-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, iWu4ZJ8//dS5fWXaW2SCqUqygWs/53ZRrk2cZUlgOPh4dJN3lDfmWO5PTGDdHxh+ 9J6Ajrq4KqKsYqpBjNHLNA== 0000820027-95-000441.txt : 19950905 0000820027-95-000441.hdr.sgml : 19950905 ACCESSION NUMBER: 0000820027-95-000441 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950831 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS FEDERAL INCOME FUND INC CENTRAL INDEX KEY: 0000764802 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04260 FILM NUMBER: 95569429 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 N-30D 1 IDS FEDERAL INCOME FUND, INC. PAGE 1 IDS Federal Income Fund 1995 annual report (prospectus enclosed) [graphic of the Capitol dome] The goals of IDS Federal Income Fund, Inc. are to provide shareholders with a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. (This annual report includes a prospectus that describes in detail the fund's objective, investment policies, risks, sales charges, fees and other matters of interest. Please read the prospectus carefully before you invest or send money.) Distributed by American Express Financial Advisors Inc. PAGE 2 [graphic of the Capitol dome] A comfortable compromise Balancing risk and reward is something all investors must consider. In the fixed-income area, intermediate-term securities issued by the federal government and its agencies offer a good middle ground. These securities, which form the core of Federal Income Fund, normally provide greater investment stability than long-term bonds, while still offering a yield higher than that of guaranteed investments such as bank CDs. For a conservative investor, that can be a rewarding combination. PAGE 3 Contents [graphic of two nested, open booklets] The purpose of this annual report is to tell investors how the fund performed. The prospectus, which is bound into the middle of this annual report, describes the fund in detail. 1995 annual report From the president 4 From the portfolio manager 4 Making the most of your fund 6 Long-term performance 7 Independent auditors' report 8 Financial statements 9 Notes to financial statements 12 Investments in securities 20 IDS mutual funds 24 Federal income tax information 27 1995 prospectus The fund in brief Goals 3p Types of fund investments and their risks 3p Manager and distributor 3p Portfolio manager 3p Alternative sales arrangements 3p Sales charge and fund expenses 4p Performance Financial highlights 6p Total returns 7p Yield 8p Key terms 9p Investment policies and risks Facts about investments and their risks 10p Alternative investment option 13p Valuing assets 13p How to buy, exchange or sell shares Alternative sales arrangements 14p How to buy shares 16p How to exchange shares 19p How to sell shares 19p Reductions and waivers of the sales charge 23p PAGE 4 Special shareholder services Services 27p Quick telephone reference 27p Distributions and taxes Dividend and capital gain distributions 27p Reinvestments 29p Taxes 30p How the fund is organized Shares 33p Voting rights 33p Shareholder meetings 33p Directors and officers 33p Investment manager and transfer agent 35p Distributor 36p About American Express Financial Corporation General information 37p Appendix Descriptions of derivative instruments 38p (This annual report is not part of the prospectus.) PAGE 5 To our shareholders [photo of William Pearce] William R. Pearce President of the fund [photo of James Snyder] James W. Snyder Portfolio manager From the president As I indicated in the fund's previous reports, new agreements between the fund and American Express Financial Corporation were approved by shareholders in November 1994. The new agreements became effective when the fund began offering multiple classes of shares on March 20, 1995. The advantage of offering more than a single class of shares is that investors may choose how they wish to pay sales charges. These charges compensate your American Express financial advisor (formerly called your IDS planner), who is committed to providing you with outstanding services. Adding new classes of mutual fund shares does make the presentation of financial information in this report more complex. However, we will continue our effort to make the reports easier to read and understand. Meanwhile, your American Express financial advisor is available to answer your questions. [signature] William R. Pearce From the portfolio manager IDS Federal Income Fund capitalized on a recovering bond market to post a solid total return -- including regular dividends and capital gains -- for the past fiscal year (July 1994 through June 1995). The period was characterized by distinct contrast. Much of the first half of the fiscal year was dominated by higher interest rates prompted by the Federal Reserve's desire to temper economic growth and thereby curb inflation. Because rising rates depress bond prices, fixed-income funds such as this one suffered eroding net asset values. Defensive strategies Still, we were able to temper the decline by: reducing the average maturity level of the portfolio; increasing our holdings of short- term Treasury notes (one- to two-year maturities) and direct-agency securities, which are bonds issued by government agencies such as GNMA (Ginnie Mae) and FNMA (Fannie Mae); and also reducing our positions in derivative instruments to provide us with the flexibility to buy when opportunities arose. PAGE 6 (The fund uses small amounts of derivatives, which have proved to be beneficial to the fund by providing an attractive total return with minimal fluctuations in net asset value. As of this writing, less than 4% of the portfolio was invested in interest-only and principal-only instruments. Approximately 4% was invested in derivatives known as inverse floaters. We plan to continue to use these instruments only when we feel we can benefit the fund without taking undue risk. Because of this cautious approach, which centers on using derivatives to hedge risk, this fund was not greatly affected by the derivative problems that drove down the values of similar types of funds last year.) New year, new environment By the time 1995 rolled around, the investment environment had changed markedly. With the Federal Reserve taking a hands-off approach, interest rates were falling and the bond market was enjoying a strong rally. We were able to take full advantage of the advance thanks to our longer-than-average portfolio maturity. (The longer the maturity, the greater the gain from an interest-rate decline. We lengthened our maturity structure in late 1994 and early 1995.) Beyond that, we shifted our emphasis among derivatives, reducing our exposure to interest-only securities while adding to our holdings of inverse floaters. Lastly, we lessened our exposure to mortgage-backed securities, which were relatively weak performers, in favor of intermediate- and short-term Treasurys. All of these strategies benefitted fund performance. Our outlook for the new fiscal year remains positive, as we expect interest rates to decline further. Given that forecast, we are holding to a longer-than-average maturity, maintaining a relatively high level of Treasury securities and increasing our exposure to intermediate-term bonds. If our expectations prove accurate, we think we can look forward to another productive period in the months ahead. [signature] James W. Snyder Class A 12-month performance (All figures per share) Net asset value (NAV) June 30, 1995 $4.97 June 30, 1994 $4.85 Increase $0.12 Distributions July 1, 1994 - June 30, 1995 From income $0.31 From capital gains $ -- Total distributions $0.31 Total return** +9.3%*** PAGE 7 Class B March 20, 1995 - June 30, 1995 (All figures per share) Net asset value (NAV) June 30, 1995 $4.96 March 20, 1995* $4.87 Increase $0.09 Distributions March 20, 1995* - June 30, 1995 From income $0.11 From capital gains $ -- Total distributions $0.11 Total return** +4.1%*** Class Y March 20, 1995 - June 30, 1995 (All figures per share) Net asset value (NAV) June 30, 1995 $4.97 March 20, 1995* $4.87 Increase $0.10 Distributions March 20, 1995* - June 30, 1995 From income $0.12 From capital gains $ -- Total distributions $0.12 Total return** +4.5%*** *Inception date. **The prospectus discusses the effects of sales charge, if any, on the various classes. ***The total return is a hypothetical investment in the fund with all distributions reinvested. PAGE 8 Making the most of your fund Average annual total return (as of June 30, 1995) Class A 1 year 5 years Since inception* +3.79% +6.31% +7.58% *Aug. 19, 1985 Total returns for Class A, Class B and Class Y for the period from March 20, 1995 to June 30, 1995 were -0.7%, -0.9% and +4.5%, respectively. March 20, 1995 was the inception date for Class B and Class Y. Total return for Class A is shown for comparative purposes. The performance of Class B and Class Y will vary from the performance of Class A based on differences in sales charges and fees. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Figures for Class A reflect the deduction of the maximum 5% sales charge. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. Build your assets systematically To keep your assets growing steadily, one of the best ways to invest in the fund is by dollar-cost averaging -- a time-tested strategy that can make market fluctuations work for you. To dollar-cost average, simply invest a fixed amount of money regularly. You'll automatically buy more shares when the fund's share price is low, fewer shares when it is high. This does not ensure a profit or avoid a loss if the market declines. But, if you can continue to invest regularly through changing market conditions, it can be an effective way to accumulate shares to meet your long-term goals. How dollar-cost averaging works Month Amount Per-share Number of shares purchased invested market price Jan. $100 $20 5.00 XXXXX Feb. 100 18 5.56 XXXXXx Mar 100 17 5.88 XXXXXx Apr 100 15 6.67 XXXXXXx May 100 16 6.25 XXXXXXx June 100 18 5.56 XXXXXx July 100 17 5.88 XXXXXx Aug 100 19 5.26 XXXXXx Sept 100 21 4.76 XXXXx Oct 100 20 5.00 XXXXX [3-part caption in margin:] By investing an equal number of dollars each month... you automatically buy more shares when the per share market price is low [arrow pointing to "Apr" line in table above] and fewer shares when the per share market price is high. [arrow pointing to "Sept" line in table above] You have paid an average price of only $17.91 per share over the 10 months, while the average market price actually was $18.10. PAGE 9 Your fund's long-term performance Three ways to benefit from a mutual fund: o your shares increase in value when the fund's investments do well o you receive capital gains when the gains on investments sold by the fund exceed losses o you receive income when the fund's dividends, interest and short-term gains exceed its expenses. All three make up your total return. And you potentially can increase your investment if, like most investors, you reinvest your dividends and capital gain distributions to buy additional shares of the fund or another fund. Class A* How your $10,000 has grown in IDS Federal Income Fund Average annual total return (as of June 30, 1995) 1 year 5 years Since 8/19/85 +3.79% +6.31% +7.58% $20,000 [graph consisting of three lines plotting the growth of a $10,000 investment in Lehman Aggregate Bond Index, Lehman Treasury Index and Federal Income Fund, with each investment $9,500 generally out-performing those which follow it in the list above.] '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 * The graph above is for Class A only. Class B and Class Y are not shown. Total returns for Class A, Class B and Class Y for the period form march 20, 1995 to June 30, 1995 were -0.7%, -0.9%, +4.5% respectively. March 20, 1995 was the inception date for Class B and Class Y. Total return for Class A is shown for comparative purposes. The performance of Class B and Class Y will vary from the performance of Class A based on differences in sales charges and fees. [the following three paragraphs appear in the margin next to the graph:] Assumes: -Holding period from 9/1/85 to 6/30/95. -Returns do not reflect taxes payable on distributions. -Also see "Performance" in the fund's current prospectus. -Reinvestment of all income and capital gain distributions for the fund, with a value of $11,178. Lehman Aggregate Bond Index is made up of a representative list of government and corporate bonds as well as asset-backed securities and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of the bonds held in the fund. Lehman Treasury Bond Index is made up of a representative list of government bonds that includes all publicly issued obligations of the U.S. Treasury. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of the debt securities held in the fund. Your investment and return values fluctuate so that your shares, when redeemed, may be worth more or less than the original cost. Average annual total return figures reflect the deduction of the maximum 5% sales charge. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. On the chart above you can see how the fund's total return compared to two widely cited performance indexes, Lehman Treasury Index and Lehman Aggregate Bond Index. In comparing Federal Income Fund to the two indexes, you should take into account the fact that the fund's performance reflects the maximum sales charge of 5%, while such charges are not reflected in the performance of the indexes. If you were actually to buy either individual stocks or growth mutual funds, any sales charges that you pay would reduce your total return as well. PAGE 10 Independent auditors' report The board of directors and shareholders IDS Federal Income Fund, Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of IDS Federal Income Fund, Inc. as of June 30, 1995, and the related statement of operations for the year then ended and the statements of changes in net assets for each of the years in the two-year period ended June 30, 1995, and the financial highlights for each of the years in the nine-year period ended June 30, 1995, and for the period from August 19, 1985 (commencement of operations), to June 30, 1986. 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 generally accepted auditing standards. 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. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased and sold but not received or delivered and securities on loan, we request confirmations from brokers, and where replies are not received, we carry out 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 referred to above present fairly, in all material respects, the financial position of IDS Federal Income Fund, Inc. at June 30, 1995, and the results of its operations for the year then ended and the changes in its net assets for each of the years in the two-year period ended June 30, 1995, and the financial highlights for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota August 4, 1995 PAGE 11
Financial statements Statement of assets and liabilities IDS Federal Income Fund, Inc. June 30, 1995 ________________________________________________________________________________________________ Assets ________________________________________________________________________________________________ Investments in securities, at value (Note 1) (identified cost $1,281,797,084) $1,312,311,439 Accrued interest receivable 11,254,923 Receivable for investment securities sold 154,067,961 U.S. government securities held as collateral (Note 4) 31,368,435 ________________________________________________________________________________________________ Total assets 1,509,002,758 ________________________________________________________________________________________________ Liabilities ________________________________________________________________________________________________ Disbursements in excess of cash on demand deposit 5,744,516 Dividends payable to shareholders 858,890 Payable for investment securities purchased 107,580,812 Payable upon return of securities loaned (Note 4) 31,368,435 Accrued investment management services fee 436,773 Accrued distribution fee 133,354 Accrued service fee 162,695 Accrued transfer agency fee 102,258 Accrued administrative services fee 41,429 Other accrued expenses 188,506 Open option contracts written, at value (premium received $3,100,628)(Note 6) 7,628,448 ________________________________________________________________________________________________ Total liabilities 154,246,116 ________________________________________________________________________________________________ Net assets applicable to outstanding capital stock $1,354,756,642 ________________________________________________________________________________________________ Represented by ________________________________________________________________________________________________ Capital stock -- authorized 10,000,000,000 shares of $.01 par value; $ 2,727,705 Additional paid-in capital 1,386,164,844 Undistributed net investment income 668,460 Accumulated net realized loss (Notes 1 and 9) (57,644,807) Unrealized appreciation (Note 5) 22,840,440 ________________________________________________________________________________________________ Total -- representing net assets applicable to outstanding capital stock $1,354,756,642 ________________________________________________________________________________________________ Net assets applicable to outstanding shares: Class A $ 977,243,350 Class B $ 292,031,307 Class Y $ 85,481,985 Net asset value per share of outstanding capital stock: Class A shares 196,735,958 $ 4.97 Class B shares 58,824,204 $ 4.96 Class Y shares 17,210,263 $ 4.97 ________________________________________________________________________________________________ See accompanying notes to financial statements. PAGE 12 Financial statements Statement of operations IDS Federal Income Fund, Inc. Year ended June 30, 1995 ________________________________________________________________________________________________ Investment income ________________________________________________________________________________________________ Income: Interest $ 80,861,516 ________________________________________________________________________________________________ Expenses (Note 2): Investment management services fee 5,683,320 Distribution fee Class A 340,515 Class B 533,614 Transfer agency fee 1,322,478 Incremental transfer agency fee -- Class B 6,890 Service fee Class A 471,523 Class B 123,631 Administrative services fee 177,341 Compensation of directors 24,265 Compensation of officers 12,393 Custodian fees 91,165 Postage 204,881 Registration fees 169,016 Reports to shareholders 28,463 Audit fees 35,000 Administrative 11,125 Other 18,588 ________________________________________________________________________________________________ Total expenses 9,254,208 ________________________________________________________________________________________________ Investment income -- net 71,607,308 ________________________________________________________________________________________________ Realized and unrealized gain (loss) -- net ________________________________________________________________________________________________ Net realized loss on security transactions (4,572,250) Net realized loss on closed interest rate futures contracts (22,114,909) Net realized gain on closed, exercised or expired option contracts written (Note 6) 3,020,852 ________________________________________________________________________________________________ Net realized loss on investments (23,666,307) Net change in unrealized appreciation or depreciation 52,857,972 ________________________________________________________________________________________________ Net gain on investments 29,191,665 ________________________________________________________________________________________________ Net increase in net assets resulting from operations $ 100,798,973 ________________________________________________________________________________________________ See accompanying notes to financial statements. /TABLE PAGE 13
Financial statements Statements of changes in net assets IDS Federal Income Fund, Inc. Year ended June 30, ________________________________________________________________________________________________ Operations and distributions 1995 1994 ________________________________________________________________________________________________ Investment income -- net $ 71,607,308 $ 57,385,576 Net realized loss on investments (23,666,307) (24,752,055) Net change in unrealized appreciation or depreciation 52,857,972 (38,009,969) ________________________________________________________________________________________________ Net increase (decrease) in net assets resulting from operations 100,798,973 (5,376,448) ________________________________________________________________________________________________ Distributions to shareholders from: Net investment income Class A (64,225,838) (57,139,239) Class B (4,334,929) -- Class Y (1,938,661) -- Net realized gain Class A -- (28,095,757) ________________________________________________________________________________________________ Total distributions (70,499,428) (85,234,996) ________________________________________________________________________________________________ Capital share transactions (Note 7) ________________________________________________________________________________________________ Proceeds from sales Class A shares (Note 2) 641,569,225 671,874,642 Class B shares 138,024,110 -- Class Y shares 89,538,242 -- Fund merger (Note 8) Class A shares 3,521,950 -- Class B shares 213,190,532 -- Reinvestment of distributions at net asset value Class A shares 54,545,686 73,532,781 Class B shares 4,222,182 -- Class Y shares 1,657,604 -- Payments for redemptions Class A shares (771,657,740) (654,662,328) Class B shares (Note 2) (68,176,074) -- Class Y shares (7,300,426) -- ________________________________________________________________________________________________ Increase in net assets from capital share transactions 299,135,291 90,745,095 ________________________________________________________________________________________________ Total increase in net assets 329,434,836 133,651 Net assets at beginning of year 1,025,321,806 1,025,188,155 ________________________________________________________________________________________________ Net assets at end of year (including undistributed net investment income of $668,460 and $(439,420) $1,354,756,642 $1,025,321,806 ________________________________________________________________________________________________ See accompanying notes to financial statements.
PAGE 14 IDS Federal Income Fund, Inc. Notes to financial statements ___________________________________________________________________ 1. Summary of significant accounting policies The fund is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The fund offers Class A, Class B and Class Y shares. Class A shares are sold with a front-end sales charge. Class B shares, which the fund began offering on March 20, 1995, may be subject to a contingent deferred sales charge. Class B shares automatically convert to Class A shares after eight years. Class Y shares, which the fund also began offering on March 20, 1995, have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend, liquidation and other rights, and the same terms and conditions, except that the level of distribution fee, 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. Significant accounting policies followed by the fund are summarized below: 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; securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board of directors. Determination of fair value involves, among other things, reference to market indexes, matrixes and data from independent brokers. 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. Options transactions In order to produce incremental earnings, protect gains, and facilitate buying and selling of securities for investment purposes, the fund may buy and sell put and call options and write covered call options on portfolio securities and may write cash-secured put options on U.S. government securities. The fund also may purchase mortgage-backed security (MBS) put spread options and write covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. The risk in writing a call option is that the fund gives up the opportunity of profit if the market price of the security PAGE 15 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 not being able to enter into a closing transaction if a liquid secondary market does not exist. The fund also may write over-the-counter options where the completion of the obligation is dependent upon the credit standing of the other party. 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 upon expiration or closing of the option transaction. 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 In order to gain exposure to or protect itself from changes in the market, the fund may buy and sell interest rate futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be 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. Federal taxes Since the fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to shareholders, no provision for income or excise taxes is required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of the deferral of 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. PAGE 16 On the statement of assets and liabilities, as a result of permanent book-to-tax differences, accumulated net realized loss has been decreased by $1,294 resulting in a reclassification adjustment to decrease paid in capital by $1,294. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, 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. Interest income, including level-yield amortization of premium and discount is accrued daily. ___________________________________________________________________ 2. Expenses and sales charges Under terms of a prior agreement that ended March 19, 1995, the fund paid American Express Financial Corporation (AEFC) a fee for managing its investments, recordkeeping and other specified services. The fee was a percentage of the fund's average daily net assets consisting of a group asset charge in reducing percentages from 0.46% to 0.32% annually on the combined net assets of all non-money market funds in the IDS MUTUAL FUND GROUP and an individual annual asset charge of 0.13% of average daily net assets. Also under the terms of a prior agreement, the fund paid AEFC a distribution fee at an annual rate of $6 per shareholder account and a transfer agency fee at an annual rate of $15.50 per shareholder account. The transfer agency fee was reduced by earnings on monies pending shareholder redemptions. Effective March 20, 1995, when the fund began offering multiple classes of shares, the fund entered into agreements with AEFC for managing its portfolio, providing administrative services and serving as transfer agent as follows: Under its 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 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. Under a separate Transfer Agency Agreement, AEFC maintains shareholder accounts and records. The fund pays AEFC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 PAGE 17 Also effective March 20, 1995, the fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder servicing- related services as follows: Under the Distribution Agreement, the fund pays a distribution fee at an annual rate of 0.75% of the fund's average daily net assets attributable to Class B shares for distribution-related services. Under a Shareholder Service Agreement, the fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the fund's average daily net assets attributable to Class A and Class B shares. AEFC will assume and pay any expenses (except taxes and brokerage commissions) that exceed the most restrictive applicable state expense limitation. Sales charges deducted by American Express Financial Advisors Inc. for distributing fund shares were $22,590,635 for Class A and $86,206 for Class B for the year ended June 30, 1995. The fund also pays custodian fees to American Express Trust Company, an affiliate of AEFC. The fund has a retirement plan for its independent directors. Upon retirement, directors receive monthly payments equal to one-half of the retainer fee for as many months as they served as directors up to 120 months. There are no death benefits. The plan is not funded but the fund recognizes the cost of payments during the time the directors serve on the board. The retirement plan expense amounted to $10,673 for the year ended June 30, 1995. ___________________________________________________________________ 3. Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,661,670,903 (including $164,420,370 that was acquired in the fund merger as described in Note 8) and $2,427,083,375, respectively, for the year ended June 30, 1995. Realized gains and losses are determined on an identified cost basis. ___________________________________________________________________ 4. Lending of portfolio securities At June 30, 1995, securities valued at $29,440,000 were on loan to brokers. For collateral, the fund received U.S. government securities valued at $31,368,435. Income from securities lending amounted to $66,317 for the year ended June 30, 1995. 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. ___________________________________________________________________ 5. Interest rate futures contracts At June 30, 1995, investments in securities included securities valued at $33,083,900 that were pledged as collateral to cover PAGE 18 initial margin deposit on 979 open sale contracts. The market value of the open contracts at June 30, 1995, was $111,147,094 with a net unrealized loss of $3,146,094. ___________________________________________________________________ 6. Options contracts written The number of contracts and premium amounts associated with options contracts written is as follows:
Year ended June 30, 1995 __________________________________________________________________________ Puts Calls MBS Calls __________________________________________________________________________ Contracts Premium Contracts Premium Notional Premium __________________________________________________________________________________________________ Balance June 30, 1994 200 $ 89,226 -- $ -- $ 31,000,000 $ 145,313 Opened 15,284 11,140,779 20,168 14,241,862 67,500,000 305,859 Closed (9,945) (8,282,626) (14,591) (8,870,700) (98,500,000) (451,172) Exercised (1,207) (482,963) (2,251) (2,351,400) -- -- Expired (3,007) (1,265,959) (2,310) (1,117,591) -- -- __________________________________________________________________________________________________ Balance June 30, 1995 1,325 $ 1,198,457 1,016 $ 1,902,171 $ -- $ -- __________________________________________________________________________________________________
___________________________________________________________________ 7. Capital share transactions Transactions in shares of capital stock for the periods indicated are as follows:
Period ended June 30, 1995 Year ended 06/30/94 Class A Class B* Class Y* Class A _____________________________________________________________________________ Sold 132,313,514 28,069,540 18,364,074 132,557,506 Fund Merger 723,045 43,767,303 -- -- Issued for reinvested distributions 11,239,784 856,748 336,591 14,452,759 Redeemed (159,116,207) (13,869,387) (1,490,402) (128,743,048) _____________________________________________________________________________ Net increase (decrease) (14,839,864) 58,824,204 17,210,263 18,267,217 _____________________________________________________________________________ *Commencement of operations was March 20, 1995.
___________________________________________________________________ 8. Fund merger On March 17, 1995, IDS Federal Income Fund acquired the assets and assumed the identified liabilities of IDS Strategy - Short-Term Income Fund. PAGE 19 The aggregate net assets of IDS Federal Income Fund immediately before the aquisition was $1,015,587,336. The merger was accomplished by a tax-free exchange of 219,863,326 shares of IDS Strategy - Short-Term Income Fund valued at $216,712,482. In exchange for the IDS Strategy - Short-Term Income Fund shares and assets, IDS Federal Income Fund issued the following number of shares: Class A 723,045 Class B 43,767,303 IDS Strategy - Short-Term Income Fund's net assets at that date were as follows, which include the following amounts of capital stock, unrealized depreciation, and accumulated net realized loss that was combined with IDS Federal Income Fund. Total net Capital stock Unrealized Accumulated assets depreciation net realized loss ___________________________________________________________________ Class A 3,521,950 3,580,826 (31,076) (27,800) Class B 213,190,532 216,754,432 (1,881,087) (1,682,813) ___________________________________________________________________ 9. Capital loss carryover For federal income tax purposes, the fund had a capital loss carryover of $47,903,664 at June 30, 1995, that if not offset by subsequent capital gains, will expire in 2002 and 2003. The carryover includes $1,992,072 acquired in connection with the IDS Strategy - Short-Term Income Fund merger (Note 8). There is no limitation on the ability to utilize these losses, however, if not offset by subsequent capital gains, they will expire in 2002. It is unlikely the board of directors will authorize a distribution of any net realized gains until the available capital loss carryover has been offset or expired. ___________________________________________________________________ 10. Financial highlights "Financial highlights" showing per share data and selected information is presented on page 6 of the prospectus. PAGE 20
Investments in securities IDS Federal Income Fund, Inc. (Percentages represent value of June 30, 1995 investments compared to net assets) _______________________________________________________________________________________________________________________ Bonds (95.8%) _______________________________________________________________________________________________________________________ Issuer Coupon Maturity Principal Value(a) rate year amount _______________________________________________________________________________________________________________________ U.S. government obligations (28.6%) U.S. Treasury 4.00 % 1996 $ 25,000,000 $ 24,763,500 5.25 1998 60,160,000 59,054,259 5.625 1997 19,000,000 18,945,090 5.75 1997 20,000,000 19,955,000 6.25 2000 16,200,000 16,368,966 6.875 2000 22,900,000 23,704,248 7.25 2016 4,000,000 4,249,520 7.50 2005-24 23,490,000 (h) 25,841,054 7.875 1996 5,000,000 5,063,550 8.125 2019 16,000,000 18,642,400 Zero Coupon 6.50 1999 25,500,000 (b) 20,334,975 Resolution Funding Corp 8.125 2019 8,000,000 9,218,560 Zero Coupon 6.06 2001 20,863,000 (b) 14,969,620 Zero Coupon 6.70 1999 20,000,000 (b) 15,991,600 Zero Coupon 7.17 2018 38,250,000 (b) 7,702,785 Zero Coupon 7.18 2009 16,000,000 (b) 6,147,680 Zero Coupon 7.34 2007 83,120,000 (b) 37,784,690 Zero Coupon 7.87 2018 7,500,000 (b) 1,480,950 Zero Coupon 7.87 2019 16,500,000 (b) 3,201,825 Zero Coupon 7.94 2012 89,150,000 (b) 28,231,130 Zero Coupon 8.04 2012 8,400,000 (b) 2,557,632 Zero Coupon 8.09 2012 74,200,000 (b) 23,097,718 ______________ Total 387,306,752 _______________________________________________________________________________________________________________________ Mortgage-backed securities (67.1%) Federal Home Loan Bank Note (0.8%) 7.32 1997 10,490,000 10,778,370 _______________________________________________________________________________________________________________________ Federal Home Loan Mortgage Corporation (18.7%) 6.50 2003-10 32,455,733 32,016,004 7.50 2024 9,712,194 9,757,744 8.00 2023-24 53,712,902 54,803,811 8.50 2025 14,639,534 15,124,542 10.00 2009 17,723,852 18,704,158 11.50 2024 6,088,961 6,761,182 12.00 2016 5,584,386 6,270,205 Collateralized Mtge Obligation 7.00 2021 10,000,000 9,937,500 7.612 2023 24,078,648 19,503,705 8.25 2023 27,516,793 27,898,175 8.50 2022 9,150,000 9,808,251 8.60 2008 6,331,388 5,698,249 Interest Only 10.00 2020 778,845 (c) 131,220 Inverse Floater 4.74 2008 6,373,780 (d) 5,002,015 5.525 2024 10,642,081 (d) 7,738,123 5.601 2023 3,956,343 (d) 2,729,877 7.758 2022 5,798,581 (d) 4,731,280 12.962 2021 9,375,769 (d) 9,513,476 13.895 2023 10,514,507 (d) 6,676,712 ______________ Total 252,806,229 _______________________________________________________________________________________________________________________ Federal National Mortgage Association (43.1%) 6.00 2023 14,252,370 13,392,810 6.50 2010-24 172,255,830 (e,f) 167,914,798 7.00 2023 22,928,418 22,577,384 8.00 2021 6,128,681 6,253,154 8.50 2007-23 159,382,476 (e,f) 164,736,584 9.00 2023-24 21,245,624 22,168,534 12.00 2016 6,572,389 7,490,617 PAGE 21 Collateralized Mtge Obligation 9.515 2023 9,266,931 7,332,459 3.00 2019 11,250,000 9,221,963 4.50 2010 8,204,208 6,860,769 4.70 2022 12,732,716 12,565,026 5.50 2008 13,306,859 12,665,735 6.00 2008 10,166,690 9,901,136 6.50 2017 3,554,593 3,544,001 6.367 2024 6,376,908 5,340,660 7.00 2012 7,658,672 7,678,814 8.50 2021 12,350,000 13,007,020 11.20 2021 11,661,558 11,851,058 Interest Only 8.00 2024 5,913,635 (c) 4,357,796 9.50 2018-22 9,727,932 (c) 6,706,345 10.00 2018-23 37,076,017 (c) 35,454,386 10.50 2021 6,240,492 (c) 5,470,438 Inverse Floater .971 2021 8,972,902 (d) 5,899,683 5.107 2023 2,282,734 (d) 1,793,373 5.476 2023 4,728,370 (d) 3,447,277 5.736 2023 2,144,513 (d) 1,590,960 6.877 2023 3,456,299 (d) 2,361,084 8.156 2022 6,800,000 (d) 6,532,216 8.82 2022 5,000,000 (d) 4,050,000 14.00 2023 1,855,845 (d) 1,482,356 Principal Only 12.568 2021 1,196,215 (g) 915,476 ______________ Total 584,563,912 _______________________________________________________________________________________________________________________ Government National Mortgage Association (4.5%) 6.00 2025 29,400,002 29,454,882 9.00 2022 10,238,270 10,766,155 11.00 2010-19 18,268,967 20,319,223 ______________ Total 60,540,260 _______________________________________________________________________________________________________________________ Other mortgage-backed securities (--%) Daiwa Securities Collateralized Mtge Obligation Inverse Floater 12.00 2009 161,697 (d) 161,801 _______________________________________________________________________________________________________________________ Financial services (0.1%) Beneficial 9.35 1995 1,900,000 1,902,318 _______________________________________________________________________________________________________________________ Total bonds (Cost: $1,267,551,600) $ 1,298,059,642 _______________________________________________________________________________________________________________________
Short-term securities (1.0%) __________________________________________________________________________________ Issuer Annualized Amount Value(a) yield on payable date of at purchase maturity __________________________________________________________________________________ U.S. government agency (0.3%) Federal Home Loan Mtge Corp Disc Note 07-17-95 5.91% $ 4,400,000 $ 4,388,502 __________________________________________________________________________________ Commercial paper (0.7%) Commerzbank US Finance 11-20-95 6.39 10,100,000 9,863,295 __________________________________________________________________________________ Total short-term securities (Cost: $14,245,484) $ 14,251,797 __________________________________________________________________________________ Total investments in securities (Cost: $1,281,797,084)(i) $1,312,311,439 __________________________________________________________________________________
PAGE 22 Notes to investments in securities ___________________________________________________________________ (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (c) 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. (d) Inverse floaters represent securities that pay interest at a rate that increases (decreases) in the same magnitude as, or in a multiple of, a decline (increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate disclosed is the rate in effect on June 30, 1995. (e) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 5 to the financial statements): Type of security Notional amount ________________________________________________________________ Sale contracts U.S. Treasury Bonds Sept. 95 $97,900,000 ________________________________________________________________ (f) At June 30, 1995, securities valued at $36,499,060 were held to cover open call options written as follows:
Issuer Number of Exercise Expiration Value(a) contracts price date _____________________________________________________________________________________ U.S. Treasury Bonds Sept. 95 576 $104 Aug. 1995 $5,498,997 U.S. Treasury Bonds Sept. 95 240 114 Aug. 1995 371,249 U.S. Treasury Bonds Sept. 95 200 115 July 1995 118,750
At June 30, 1995, cash or short-term securities were designated to cover open put options written as follows:
Issuer Number of Exercise Expiration Value(a) contracts price date _____________________________________________________________________________________ U.S. Treasury Bonds Sept. 95 900 $112 Aug. 1995 $1,012,500 U.S. Treasury Bonds Sept. 95 225 113 July 1995 214,452 U.S. Treasury Bonds Sept. 95 200 115 July 1995 412,500
(g) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed PAGE 23 represents current yield based upon the current cost basis and estimated timing of future cash flows. (h) Security is partially or fully on loan. See Note 4 to the financial statements. (i) At June 30, 1995, the cost of securities for federal income tax purposes was $1,281,725,449 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 45,534,851 Unrealized depreciation (14,948,861) ____________________________________________ Net unrealized appreciation $(30,585,990) ____________________________________________ PAGE 24 IDS mutual funds Cash equivalent investments These money market funds have three main goals: conservation of capital, constant liquidity and the highest possible current income consistent with these objectives. Very limited risk. IDS Cash Management Fund Invests in such money market securities as high quality commercial paper, bankers' acceptances, certificates of deposits (CDs) and other bank securities. (icon of) piggy bank IDS Tax-Free Money Fund Invests primarily in short-term bonds and notes issued by state and local governments to seek high current income exempt from federal income taxes. (icon of) shield with piggy bank enclosed Income investments The funds in this group invest their assets primarily in corporate bonds or government securities to seek interest income. Secondary objective is capital growth. Risk varies by bond quality. IDS Global Bond Fund Invests primarily in debt securities of U.S. and foreign issuers to seek high total return through income and growth of capital. (icon of) globe IDS Extra Income Fund Invests mainly in long-term, high-yielding corporate fixed-income securities in the lower rated, higher risk bond categories to seek high current income. Secondary objective is capital growth. (icon of) cornucopia IDS Bond Fund Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk bond categories, or the equivalent, and in government bonds. (icon of) greek column PAGE 25 IDS Selective Fund Invests in high-quality corporate bonds and other highly rated debt instruments including government securities and short-term investments. Seeks current income and preservation of capital. (icon of) skyline IDS Federal Income Fund Invests primarily in securities issued or guaranteed as to the timely payment of principal and interest by the U.S. government, its agencies and instrumentalities. Seeks a high level of current income and safety of principal consistent with its type of investments. (icon of) federal building Tax-exempt income investments These funds provide tax-free income by investing in municipal bonds. The income is generally free from federal income tax. Risk varies by bond quality. IDS High Yield Tax-Exempt Fund Invests primarily in medium- and lower-quality municipal bonds and notes. Lower-quality securities generally involve greater risk of principal and income. (icon of) shield with basket of apples enclosed IDS State Tax-Exempt Funds (CA, MA, MI, MN, NY, OH) Invests primarily in high- and medium-grade municipal securities to provide income to residents of each respective state that is exempt from federal, state and local income taxes. (New York is the only state that is exempt at the local level.) (icon of) shield with U.S. enclosed IDS Tax-Exempt Bond Fund Invests mainly in bonds and notes of state or local government units, with at least 75% in the four highest rated, lowest risk bond categories. (icon of) shield with Greek column IDS Insured Tax-Exempt Fund Invests primarily in municipal securities that are insured as to the timely payment of principal and interest. The insurance feature minimizes credit risk of the fund but does not guarantee the market value of the fund's shares. (icon of) shield with eagle head PAGE 26 Growth and income investments These funds focus on securities of medium to large, well- established companies that offer long-term growth of capital and reasonable income from dividends and interest. Moderate risk. IDS International Fund Invests primarily in common stocks of foreign companies that offer potential for superior growth. The fund may invest up to 20% of its assets in the U.S. market. (icon of) three flags IDS Managed Retirement Fund Invests in a combination of common stocks, fixed-income investments and money market securities to seek a maximum total return through a combination of growth of capital and current income. (icon of) bird in a nest IDS Equity Select Fund Invests primarily in a combination of moderate growth stocks, higher-yielding equities and bonds. Seeks growth of capital and income. (icon of) three apple trees IDS Blue Chip Advantage Fund Invests in selected stocks from a major market index. Securities purchased are those recommended by our research analysts as the best from each industry represented on the index. Offers potential for long-term growth as well as dividend income. (icon of) ribbon IDS Stock Fund Invests in common stock of companies representing many sectors of the economy. Seeks current income and growth of capital. (icon of) building with columns IDS Equity Value Fund Invests primarily in undervalued common stocks that offer potential for growth of capital and income. (icon of) three growing flowers PAGE 27 IDS Utilities Income Fund Invests primarily in the stocks of public utility companies to seek high current income and growth of income and capital with reduced volatility. (icon of) electrical cord IDS Diversified Equity Income Fund Invests primarily in high-yielding common stocks to seek high current income and, secondarily, to benefit from the growth potential offered by stock investments. (icon of) four puzzle pieces IDS Mutual Invests in a balance between common stocks and senior securities (preferred stocks and bonds). Seeks a balance of growth of capital and current income. (icon of) scale of justice Growth investments Funds in this group seek capital growth, primarily from common stocks. They are high risk mutual funds with a potential for high reward. IDS Discovery Fund Invests in small- and medium-size, growth-oriented companies emphasizing technological innovation and productivity enhancement. Buys and holds larger growth-oriented stocks. (icon of) ship IDS Strategy Aggressive Fund Invests primarily in common stocks of companies that are selected for their potential for above-average growth. Above-average means that their growth potential is better, in the opinion of the portfolio's investment manager, than the Standard & Poor's Corporation (S&P) 500 Stock Index. (icon of) chess piece IDS Growth Fund Invests primarily in companies that have above-average potential for long-term growth as a result of new management, marketing opportunities or technological superiority. (icon of) flower PAGE 28 IDS Global Growth Fund Invests in stocks of companies throughout the world that are positioned to meet market needs in a changing world economy. These companies offer above-average potential for long-term growth. (icon of) world IDS New Dimensions Fund Invests primarily in companies with significant growth potential due to superiority in technology, marketing or management. The fund frequently changes its industry mix. (icon of) dimension IDS Progressive Fund Invests primarily in undervalued common stocks. The fund holds stocks for the long term with the goal of capital growth. (icon of) shooting star Specialty growth investment This fund aggressively seeks capital growth as a hedge against inflation. IDS Precious Metals Fund Invests primarily in the securities of foreign or domestic companies that explore for, mine and process or distribute gold and other precious metals. This is the most aggressive and most speculative IDS mutual fund. (icon of) cart of precious gems For more complete information about any of these funds, including charges and expenses, you can obtain a prospectus by contacting your financial advisor or writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534. Read it carefully before you invest or send money. PAGE 29 Federal income tax information IDS Federal Income Fund, Inc. ___________________________________________________________________ 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. Some of the dividends listed below were reported to you on Form 1099-DIV, Dividends and Distributions, last January. Dividends paid to you since the end of last year will be reported to you on a tax statement sent next January. Shareholders should consult a tax advisor on how to report distributions for state and local purposes. IDS Federal Income Fund, Inc. Fiscal year ended June 30, 1995 Class A Income distributions -- taxable as dividend income, none qualifying for deductions by corporations. Payable date Per share July 27, 1994 $0.02050 Aug. 29, 1994 0.02410 Sept. 28, 1994 0.02490 Oct. 27, 1994 0.02260 Nov. 29, 1994 0.02667 Dec. 29, 1994 0.02579 Jan. 26, 1995 0.02356 Feb. 24, 1995 0.02487 March 29, 1995 0.03050 April 27, 1995 0.02997 May 26, 1995 0.02847 June 27, 1995 0.02875 Total distributions $0.31068 Class B Income distributions -- taxable as dividend income, none qualifying for deductions by corporations. March 29, 1995 0.02960 April 27, 1995 0.02699 May 26, 1995 0.02545 June 27, 1995 0.02541 Total distributions $0.10745 PAGE 30 Class Y Income distributions -- taxable as dividend income, none qualifying for deductions by corporations. March 29, 1995 0.03071 April 27, 1995 0.03060 May 26, 1995 0.02909 June 27, 1995 0.02947 Total distributions $0.11987 PAGE 31 Quick telephone reference American Express Telephone Transaction Service Redemptions and exchanges, dividend payments or reinvestments and automatic payment arrangements National/Minnesota: 800-437-3133 Mpls./St. Paul area: 671-3800 American Express Shareholder Service Fund performance, objectives and account inquiries 612-671-3733 TTY Service For the hearing impaired 800-846-4852 American Express Infoline Automated account information (TouchToneR phones only), including current fund prices and performance, account values and recent account transactions National/Minnesota: 800-272-4445 Mpls./St. Paul area: 671-1630 Your IDS financial advisor: IDS Federal Income Fund IDS Tower 10 Minneapolis, MN 55440-0010 PAGE 32 STATEMENT OF DIFFERENCES Difference Description 1) The layout is different 1) Some of the layout in the throughout the annual report. annual report to shareholders is in two columns. 2) Headings. 2) The headings in the annual report and prospectus are placed in blue strip at the top of the page. 3) There are pictures, icons 3) Each picture, icon and and graphs throughout the graph is described in annual report and prospectus. parentheses. 4) Footnotes for charts and 4) The footnotes for each graphs are described at chart or graph are typed the left margin. below the description of the chart or graph. -----END PRIVACY-ENHANCED MESSAGE-----