyclical and 0.1% Transporation.
** Commercial mortgage-backed securities/ Asset-backed securities.
*** 1.0% of the securities in this category is due to security lending
activity. 6.0% of the short term securities is the Fund's cash equivalent
position.
CREDIT QUALITY SUMMARY
Percentage of portfolio assets excluding cash equivalents
AAA bonds 75.3%
AA bonds 1.6
A bonds 5.3
BBB bonds 12.2
Non-investment grade bonds 5.6
Individual security ratings are based on information from Standard & Poor's
Corp. and Moody's Investors Service. If a rating is unavailable, the rating is
determined through an internal analysis, if appropriate. 0.3% of the portfolio
rating above was determined through internal analysis.
For further detail about these holdings, please refer to the section entitled
"Investments in Securities."
(1) Weighted average life measures a bond's maturity, which takes into
consideration the possibility that the issuer may call the bond before its
maturity date.
(2) Effective duration measures the sensitivity of a security's price to
parallel shifts in the yield curve (the graphical depiction of the levels
of interest rates from two years out to 30 years). Positive duration means
that as rates rise, the price decreases, and negative duration means that
as rates rise, the price increases.
(3) Weighted average bond rating represents the average credit quality of the
underlying bonds in the portfolio.
Fund holdings are subject to change.
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3 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Performance Summary
[bar graph]
PERFORMANCE COMPARISON
For the year ended Aug. 31, 2004
8%
[bar 1] [bar 2] [bar 3]
6% 5.54 6.13 6.14
4%
2%
0%
[bar 1] AXP Diversified Bond Fund Class A (excluding sales charge)
[bar 2] Lehman Brothers Aggregate Bond Index (unmanaged)
[bar 3] Lipper Intermediate Investment Grade Index
(see "The Fund's Long-term Performance" for Index descriptions)
Past performance is no guarantee of future results. The 4.75% sales charge
applicable to Class A shares of the Fund is not reflected in the bar chart; if
reflected, returns would be lower than those shown. The performance of other
classes may vary from that shown above because of differences in expenses.
The indices do not reflect the effects of sales charges, expenses (excluding
Lipper) and taxes.
AVERAGE ANNUAL TOTAL RETURNS
Class A Class B Class C Class Y
(Inception dates) (10/3/74) (3/20/95) (6/26/00) (3/20/95)
NAV(1) POP(2) NAV(1) After CDSC(3) NAV(1) After CDSC(4) NAV(5) POP(5)
as of Aug. 31, 2004
1 year +5.54% +0.53% +4.95% +0.95% +4.95% +4.95% +5.92% +5.92%
3 years +4.52% +2.84% +3.80% +2.87% +3.80% +3.80% +4.76% +4.76%
5 years +5.72% +4.70% +4.96% +4.80% N/A N/A +5.93% +5.93%
10 years +6.76% +6.24% N/A N/A N/A N/A N/A N/A
Since inception +9.58% +9.40% +5.99% +5.99% +5.59% +5.59% +6.95% +6.95%
as of Sept. 30, 2004
1 year +3.63% -1.29% +2.85% -1.15% +2.85% +2.85% +3.79% +3.79%
3 years +4.83% +3.15% +4.04% +3.11% +4.04% +4.04% +4.93% +4.93%
5 years +5.70% +4.68% +4.90% +4.74% N/A N/A +5.87% +5.87%
10 years +6.93% +6.41% N/A N/A N/A N/A N/A N/A
Since inception +9.57% +9.40% +5.97% +5.97% +5.59% +5.59% +6.92% +6.92%
The performance information shown represents the past performance and is not a
guarantee of future results. The investment return and principal value of your
investment will fluctuate so that your shares, when redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance information shown. You may obtain performance information
current to the most recent month-end by calling (888) 723-8476 or visiting
www.americanexpress.com/funds. You should consider the investment objectives,
risks, and charges and expenses of the Fund carefully before investing.
(1) Excluding sales charge.
(2) Returns at public offering price (POP) reflect a sales charge of 4.75%.
(3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as
follows: first year 5%; second and third year 4%; fourth year 3%; fifth
year 2%; sixth year 1%; no sales charge thereafter.
(4) 1% CDSC applies to redemptions made within the first year of purchase.
(5) Sales charge is not applicable to these shares. Shares available to
institutional investors only.
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4 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Questions & Answers
WITH PORTFOLIO MANAGEMENT
Below, AXP Diversified Bond Fund's portfolio management team discusses the
Fund's positioning and results for fiscal year 2004.
Q: How did AXP Diversified Bond Fund perform for the 12-month period ended
Aug. 31, 2004?
A: AXP Diversified Bond Fund's Class A shares rose 5.54%, excluding sales
charge, for the 12-month period ended Aug. 31, 2004. This was less than the
Fund's benchmark, the Lehman Brothers Aggregate Bond Index, which gained
6.13% for the period. It was also less than Lipper Intermediate Investment
Grade Index, representing the Fund's peer group, which advanced
6.14% over the same time frame.
Q: What factors most significantly affected the Fund's performance?
A: A meaningful contributor to overall portfolio performance was the Fund's
positioning, which reflected our view that the difference in interest rates
between short-term and long-term securities would narrow. A negative
contributor to Fund performance was its holdings in investment grade
corporate bonds, which were relatively weak during the second half of fiscal
year 2004.
For much of the period, the Fund benefited from the outperformance of
long-term U.S. Treasuries, where the Fund had a higher-than-index position.
Over the course of the fiscal year, the Fund's short duration relative to
its benchmark (effective duration was 4.0 years as of Aug. 31, 2004) was
also a small positive factor in its results.
The Fund's annual returns were further boosted by its allocation to
high-yield debt, which, with the exception of a weak first calendar quarter,
produced strong returns. The market focused on the improving fundamentals of
the high yield sector. Emerging markets provided strong returns through
early February but then suffered during much of the second half of the
fiscal year, amid the increase in U.S. interest rates. The Fund did not own
any emerging market debt given these concerns and our view that these
securities were overvalued.
AXP Diversified Bond Fund
SEC YIELDS
Class A Class B Class C Class Y
As of Aug. 31, 2004 3.42% 2.83% 2.82% 3.74%
As of Sept. 30, 2004 3.53% 2.96% 2.96% 3.87%
The Securities and Exchange Commission (SEC) yield is calculated by dividing
anticipated net investment income during a 31-day period by the public offering
price (POP) per share on the last day of the period, and converting the results
to yearly figures. See Average Annual Total Returns on page 4 for additional
performance information.
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5 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Questions & Answers
(begin callout quote) >We constantly re-evaluate all of the Fund's positions as
we seek to have the best risk/reward opportunities in the portfolio across
sectors.(end callout quote)
At the same time, corporate and mortgage securities produced mixed results
over the period.
We selectively sold corporate bonds, throughout the period amid market
strength. We found very poor risk/reward in the broader bond market.
However, we maintained higher-than-index weightings in bonds we thought
offered attractive value.
Investment grade credit generated positive performance versus similar
duration U.S. Treasuries for much of the reporting period. However, the
sector did not perform well during the second half of the fiscal year, as
the market struggled to interpret signals from economic data and the raft of
Federal Reserve Board (the Fed) commentary about inflation, the pace of
economic expansion, and its likely approach to monetary policy. This
detracted from the Fund's relative results.
Mortgages generated positive returns over the period (though not without
some late second quarter 2004 fireworks when Treasuries sold off
dramatically), as investors took advantage of the steepness of the yield
curve and long stretches of low market volatility. The Fund, however, held a
lower-than-index position in this sector, since mortgage valuations remained
expensive by historical standards, and we believe these securities are
vulnerable to underperformance if and when market volatility heightens. As
in corporate bonds, we sold mortgages throughout the period as opportunities
arose.
We viewed AAA-rated commercial mortgage-backed securities (CMBS) as an
excellent substitute for high quality credit and agency securities and
positioned the portfolio accordingly. This was a positive contributor to
Fund performance, as the CMBS market has absorbed an increase in bond
supply.
The Fund's global bond position (long the euro/short the dollar) had a small
positive impact on portfolio performance over the period, and we maintained
those positions given our expectation of a longer-term decline in the value
of the U.S. dollar.
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6 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Questions & Answers
Q: How did the interest rate environment change during the reporting period?
A: Ten-year U.S. Treasury rates were volatile, but ended the period less than
50 basis points (0.50%) lower than where they began. Much of the
volatility was driven by the market's analysis of Fed statements.
Q: What changes did you make to the portfolio and how is it currently
positioned?
A: We began the period with a higher-than-index position in mortgages,
investment grade credit, and commercial mortgage-backed securities (CMBS).
By the end of the fiscal year, the Fund was neutral investment grade
corporate bonds
[line graph]
U.S. TREASURY YIELDS
(Sept. 30, 2004 compared to Sept. 30, 2003)
[dash line] 0.94% 1.00% 1.46% 1.86% 2.83% 3.94% 4.88%
[solid line] 1.70% 1.99% 2.61% 2.85% 3.37% 4.12% 4.89%
3 mos. 6 mos. 2 yrs. 3 yrs. 5 yrs. 10 yrs. 30 yrs.
Maturity
Treasury yields as of: [solid line] 9/30/04
[dash line] 9/30/03
Source: Bloomberg
This chart compares the income potential of U.S. Treasury bills, notes and
bonds as of Sept. 30, 2004 compared to a year earlier. This is known as the
yield curve.
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7 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Questions & Answers
versus its benchmark, and moved to a lower-than-index exposure to mortgages.
We had a higher-than-index position in commercial mortgage-backed securities
(CMBS) than when the period began.
We constantly re-evaluate all of the Fund's positions as we seek to have the
best risk/reward opportunities in the portfolio across sectors, with an eye
toward having a higher-than-index position in securities that may offer the
greatest likelihood of outperforming the Fund's benchmark.
Q: Did portfolio turnover affect the Fund this past year?
A: Our portfolio turnover was higher than a year earlier and added value to the
portfolio. A significant portion of the Fund's 279% turnover rate this past
fiscal year was the result of "roll" transactions in U.S. Treasury notes.
For U.S. Treasury notes, existing holdings were sold and newly issued
securities with better liquidity were purchased. These transactions affect
the Fund's turnover rate but do not change the risk exposure or result in
material transaction costs.
Q: How do you intend to manage the Fund in the coming months?
A: Though recent economic data appears to have moderated a bit from the
dramatic rebound early in April and May, we are of the view that the
economic expansion continues at an above-trend pace. We view the recent
weakness as transitory but continue to re-evaluate our view with each new
data point. While interest rates have declined from their period highs of
May and June, we believe rates will move still higher over the remainder of
the year. In particular, we believe the improvement in economic conditions
and higher inflation so far this year present risks to the Fed's willingness
to remain measured in its tightening plan. Our outlook calls for persistent
monetary tightening moves by the Fed through 2005. In managing the Fund, we
continue to emphasize capital preservation strategies designed to benefit
from a rising rate environment.
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8 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Questions & Answers
In the corporate and mortgage sectors, we will likely have lower-than-index
positions for the near term. From a relative value perspective, the yield
difference over U.S. Treasuries generally continue to look unattractive on a
historical basis and look even less compelling given the liquidity risks
surrounding the commencement of the Fed's tightening regime. In corporates,
we remain highly selective, seeking to reduce the Fund's exposure modestly.
In mortgages, we intend to maintain the Fund's more significant
lower-than-index position, especially to lower-coupon mortgages, which we
believe may underperform as the sector reprices to a higher, flatter yield
curve. We intend to maintain the Fund's meaningful exposure to commercial
mortgage-backed securities compared to its index weighting, as we view these
securities as a strong substitute for high-quality corporate and government
agency securities.
As always, we maintain a disciplined focus on individual security selection
in concert with our qualitative and quantitative partners in research.
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9 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
The Fund's Long-term Performance
The chart on the facing page illustrates the total value of an assumed $10,000
investment in AXP Diversified Bond Fund Class A shares (from 9/1/94 to 8/31/04)
as compared to the performance of two widely cited performance indices, the
Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment
Grade Index. In comparing the Fund's Class A shares to these indices, you should
take into account the fact that the Fund's performance reflects the maximum
sales charge of 4.75%, while such charges are not reflected in the performance
of the indices. Returns for the Fund include the reinvestment of any
distribution paid during each period.
The performance information shown represents the past performance and is not a
guarantee of future results. The value of your investment and returns will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Returns do not reflect taxes payable on distributions and
redemptions. Current performance may be lower or higher than the performance
information shown. You may obtain performance information current to the most
recent month-end by calling (888) 723-8476 or visiting
www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current
prospectus. You should consider the investment objectives, risks, and charges
and expenses of the Fund carefully before investing.
DISTRIBUTION SUMMARY
The table below details the Fund's income and capital gain distributions for the
fiscal years shown. More information on the other classes can be found in the
Financial Highlights section of this report's Notes to Financial Statements.
Class A
Short-term Long-term
Fiscal year ended Income capital gains capital gains Total
Aug. 31, 2004 $0.17 $-- $-- $0.17
Aug. 31, 2003 0.20 -- -- 0.20
Aug. 31, 2002 0.26 -- -- 0.26
Aug. 31, 2001 0.32 -- -- 0.32
Aug. 31, 2000 0.33 -- -- 0.33
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10 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
[bar graph]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP DIVERSIFIED BOND FUND
AXP Diversified Bond Fund Class A
(includes sales charge) $ 9,525 $10,825 $11,449 $12,829 $13,650 $13,877 $14,525 $16,047 $16,550 $17,362 $18,324
Lehman Brothers Aggregate
Bond Index(1) $10,000 $11,130 $11,587 $12,746 $14,093 $14,206 $15,280 $17,167 $18,560 $19,369 $20,556
Lipper Intermediate
Investment Grade Index(2) $10,000 $11,020 $11,454 $12,553 $13,745 $13,806 $14,714 $16,525 $17,492 $18,433 $19,565
`94 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04
COMPARATIVE RESULTS
Results as of Aug. 31, 2004 Since
1 year 3 years 5 years 10 years inception(3)
AXP Diversified Bond Fund (includes sales charge)
Class A Cumulative value of $10,000 $10,053 $10,876 $12,582 $18,324 $146,890
Average annual total return +0.53% +2.84% +4.70% +6.24% +9.40%
Lehman Brothers Aggregate Bond Index(1)
Cumulative value of $10,000 $10,613 $11,974 $14,470 $20,556 N/A
Average annual total return +6.13% +6.19% +7.67% +7.47% N/A
Lipper Intermediate Investment Grade Index(2)
Cumulative value of $10,000 $10,614 $11,836 $14,170 $19,565 N/A
Average annual total return +6.14% +5.78% +7.22% +6.94% N/A
Results for other share classes can be found on page 4.
(1) Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a
representative list of government, corporate, asset-backed and
mortgage-backed securities. The index is frequently used as a general
measure of bond market performance. The index reflects reinvestment of all
distributions and changes in market prices, but excludes brokerage
commissions or other fees. However, the securities used to create the index
may not be representative of the bonds held in the Fund.
(2) The Lipper Intermediate Investment Grade Index, published by Lipper Inc.,
includes the 30 largest funds that are generally similar to the Fund,
although some funds in the index may have somewhat different investment
policies or objectives.
(3) Fund data is from Oct. 3, 1974. The Fund began operating before both
indices.
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11 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Investments in Securities
AXP Diversified Bond Fund
Aug. 31, 2004
(Percentages represent value of investments compared to net assets)
Bonds (97.2%)
Issuer Coupon Principal Value(a)
rate amount
Foreign government (2.6%)
Bundesrepublik Deutschland
(European Monetary Unit)
07-04-10 5.25% 39,060,000(c) $51,851,828
Pemex Project Funding Master Trust
(U.S. Dollar)
12-15-14 7.38 4,895,000(c) 5,384,500
United Mexican States
(U.S. Dollar)
03-03-15 6.63 15,545,000(c) 16,399,975
Total 73,636,303
U.S. government obligations & agencies (20.2%)
Federal Home Loan Mtge Corp
08-15-06 2.75 50,500,000 50,674,427
07-15-13 4.50 28,240,000 28,254,967
11-15-13 4.88 31,926,000 32,685,392
Federal Natl Mtge Assn
04-15-06 2.13 26,800,000(i) 26,668,224
08-15-08 3.25 86,170,000 85,664,182
02-15-09 3.25 2,990,000 2,951,312
U.S. Treasury
12-31-05 1.88 55,425,000 55,251,799
08-15-09 3.50 4,035,000(i) 4,068,414
08-15-14 4.25 5,730,000 5,787,300
08-15-23 6.25 107,204,000(q) 124,528,381
02-15-26 6.00 122,907,000(q) 139,245,028
02-15-31 5.38 5,515,000 5,871,754
Total 561,651,180
Commercial mortgage-backed/
Asset-backed securities (10.0%)(f)
Aesop Funding II LLC
Series 2002-1A Cl A1
10-20-06 3.85 7,090,000(d) 7,193,914
Series 2003-3A Cl A3
07-20-09 3.72 4,650,000(d) 4,655,858
AmeriCredit Automobile Receivables Trust
Series 2002-C Cl 4A (FSA)
02-12-09 3.55 2,660,000(n) 2,690,077
Series 2004-CA Cl A3
03-06-09 3.00 5,500,000 5,504,950
Bank of America Alternative Loan Trust
Series 2003-11 Cl 1A1
01-25-34 6.00 9,207,403 9,437,588
Bear Stearns
Commercial Mtge Securities
Series 2004-PWR3 Cl A2
02-11-41 3.87 6,000,000 5,960,760
Commercial Mtge Pass-Through Certificates
Series 2004-LB3A Cl A2
07-10-37 4.71 6,000,000 6,191,940
Series 2004-LB3A Cl A5
07-10-37 5.44 6,500,000 6,796,660
CS First Boston Mtge Securities
Series 2004-C1 Cl A2
01-15-37 3.52 6,000,000 5,944,394
GE Capital Commercial Mtge
Series 2004-C2 Cl A2
03-10-40 4.12 3,000,000 3,003,870
Series 2004-C2 Cl A4
03-10-40 4.89 6,800,000 6,870,094
Series 2004-C3 Cl A2
07-10-39 4.43 6,600,000 6,721,259
GMAC Commercial Mtge Securities
Series 1999-C1 Cl B
05-15-33 6.30 5,800,000 6,357,882
Greenwich Capital Commercial Funding
Series 2004-GG1 Cl A7
06-10-36 5.32 8,000,000 8,328,871
GS Mtge Securities
Series 2004-GG2 Cl A6
08-10-38 5.40 10,550,000 11,008,080
J.P. Morgan Chase Commercial Mtge Securities
Series 2001-CIBC Cl A3
03-15-33 6.26 2,000,000 2,212,552
Series 2003-CB6 Cl A1
07-12-37 4.39 8,261,667 8,402,859
Series 2003-CB6 Cl A2
07-12-37 5.26 4,200,000 4,372,930
See accompanying notes to investments in securities.
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12 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Commercial mortgage-backed/
Asset-backed securities (cont.)
J.P. Morgan Chase Commercial Mtge Securities (cont.)
Series 2004-C2 Cl A3
05-15-41 5.39% $2,850,000 $2,960,032
Series 2004-PNC1 Cl A2
06-12-41 4.56 3,500,000 3,601,040
Series 2004-PNC1 Cl A4
06-12-41 5.55 6,500,000 6,822,768
KSL Resorts
Series 2003-1A Cl C
05-15-13 2.50 3,500,000(d,m) 3,505,589
LB-UBS Commercial Mtge Trust
Series 2002-C2 Cl A3
06-15-26 5.39 7,360,000 7,820,380
Series 2002-C2 Cl A4
06-15-31 5.59 4,905,000 5,258,952
Series 2002-C4 Cl A4
09-15-26 4.56 5,200,000 5,279,391
Series 2002-C4 Cl A5
09-15-31 4.85 6,000,000 6,118,030
Series 2002-C8 Cl A3
11-15-27 4.83 2,950,000 3,010,269
Series 2003-C3 Cl A2
05-15-27 3.09 14,900,000 14,630,540
Series 2003-C7 Cl A2
09-15-27 4.06 2,200,000 2,216,727
Series 2003-C8 Cl A2
11-15-27 4.21 7,500,000 7,593,975
Series 2003-C8 Cl A4
11-15-32 5.12 8,500,000 8,771,516
Series 2004-C2 Cl A2
03-15-29 3.25 10,190,000 9,947,274
Series 2004-C2 Cl A4
03-15-36 4.37 3,700,000 3,600,988
Series 2004-C4 Cl A2
06-15-29 4.57 4,300,000 4,426,690
Series 2004-C4 Cl A4
06-15-29 5.31 7,500,000(i) 7,847,667
Series 2004-C6 Cl A2
08-15-29 4.19 6,500,000 6,569,485
Series 2004-C6 Cl A6
08-15-29 5.02 7,500,000 7,583,203
Merrill Lynch Mtge Trust
Series 2003-KEY1 Cl A4
11-12-35 5.24 4,000,000 4,144,448
Morgan Stanley Auto Loan Trust
Series 2004-HB2 Cl A3
03-16-09 2.94 4,300,000 4,300,000
Morgan Stanley Capital 1
Series 2003-IQ4 Cl A1
05-15-40 3.27 6,064,478 5,872,720
Series 2004-T13 Cl A2
09-13-45 3.94 4,800,000 4,766,640
Series 2004-IQ7 Cl A4
06-15-38 5.57 9,300,000 9,755,235
Morgan Stanley, Dean Witter Capital 1
Series 2002-TOP7 Cl A2
01-15-39 5.98 5,900,000 6,453,149
Nissan Auto Receivables Owner Trust
Series 2003-A Cl A4
07-15-08 2.61 2,500,000 2,494,715
Residential Asset Securities
Series 2002-KS1 Cl AI4
11-25-29 5.86 7,500,000 7,591,050
WFS Financial Owner Trust
Series 2004-3 Cl A3
03-17-09 3.30 5,000,000 5,038,280
Total 279,635,291
Mortgage-backed securities (40.3%)(f,h)
Bank of America Alternative Loan Trust
Series 2004-3 Cl 1A1
04-25-34 6.00 14,193,210 14,541,103
Bank of American Mtge Securities
Series 2004-E Cl B1
06-25-34 4.06 2,968,826(k) 2,897,545
Series 2004-F Cl B1
07-25-34 4.17 5,341,509(k) 5,214,969
Countrywide Alternative Loan Trust
Series 2003-11T1 Cl A1
07-25-18 4.75 5,727,941 5,717,343
Countrywide Home Loans
Series 2004-12 Cl 1M
08-25-34 4.69 3,549,299(k) 3,556,007
Series 2004-J6 Cl 3A1
08-25-19 5.00 15,739,222 15,884,318
CS First Boston Mtge Securities
Series 2003-29 Cl 8A1
11-25-18 6.00 5,609,651 5,821,769
Series 2004-AR5 Cl CB1
06-25-34 4.46 3,391,259(k) 3,331,912
Federal Home Loan Mtge Corp
05-01-13 4.50 4,073,740 4,153,147
04-01-17 8.00 22,151 24,225
05-01-17 6.00 2,527,644 2,658,013
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
13 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Home Loan Mtge Corp (cont.)
05-01-18 5.50% $5,794,865 $6,003,914
08-01-18 5.00 17,324,866 17,700,639
10-01-18 5.00 10,687,062 10,921,363
02-01-23 6.00 19,461,081 20,295,926
10-01-23 5.50 7,145,547 7,362,431
12-01-23 6.00 15,226,290 15,876,441
08-01-24 8.00 794,403 867,307
10-01-28 7.00 121,740 130,168
12-01-30 5.50 3,224,319 3,294,279
04-01-33 5.50 13,859,191 14,159,136
04-01-33 6.00 9,899,477 10,297,210
06-01-33 5.50 9,704,759 9,885,748
07-01-33 5.00 6,285,672 6,254,585
09-01-33 4.56 923,833(k) 927,418
08-01-34 5.21 12,000,000(k) 12,158,406
Collateralized Mtge Obligation
03-15-22 7.00 2,583,995 2,628,085
02-15-27 5.00 10,070,000 10,375,319
11-15-28 4.50 6,344,704 6,422,390
02-15-33 5.50 9,889,951 10,327,422
07-25-43 7.00 6,276,052 6,721,257
Interest Only
02-15-14 7.40 5,027,816(l) 416,756
06-15-18 8.78 3,579,588(l) 242,826
10-15-22 14.56 13,223,047(l) 1,145,911
Federal Natl Mtge Assn
03-01-08 7.00 2,563,523 2,722,163
07-01-08 6.50 1,088,435 1,155,132
11-01-09 9.00 161 175
06-01-10 6.50 2,614,600 2,774,818
08-01-11 8.50 2,794,841 2,993,672
01-01-13 4.92 5,667,793 5,864,330
02-01-13 4.83 6,416,394 6,600,481
02-01-13 5.02 5,829,682 6,025,360
04-01-13 7.00 7,672,257 8,147,046
01-01-14 4.84 4,169,568 4,243,065
02-01-14 4.77 7,958,211 8,092,581
03-01-14 4.60 1,143,919 1,140,304
04-01-14 4.65 3,987,151 4,002,662
04-01-14 6.50 1,560,943 1,660,025
08-01-16 6.00 6,395,390 6,723,779
08-01-16 6.50 2,847,450 3,025,937
12-01-16 5.50 8,873,089 9,207,106
06-01-17 6.50 6,090,356 6,488,332
08-01-17 6.00 11,941,057 12,584,041
08-01-17 6.50 3,671,847 3,917,983
09-01-17 6.00 1,766,316 1,856,635
09-01-17 6.50 4,318,755 4,588,861
12-01-17 6.50 2,058,057 2,186,773
01-01-18 5.50 8,107,100 8,424,476
02-01-18 5.50 13,283,031 13,789,776
03-01-18 5.50 22,274,980 23,167,296
04-01-18 5.00 8,351,492 8,526,856
05-01-18 5.50 4,135,035 4,296,215
05-01-18 6.00 13,827,775 14,546,712
06-01-18 5.00 9,121,345 9,331,069
07-01-18 4.50 4,703,332 4,711,656
08-01-18 4.50 9,585,998 9,611,460
10-01-18 5.00 11,087,310 11,326,350
10-01-18 6.00 2,799,025 2,942,090
12-01-18 5.00 7,259,662 7,412,101
02-01-19 6.00 4,726,141 4,967,704
09-01-19 4.50 6,985,000(g) 6,978,448
04-01-23 8.50 1,021,740 1,125,692
07-01-23 5.00 8,342,435 8,419,210
09-01-23 5.50 13,067,538 13,454,444
09-01-23 6.50 763,352 808,090
01-01-24 6.50 257,472 272,562
05-01-24 6.00 10,967,130 11,447,206
06-01-24 9.00 874,097 976,094
02-01-25 8.00 285,786 312,397
09-01-25 8.00 698,039 763,822
03-01-26 7.00 1,498,528 1,605,852
07-01-28 5.50 3,599,236 3,678,808
08-01-28 5.50 5,837,105 5,966,152
09-01-28 7.50 2,158,316 2,326,673
12-01-28 5.50 12,421,041 12,695,648
01-01-29 6.50 6,617,298 6,983,906
04-01-29 5.00 20,229,151 20,106,172
05-01-29 6.50 4,675,244 4,927,975
06-01-29 7.00 12,750 13,631
09-01-29 7.00 8,447,897 9,031,835
10-01-30 7.00 3,108,965 3,323,864
07-01-31 7.00 5,206,849 5,562,963
09-01-31 7.00 1,463,535 1,576,539
03-01-32 5.50 2,372,726 2,425,183
06-01-32 7.00 4,780,682 5,123,842
07-01-32 6.50 3,220,420 3,403,819
08-01-32 7.00 2,224,114 2,376,713
09-01-32 6.00 20,700,462 21,473,577
09-01-32 6.50 3,733,885 3,950,349
10-01-32 6.00 2,534,960 2,638,329
10-01-32 6.50 3,836,434 4,041,975
11-01-32 6.00 2,252,770 2,344,662
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
14 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (cont.)
Federal Natl Mtge Assn (cont.)
11-01-32 7.00% $2,300,887 $2,457,668
12-01-32 6.50 6,941,422 7,313,315
01-01-33 6.00 15,614,614 16,203,172
02-01-33 6.00 2,969,743 3,087,900
02-01-33 6.50 719,936 759,931
03-01-33 5.50 19,468,249 19,848,362
03-01-33 6.00 6,405,620 6,652,587
03-01-33 6.50 9,586,636 10,077,334
04-01-33 5.50 16,062,248 16,403,211
04-01-33 6.00 31,534,812 32,858,007
05-01-33 5.50 27,181,220 27,693,727
07-01-33 4.85 7,030,780(k) 6,991,197
07-01-33 5.00 14,578,509(g) 14,512,762
07-01-33 5.50 16,696,941 17,005,405
08-01-33 5.50 1,102,977 1,123,068
11-01-33 6.50 8,699,626 9,144,922
12-01-33 5.00 10,586,500(k) 10,684,229
01-01-34 6.50 1,687,260 1,783,652
02-01-34 6.50 14,743,669 15,498,333
03-01-34 5.00 14,855,969(g) 14,788,971
03-01-34 5.00 30,684,358 30,545,975
04-01-34 5.00 3,599,461 3,585,711
08-01-34 4.53 6,592,656(k) 6,563,780
10-01-34 6.00 27,025,000(g) 27,886,421
Collateralized Mtge Obligation
05-25-16 4.00 8,700,000 8,738,207
12-25-26 8.00 5,730,607 6,238,973
02-25-44 7.00 26,245,163 27,886,573
06-25-44 7.50 6,004,092 6,514,740
Interest Only
12-25-12 13.29 4,743,421(l) 292,573
Govt Natl Mtge Assn
02-15-24 8.00 312,654 344,491
02-15-25 9.00 85,072 95,322
06-15-26 8.00 351,300 385,834
08-15-26 8.00 337,058 370,192
05-15-33 6.00 9,608,487 9,989,160
10-15-33 5.50 18,089,379 18,473,486
03-20-34 6.50 5,381,736 5,680,327
Collateralized Mtge Obligation
Interest Only
01-20-32 0.00 4,267,140(l) 522,582
08-20-32 0.00 16,398,827(l) 2,692,399
GRS Mtge Loan Trust
Series 2004-6F Cl 2A2
05-25-34 5.50 5,431,647 5,640,518
Series 2004-10F Cl 1A5
08-25-19 4.50 14,150,000 13,968,703
Harborview Mtge Loan Trust
Series 2004-3 Cl B1
05-19-34 4.40 4,427,101 4,339,350
Master Adjustable Rate Mtge Trust
Series 2004-5 Cl B1
07-25-34 4.46 4,199,992(k) 4,187,140
Master Alternative Loans Trust
Series 2004-4 Cl 2A1
05-25-34 6.00 2,034,508 2,085,370
Series 2004-7 Cl 8A1
08-25-19 5.00 5,538,963 5,626,313
Series 2004-8 Cl 7A1
09-25-19 5.00 7,625,000 7,691,719
Morgan Stanley Mtge Loan Trust
Series 2004-3 Cl 4A
04-25-34 5.74 13,972,673 14,255,772
Structured Adjustable Rate Mtge Loan
Series 2004-3AC
03-25-34 4.94 5,587,859(k) 5,725,097
Series 2004-5 Cl B1
05-25-34 4.64 4,246,616(k) 4,231,370
Structured Asset Securities
Series 2003-33H Cl 1A1
10-25-33 5.50 19,865,570 19,934,122
Washington Mutual
Series 2004-CB2 Cl 6A
07-25-19 4.50 4,918,164 4,851,769
Total 1,121,638,484
Aerospace & defense (0.2%)
Alliant Techsystems
05-15-11 8.50 1,000,000 1,087,500
DRS Technologies
Sr Sub Nts
11-01-13 6.88 1,000,000 1,030,000
L-3 Communications
06-15-12 7.63 2,000,000 2,165,000
07-15-13 6.13 190,000 187,150
Total 4,469,650
Airlines (--%)
Northwest Airlines
Series 1999-1A
02-01-20 6.81 1,453,500 1,264,167
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
15 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Automotive & related (0.5%)
DaimlerChrysler NA Holding
11-15-13 6.50% $4,949,000 $5,334,675
Ford Motor
10-01-28 6.63 2,095,000 1,900,540
02-01-29 6.38 4,245,000 3,721,961
Meritor Automotive
02-15-09 6.80 1,000,000 1,030,000
TRW Automotive
Sr Nts
02-15-13 9.38 931,000 1,072,978
Total 13,060,154
Banks and savings & loans (3.0%)
Banknorth Group
Sr Nts
05-01-08 3.75 3,960,000 3,957,980
J.P. Morgan Chase
Sub Nts
02-01-11 6.75 3,946,000 4,411,024
03-15-14 4.88 604,000 598,816
US Bank NA Minnesota
08-01-11 6.38 9,020,000 10,079,011
Wachovia
Sub Nts
08-01-14 5.25 14,170,000 14,498,801
Washington Mutual Bank FA
Sub Nts
06-15-11 6.88 15,850,000 17,902,306
08-15-14 5.65 8,910,000 9,230,404
Wells Fargo Bank NA
Sub Nts
02-01-11 6.45 21,120,000 23,750,707
Total 84,429,049
Beverages & tobacco (0.1%)
Cott Beverages
12-15-11 8.00 2,770,000 3,001,988
Building materials & construction (0.3%)
Associated Materials
04-15-12 9.75 600,000 675,000
Louisiana Pacific
Sr Nts
08-15-10 8.88 2,260,000 2,666,800
Norcraft Companies LP/Finance
Sr Sub Nts
11-01-11 9.00 1,135,000(d) 1,214,450
Ryland Group
Sr Nts
06-01-08 5.38 2,500,000 2,581,250
Total 7,137,500
Cable (1.0%)
Comcast
03-15-11 5.50 22,710,000 23,628,165
CSC Holdings
Sr Nts
12-15-07 7.88 1,500,000 1,593,750
DirectTV Holdings/Finance
Sr Nts
03-15-13 8.38 1,700,000 1,933,750
Echostar DBS
Sr Nts
10-01-08 5.75 750,000 751,875
Videotron Ltee
(U.S. Dollar)
01-15-14 6.88 1,250,000(c) 1,262,500
Total 29,170,040
Cellular telecommunications (0.2%)
Nextel Communications
Sr Nts
10-31-13 6.88 1,500,000 1,515,000
US Cellular
Sr Nts
12-15-33 6.70 5,495,000 5,401,558
Total 6,916,558
Chemicals (0.3%)
Airgas
10-01-11 9.13 1,500,000 1,691,250
Sr Sub Nts
07-15-14 6.25 180,000 177,075
BCP Caylux Holdings
(U.S. Dollar) Sr Sub Nts
06-15-14 9.63 985,000(c,d) 1,057,644
Compass Minerals Group
08-15-11 10.00 2,500,000 2,775,000
Georgia Gulf
Sr Nts
12-15-13 7.13 1,525,000 1,555,500
Innophos
Sr Sub Nts
08-15-14 8.88 115,000(d) 119,600
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
16 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Chemicals (cont.)
MacDermid
07-15-11 9.13% $1,500,000 $1,674,375
Total 9,050,444
Energy (0.9%)
Amerada Hess
08-15-11 6.65 5,940,000 6,516,263
Chesapeake Energy
Sr Nts
06-15-14 7.50 375,000 400,313
08-15-14 7.00 670,000(d) 690,100
01-15-16 6.88 480,000 486,000
Devon Financing
09-30-11 6.88 4,615,000 5,207,211
Encore Acquisition
Sr Sub Nts
04-15-14 6.25 2,800,000 2,744,000
Foundation PA Coal
Sr Nts
08-01-14 7.25 300,000(d) 313,500
Gulfterra Energy Partner
Sr Nts
06-01-10 6.25 3,645,000 4,014,056
Newfield Exploration
Sr Nts
03-01-11 7.63 2,500,000 2,750,000
Sr Sub Nts
08-15-12 8.38 380,000 420,850
09-01-14 6.63 475,000(d) 486,875
Peabody Energy
Series B
03-15-13 6.88 2,000,000 2,110,000
Total 26,139,168
Energy equipment & services (0.9%)
Grant Prideco Escrow
12-15-09 9.00 2,000,000 2,220,000
Halliburton
10-15-10 5.50 17,045,000 17,702,596
Key Energy Services
Series C
03-01-08 8.38 1,250,000 1,318,750
Sr Nts
05-01-13 6.38 1,195,000 1,141,225
Offshore Logistics
06-15-13 6.13 1,420,000 1,405,800
Pacific Energy
Sr Nts
06-15-14 7.13 890,000(d) 941,175
Pride Intl
Sr Nts
07-15-14 7.38 495,000(d) 527,175
Total 25,256,721
Finance companies (0.6%)
Ford Motor Credit
10-01-13 7.00 1,155,000 1,210,821
GMAC
09-15-11 6.88 14,755,000 15,447,747
Total 16,658,568
Financial services (0.6%)
Capital One Bank
Sr Nts
02-01-06 6.88 1,740,000 1,841,884
HSBC Holdings
(U.S. Dollar) Sub Nts
12-12-12 5.25 4,618,000(c) 4,784,788
Pricoa Global Funding I
06-15-08 4.35 8,755,000(d) 8,952,601
Total 15,579,273
Food (0.5%)
Burns Philp Capital Property
(U.S. Dollar) Sr Sub Nts
02-15-11 10.75 1,745,000(c) 1,910,775
Chiquita Brands Intl
Sr Nts
03-15-09 10.56 1,500,000 1,625,625
Del Monte
Sr Sub Nts
12-15-12 8.63 500,000 550,000
Kraft Foods
10-01-13 5.25 8,515,000 8,674,682
Total 12,761,082
Health care services (0.5%)
Cardinal Health
06-15-15 4.00 6,876,000 6,060,314
HCA
03-15-14 5.75 2,000,000 1,982,610
IASIS Healthcare
Sr Sub Nts
06-15-14 8.75 350,000(d) 365,750
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
17 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Health care services (cont.)
NeighborCare
Sr Sub Nts
11-15-13 6.88% $410,000 $428,450
Omnicare
Sr Sub Nts
06-01-13 6.13 1,100,000 1,067,000
Triad Hospitals
Sr Nts
05-15-12 7.00 1,000,000 1,042,500
US Oncology
Sr Nts
08-15-12 9.00 290,000(d) 303,775
Vanguard Health Systems
08-01-11 9.75 1,235,000 1,432,600
Total 12,682,999
Home building (0.2%)
D.R. Horton
12-01-07 7.50 1,000,000 1,100,000
01-15-09 5.00 990,000 1,004,850
07-01-13 5.88 1,000,000 1,000,000
Meritage
06-01-11 9.75 1,200,000 1,338,000
Total 4,442,850
Industrial services (0.1%)
Allied Waste North America
11-15-10 6.50 625,000 625,000
04-15-11 6.38 1,110,000 1,090,575
Total 1,715,575
Industrial transportation (--%)
Greater Beijing First Expressways
(U.S. Dollar) Sr Nts
06-15-07 9.50 3,640,000(b,c,p) 72,800
Insurance (1.5%)
ASIF Global Financing
01-17-13 4.90 38,990,000(d) 39,570,951
Pacific Life
09-15-33 6.60 1,540,000(d) 1,668,883
Total 41,239,834
Leisure time & entertainment (1.4%)
Blockbuster
Sr Sub Nts
09-01-12 9.00 165,000(d) 170,775
Time Warner
05-15-29 6.63 18,265,000 18,623,104
Speedway Motorsports
Sr Sub Nts
06-01-13 6.75 865,000(d) 899,600
Viacom
05-15-11 6.63 18,475,000 20,518,889
Total 40,212,368
Lodging & gaming (0.5%)
Boyd Gaming
Sr Sub Nts
12-15-12 7.75 375,000 396,094
04-15-14 6.75 1,145,000 1,147,863
Caesars Entertainment
Sr Sub Nts
05-15-11 8.13 2,790,000 3,159,674
Choctaw Resort Development Enterprises
Sr Nts
04-01-09 9.25 1,500,000 1,608,750
Hilton Hotels
12-01-12 7.63 1,250,000 1,434,375
MGM Mirage
10-01-09 6.00 670,000 683,400
Sr Nts
02-27-14 5.88 720,000 680,400
Mohegan Tribal Gaming
Sr Sub Nts
04-01-12 8.00 1,500,000 1,646,250
08-15-14 7.13 250,000(d) 256,875
Prime Hospitality
Sr Sub Nts Series B
05-01-12 8.38 560,000 644,000
Station Casinos
Sr Nts
04-01-12 6.00 1,000,000 1,002,500
Total 12,660,181
Machinery (0.1%)
Case New Holland
Sr Nts
08-01-11 9.25 570,000(d) 629,850
Joy Global
Series B
03-15-12 8.75 1,500,000 1,691,250
Manitowoc
11-01-13 7.13 1,355,000 1,399,038
Total 3,720,138
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
18 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Media (0.9%)
CanWest Media
(U.S. Dollar) Series B
04-15-13 7.63% $1,000,000(c) $1,065,000
CBD Media/Finance
06-01-11 8.63 1,000,000 1,057,500
Corus Entertainment
(U.S. Dollar) Sr Sub Nts
03-01-12 8.75 1,475,000(c) 1,611,438
Dex Media West LLC/Finance
Sr Nts Series B
08-15-10 8.50 700,000 788,375
Emmis Operating
05-15-12 6.88 1,085,000 1,088,092
Lamar Media
01-01-13 7.25 425,000 452,625
News Corp
(U.S. Dollar)
06-24-10 10.15 2,437,209(c,p) 3,009,365
Nexstar Finance LLC
04-01-08 12.00 575,000 633,938
Quebecor Media
(U.S. Dollar) Sr Nts
07-15-11 11.13 640,000(c) 736,800
Radio One
Series B
07-01-11 8.88 1,000,000 1,108,750
Shaw Communications
(U.S. Dollar) Sr Nts
04-06-11 7.25 2,435,000(c) 2,603,707
Sun Media
(U.S. Dollar)
02-15-13 7.63 1,500,000(c) 1,597,500
Susquehanna Media
Sr Sub Nts
04-15-13 7.38 900,000 927,000
United Artists Theatre
07-01-15 9.30 8,331,332 8,497,958
Total 25,178,048
Metals (0.1%)
Jorgensen Earle M.
06-01-12 9.75 500,000 555,000
Russel Metals
(U.S. Dollar) Sr Nts
03-01-14 6.38 1,500,000(c) 1,436,250
Total 1,991,250
Multi-industry (0.9%)
SPX
Sr Nts
06-15-11 6.25 750,000 742,500
Tyco Intl Group
(U.S. Dollar)
02-15-11 6.75 21,160,000(c) 23,646,470
10-15-11 6.38 75,000(c) 82,164
Total 24,471,134
Paper & packaging (0.7%)
Ainsworth Lumber
(U.S. Dollar) Sr Nts
03-15-14 6.75 885,000(c,d) 863,475
Ball
12-15-12 6.88 2,220,000 2,319,900
Cascades
(U.S. Dollar) Sr Nts
02-15-13 7.25 1,400,000(c) 1,452,500
Crown Paper
Sr Sub Nts
09-01-05 11.00 6,950,000(b,o,p) --
Domtar
(U.S. Dollar)
12-01-13 5.38 6,240,000(c) 6,203,122
Georgia-Pacific
02-01-10 8.88 1,000,000 1,172,500
Graphic Packaging Intl
Sr Nts
08-15-11 8.50 430,000 477,300
Norampac
(U.S. Dollar) Sr Nts
06-01-13 6.75 2,110,000(c) 2,178,575
Owens-Brockway Glass
02-15-09 8.88 400,000 435,000
05-15-11 7.75 1,500,000 1,590,000
Silgan Holdings
Sr Sub Nts
11-15-13 6.75 2,000,000 1,990,000
Stone Container
Sr Nts
07-01-12 8.38 1,000,000 1,095,000
Total 19,777,372
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
19 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Real estate (0.5%)
Archstone-Smith OPR Trust
08-15-14 5.63% $11,930,000 $12,328,366
Host Marriott
Sr Nts
08-15-12 7.00 1,500,000(d) 1,526,250
La Quinta Properties
Sr Nts
08-15-12 7.00 295,000(d) 304,219
Total 14,158,835
Restaurants (--%)
Domino's Pizza LLC
Sr Sub Nts
07-01-11 8.25 729,000 780,030
Retail -- drugstores (--%)
Jean Coutu Group PJC
(U.S. Dollar) Sr Nts
08-01-12 7.63 925,000(c,d) 952,750
Retail -- general (0.6%)
Finlay Fine Jewelry
Sr Nts
06-01-12 8.38 355,000(d) 378,075
May Department Stores
07-15-14 5.75 9,565,000(d) 9,876,063
United Auto Group
03-15-12 9.63 670,000 743,700
Wal-Mart Stores
06-29-11 8.88 3,500,000 3,569,965
William Carter
Series B
08-15-11 10.88 2,195,000 2,469,375
Total 17,037,178
Telecom equipment & services (1.3%)
PanAmSat
08-15-14 9.00 440,000(d) 457,600
Qwest
03-15-12 9.13 2,015,000(d) 2,156,050
Sprint Capital
11-15-28 6.88 21,355,000 22,258,124
TELUS
(U.S. Dollar)
06-01-07 7.50 5,145,000(c) 5,652,328
06-01-11 8.00 5,832,500(c) 6,781,086
Total 37,305,188
Utilities -- electric (2.7%)
Centerpoint Energy
02-15-11 7.75 2,000,000 2,318,364
Centerpoint Energy Resources
Sr Nts Series B
04-01-13 7.88 1,610,000 1,899,270
Cleveland Electric Illuminating
Sr Nts
12-15-13 5.65 4,170,000 4,258,383
Columbus Southern Power
Sr Nts Series C
03-01-13 5.50 1,462,000 1,519,674
Consolidated Natural Gas
12-01-13 6.63 2,980,000 3,333,273
Dayton Power & Light
1st Mtge
10-01-13 5.13 6,195,000(d) 6,213,895
DPL
Sr Nts
09-01-11 6.88 750,000 780,000
Duke Energy
01-15-12 6.25 3,925,000 4,234,989
1st Mtge
03-05-08 3.75 4,960,000 4,988,520
04-01-10 4.50 1,445,000 1,462,990
Sr Nts
11-30-12 5.63 9,430,000 9,806,521
Duquesne Light
1st Mtge Series Q
05-15-14 5.70 1,230,000 1,292,213
Florida Power
1st Mtge
03-01-13 4.80 2,975,000 2,989,012
Indianapolis Power & Light
1st Mtge
07-01-13 6.30 1,880,000(d) 2,008,009
IPALCO Enterprises
11-14-08 8.38 400,000 444,000
11-14-11 8.63 3,680,000 4,084,800
Metropolitan Edison
03-15-13 4.95 6,365,000 6,309,892
1st Mtge
04-01-14 4.88 3,050,000(d) 2,981,229
Tampa Electric
06-15-12 6.88 985,000 1,101,026
08-15-12 6.38 1,385,000 1,506,164
Texas Utilities Electric
01-01-05 9.45 741,000 744,400
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
20 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Bonds (continued)
Issuer Coupon Principal Value(a)
rate amount
Utilities -- electric (cont.)
Westar Energy
1st Mtge
07-01-14 6.00% $10,240,000 $10,898,965
Total 75,175,589
Utilities -- natural gas (0.5%)
ANR Pipeline
03-15-10 8.88 785,000 883,125
Consolidated Natural Gas
Sr Nts
04-15-11 6.85 1,660,000 1,872,696
El Paso Natl Gas
Sr Nts Series A
08-01-10 7.63 680,000 724,200
Northwest Pipeline
03-01-10 8.13 2,455,000 2,764,944
Plains Exploration & Production
Sr Nts
06-15-14 7.13 1,500,000(d) 1,590,000
Southern Natural Gas
03-15-10 8.88 875,000 984,375
Southern Star Central
08-01-10 8.50 1,000,000 1,095,000
Transcontinental Gas Pipeline
Series B
08-15-11 7.00 2,250,000 2,486,250
Williams Companies
03-15-12 8.13 1,750,000 2,012,500
Total 14,413,090
Utilities -- telephone (2.4%)
Deutsche Telekom Intl Finance
(U.S. Dollar)
07-22-13 5.25 5,740,000(c) 5,828,453
Telecom Italia Capital
(U.S. Dollar)
11-15-13 5.25 18,600,000(c,d) 18,888,765
11-15-33 6.38 1,890,000(c,d) 1,951,315
Verizon New York
Series B
04-01-32 7.38 7,060,000 7,804,145
Verizon Pennsylvania
Series A
11-15-11 5.65 30,820,000 32,335,420
Total 66,808,098
Total bonds
(Cost: $2,673,877,308) $2,706,250,927
Common stock (--%)
Issuer Shares Value(a)
Stellex Aerostructures 1,311(b,o,p) $--
Total common stock
(Cost: $--) $--
Other (0.1%)
Issuer Shares Value(a)
Wayland Investment LLC 6,000,000(b,e,p) $1,683,420
Total other
(Cost: $6,671,880) $1,683,420
Short-term securities (7.3%)(j)
Issuer Effective Amount Value(a)
yield payable at
maturity
U.S. government agencies (4.9%)
Federal Home Loan Mtge Corp Disc Nt
09-14-04 1.50% $50,000,000 $49,970,835
Federal Natl Mtge Assn Disc Nts
09-01-04 1.21 50,000,000 49,998,314
09-27-04 1.47 6,200,000 6,193,164
10-12-04 1.58 30,000,000 29,944,700
Total 136,107,013
Commercial paper (2.4%)
Barton Capital
10-07-04 1.58 10,000,000 9,983,761
Falcon Asset Securitization
09-28-04 1.58 15,000,000 14,981,567
Household Finance
09-01-04 1.58 1,200,000 1,199,947
Kitty Hawk Funding
10-12-04 1.60 25,000,000 24,953,333
Receivables Capital
09-24-04 1.55 15,000,000 14,984,500
Total 66,103,108
Total short-term securities
(Cost: $202,218,366) $202,210,121
Total investments in securities
(Cost: $2,882,767,554)(r) $2,910,144,468
See accompanying notes to investments in securities.
- --------------------------------------------------------------------------------
21 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) Non-income producing. For long-term debt securities, item identified is in
default as to payment of interest and/or principal.
(c) Foreign security values are stated in U.S. dollars. For debt securities,
principal amounts are denominated in the currency indicated. As of Aug.
31, 2004, the value of foreign securities represented 6.1% of net assets.
(d) Represents a security sold under Rule 144A, which is exempt from
registration under the Securities Act of 1933, as amended. This security
has been determined to be liquid under guidelines established by the
board. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. As of Aug. 31,
2004, the value of these securities amounted to $123,672,635 or 4.4% of
net assets.
(e) The share amount for Limited Liability Companies (LLC) or Limited
Partnerships (LP) represents capital contributions.
(f) Mortgage-backed securities represent direct or indirect participations
in, or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities
and Collateralized Mortgage Obligations. These securities may be issued
or guaranteed by U.S. government agencies or instrumentalities, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities. The maturity dates
shown represent the original maturity of the underlying obligation.
Actual maturity may vary based upon prepayment activity on these
obligations. Unless otherwise noted, the coupon rates presented are
fixed rates.
(g) At Aug. 31, 2004, the cost of securities purchased, including interest
purchased, on a when-issued and/or other forward-commitment basis was
$63,880,702.
(h) Comparable securities are held to satisfy future delivery requirements of
the following open forward sale commitments as of Aug. 31, 2004:
Security Principal Settlement Proceeds Value
amount date receivable
Federal Natl Mtge Assn
09-01-19 5.00% $ 950,000 9-20-04 $ 961,875 $ 967,516
09-01-34 5.00 26,550,000 9-15-04 26,195,309 26,334,281
09-01-34 5.50 19,810,000 9-15-04 19,987,421 20,113,331
09-01-34 6.00 13,100,000 9-15-04 13,476,625 13,566,688
09-01-34 6.50 20,500,000 9-15-04 21,409,687 21,518,604
------------- ---------- ------- ---------- ----------
(i) Security is partially or fully on loan. See Note 5 to the financial
statements.
(j) Cash collateral received from security lending activity is invested in
short-term securities and represents 1.1% of this category (see Note 5 to
the financial statements). 6.2% of the short-term securities is the Fund's
cash equivalent position.
(k) Adjustable rate mortgage; interest rate varies to reflect current market
conditions; rate shown is the effective rate on Aug. 31, 2004.
(l) Interest only represents securities that entitle holders to receive only
interest payments on the underlying mortgages. The yield to maturity of
an interest only is extremely sensitive to the rate of principal
payments on the underlying mortgage assets. A rapid (slow) rate of
principal repayments may have an adverse (positive) effect on yield to
maturity. The principal amount shown is the notional amount of the
underlying mortgages. Interest rate disclosed represents yield based
upon the estimated timing and amount of future cash flows as of Aug. 31,
2004.
(m) Interest rate varies either based on a predetermined schedule or to
reflect current market conditions; rate shown is the effective rate on
Aug. 31, 2004.
(n) The following abbreviation is used in the portfolio security description
to identify the insurer of the issue:
FSA -- Financial Security Assurance
(o) Negligible market value.
- --------------------------------------------------------------------------------
22 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Notes to investments in securities (continued)
(p) Identifies issues considered to be illiquid as to their marketability (see
Note 1 to the financial statements). Information concerning such security
holdings at Aug. 31, 2004, is as follows:
Security Acquisition Cost
dates
Crown Paper
11.00% Sr Sub Nts 2005 02-10-00 thru 02-14-00 $4,216,724
Greater Beijing First Expressways
(U.S. Dollar) 9.50% Sr Nts 2007 09-16-98 --
News Corp
(U.S. Dollar) 10.15% 2010 01-29-93 2,467,251
Stellex Aerostructures 10-31-97 --
Wayland Investment LLC 05-19-00 6,671,880
(q) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 6 to the financial statements):
Type of security Notional amount
Purchase contracts
U.S. Treasury Bonds, Dec. 2004, 20-year $ 71,000,000
Sale contracts
U.S. Treasury Notes, Sept. 2004, 5-year 5,600,000
U.S. Treasury Notes, Sept. 2004, 10-year 90,300,000
U.S. Treasury Notes, Dec. 2004, 5-year 56,800,000
U.S. Treasury Notes, Dec. 2004, 10-year 244,200,000
(r) At Aug. 31, 2004, the cost of securities for federal income tax purposes
was $2,879,208,482 and the aggregate gross unrealized appreciation and
depreciation based on that cost was:
Unrealized appreciation $ 45,886,038
Unrealized depreciation (14,950,052)
-----------
Net unrealized appreciation $ 30,935,986
------------
How to find information about the Fund's portfolio holdings
(i) The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission (Commission) for the first and third
quarters of each fiscal year on Form N-Q;
(ii) The Fund's Forms N-Q are available on the Commission's website at
http://www.sec.gov;
(iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC (information on the operations of the
Public Reference Room may be obtained by calling 1-800-SEC-0330); and
(iv) The Fund's complete schedule of portfolio holdings, as disclosed in its
annual and semiannual shareholder reports and in its filings on Form N-Q,
can be found at www.americanexpress.com/funds.
- --------------------------------------------------------------------------------
23 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Financial Statements
Statement of assets and liabilities
AXP Diversified Bond Fund
Aug. 31, 2004
Assets
Investments in securities, at value (Note 1)*
(identified cost $2,882,767,554) $2,910,144,468
Cash in bank on demand deposit 2,166,153
Expense reimbursement receivable from AEFC 472,107
Capital shares receivable 591,093
Dividends and accrued interest receivable 18,444,234
Receivable for investment securities sold 114,678,525
-----------
Total assets 3,046,496,580
-------------
Liabilities
Dividends payable to shareholders 1,638,915
Capital shares payable 474,974
Payable for investment securities purchased 146,425,054
Payable upon return of securities loaned (Note 5) 30,092,500
Accrued investment management services fee 37,766
Accrued distribution fee 30,898
Accrued service fee 555
Accrued transfer agency fee 8,834
Accrued administrative services fee 3,450
Other accrued expenses 258,845
Forward sale commitments, at value (proceeds receivable $82,030,917) (Note 1) 82,500,420
----------
Total liabilities 261,472,211
-----------
Net assets applicable to outstanding capital stock $2,785,024,369
==============
Represented by
Capital stock -- $.01 par value (Note 1) $ 5,713,203
Additional paid-in capital 2,893,139,173
Undistributed net investment income 6,413,116
Accumulated net realized gain (loss) (Note 9) (142,002,409)
Unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies (Note 6) 21,761,286
----------
Total -- representing net assets applicable to outstanding capital stock $2,785,024,369
==============
Net assets applicable to outstanding shares: Class A $1,932,496,967
Class B $ 628,262,697
Class C $ 20,877,765
Class I $ 9,932
Class Y $ 203,377,008
Net asset value per share of outstanding capital stock: Class A shares 396,460,333 $ 4.87
Class B shares 128,868,605 $ 4.88
Class C shares 4,277,175 $ 4.88
Class I shares 2,037 $ 4.88
Class Y shares 41,712,199 $ 4.88
---------- --------------
* Including securities on loan, at value (Note 5) $ 29,587,105
--------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
24 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Statement of operations
AXP Diversified Bond Fund
Year ended Aug. 31, 2004
Investment income
Income:
Dividends $ 12,077
Interest 141,197,223
Fee income from securities lending (Note 5) 318,608
-------
Total income 141,527,908
-----------
Expenses (Note 2):
Investment management services fee 15,409,504
Distribution fee
Class A 5,209,432
Class B 7,944,719
Class C 241,016
Transfer agency fee 4,829,880
Incremental transfer agency fee
Class A 259,949
Class B 174,395
Class C 5,699
Service fee -- Class Y 224,387
Administrative services fees and expenses 1,460,195
Compensation of board members 23,907
Custodian fees 340,348
Printing and postage 502,063
Registration fees 110,555
Audit fees 43,000
Other 76,975
------
Total expenses 36,856,024
Expenses waived/reimbursed by AEFC (Note 2) (472,107)
--------
36,383,917
Earnings credits on cash balances (Note 2) (48,841)
-------
Total net expenses 36,335,076
----------
Investment income (loss) -- net 105,192,832
-----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (Note 3) 8,204,035
Foreign currency transactions (141,246)
Futures contracts (13,804,387)
Options contracts written (Note 7) 1,120,125
---------
Net realized gain (loss) on investments (4,621,473)
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 68,359,517
----------
Net gain (loss) on investments and foreign currencies 63,738,044
----------
Net increase (decrease) in net assets resulting from operations $168,930,876
============
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
25 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Statements of changes in net assets
AXP Diversified Bond Fund
Year ended Aug. 31, 2004 2003
Operations and distributions
Investment income (loss) -- net $ 105,192,832 $ 148,096,536
Net realized gain (loss) on investments (4,621,473) 111,836,822
Net change in unrealized appreciation (depreciation) on investments
and on translation of assets and liabilities in foreign currencies 68,359,517 (82,489,907)
---------- -----------
Net increase (decrease) in net assets resulting from operations 168,930,876 177,443,451
----------- -----------
Distributions to shareholders from:
Net investment income
Class A (72,912,216) (98,126,653)
Class B (21,667,704) (34,728,824)
Class C (659,148) (854,382)
Class I (1,353) --
Class Y (8,189,423) (12,225,930)
Tax return of capital
Class A -- (2,476,941)
Class B -- (876,635)
Class C -- (21,567)
Class I -- --
Class Y -- (308,611)
------------ ------------
Total distributions (103,429,844) (149,619,543)
------------ ------------
Capital share transactions (Note 4)
Proceeds from sales
Class A shares (Note 2) 251,088,529 392,003,998
Class B shares 89,582,880 232,251,463
Class C shares 5,454,766 11,080,202
Class I shares 821,608 --
Class Y shares 71,322,514 150,904,209
Reinvestment of distributions at net asset value
Class A shares 56,831,525 77,130,545
Class B shares 18,955,456 30,927,117
Class C shares 580,863 767,401
Class I shares 1,139 --
Class Y shares 6,500,832 11,324,132
Payments for redemptions
Class A shares (699,205,028) (642,065,690)
Class B shares (Note 2) (397,699,256) (419,428,542)
Class C shares (Note 2) (12,180,164) (9,230,935)
Class I shares (814,281) --
Class Y shares (147,874,937) (193,312,689)
------------ ------------
Increase (decrease) in net assets from capital share transactions (756,633,554) (357,648,789)
------------ ------------
Total increase (decrease) in net assets (691,132,522) (329,824,881)
Net assets at beginning of year 3,476,156,891 3,805,981,772
------------- -------------
Net assets at end of year $2,785,024,369 $3,476,156,891
============== ==============
Undistributed net investment income $ 6,413,116 $ 3,631,514
-------------- --------------
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
26 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Notes to Financial Statements
AXP Diversified Bond Fund
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is a series of AXP Fixed Income Series, Inc. and is registered under
the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. AXP Fixed Income Series, Inc. has 10 billion
authorized shares of capital stock that can be allocated among the separate
series as designated by the board. The Fund invests primarily in bonds and other
debt securities including securities issued by the U.S. government, corporate
bonds and mortgage- and asset-backed securities.
The Fund offers Class A, Class B, Class C and Class Y shares.
o Class A shares are sold with a front-end sales charge.
o Class B shares may be subject to a contingent deferred sales charge (CDSC)
and automatically convert to Class A shares during the ninth calendar year of
ownership.
o Class C shares may be subject to a CDSC.
o Class Y shares have no sales charge and are offered only to qualifying
institutional investors.
Effective March 4, 2004, the Fund offers an additional class of shares, Class I,
exclusively to certain institutional investors. Class I shares have no sales
charge and are made available through a separate prospectus supplement provided
to investors eligible to purchase the shares. As of Aug. 31, 2004, American
Express Financial Corporation (AEFC) owned 100% of Class I shares.
All classes of shares have identical voting, dividend and liquidation rights.
The distribution fee, incremental transfer agency fee and service fee (class
specific expenses) differ among classes. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses on investments
are allocated to each class of shares based upon its relative net assets.
The Fund's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to accounting principles generally
accepted in the United States of America requires management to make estimates
(e.g., on assets, liabilities and contingent assets and liabilities) that could
differ from actual results.
Valuation of securities
All securities are valued at the close of each business day. Securities traded
on national securities exchanges or included in national market systems are
valued at the last quoted sales price. Debt securities are generally traded in
the over-the-counter market and are valued at a price that reflects fair value
as quoted by dealers in these securities or by an independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
- --------------------------------------------------------------------------------
27 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Option transactions
To produce incremental earnings, protect gains, and facilitate buying and
selling of securities for investments, the Fund may buy and write options traded
on any U.S. or foreign exchange or in the over-the-counter market where
completing the obligation depends upon the credit standing of the other party.
The Fund also may buy and sell put and call options and write covered call
options on portfolio securities as well as write cash-secured put options. The
risk in writing a call option is that the Fund gives up the opportunity for
profit if the market price of the security increases. The risk in writing a put
option is that the Fund may incur a loss if the market price of the security
decreases and the option is exercised. The risk in buying an option is that the
Fund pays a premium whether or not the option is exercised. The Fund also has
the additional risk of being unable to enter into a closing transaction if a
liquid secondary market does not exist.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Fund will realize a
gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Fund may buy and
sell financial futures contracts traded on any U.S. or foreign exchange. The
Fund also may buy and write put and call options on these futures contracts.
Risks of entering into futures contracts and related options include the
possibility of an illiquid market and that a change in the value of the contract
or option may not correlate with changes in the value of the underlying
securities.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities in an amount (initial margin) equal to a certain percentage
of the contract value. Subsequent payments (variation margin) are made or
received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund recognizes a realized gain or loss when the contract is closed
or expires.
Foreign currency translations and foreign currency contracts
Securities and other assets and liabilities denominated in foreign currencies
are translated daily into U.S. dollars. Foreign currency amounts related to the
purchase or sale of securities and income and expenses are translated at the
exchange rate on the transaction date. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected as a
component of such gains or losses. In the statement of operations, net realized
gains or losses from foreign currency transactions, if any, may arise from sales
of foreign currency, closed forward contracts, exchange gains or losses realized
between the trade date and settlement date on securities transactions, and other
translation gains or losses on dividends, interest income and foreign
withholding taxes.
- --------------------------------------------------------------------------------
28 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete its contract obligations.
Illiquid securities
As of Aug. 31, 2004, investments in securities included issues that are illiquid
which the Fund currently limits to 10% of net assets, at market value, at the
time of purchase. The aggregate value of such securities as of Aug. 31, 2004 was
$4,765,585 representing 0.17% of net assets. These securities are valued at fair
value according to methods selected in good faith by the board. According to
board guidelines, certain unregistered securities are determined to be liquid
and are not included within the 10% limitation specified above. Assets are
liquid if they can be sold or disposed of in the ordinary course of business
within seven days at approximately the value at which the asset is valued by the
Fund.
Securities purchased on a forward-commitment basis
Delivery and payment for securities that have been purchased by the Fund on a
forward-commitment basis, including when-issued securities and other
forward-commitments, can take place one month or more after the transaction
date. During this period, such securities are subject to market fluctuations,
and they may affect the Fund's net assets the same as owned securities. The Fund
designates cash or liquid securities at least equal to the amount of its
forward-commitments. As of Aug. 31, 2004, the Fund has entered into outstanding
when-issued securities of $34,731,648 and other forward-commitments of
$29,149,054.
The Fund also enters into transactions to sell purchase commitments to third
parties at current market values and concurrently acquires other purchase
commitments for similar securities at later dates. As an inducement for the Fund
to "roll over" its purchase commitments, the Fund receives negotiated amounts in
the form of reductions of the purchase price of the commitment.
Forward sale commitments
The Fund may enter into forward sale commitments to hedge its portfolio
positions or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of forward sale commitments are not received until the
contractual settlement date. During the time a forward sale commitment is
outstanding, equivalent deliverable securities, or an offsetting forward
purchase commitment deliverable on or before the sale commitment date, are used
to satisfy the commitment.
Unsettled forward sale commitments are valued at the current market value of the
underlying securities, generally according to the procedures described under
"Valuation of securities" above. The forward sale commitment is
"marked-to-market" daily and the change in market value is recorded by the Fund
as an unrealized gain or loss. If the forward sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Fund realizes a gain
or loss. If the Fund delivers securities under the commitment, the Fund realizes
a gain or a loss from the sale of the securities based upon the market price
established at the date the commitment was entered into. Forward sale
commitments outstanding at period end are listed in the "Notes to investments in
securities."
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29 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Guarantees and indemnifications
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, certain of the Fund's contracts with its
service providers contain general indemnification clauses. The Fund's maximum
exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has
no historical basis for predicting the likelihood of any such claims.
Federal taxes
The Fund's policy is to comply with all sections of the Internal Revenue Code
that apply to regulated investment companies and to distribute substantially all
of its taxable income to shareholders. No provision for income or excise taxes
is thus required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of the deferred losses on
certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by
$1,018,614 and accumulated net realized loss has been increased by $1,178,933
resulting in a net reclassification adjustment to increase paid-in capital by
$160,319.
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30 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
The tax character of distributions paid for the years indicated is as follows:
Year ended Aug. 31, 2004 2003
Class A
Distributions paid from:
Ordinary income $72,912,216 $98,126,653
Long-term capital gain -- --
Tax return of capital -- 2,476,941
Class B
Distributions paid from:
Ordinary income 21,667,704 34,728,824
Long-term capital gain -- --
Tax return of capital -- 876,635
Class C
Distributions paid from:
Ordinary income 659,148 854,382
Long-term capital gain -- --
Tax return of capital -- 21,567
Class I*
Distributions paid from:
Ordinary income 1,353 N/A
Long-term capital gain -- N/A
Tax return of capital -- N/A
Class Y
Distributions paid from:
Ordinary income 8,189,423 12,225,930
Long-term capital gain -- --
Tax return of capital -- 308,611
* Inception date was March 4, 2004.
As of Aug. 31, 2004, the components of distributable earnings on a tax basis
are as follows:
Undistributed ordinary income $ 2,720,960
Accumulated long-term gain (loss) $(134,156,528)
Unrealized appreciation (depreciation) $ 19,246,476
Dividends to shareholders
Dividends from net investment income, declared daily and payable monthly, when
available, are reinvested in additional shares of the Fund at net asset value or
payable in cash. Capital gains, when available, are distributed along with the
last income dividend of the calendar year.
Other
Security transactions are accounted for on the date securities are purchased or
sold. Dividend income is recognized on the ex-dividend date or upon receipt of
ex-dividend notification in the case of certain foreign securities. Interest
income, including amortization of premium, market discount and original issue
discount using the effective interest method, is accrued daily.
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31 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
2. EXPENSES AND SALES CHARGES
The Fund has agreements with AEFC to manage its portfolio and provide
administrative services. Under an Investment Management Services Agreement, AEFC
determines which securities will be purchased, held or sold. The management fee
is a percentage of the Fund's average daily net assets in reducing percentages
from 0.52% to 0.395% annually.
Under an Administrative Services Agreement, the Fund pays AEFC a fee for
administration and accounting services at a percentage of the Fund's average
daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor
portion of additional administrative service expenses paid by the Fund are
consultants' fees and fund office expenses. Under this agreement, the Fund also
pays taxes, audit and certain legal fees, registration fees for shares,
compensation of board members, corporate filing fees and any other expenses
properly payable by the Fund and approved by the board.
Under a Deferred Compensation Plan (the Plan), non-interested board members may
defer receipt of their compensation. Deferred amounts are treated as though
equivalent dollar amounts had been invested in shares of the Fund or other
American Express mutual funds. The Fund's liability for these amounts is
adjusted for market value changes and remains in the Fund until distributed in
accordance with the Plan.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $20.50
o Class B $21.50
o Class C $21.00
o Class Y $18.50
The incremental transfer agency fee is the amount charged to the specific
classes for the additional expense above the fee for Class Y.
Class I pays a transfer agency fee at an annual rate per shareholder account of
$1. This amount is included in the transfer agency fee on the statement of
operations.
In addition, AECSC is entitled to charge an annual closed account fee of $5 per
inactive account, charged on a pro rata basis from the date the account becomes
inactive until the date the account is purged from the transfer agent system
generally within one year. However, the closed account fee is currently not
effective.
The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution, the Fund pays a fee at an annual rate up to 0.25% of
the Fund's average daily net assets attributable to Class A shares and up to
1.00% for Class B and Class C shares.
Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares.
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32 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Sales charges received by the Distributor for distributing Fund shares were
$2,924,778 for Class A, $991,121 for Class B and $10,370 for Class C for the
year ended Aug. 31, 2004.
Under an agreement that began June 1, 2004, AEFC and its affiliates have agreed
to waive certain fees and expenses until Aug. 31, 2005. Under this agreement,
net expenses will not exceed 0.945% for Class A, 1.695% for Class B, 1.695% for
Class C, 0.735% for Class I and 0.775% for Class Y of the Fund's average daily
net assets. As a result of the agreement that began June 1, 2004, net expenses
for the year ended Aug. 31, 2004 were 0.98% for Class A, 1.73% for Class B,
1.73% for Class C and 0.81% for Class Y.
During the year ended Aug. 31, 2004, the Fund's custodian and transfer agency
fees were reduced by $48,841 as a result of earnings credits from overnight cash
balances.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $8,429,906,585 and $9,346,641,437, respectively, for the
year ended Aug. 31, 2004. Realized gains and losses are determined on an
identified cost basis.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of capital stock for the years indicated are as follows:
Year ended Aug. 31, 2004
Class A Class B Class C Class I* Class Y
Sold 51,888,177 18,469,701 1,122,760 166,209 14,733,853
Issued for reinvested distributions 11,728,875 3,911,848 119,675 231 1,341,478
Redeemed (144,542,248) (82,296,004) (2,511,111) (164,403) (30,501,584)
------------ ----------- ---------- -------- -----------
Net increase (decrease) (80,925,196) (59,914,455) (1,268,676) 2,037 (14,426,253)
----------- ----------- ---------- ----- -----------
* Inception date was March 4, 2004.
Year ended Aug. 31, 2003
Class A Class B Class C Class I Class Y
Sold 80,898,241 48,207,053 2,295,059 N/A 31,349,284
Issued for reinvested distributions 16,049,376 6,438,951 159,500 N/A 2,357,634
Redeemed (133,258,985) (86,570,359) (1,914,872) N/A (40,187,210)
------------ ----------- ---------- ----- -----------
Net increase (decrease) (36,311,368) (31,924,355) 539,687 N/A (6,480,292)
----------- ----------- ------- ----- ----------
5. LENDING OF PORTFOLIO SECURITIES
As of Aug. 31, 2004, securities valued at $29,587,105 were on loan to brokers.
For collateral, the Fund received $30,092,500 in cash. Cash collateral received
is invested in short-term securities, which are included in the short-term
section of the "Investments in securities." Income from securities lending
amounted to $318,608 for the year ended Aug. 31, 2004. The risks to the Fund of
securities lending are that the borrower may not provide additional collateral
when required or return the securities when due.
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33 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
6. INTEREST RATE FUTURES CONTRACTS
As of Aug. 31, 2004, investments in securities included securities valued at
$3,758,003 that were pledged as collateral to cover initial margin deposits on
710 open purchase contracts and 3,969 open sale contracts. The notional market
value of the open purchase contracts as of Aug. 31, 2004 was $79,031,875 with a
net unrealized gain of $1,351,057. The notional market value of the open sale
contracts as of Aug. 31, 2004 was $445,835,910 with a net unrealized loss of
$6,495,466. See "Summary of significant accounting policies" and "Notes to
investments in securities."
7. OPTIONS CONTRACTS WRITTEN
Contracts and premiums associated with options contracts written are as follows:
Year ended Aug. 31, 2004
Puts Calls
Contracts Premiums Contracts Premiums
Balance Aug. 31, 2003 395 $ 362,563 395 $ 757,562
Opened -- -- -- --
Exercised -- -- (395) (757,562)
Expired (395) (362,563) -- --
---- ---------- ---- ---------
Balance Aug. 31, 2004 -- $ -- -- $ --
---- ---------- ---- ---------
See "Summary of significant accounting policies."
8. BANK BORROWINGS
The Fund has a revolving credit agreement with a syndicate of banks headed by
Deutsche Bank, whereby the Fund is permitted to have bank borrowings for
temporary or emergency purposes to fund shareholder redemptions. The Fund must
maintain asset coverage for borrowings of at least 300%. The agreement, which
enables the Fund to participate with other American Express mutual funds,
permits borrowings up to $500 million, collectively. Interest is charged to each
Fund based on its borrowings at a rate equal to either the LIBOR plus 0.50%, the
IBOR plus 0.50% or the higher of the Federal Funds Rate plus 0.25% and the Prime
Lending Rate. Borrowings are payable within 60 days after such loan is executed.
The Fund also pays a commitment fee equal to its pro rata share of the amount of
the credit facility at a rate of 0.09% per annum. The Fund had no borrowings
outstanding during the year ended Aug. 31, 2004. Effective Sept. 21, 2004, the
Fund will enter into a new revolving credit agreement with a syndicate of banks
headed by The Bank of New York, whereby the Fund will be permitted to have bank
borrowings for temporary or emergency purposes, including funding shareholder
redemptions.
9. CAPITAL LOSS CARRY-OVER
For federal income tax purposes, the Fund has a capital loss carry-over of
$134,156,528 as of Aug. 31, 2004, that if not offset by capital gains will
expire as follows:
2009 2010 2013
$100,641,177 $26,118,914 $7,396,437
It is unlikely the board will authorize a distribution of any net realized
capital gains until the available capital loss carry-over has been offset or
expires.
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34 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
10. FINANCIAL HIGHLIGHTS
The tables below show certain important financial information for evaluating the
Fund's results.
Class A
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2004 2003 2002 2001 2000
Net asset value, beginning of period $4.78 $4.75 $4.86 $4.70 $4.82
Income from investment operations:
Net investment income (loss) .18 .20 .25 .31 .33
Net gains (losses) (both realized and unrealized) .08 .03 (.10) .17 (.12)
Total from investment operations .26 .23 .15 .48 .21
Less distributions:
Dividends from net investment income (.17) (.20) (.25) (.32) (.33)
Tax return of capital -- -- (.01) -- --
Total distributions (.17) (.20) (.26) (.32) (.33)
Net asset value, end of period $4.87 $4.78 $4.75 $4.86 $4.70
Ratios/supplemental data
Net assets, end of period (in millions) $1,933 $2,280 $2,438 $2,390 $2,229
Ratio of expenses to average daily net assets(b) .98%(d) .97% .95% .94% .93%
Ratio of net investment income (loss) to average daily net assets 3.55% 4.16% 5.17% 6.51% 7.04%
Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64%
Total return(c) 5.54% 4.91% 3.13% 10.48% 4.67%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class A would have been 1.00% for the year
ended Aug. 31, 2004.
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35 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class B
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2004 2003 2002 2001 2000
Net asset value, beginning of period $4.78 $4.75 $4.86 $4.70 $4.82
Income from investment operations:
Net investment income (loss) .14 .16 .21 .27 .30
Net gains (losses) (both realized and unrealized) .09 .03 (.10) .17 (.13)
Total from investment operations .23 .19 .11 .44 .17
Less distributions:
Dividends from net investment income (.13) (.16) (.21) (.28) (.29)
Tax return of capital -- -- (.01) -- --
Total distributions (.13) (.16) (.22) (.28) (.29)
Net asset value, end of period $4.88 $4.78 $4.75 $4.86 $4.70
Ratios/supplemental data
Net assets, end of period (in millions) $628 $902 $1,047 $954 $867
Ratio of expenses to average daily net assets(b) 1.73%(d) 1.73% 1.71% 1.70% 1.69%
Ratio of net investment income (loss) to average daily net assets 2.78% 3.40% 4.40% 5.74% 6.28%
Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64%
Total return(c) 4.95% 4.12% 2.35% 9.65% 3.88%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class B would have been 1.75% for the year
ended Aug. 31, 2004.
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36 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class C
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2004 2003 2002 2001 2000(b)
Net asset value, beginning of period $4.78 $4.75 $4.86 $4.71 $4.64
Income from investment operations:
Net investment income (loss) .14 .16 .21 .27 .04
Net gains (losses) (both realized and unrealized) .09 .03 (.10) .16 .07
Total from investment operations .23 .19 .11 .43 .11
Less distributions:
Dividends from net investment income (.13) (.16) (.21) (.28) (.04)
Tax return of capital -- -- (.01) -- --
Total distributions (.13) (.16) (.22) (.28) (.04)
Net asset value, end of period $4.88 $4.78 $4.75 $4.86 $4.71
Ratios/supplemental data
Net assets, end of period (in millions) $21 $27 $24 $10 $1
Ratio of expenses to average daily net assets(c) 1.73%(g) 1.74% 1.72% 1.70% 1.69%(d)
Ratio of net investment income (loss) to average daily net assets 2.79% 3.34% 4.33% 5.62% 6.80%(d)
Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64%
Total return(e) 4.95% 4.11% 2.35% 9.43% 2.58%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was June 26, 2000.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
(g) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class C would have been 1.75% for the year
ended Aug. 31, 2004.
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37 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class I
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2004(b)
Net asset value, beginning of period $4.91
Income from investment operations:
Net investment income (loss) .11
Net gains (losses) (both realized and unrealized) (.04)
Total from investment operations .07
Less distributions:
Dividends from net investment income (.10)
Net asset value, end of period $4.88
Ratios/supplemental data
Net assets, end of period (in millions) $--
Ratio of expenses to average daily net assets(c) .59%(d)
Ratio of net investment income (loss) to average daily net assets 3.13%(d)
Portfolio turnover rate (excluding short-term securities) 279%
Total return(e) 1.43%(f)
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Inception date was March 4, 2004.
(c) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(d) Adjusted to an annual basis.
(e) Total return does not reflect payment of a sales charge.
(f) Not annualized.
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38 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class Y
Per share income and capital changes(a)
Fiscal period ended Aug. 31, 2004 2003 2002 2001 2000
Net asset value, beginning of period $4.78 $4.75 $4.86 $4.70 $4.82
Income from investment operations:
Net investment income (loss) .18 .21 .25 .32 .34
Net gains (losses) (both realized and unrealized) .10 .03 (.10) .17 (.12)
Total from investment operations .28 .24 .15 .49 .22
Less distributions:
Dividends from net investment income (.18) (.21) (.25) (.33) (.34)
Tax return of capital -- -- (.01) -- --
Total distributions (.18) (.21) (.26) (.33) (.34)
Net asset value, end of period $4.88 $4.78 $4.75 $4.86 $4.70
Ratios/supplemental data
Net assets, end of period (in millions) $203 $268 $297 $533 $385
Ratio of expenses to average daily net assets(b) .81%(d) .81% .78% .78% .77%
Ratio of net investment income (loss) to average daily net assets 3.70% 4.34% 5.30% 6.66% 7.20%
Portfolio turnover rate (excluding short-term securities) 279% 256% 169% 115% 64%
Total return(c) 5.92% 5.08% 3.29% 10.65% 4.84%
(a) For a share outstanding throughout the period. Rounded to the nearest cent.
(b) Expense ratio is based on total expenses of the Fund before reduction of
earnings credits on cash balances.
(c) Total return does not reflect payment of a sales charge.
(d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so,
the annual ratio of expenses for Class Y would have been 0.83% for the year
ended Aug. 31, 2004.
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39 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Report of Independent
Registered Public Accounting Firm
THE BOARD AND SHAREHOLDERS
AXP FIXED INCOME SERIES, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments in securities, of AXP Diversified Bond Fund (a
series of AXP Fixed Income Series, Inc.) as of August 31, 2004, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period ended August 31, 2004,
and the financial highlights for each of the years in the five-year period ended
August 31, 2004. These financial statements and the financial highlights are the
responsibility of fund management. Our responsibility is to express an opinion
on these financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of August 31, 2004, by correspondence with the custodian and
brokers or by other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of AXP
Diversified Bond Fund as of August 31, 2004, and the results of its operations,
changes in its net assets and the financial highlights for each of the periods
stated in the first paragraph above, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
October 20, 2004
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40 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Federal Income Tax Information
(UNAUDITED)
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its fiscal
year. The dividends listed below are reported to you on Form 1099-DIV, Dividends
and Distributions. Shareholders should consult a tax advisor on how to report
distributions for state and local tax purposes.
AXP Diversified Bond Fund
Fiscal year ended Aug. 31, 2004
Class A
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.10%
Dividends Received Deduction for corporations 0.10%
Payable date Per share
Sept. 22, 2003 $0.01205
Oct. 23, 2003 0.01250
Nov. 21, 2003 0.01250
Dec. 22, 2003 0.01651
Jan. 26, 2004 0.01400
Feb. 25, 2004 0.01400
March 26, 2004 0.01500
April 26, 2004 0.01500
May 26, 2004 0.01500
June 25, 2004 0.01500
July 26, 2004 0.01400
Aug. 25, 2004 0.01497
Total distributions $0.17053
Class B
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.10%
Dividends Received Deduction for corporations 0.10%
Payable date Per share
Sept. 22, 2003 $0.00894
Oct. 23, 2003 0.00937
Nov. 21, 2003 0.00957
Dec. 22, 2003 0.01336
Jan. 26, 2004 0.01044
Feb. 25, 2004 0.01105
March 26, 2004 0.01192
April 26, 2004 0.01185
May 26, 2004 0.01202
June 25, 2004 0.01203
July 26, 2004 0.01086
Aug. 25, 2004 0.01194
Total distributions $0.13335
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41 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Class C
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.10%
Dividends Received Deduction for corporations 0.10%
Payable date Per share
Sept. 22, 2003 $0.00890
Oct. 23, 2003 0.00934
Nov. 21, 2003 0.00954
Dec. 22, 2003 0.01334
Jan. 26, 2004 0.01041
Feb. 25, 2004 0.01124
March 26, 2004 0.01189
April 26, 2004 0.01185
May 26, 2004 0.01202
June 25, 2004 0.01202
July 26, 2004 0.01089
Aug. 25, 2004 0.01194
Total distributions $0.13338
Class I
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.10%
Dividends Received Deduction for corporations 0.10%
Payable date Per share
March 26, 2004 0.01923
April 26, 2004 0.01674
May 26, 2004 0.01666
June 25, 2004 0.01667
July 26, 2004 0.01573
Aug. 25, 2004 0.01663
Total distributions $0.10166
Class Y
Income distributions -- taxable as dividend income:
Qualified Dividend Income for individuals 0.10%
Dividends Received Deduction for corporations 0.10%
Payable date Per share
Sept. 22, 2003 $0.01271
Oct. 23, 2003 0.01317
Nov. 21, 2003 0.01313
Dec. 22, 2003 0.01718
Jan. 26, 2004 0.01476
Feb. 25, 2004 0.01462
March 26, 2004 0.01566
April 26, 2004 0.01569
May 26, 2004 0.01563
June 25, 2004 0.01564
July 26, 2004 0.01466
Aug. 25, 2004 0.01562
Total distributions $0.17847
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42 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Fund Expenses Example
(UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments; and (2) ongoing
costs, including management fees; distribution and service (12b-1) fees; and
other Fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the six months ended Aug. 31, 2004.
Actual Expenses
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading titled "Expenses paid during the period" to
estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads). Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds. In addition, if these transactional costs were included,
your costs would have been higher.
- --------------------------------------------------------------------------------
43 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Beginning Ending Expenses paid
account value account value during the period
March 1, 2004 Aug. 31, 2004 March 1, 2004-Aug. 31, 2004
Class A
Actual(e) $1,000 $1,008.60 $4.95(a),(g)
Hypothetical (5% return before expenses) $1,000 $1,020.48 $4.98(a),(g)
Class B
Actual(e) $1,000 $1,006.80 $8.82(b),(g)
Hypothetical (5% return before expenses) $1,000 $1,016.62 $8.86(b),(g)
Class C
Actual(e) $1,000 $1,006.80 $8.87(c),(g)
Hypothetical (5% return before expenses) $1,000 $1,016.57 $8.92(c),(g)
Class I(f)
Actual N/A N/A N/A
Hypothetical (5% return before expenses) N/A N/A N/A
Class Y
Actual(e) $1,000 $1,011.50 $4.14(d),(g)
Hypothetical (5% return before expenses) $1,000 $1,021.29 $4.16(d),(g)
(a) Expenses are equal to the Fund's Class A annualized expense ratio of 0.97%,
multiplied by the average account value over the period, multiplied by
186/366 (to reflect the one-half year period).
(b) Expenses are equal to the Fund's Class B annualized expense ratio of 1.73%,
multiplied by the average account value over the period, multiplied by
186/366 (to reflect the one-half year period).
(c) Expenses are equal to the Fund's Class C annualized expense ratio of 1.74%,
multiplied by the average account value over the period, multiplied by
186/366 (to reflect the one-half year period).
(d) Expenses are equal to the Fund's Class Y annualized expense ratio of 0.81%,
multiplied by the average account value over the period, multiplied by
186/366 (to reflect the one-half year period).
(e) Based on the actual return for the six months ended Aug. 31, 2004: 0.86%
for Class A, 0.68% for Class B, 0.68% for Class C and 1.15% for Class Y.
(f) The values and expenses paid are not presented because Class I does not
have a full six months of history. The inception date for Class I was March
4, 2004.
(g) AEFC and its affiliates have contractually agreed to waive certain fees and
to absorb certain expenses until Aug. 31, 2005, which will not exceed the
net expenses of 0.95% for Class A; 1.70% for Class B; 1.70% for Class C and
0.78% for Class Y. If this expense cap had been in place for the entire
six-month period ended Aug. 31, 2004, the actual expenses paid would have
been: $4.82% for Class A, $8.64% for Class B, $8.64 for Class C and $3.96
for Class Y; the hypothetical expenses paid would have been: $4.85 for
Class A, $8.69 for Class B, $8.69 for Class C and $3.98 for Class Y.
- --------------------------------------------------------------------------------
44 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Board Members and Officers
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. Each member oversees 14
Master Trust portfolios and 89 American Express mutual funds. Board members
serve until the next regular shareholders' meeting or until he or she reaches
the mandatory retirement age established by the board.
Independent Board Members
Name, Position held Principal occupation during past five Other directorships
address, with Fund and years
age length of
service
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Arne H. Carlson Board member Chair, Board Services Corporation
901 S. Marquette Ave. since 1999 (provides administrative services to
Minneapolis, MN 55402 boards). Former Governor of Minnesota
Age 69
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Fluor Scottish Power PLC, Vulcan
901 S. Marquette Ave. since 2002 Corporation (engineering and Materials Company, Inc.
Minneapolis, MN 55402 construction) since 1998 (construction materials/chemicals)
Age 66
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Livio D. DeSimone Board member Retired Chair of the Board and Chief Cargill, Incorporated (commodity
30 Seventh Street East since 2001 Executive Officer, Minnesota Mining and merchants and processors), General
Suite 3050 Manufacturing (3M) Mills, Inc. (consumer foods),
St. Paul, MN 55101-4901 Vulcan Materials Company
Age 70 (construction materials/
chemicals), Milliken & Company
(textiles and chemicals), and Nexia
Biotechnologies, Inc.
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Anne P. Jones Board member Attorney and Consultant
901 S. Marquette Ave. since 1985
Minneapolis, MN 55402
Age 69
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Stephen R. Lewis, Jr.* Board member Retired President and Professor of Valmont Industries, Inc.
901 S. Marquette Ave. since 2002 Economics, Carleton College (manufactures irrigation systems)
Minneapolis, MN 55402
Age 65
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
* Interested person of AXP Partners International Aggressive Growth Fund by
reason of being a security holder of FleetBoston Financial Corporation,
parent company of Columbia Wanger Asset Management, L.P., one of the fund's
subadvisers.
- --------------------------------------------------------------------------------
45 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
Independent Board Members (continued)
Name, Position held Principal occupation during past five Other directorships
address, with Fund and years
age length of
service
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Alan K. Simpson Board member Former three-term United States Senator
1201 Sunshine Ave. since 1997 for Wyoming
Cody, WY 82414
Age 72
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Alison Taunton-Rigby Board member Founder and Chief Executive Officer,
901 S. Marquette Ave. since 2002 RiboNovix, Inc. since 2004; President,
Minneapolis, MN 55402 Forester Biotech since 2000; prior to
Age 60 that, President and CEO, Aquila
Biopharmaceuticals, Inc.
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Board Member Affiliated with AEFC**
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of
service
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
William F. Truscott Board member Senior Vice President - Chief Investment
53600 AXP Financial Center since 2001, Officer of AEFC since 2001. Former Chief
Minneapolis, MN 55474 Vice President Investment Officer and Managing Director,
Age 43 since 2002 Zurich Scudder Investments
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
** Interested person by reason of being an officer, director and/or employee
of AEFC.
- --------------------------------------------------------------------------------
46 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. The officers serve at the
pleasure of the board. In addition to Mr. Truscott, who is vice president, the
Fund's other officers are:
Other Officers
Name, address, age Position held Principal occupation during past five Other directorships
with Fund and years
length of
service
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Jeffrey P. Fox Treasurer Vice President - Investment Accounting,
50005 AXP Financial Center since 2002 AEFC, since 2002; Vice President -
Minneapolis, MN 55474 Finance, American Express Company,
Age 49 2000-2002; Vice President - Corporate
Controller, AEFC, 1996-2000
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Paula R. Meyer President Senior Vice President and General Manager
596 AXP Financial Center since 2002 - Mutual Funds, AEFC, since 2002; Vice
Minneapolis, MN 55474 President and Managing Director -
Age 50 American Express Funds, AEFC, 2000-2002;
Vice President, AEFC, 1998-2000
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
Leslie L. Ogg Vice President, President of Board Services Corporation
901 S. Marquette Ave. General
Minneapolis, MN 55402 Counsel, and
Age 65 Secretary
since 1978
- -------------------------------- ----------------- ------------------------------------------- -------------------------------------
The SAI has additional information about the Fund's directors and is available,
without charge, upon request by calling (800) 862-7919.
Proxy Voting
The policy of the Board is to vote all proxies of the companies in which the
Fund holds investments. The procedures are stated in the Statement of Additional
Information (SAI). You may obtain a copy of the SAI without charge by calling
(800) 862-7919; by looking at the website americanexpress.com/funds; or by
searching the website of the Securities and Exchange Commission
http://www.sec.gov. You may view the Fund's voting record for all portfolio
companies whose shareholders meetings were completed the previous quarter on
americanexpress.com/funds or obtain a copy by calling the Fund's administrator,
Board Services Corporation, collect at (612) 330-9283. In addition, information
regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 is available at http://www.sec.gov.
- --------------------------------------------------------------------------------
47 -- AXP DIVERSIFIED BOND FUND -- 2004 ANNUAL REPORT
(logo)
AMERICAN
EXPRESS
(R)
American Express Funds
70100 AXP Financial Center
Minneapolis, MN 55474
This report must be accompanied or preceded by the Fund's current prospectus.
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and
is not a broker-dealer.
Item 2. (a) The Registrant has adopted a code of ethics that applies to the
Registrant's principal executive officer and principal financial
officer. A copy of the code of ethics is filed as an exhibit to this
form N-CSR.
(b) During the period covered by this report, there were not any
amendments to the provisions of the code of ethics adopted in 2(a)
above.
(c) During the period covered by this report, there were not any
implicit or explicit waivers to the provisions of the code of ethics
adopted in 2(a).
Item 3. The Registrant's board of directors has determined that independent
directors Livio D. DeSimone and Anne P. Jones, each qualify as audit
committee financial experts.
Item 4. Principal Accountant Fees and Services
Fund - Related Fees*
(a) Audit Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for
professional services rendered for the audits of the annual financial
statements for AXP Fixed Income Series, Inc. were as follows:
2004 - $43,383; 2003 - $43,122
(b) Audit - Related Fees. The fees paid for the years ended Aug. 31, to
KPMG LLP for additional professional services rendered in connection
with the registrant's security count pursuant to Rule 17f-2 for AXP
Fixed Income Series, Inc. were as follows:
2004 - $639; 2003 - $746
(c) Tax Fees. The fees paid for the years ended Aug. 31, to KPMG LLP for
tax compliance related services for AXP Fixed Income Series, Inc. were
as follows:
2004 - $1,930; 2003 - $2,575
(d) All Other Fees. The fees paid for the years ended Aug. 31, to KPMG LLP
for additional professional services rendered in connection to proxy
filing for AXP Fixed Income Series, Inc. were as follows:
2004 - None; 2003 - $47
(e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley
pre-approval requirements, all services to be performed by KPMG LLP for
the registrant and to the registrant's investment adviser and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
must be pre-approved by the audit committee.
(e) (2) 100% of the services performed for items (b) through (d) above
during 2004 and 2003 were pre-approved by the audit committee with the
exception of the 2003 tax fees.
(f) Not applicable.
(g) Non-Audit Fees. The fees paid for the years ended Aug. 31, by the
registrant for non-audit services to KPMG LLP were as follows:
2004 - None; 2003 - None
The fees paid for the years ended Aug. 31, to KPMG LLP by the
registrant's investment adviser, and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the registrant were as follows:
2004 - $126,900; 2003 - $184,000
(h) For the fees disclosed in item (g) above, 100% and 97% of the fees for
services performed during 2004 and 2003, respectively, were
pre-approved by the audit committee. The exception was a 2003 tax
research request by the adviser on defaulted securities for $5,000. The
amounts not pre-approved are compatible with maintaining KPMG LLP's
independence.
* 2003 represents bills paid 9/1/02 - 8/31/03
2004 represents bills paid 9/1/03 - 8/31/04
Item 5. Audit Committee of Listed Registrants. Not applicable.
Item 6. The complete schedule of investments is included in Item 1 of this
Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies. Not applicable.
Item 8. Purchase of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers. Not applicable.
Item 9. Submission of matters to a vote of security holders. Not applicable.
Item 10. Controls and Procedures.
(a) Based upon their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing
date of this Form N-CSR, the registrant's Principal Financial
Officer and Principal Executive Officer have concluded that those
disclosure controls and procedures provide reasonable assurance
that the material information required to be disclosed by the
registrant on this report is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over
financial reporting.
Item 11. Exhibits.
(a)(1) Code of ethics as applies to the Registrant's principal
executive officer and principal financial officer, as required to be
disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH.
(a)(2) Separate certification for the Registrant's principal
executive officer and principal financial officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a)
under the Investment Company Act of 1940, are attached as
EX.99.CERT.
(a)(3) Not applicable.
(b) A certification by the Registrant's principal executive officer
and principal financial officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment
Company Act of 1940, is attached as EX.99.906 CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) AXP Fixed Income Series, Inc.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date November 2, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Paula R. Meyer
------------------
Paula R. Meyer
President and Principal Executive Officer
Date November 2, 2004
By /s/ Jeffrey P. Fox
------------------
Jeffrey P. Fox
Treasurer and Principal Financial Officer
Date November 2, 2004