-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VzUTr+1vov0gXSjAgHpdJamjEIeUvk/IUs8Qu8p6oIIZ7sM2jsOvJZcvrcoHGz9b 4acuuUzZg66wj1spXuhdAA== 0000820027-96-000447.txt : 19960806 0000820027-96-000447.hdr.sgml : 19960806 ACCESSION NUMBER: 0000820027-96-000447 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960805 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: 96603790 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 1996 ANNUAL REPORT IDS Federal Income Fund (prospectus enclosed) (graphic of an eagle head enclosed in a shield) 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.) AMERICAN EXPRESS Financial Advisors Distributed by American Express Financial Advisors Inc. PAGE 2 (graphic of an eagle head enclosed in a shield) 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 insured 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. 1996 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 23 IDS mutual funds 28 Federal income tax information 31 1996 prospectus The Fund in brief 3p Goals 3p Investment policies and risks 3p Structure of the Fund 4p Manager and distributor 4p Portfolio manager 4p Alternative purchase arrangements 4p Sales charge and Fund expenses 5p Performance 7p Financial highlights 7p Total returns 9p Yield 11p Investment policies and risks 12p Facts about investments and their risks 12p Valuing Fund shares 16p How to purchase, exchange or redeem shares 17p Alternative purchase arrangements 17p How to purchase shares 19p How to exchange shares 22p How to redeem shares 22p Reductions and waivers of the sales charge 27p Special shareholder services 32p Services 32p Quick telephone reference 32p Distributions and taxes 33p Dividend and capital gain distributions 33p Reinvestments 34p Taxes 34p How to determine the correct TIN 36p How the Fund is organized 37p Shares 37p Voting rights 37p Shareholder meetings 37p Special considerations regarding master/feeder structure 38p Board members and officers 39p Investment manager 41p Administrator and Transfer Agent 41p Distributor 42p About American Express Financial Corporation 44p General information 44p Appendix 45p Descriptions of derivative instruments 45p (This annual report is not part of the prospectus.) PAGE 4 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 If you're an experienced investor, you know that 1995 was an unusually strong year for the U.S. financial markets. Perhaps just as important, you also know that history shows that bull markets don't last forever. Through they're often unpredictable, declines - whether they're brief or long-lasting, moderate or substantial - are always a possibility. That fact reinforces the need for investors to review periodically their long-term goals and assess whether their investment program remains on track to achieving them. Your quarterly investment statements are one part of that monitoring process. The other is a meeting with your American Express financial advisor. That becomes even more important if there's a major change in your financial situation or in the financial markets. [signature] William R. Pearce From the portfolio manager During the past fiscal year, the bond market followed an up-and- down course, rallying strongly through last December, then retreating quickly early in 1996. IDS Federal Income Fund weathered the volatile environment relatively well, generating a total return of 5% on Class A shares (net asset change plus interest income) for shareholders over the July 1995 through May 1996 period. The bond market's remarkable advance, which actually began last in 1994, was fueled by the favorable forces of moderate economic growth and a surprisingly low rate of inflation. Adding further support to the market in 1995 were two reductions of short-term interest rates by the Federal Reserve Board and renewed hope for an agreement to balance the federal budget. The ultimate result of these developments was an ongoing decline in long-term interest rates, a trend that drives up the values of previously issued bonds and, in turn, the net asset value of bond-holders such as this Fund. An aggressive approach In anticipation of falling long-term rates, I maintained a relatively aggressive strategy that centered on keeping a longer- than-average maturity level among the securities held in our PAGE 5 portfolio. Because a portfolio's sensitivity to interest rate changes increases as its average maturity lengthens, the Fund enjoyed an extra performance boost when rates came down. Also benefiting Fund results was my decision to increase the holdings among U.S. Treasury bonds (particularly those in the five- to ten-year maturity range), whose prices rose more during that time than those of our core investments in mortgage-backed securities. This resulted from the fact that falling interest rates spawn more home refinancings, which tempers the performance of mortgage-backed securities. I should also note that most of the Fund's assets are invested in mortgage-backed securities - primarily mortgage pass-throughs and included collateralized mortgage obligations (CMO's), inverse floaters, interest-only (IO) and principal-only (PO) strips. In combination, these positions enable the portfolio to deliver competitive total return, high level of income, and relatively stable net asset value (NAV). I also maintained various combinations of futures, options on futures, and options on mortgage pass-throughs to further reduce the portfolio's sensitivity to changes in interest rates. Market changes direction in '96 Shortly after the new year began, professional bond investors' attitude toward the market began to sour, as stronger-than-expected economic growth, a stalemate on the balanced-budget agreement and a spike in certain commodity prices raised fears of impending higher inflation - always a bond investor's worst enemy. The negative psychology soon spawned considerable selling and, as a result, higher long-term interest rates and lower prices for existing bonds. Naturally, the Fund was negatively affected by the market reversal. However, it held up better than some types of bond funds because of its substantial exposure to mortgage-backed securities, which typically perform better than U.S. Treasury bonds when long-term interest rates rise, as they did in early 1996. To help temper the effect of the market downturn, I also shortened the portfolio's average maturity. Although I continue to be bullish on the longer-term outlook for the bond market, I plan to stay with a more conservative investment strategy until I see signs of a better environment. Although it's impossible to say with any real precision, I would expect that to occur before the year is out. In the meantime, I expect shareholders will have to be content to rely on the income generated by the portfolio, rather than price appreciation, for their investment return. [signature] James Snyder Class A 11-month performance (All figures per share) Net asset value (NAV) May 31, 1996 $4.92 June 30, 1995 $4.97 Decrease $(.05) Distributions July 1, 1995-May 31, 1996 From income $0.29 From capital gains $ -- Total distribution $0.29 Total return* +5.0%** Class B 11-month performance (All figures per share) Net asset value (NAV) May 31, 1996 $4.92 June 30, 1995 $4.96 Decrease $(.04) Distributions July 1, 1995-May 31, 1996 From income $0.26 From capital gains $ -- Total distribution $0.26 Total return* +4.3%** Class Y 11-month performance (All figures per share) Net asset value (NAV) May 31, 1996 $4.92 June 30, 1995 $4.97 Decrease $(.05) Distributions July 1, 1995-May 31, 1996 From income $0.30 From capital gains $ -- Total distribution $0.30 Total return* +5.2%** *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 6 Making the most of your Fund Average annual total return (as of May 31, 1996) 1 year 5 years 10 years or since inception Class A +0.55% +5.31% +7.11% Class B* +0.82% -- +2.39% Class Y* +6.01% -- +8.07% *Inception date was March 20, 1995 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 and Class B reflect the effect 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 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 March 100 17 5.88 XXXXXx April 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 "April" 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 7 The 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 stock 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. How your $10,000 has grown in IDS Federal Income Fund Lehman Aggregate Bond Index $20,000 $19,880 Merrill Lynch Federal Lehman 1-5 Yr. Income Fund Treasury Government Class A Index $9,500 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 Average annual total return (as of May 31, 1996) 1 year 5 years 10 years or since inception Class A +0.55% +5.31% +7.11% Class B* +0.82% -- +2.39% Class Y* +6.01% -- +8.07% *Inception date was March 20, 1995 [the following three paragraphs appear in the margin next to the graph:] Assumes: Holding period from 6/1/86 to 5/31/96. Returns do not reflect taxes payable on distributions. Reinvestment of all income and capital gain distributions for the Fund, with a value of $10,630. Also see "Performance" in the fund's current prospectus. 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 government bond performance. However, the securities used to create the index may not be representative of the debt securities held in the fund. Merrill Lynch 1 to 5 year Government Index is made up of a representative list of government bonds. The index is frequently used as a general measure of government bond performance. However, the securities used to create the index may not be representative of the bonds held in the fund. On the graph above you can see how the Fund's total return compared to three widely cited performance indexes, Lehman Treasury Index, Lehman Aggregate Bond Index and Merrill Lynch 1 to 5 year Government Index. In comparing Federal Income Fund to the three 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 bonds or bond mutual funds, any sales charges that you pay would reduce your total return as well. 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, if any. This was a period of widely fluctuating security prices. Past performance is no guarantee of future results. PAGE 8 Independent auditors' report The board 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 May 31, 1996, and the related statements of operations and changes in net assets, and the financial highlights for the eleven months then ended and the statement of changes in net assets for the year ended June 30, 1995 and the financial highlights for each of the years in the nine-year period ended June 30, 1995. 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, 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 May 31, 1996, and the results of its operations and changes in its net assets for the eleven months then ended and the changes in its net assets for the year 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 July 5, 1996 PAGE 9
Financial statements Statement of assets and liabilities IDS Federal Income Fund, Inc. May 31, 1996 _____________________________________________________________________________________________________________ Assets _____________________________________________________________________________________________________________ Investments in securities, at value (Note 1) (identified cost $1,751,340,289) $1,741,569,276 Accrued interest receivable 9,895,703 Receivable for investment securities sold 257,702,808 _____________________________________________________________________________________________________________ Total assets 2,009,167,787 _____________________________________________________________________________________________________________ Liabilities _____________________________________________________________________________________________________________ Disbursements in excess of cash on demand deposit 11,836,711 Dividends payable to shareholders 898,226 Payable for investment securities purchased 278,109,499 Accrued investment management services fee 24,117 Accrued distribution fee 10,774 Accrued service fee 7,801 Accrued transfer agency fee 5,250 Accrued administrative services fee 2,267 Other accrued expenses 440,007 Open option contracts written, at value (premium received $4,398,857)(Note 5) 3,865,038 _____________________________________________________________________________________________________________ Total liabilities 295,199,690 _____________________________________________________________________________________________________________ Net assets applicable to outstanding capital stock $1,713,968,097 _____________________________________________________________________________________________________________ Represented by _____________________________________________________________________________________________________________ Capital stock -- authorized 10,000,000,000 shares of $.01 par value $ 3,481,647 Additional paid-in capital 1,762,945,613 Undistributed net investment income 873,023 Accumulated net realized loss (Notes 1 and 7) (47,208,634) Unrealized depreciation (Note 4) (6,123,552) _____________________________________________________________________________________________________________ Total -- representing net assets applicable to outstanding capital stock $1,713,968,097 _____________________________________________________________________________________________________________ Net assets applicable to outstanding shares: Class A $1,095,222,866 Class B $ 519,857,677 Class Y $ 98,887,554 Net asset value per share of outstanding capital stock: Class A shares 222,446,482 $ 4.92 Class B shares 105,626,695 $ 4.92 Class Y shares 20,091,530 $ 4.92 See accompanying notes to financial statements. PAGE 10 Financial statements Statement of operations IDS Federal Income Fund, Inc. Eleven months ended May 31, 1996 _____________________________________________________________________________________________________________ Investment income _____________________________________________________________________________________________________________ Income: Interest $ 105,533,391 _____________________________________________________________________________________________________________ Expenses (Note 2): Investment management services fee 7,421,829 Distribution fee -- Class B 2,982,481 Transfer agency fee 1,608,801 Incremental transfer agency fee -- Class B 27,978 Service fee Class A 1,681,522 Class B 691,906 Administrative services fee 699,798 Compensation of board members 34,588 Compensation of officers 12,275 Custodian fees 126,580 Postage 270,324 Registration fees 468,038 Reports to shareholders 57,109 Audit fees 35,000 Administrative 12,524 Other 20,440 _____________________________________________________________________________________________________________ Total expenses 16,151,193 Earnings credits on cash balances (Note 2) (9,875) _____________________________________________________________________________________________________________ Total net expenses 16,141,318 _____________________________________________________________________________________________________________ Investment income -- net 89,392,073 _____________________________________________________________________________________________________________ Realized and unrealized gain (loss) -- net _____________________________________________________________________________________________________________ Net realized gain on security transactions (Note 3) 13,465,253 Net realized loss on closed interest rate futures contracts (14,075,204) Net realized gain on closed, exercised or expired option contracts written (Note 5) 11,046,124 _____________________________________________________________________________________________________________ Net realized gain on investments 10,436,173 Net change in unrealized appreciation or depreciation (28,963,992) _____________________________________________________________________________________________________________ Net loss on investments (18,527,819) _____________________________________________________________________________________________________________ Net increase in net assets resulting from operations $ 70,864,254 _____________________________________________________________________________________________________________ See accompanying notes to financial statements.
PAGE 11
Financial statements Statements of changes in net assets IDS Federal Income Fund, Inc. _____________________________________________________________________________________________________________ Operations and distributions May 31, 1996 June 30, 1995 _____________________________________________________________________________________________________________ Eleven months ended Year ended Investment income -- net $ 89,392,073 $ 71,607,308 Net realized gain/(loss) on investments 10,436,173 (23,666,307) Net change in unrealized appreciation or depreciation (28,963,992) 52,857,972 _____________________________________________________________________________________________________________ Net increase in net assets resulting from operations 70,864,254 100,798,973 _____________________________________________________________________________________________________________ Distributions to shareholders from: Net investment income Class A (61,393,266) (64,225,838) Class B (22,254,823) (4,334,929) Class Y (5,539,421) (1,938,661) _____________________________________________________________________________________________________________ Total distributions (89,187,510) (70,499,428) _____________________________________________________________________________________________________________ Capital share transactions (Note 6) _____________________________________________________________________________________________________________ Proceeds from sales Class A shares (Note 2) 747,243,121 641,569,225 Class B shares 594,129,348 138,024,110 Class Y shares 39,504,359 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 52,527,243 54,545,686 Class B shares 21,396,595 4,222,182 Class Y shares 5,539,139 1,657,604 Payments for redemptions Class A shares (670,726,520) (771,657,740) Class B shares (Note 2) (381,443,715) (68,176,074) Class Y shares (30,634,859) (7,300,426) _____________________________________________________________________________________________________________ Increase in net assets from capital share transactions 377,534,711 299,135,291 _____________________________________________________________________________________________________________ Total increase in net assets 359,211,455 329,434,836 Net assets at beginning of period 1,354,756,642 1,025,321,806 _____________________________________________________________________________________________________________ Net assets at end of period (including undistributed net investment income of $873,023 and $668,460) $1,713,968,097 $1,354,756,642 _____________________________________________________________________________________________________________ See accompanying notes to financial statements.
PAGE 12 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 goal of the Fund is 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. 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 may be subject to a contingent deferred sales charge and such shares automatically convert to Class A shares after eight years. Class Y shares 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) differs 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: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. 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. 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. PAGE 13 Option 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 and call 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 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. Securities purchased on a when-issued basis Delivery and payment for securities that have been purchased by the Fund on a forward-commitment or when-issued basis can take place one month or more after the transactioin date. During this period, such securitites are subject to market fluctuations, and they may PAGE 14 affect the Fund's net assets the same as owned securities. The fund designates cash or liquid high-grade short-term debt securities at least equal to the amount of its commitment. As of May 31, 1996, the Fund had entered into outstanding when-issued or forward commitments of $250,159,288. 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. 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 Effective March 20, 1995, the Fund entered into agreements with American Express Financial Corporation (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. PAGE 15 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 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 a Plan and Agreement of Distribution, 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 received by American Express Financial Advisors Inc. for distributing Fund shares were $26,301,380 for Class A and $268,231 for Class B for the fiscal period ended May 31, 1996. The Fund also pays custodian fees to American Express Trust Company, an affiliate of AEFC. During the fiscal period ended May 31, 1996, the Fund's custodian and transfer agency fees were reduced by $9,875 as a result of earnings credits from overnight cash balances. Prior to April 30, 1996, the Fund had a retirement plan for its independent board members. The plan was terminated April 30, 1996. The retirement plan expense amounted to $14,881 for the period ended May 31, 1996. The total liability for the plan is $61,505 which will be paid out at some future date. ___________________________________________________________________ 3. Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,203,791,501 and $1,794,838,755, respectively, for the fiscal period ended May 31, 1996. Realized gains and losses are determined on an identified cost basis. Income from securities lending amounted to $64,299 for the fiscal period ended May 31, 1996. 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. PAGE 16 ___________________________________________________________________ 4. Interest rate futures contracts At May 31, 1996, investments in securities included securities valued at $45,085,832 that were pledged as collateral to cover initial margin deposits on 1,401 open purchase contracts and 2,611 open sale contracts. The market value of the open contracts at May 31, 1996 was $428,651,661 with a net unrealized gain of $3,113,642. ___________________________________________________________________ 5. Options contracts written The number of contracts and premium amounts associated with options contracts written is as follows:
Period ended May 31, 1996 __________________________________________________________________________ Puts Calls MBS Puts and Calls __________________________________________________________________________ Contracts Premium Contracts Premium Contracts Premium _________________________________________________________________________________________________ Balance June 30, 1995 1,325 $ 1,198,457 1,016 $ 1,902,171 -- $ -- Opened 11,302 12,521,721 24,312 28,298,805 91,175 4,771,904 Closed (8,584) (10,411,886) (16,450) (21,370,797) (65,300) (3,550,278) Exercised (2,542) (2,753,498) (3,187) (2,863,151) (7,600) (308,042) Expired (1,501) (554,794) (2,688) (2,322,380) (3,400) (159,375) _________________________________________________________________________________________________ Balance May 31, 1996 -- $ -- 3,003 $ 3,644,648 14,875 $ 754,209 _________________________________________________________________________________________________
___________________________________________________________________ 6. Capital share transactions Transactions in shares of capital stock for the periods indicated are as follows: Eleven months ended May 31, 1996 Class A Class B Class Y _____________________________________________________________ Sold 149,105,568 118,610,090 7,980,462 Issued for reinvested 10,494,421 4,273,427 1,106,730 distributions Redeemed (133,889,465) (76,081,026) (6,205,925) _____________________________________________________________ Net increase 25,710,524 46,802,491 2,881,267 _____________________________________________________________ Year ended June 30, 1995 Class A Class B* Class Y* ____________________________________________________________ Sold 132,313,514 28,069,540 18,364,074 Fund Merger 723,045 43,767,303 -- Issued for reinvested 11,239,784 856,748 336,591 distributions Redeemed (159,116,207) (13,869,387) (1,490,402) _____________________________________________________________ Net increase (decrease) (14,839,864) 58,824,204 17,210,263 _____________________________________________________________ *Inception date was March 20, 1995. PAGE 17 ___________________________________________________________________ 7. Capital loss carryover For federal income tax purposes, the Fund had a capital loss carryover of $24,453,239 at May 31, 1996, that if not offset by subsequent capital gains, will expire in 2003. It is unlikely the board will authorize a distribution of any net realized gains until the available capital loss carryover has been offset or expires. ___________________________________________________________________ 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. The aggregate net assets of IDS Federal Income Fund immediately before the acquisition 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 net assets depreciation 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. Change of Fund's fiscal year The by-laws of the Fund were amended on Jan. 10-11, 1996, changing its fiscal year-end from June 30 to May 31, effective 1996. ___________________________________________________________________ 10. Subsequent event The Fund invested its assets in a master portfolio, called the Government Income Portfolio, on June 10, 1996. The Portfolio is a separate investment company, but has the same goals and investment policies as the Fund. Additional information on investment policies may be found in the prospectus and Statement of Additional Information (SAI). PAGE 18 ___________________________________________________________________ 11. Financial highlights "Financial highlights" showing per share data and selected information is presented on pages 7 and 8 of the prospectus. PAGE 19
Investments in securities IDS Federal Income Fund, Inc. (Percentages represent value of May 31, 1996 investments compared to net assets) _____________________________________________________________________________________________________________________________ Bonds (98.2%) _____________________________________________________________________________________________________________________________ Issuer Coupon Maturity Principal Value(a) rate year amount _____________________________________________________________________________________________________________________________ U.S. government obligations (15.3%) U.S. Treasury and agency 7.25 % 2016 $ 4,000,000 (e) $ 4,037,680 7.50 2024 3,490,000 3,646,212 8.125 2019 16,000,000 17,693,120 Zero Coupon 5.52 1999 97,225,000 (b,f) 80,643,276 Federal National Mortgage Association Medium Term Nts 5.41 2001 10,000,000 9,432,800 Resolution Funding Corp 8.125 2019 8,000,000 8,714,640 Zero Coupon 6.06 2001 20,863,000 (b) 15,459,066 6.19 2002 32,850,000 (b,e) 22,152,398 6.36 2003 16,000,000 (b) 9,672,480 6.39 2007 32,653,000 (b) 15,075,564 6.70 1999 52,753,000 (b,e) 43,914,762 7.02 2010 19,000,000 (b,h) 6,642,970 7.08 2007 25,120,000 (b) 11,381,118 7.18 2009 16,000,000 (b) 6,104,640 7.87 2018 7,500,000 (b) 1,451,175 7.87 2019 16,500,000 (b) 3,134,505 8.04 2012 8,400,000 (b) 2,557,296 ______________ Total 261,713,702 _____________________________________________________________________________________________________________________________ Mortgage-backed securities (82.9%) Federal Home Loan Mortgage Corporation (17.5%) 6.50 2003-09 10,360,716 9,983,047 7.00 2010 22,384,500 21,964,791 7.50 2024 9,026,153 8,851,316 8.00 2023-25 80,024,919 80,398,970 8.50 2025 18,692,418 19,118,792 Collateralized Mtge Obligation 4.00 2023 14,821,976 13,544,618 6.75 2022 22,000,000 22,104,720 7.00 2021 10,000,000 9,557,100 8.25 2024 29,670,778 29,108,220 8.50 2022 9,150,000 9,452,865 Interest Only 10.00 2020 382,554 (c) 122,658 Inverse Floater 6.39 2007 11,739,040 (d) 9,800,455 6.825 2023 3,956,343 (d) 2,510,418 7.31 2024 10,642,081 (d) 7,676,665 7.42 2023 10,514,507 (d) 6,162,973 9.36 2022 5,798,581 (d) 4,731,932 9.415 2022 21,356,119 (d) 17,403,742 10.02 2023 24,078,648 (d,f) 18,483,974 14.91 2021 7,644,500 (d) 7,980,476 See accompanying notes to investments in securities. PAGE 20 ______________ Total 298,957,732 _____________________________________________________________________________________________________________________________ Federal National Mortgage Association (63.6%) 6.00 2008-23 43,934,783 40,720,931 6.50 2023-25 217,196,638 (e,f) 201,654,047 7.00 2023-26 215,903,994 (f,h) 206,081,182 7.50 2025 44,000,000 (f,h) 43,120,000 8.00 2021-26 143,501,522 (h) 143,907,392 8.50 2007-25 235,897,073 (f,h) 241,164,692 9.00 2023-24 16,995,673 17,702,013 12.00 2016 5,409,243 6,110,767 Collateralized Mtge Obligation 3.00 2019 11,250,000 9,495,900 4.50 2010 8,204,208 7,127,160 4.70 2022 12,732,716 12,548,728 5.00 2024 6,663,083 5,976,186 5.50 2008 12,985,885 12,272,830 6.00 2008 8,563,461 8,387,140 6.50 2017 2,259,657 2,252,720 7.00 2012 7,552,058 7,450,180 8.50 2021 12,350,000 12,578,598 Interest Only 9.50 2018-23 56,496,300 (c) 17,903,733 10.00 2018-23 127,044,808 (c) 40,701,831 10.50 2021 17,030,626 (c) 5,460,528 Inverse Floater 7.18 2023 6,052,314 (d) 4,273,660 8.49 2024 5,277,963 (d) 4,169,749 8.715 2023 3,456,299 (d) 2,646,315 8.78 2022 5,723,329 (d) 5,439,337 11.20 2021 10,009,687 (d) 10,029,806 Principal Only 6.12 2020 14,500,000 (g) 13,105,678 9.52 2023 9,203,533 (g) 7,635,711 12.57 2021 927,265 (f,g) 670,747 ______________ Total 1,090,587,561 _____________________________________________________________________________________________________________________________ Government National Mortgage Association (1.8%) 7.50 2025 15,477,770 15,168,214 11.00 2010-19 14,613,048 16,409,946 ______________ Total 31,578,160 _____________________________________________________________________________________________________________________________ Total bonds (Cost: $1,692,841,753) $1,682,837,155 _____________________________________________________________________________________________________________________________ Options purchased (0.2%) Issuer Number Exercise Expiration Value(a) of contracts price date Call MBS 3,400 $ 98 June 1996 $ 65,280 Put U.S. Treasury Bonds Sept. 96 212 106 Aug. 1996 304,750 U.S. Treasury Bonds Sept. 96 220 112 Aug. 1996 1,106,875 U.S. Treasury Bonds Sept. 96 620 110 Aug. 1996 2,208,750 U.S. Treasury Bonds Sept. 96 416 106 Aug. 1996 604,498 MBS 6,800 97 June 1996 36,040 Total options purchased ______________ (Cost: $4,092,608) $ 4,326,193 _____________________________________________________________________________________________________________________________ Short-term securities (3.2%) _____________________________________________________________________________________________________________________________ Issuer Annualized Amount Value(a) yield on payable date of at purchase maturity _____________________________________________________________________________________________________________________________ U.S. government agencies (3.2%) Federal Home Loan Bank Disc Note 06-13-96 5.20% $27,100,000 $ 27,053,117 Federal Home Loan Mtge Corp Disc Notes 06-05-96 5.22 1,700,000 1,699,016 06-12-96 5.20 3,700,000 3,694,132 06-12-96 5.21 3,600,000 3,594,280 06-13-96 5.19 1,300,000 1,297,755 Federal Natl Mtge Assn Disc Note 06-13-96 5.20 12,300,000 12,278,721 06-17-96 5.21 4,800,000 4,788,907 PAGE 21 Total 54,405,928 _____________________________________________________________________________________________________________________________ Total short-term securities (Cost: $54,405,928) $ 54,405,928 _____________________________________________________________________________________________________________________________ Total investments in securities (Cost: $1,751,340,289)(i) $1,741,569,276 _____________________________________________________________________________________________________________________________ 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. The principal amount shown is the notional amount of the underlying mortgages. (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 May 31, 1996. (e) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 4 to the financial statements): Type of security Notional amount ______________________________________________________________________ Purchase contracts U.S. Treasury Note Sept. 96 $ 800,000 U.S. Treasury Note June 96, 5-year notes 75,700,000 U.S. Treasury Note Sept. 96, 2-year notes 24,600,000 U.S. Treasury Note Sept. 96 27,000,000 U.S. Treasury Bonds June 96 12,000,000 Sale contracts U.S. Treasury Bonds June 96 173,900,000 U.S. Treasury Note June 96, 10-year notes 26,500,000 U.S. Treasury Bonds Sept. 96 60,700,000 (f) At May 31, 1996, securities valued at $416,409,494 were held to cover open call options written as follows:
Issuer Number of Exercise Expiration Value(a) contracts price date ___________________________________________________________________________________ U.S. Treasury Note Sept. 96 1,020 $107 Aug. 1996 $1,051,875 U.S. Treasury Bonds Sept. 96 1 110 June 1996 281 U.S. Treasury Bonds Sept. 96 446 112 Aug. 1996 271,779 U.S. Treasury Bonds Sept. 96 855 110 Aug. 1996 961,875 U.S. Treasury Bonds Sept. 96 425 107 Aug. 1996 438,281 U.S. Treasury Bonds Sept. 96 256 108 Aug. 1996 176,000 Mortgage-Backed Security (MBS) Spread 6,800 98 June 1996 130,560 At May 31, 1996, 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 ___________________________________________________________________________________ Mortgage-Backed Security (MBS) Spread 2,125 93 June 1996 282,227 Mortgage-Backed Security (MBS) Spread 5,950 98 June 1996 552,160 (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 represents current yield based upon the current cost basis and estimated timing of future cash flows. PAGE 22 (h) At May 31, 1996, the cost of securities purchased on a when-issued basis was $250,159,288. (i) At May 31, 1996, the cost of securities for federal income tax purposes was $1,751,506,522 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $ 26,490,989 Unrealized depreciation (36,428,235) ____________________________________________________________ Net unrealized depreciation $ (9,937,246) ____________________________________________________________
PAGE 23 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) coins 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 24 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) shield with eagle head enclosed 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 enclosed 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 star enclosed PAGE 25 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 U.S. equity securities, U.S. and foreign debt securities, foreign equity securities and money market instruments. The fund provides diversification among these major investment categories and has a target mix that represents the way the fund's investments will be allocated over the long term. (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 pine 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 26 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) light bulb 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) two 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) trees PAGE 27 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 28 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 a 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 period ended May 31, 1996 Class A Income distributions taxable as dividend income, none qualifying for deduction by corporations. Payable date Per share July 27, 1995 $0.02491 Aug. 28, 1995 0.02525 Sept. 27, 1995 0.02762 Oct. 27, 1995 0.02552 Nov. 28, 1995 0.02827 Dec. 28, 1995 0.03073 Jan. 26, 1996 0.02541 Feb. 26, 1996 0.02807 March 28, 1996 0.02420 April 29, 1996 0.02452 May 29, 1996 0.02817 Total distributions $0.29267 Class B Income distributions taxable as dividend income, none qualifying for deduction by corporations. July 27, 1995 $0.02196 Aug. 28, 1995 0.02218 Sept. 27, 1995 0.02431 Oct. 27, 1995 0.02241 Nov. 28, 1995 0.02493 Dec. 28, 1995 0.02760 Jan. 26, 1996 0.02235 Feb. 26, 1996 0.02461 March 28, 1996 0.02117 April 29, 1996 0.02143 May 29, 1996 0.02489 Total distributions $0.25784 PAGE 29 Class Y Income distributions taxable as dividend income, none qualifying for deduction by corporations. July 27, 1995 $0.02577 Aug. 28, 1995 0.02596 Sept. 27, 1995 0.02838 Oct. 27, 1995 0.02624 Nov. 28, 1995 0.02903 Dec. 28, 1995 0.03147 Jan. 26, 1996 0.02609 Feb. 26, 1996 0.02888 March 28, 1996 0.02487 April 29, 1996 0.02522 May 29, 1996 0.02892 Total distributions $0.30083 PAGE 30 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 AMERICAN EXPRESS Financial Advisors IDS Federal Income Fund IDS Tower 10 Minneapolis, MN 55440-0010 PAGE 31 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-----