-----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, PAx2Rv7BUnEFbSnBG3BOR12vwolR4OmmTLJ53V1P87+7wD8PZ4PnZlkfhP2Y9IWC +6R5pjqeOFc2GRYEfY6DBw== 0000820027-01-500325.txt : 20010727 0000820027-01-500325.hdr.sgml : 20010727 ACCESSION NUMBER: 0000820027-01-500325 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 20010726 EFFECTIVENESS DATE: 20010726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP FEDERAL INCOME FUND INC /MN/ CENTRAL INDEX KEY: 0000764802 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-96512 FILM NUMBER: 1689331 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-04260 FILM NUMBER: 1689332 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 MAIL ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS FEDERAL INCOME FUND INC DATE OF NAME CHANGE: 19920703 485BPOS 1 abc_01.txt AXP FEDERAL INCOME FUND, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective Amendment No. ____ Post-Effective Amendment No. 31 (File No. 2-96512) [X] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 34 (File No. 811-4260) [X] AXP FEDERAL INCOME FUND, INC. 200 AXP Financial Center Minneapolis, Minnesota 55474 Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 (612) 330-9283 Approximate Date of Proposed Public Offering: It is proposed that this filing will become effective: [ ] immediately upon filing pursuant to paragraph (b) [ X ] on July 30, 2001 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485. If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment. AXP Federal Income Fund, Inc. has adopted a master/feeder operating structure. This Post-Effective Amendment includes a signature page for Income Trust, the master fund. AXP(R) Federal Income Fund PROSPECTUS JULY 30, 2001 American Express(R) (clock icon) Funds AXP Federal Income Fund seeks 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. Please note that this Fund: o is not a bank deposit o is not federally insured o is not endorsed by any bank or government agency o is not guaranteed to achieve its goal Like all mutual funds, the Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. Table of Contents TAKE A CLOSER LOOK AT: The Fund 3p Goal 3p Principal Investment Strategies 3p Principal Risks 4p Past Performance 5p Fees and Expenses 7p Management 8p Buying and Selling Shares 8p Valuing Fund Shares 8p Investment Options 8p Purchasing Shares 10p Transactions Through American Express Brokerage or Third Parties 12p Sales Charges 12p Exchanging/Selling Shares 15p Distributions and Taxes 18p Master/Feeder Structure 20p Other Information 20p Financial Highlights 21p - -------------------------------------------------------------------------------- 2p AXP FEDERAL INCOME FUND The Fund GOAL AXP Federal Income Fund (the Fund) seeks 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. Because any investment involves risk, achieving this goal cannot be guaranteed. The Fund seeks to achieve its goal by investing all of its assets in a master portfolio rather than by directly investing in and managing its own portfolio of securities. The master portfolio has the same goal and investment policies as the Fund. PRINCIPAL INVESTMENT STRATEGIES The Fund's assets primarily are invested in debt obligations. Under normal market conditions, at least 65% of the Fund's total assets are invested in securities issued or guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities. Although the Fund may invest in any U.S. government securities, it is anticipated that U.S. government securities representing part ownership in pools of mortgage loans (mortgage-backed securities) will comprise a large percentage of the Fund's investments. The Fund will utilize forward sale commitments for hedging purposes. Additionally, the Fund will aggressively utilize derivative instruments and when-issued securities to produce incremental earnings, to hedge existing positions and to increase flexibility. The Fund's potential losses from the use of these instruments could extend beyond its initial investment. The selection of debt obligations is the primary decision in building the investment portfolio. In pursuit of the Fund's goal, American Express Financial Corporation (AEFC), the Fund's investment manager, chooses investments by: o Reviewing credit characteristics and the interest rate outlook. o Identifying and buying securities that: -- are high quality or have similar qualities, in AEFC's opinion, even though they are not rated or have been given a lower rating by a rating agency, and -- have short or intermediate-term maturities. In evaluating whether to sell a security, AEFC considers, among other factors, whether: -- the interest rate or economic outlook changes, -- the security is overvalued relative to alternative investments, -- AEFC wishes to lock-in profits, -- AEFC identifies a more attractive opportunity, and -- the issuer or the security continues to meet the other standards described above. Although not a primary investment strategy, the Fund also may invest in other instruments, such as money market securities, investment grade non-governmental debt obligations, and derivatives (such as futures, options and forward contracts). During weak or declining markets, the Fund may invest more of its assets in money market securities. Although the Fund primarily will invest in these securities to avoid losses, this type of investing also could prevent the Fund from achieving its investment objective. During these times, AEFC may make frequent securities trades that could result in increased fees, expenses, - -------------------------------------------------------------------------------- 3p PROSPECTUS -- JULY 30, 2001 and taxes. Additionally, the Fund's portfolio turnover may be affected by short-term investment strategies. High portfolio turnovers could result in increases in transaction costs and may result in realized capital gains that would be taxable distributions to shareholders. For more information on strategies and holdings, see the Fund's Statement of Additional Information (SAI) and the annual/semiannual reports. PRINCIPAL RISKS Please remember that with any mutual fund investment you may lose money. Principal risks associated with an investment in the Fund include: Market Risk Correlation Risk Interest Rate Risk Call/Prepayment Risk Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Correlation Risk The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. Interest Rate Risk The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the higher its yield and the greater its sensitivity to changes in interest rates. Call/Prepayment Risk The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to reinvestment risk, which is the risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. - -------------------------------------------------------------------------------- 4p AXP FEDERAL INCOME FUND PAST PERFORMANCE The following bar chart and table indicate the risks and variability of investing in the Fund by showing: o how the Fund's performance has varied for each full calendar year shown on the chart below, and o how the Fund's average annual total returns compare to recognized indexes. How the Fund has performed in the past does not indicate how the Fund will perform in the future. Class A Performance (based on calendar years) (bar chart) +11.00% +6.47% +6.00% -0.26% +13.90 +4.21 +7.86 +6.93 +1.13 +5.90 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 During the period shown in the bar chart, the highest return for a calendar quarter was +4.02% (quarter ending June 1995) and the lowest return for a calendar quarter was -1.52% (quarter ending March 1994). The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart; if reflected, returns would be lower than those shown. The performance of Class B, Class C and Class Y may vary from that shown above because of differences in sales charges and fees. The Fund's year to date return as of March 31, 2001 was +2.25%. Average Annual Total Returns (as of Dec. 31, 2000) Since 1 year 5 years 10 years inception Federal Income: Class A +0.87% +4.19% +5.74% N/A Class B +1.12% +4.26% N/A +5.39%(a) Class Y +6.06% +5.34% N/A +6.45%(a) Lehman Brothers Aggregate Bond Index +11.68% +5.84% +7.32% +6.76%(b) Lipper Short U.S. Government Funds Index +7.91% +5.57% +6.03% +6.10%(b) Merrill Lynch 1-3 Year U.S. Government Index +7.99% +5.92% +6.42% +6.44%(b) (a) Inception date was March 20, 1995. (b) Measurement period started April 1, 1995. - -------------------------------------------------------------------------------- 5p PROSPECTUS -- JULY 30, 2001 This table shows total returns from hypothetical investments in Class A, Class B and Class Y shares of the Fund. These returns are compared to the indexes shown for the same periods. The performance of different classes varies because of differences in sales charges and fees. Past performance for Class Y for the periods prior to March 20, 1995 may be calculated based on the performance of Class A, adjusted to reflect differences in sales charges, although not for other differences in expenses. Class C became effective June 26, 2000 and therefore performance information is not available. For purposes of this calculation we assumed: o the maximum sales charge for Class A shares, o sales at the end of the period and deduction of the applicable contingent deferred sales charge (CDSC) for Class B shares, o no sales charge for Class Y shares, and o no adjustments for taxes paid by an investor on the reinvested income and capital gains. Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. Lipper Short U.S. Government Funds Index, an unmanaged index published by Lipper Inc., includes the 30 largest funds that are generally similar to the Fund, although some funds in the index may have somewhat different investment policies and objectives. Merrill Lynch 1-3 Year U. S. Government Index, an unmanaged index, is made up of a representative list of government bonds. The index is frequently used 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. - -------------------------------------------------------------------------------- 6p AXP FEDERAL INCOME FUND FEES AND EXPENSES Fund investors pay various expenses. The table below describes the fees and expenses that you may pay if you buy and hold shares of the Fund. Shareholder Fees (fees paid directly from your investment) Class A Class B Class C Class Y Maximum sales charge (load) imposed on purchases(a) (as a percentage of offering price) 4.75%(b) none none none Maximum deferred sales charge (load) imposed on sales (as a percentage of offering price at time of purchase) none 5% 1%(c) none Annual Fund operating expenses(d) (expenses that are deducted from Fund assets) As a percentage of average daily net assets: Class A Class B Class C Class Y Management fees 0.51% 0.51% 0.51% 0.51% Distribution (12b-1) fees 0.25% 1.00% 1.00% 0.00% Other expenses(e) 0.22% 0.22% 0.22% 0.31% Total 0.98% 1.73% 1.73% 0.82% (a) This charge may be reduced depending on the value of your total investments in American Express mutual funds. See "Sales Charges." (b) For Class A purchases over $500,000 on which the sales charge is waived, a 1% sales charge applies if you sell your shares less than one year after purchase. (c) For Class C purchases, a 1% sales charge applies if you sell your shares less than one year after purchase. (d) Both in this table and the following example, fund operating expenses include expenses charged by both the Fund and its Master Portfolio as described under "Management." Other expenses for Class A, Class B and Class Y are based on actual expenses for the last fiscal year. Expenses for Class C are based on estimated amounts for the current fiscal year. (e) Other expenses include an administrative services fee, a shareholder services fee for Class Y, a transfer agency fee and other nonadvisory expenses. Example This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Assume you invest $10,000 and the Fund earns a 5% annual return. The operating expenses remain the same each year. If you hold your shares until the end of the years shown, your costs would be: 1 year 3 years 5 years 10 years Class A(a) $570 $773 $ 992 $1,624 Class B(b) $576 $845 $1,040 $1,847d Class B(c) $176 $545 $ 940 $1,847d Class C $176 $545 $ 940 $2,045 Class Y $ 84 $262 $ 456 $1,018 (a) Includes a 4.75% sales charge. (b) Assumes you sold your Class B shares at the end of the period and incurred the applicable CDSC. (c) Assumes you did not sell your Class B shares at the end of the period. (d) Based on conversion of Class B shares to Class A shares in the ninth year of ownership. This example does not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. - -------------------------------------------------------------------------------- 7p PROSPECTUS -- JULY 30, 2001 MANAGEMENT The Fund's assets are invested in Government Income Portfolio (the Portfolio), which is managed by AEFC. Scott Kirby became portfolio manager of the Fund in January 2001. He joined AEFC in 1987 as a fixed income trader. He also serves as portfolio manager of AXP Variable Portfolio - Federal Income Fund. Buying and Selling Shares VALUING FUND SHARES The public offering price for Class A is the net asset value (NAV) adjusted for the sales charge. For Class B, Class C and Class Y, it is the NAV. The NAV is the value of a single Fund share. The NAV usually changes daily, and is calculated at the close of business of the New York Stock Exchange, normally 3 p.m. Central Time (CT), each business day (any day the New York Stock Exchange is open). Fund shares may be purchased through various third-party organizations, including 401(k) plans, banks, brokers and investment advisers. Where authorized by the Fund, orders will be priced at the NAV next computed after receipt by the organization or their selected agent. Investments are valued based on market quotations, or where market quotations are not readily available, based on methods selected in good faith by the board. If the Fund's investment policies permit it to invest in securities that are listed on foreign stock exchanges that trade on weekends or other days when the Fund does not price its shares, the value of those investments may change on days when you could not buy or sell shares of the Fund. Please see the SAI for further information. INVESTMENT OPTIONS 1. Class A shares are sold to the public with a sales charge at the time of purchase and an annual distribution (12b-1) fee of 0.25%. 2. Class B shares are sold to the public with a contingent deferred sales charge (CDSC) and an annual distribution fee of 1.00%. 3. Class C shares are sold to the public without a sales charge at the time of purchase and with an annual distribution fee of 1.00% (may be subject to a CDSC). 4. Class Y shares are sold to qualifying institutional investors without a sales charge or distribution fee. Please see the SAI for information on eligibility to purchase Class Y shares. - -------------------------------------------------------------------------------- 8p AXP FEDERAL INCOME FUND Investment options summary: The Fund offers four different classes of shares. There are differences among the fees and expenses for each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision. The following table shows the key features of each class:
- ------------------- ------------------ -------------------- --------------- --------------- Class A Class B Class C Class Y - ------------------- ------------------ -------------------- --------------- --------------- - ------------------- ------------------ -------------------- --------------- --------------- Availability Available to all Available to all Available to Limited to investors. investors. all investors. qualifying institutional investors. - ------------------- ------------------ -------------------- --------------- --------------- - ------------------- ------------------ -------------------- --------------- --------------- Initial Sales Yes. Payable at No. Entire No. Entire No. Entire Charge time of purchase price is purchase purchase purchase. Lower invested in shares price is price is sales charge for of the Fund. invested in invested in larger shares of the shares of the investments. Fund. Fund. - ------------------- ------------------ -------------------- --------------- --------------- - ------------------- ------------------ -------------------- --------------- --------------- Deferred Sales On purchases Maximum 5% CDSC 1% CDSC None. Charge over $500,000, during the first applies if 1% CDSC applies year decreasing to you sell your if you sell your 0% after six years. shares less shares less than than one year one year after after purchase. purchase. - ------------------- ------------------ -------------------- --------------- --------------- - ------------------- ------------------ -------------------- --------------- --------------- Distribution Yes.* 0.25% Yes. * 1.00% Yes. * 1.00% Yes. 0.10% and/or Shareholder Service Fee - ------------------- ------------------ -------------------- --------------- --------------- - ------------------- ------------------ -------------------- --------------- --------------- Conversion to N/A Yes, automatically No. No. Class A in ninth calendar year of ownership. - ------------------- ------------------ -------------------- --------------- --------------- * The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of 1940 that allows it to pay distribution and servicing-related expenses for the sale of Class A, Class B and Class C shares. Because these fees are paid out of the Fund's assets on an on-going basis, the fees may cost long-term shareholders more than paying other types of sales charges imposed by some mutual funds.
Should you purchase Class A, Class B or Class C shares? If your investments in American Express mutual funds total $250,000 or more, Class A shares may be the better option because the sales charge is reduced for larger purchases. If you qualify for a waiver of the sales charge, Class A shares will be the best option. If you invest less than $250,000, consider how long you plan to hold your shares. Class B shares have a higher annual distribution fee than Class A shares and a CDSC for six years. Class B shares convert to Class A shares in the ninth calendar year of ownership. Class B shares purchased through reinvested dividends and distributions also will convert to Class A shares in the same proportion as the other Class B shares. Class C shares also have a higher annual distribution fee than Class A shares. Class C shares have no sales charge if you hold the shares for one year or longer. Unlike Class B shares, Class C shares do not convert to Class A. As a result, you will pay a 1% distribution fee for as long as you hold Class C shares. If you choose a deferred sales charge option (Class B or Class C), generally you should consider Class B shares if you intend to hold your shares for more than six years. Consider Class C shares if you intend to hold your shares less than six years. To help you determine what investment is best for you, consult your financial advisor. - -------------------------------------------------------------------------------- 9p PROSPECTUS -- JULY 30, 2001 PURCHASING SHARES To purchase shares through an American Express Brokerage Account or entities other than American Express Financial Advisors Inc., please refer to the American Express Brokerage Web site or consult your selling agent. The following section explains how you can purchase shares from American Express Financial Advisors (the Distributor). If you do not have a mutual fund account, you need to establish one. Your financial advisor will help you fill out and submit an application. Once your account is set up, you can choose among several convenient ways to invest. When you purchase shares for a new or existing account, your order will be priced at the next NAV calculated after your order is accepted by the Fund. If your application does not specify which class of shares you are purchasing, we will assume you are investing in Class A shares. Important: When you open an account, you must provide your correct Taxpayer Identification Number (TIN), which is either your Social Security or Employer Identification number. If you do not provide and certify the correct TIN, you could be subject to backup withholding of 31% of taxable distributions and proceeds from certain sales and exchanges. You also could be subject to further penalties, such as: o a $50 penalty for each failure to supply your correct TIN, o a civil penalty of $500 if you make a false statement that results in no backup withholding, and o criminal penalties for falsifying information. You also could be subject to backup withholding, if the IRS notifies us to do so, because you failed to report required interest or dividends on your tax return. How to determine the correct TIN - ----------------------------------- ------------------------------------------- For this type of account: Use the Social Security or Employer Identification number of: - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- Individual or joint account The individual or one of the owners listed on the joint account - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- Custodian account of a minor The minor (Uniform Gifts/Transfers to Minors Act) - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- A revocable living trust The grantor-trustee (the person who puts the money into the trust) - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- An irrevocable trust, pension The legal entity (not the personal trust or estate representative or trustee, unless no legal entity is designated in the account title) - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- Sole proprietorship The owner - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- Partnership The partnership - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- Corporate The corporation - ----------------------------------- ------------------------------------------- - ----------------------------------- ------------------------------------------- Association, club or tax-exempt The organization organization - ----------------------------------- ------------------------------------------- For details on TIN requirements, contact your financial advisor to obtain a copy of federal Form W-9, "Request for Taxpayer Identification Number and Certification." You also may obtain the form on the Internet at (http://www.irs.gov/prod/forms_pubs/). - -------------------------------------------------------------------------------- 10p AXP FEDERAL INCOME FUND Three ways to invest 1 By mail: Once your account has been established, send your check with the account number on it to: American Express Funds 70200 AXP Financial Center Minneapolis, MN 55474 Minimum amounts Initial investment: $2,000 Additional investments: $100 Account balances: $300 Qualified accounts: none If your account balance falls below $300, you will be asked to increase it to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be sold and the proceeds mailed to you. 2 By scheduled investment plan: Contact your financial advisor for assistance in setting up one of the following scheduled plans: o automatic payroll deduction, o bank authorization, o direct deposit of Social Security check, or o other plan approved by the Fund. Minimum amounts Initial investment: $100 Additional investments: $50 per payment for qualified accounts; $100 per payment for nonqualified accounts Account balances: none (on a scheduled investment plan with monthly payments) If your account balance is below $2,000, you must make payments at least monthly. 3 By wire or electronic funds transfer: If you have an established account, you may wire money to: Wells Fargo Bank Minnesota, N.A. Minneapolis, MN 55479 Routing Transit No. 091000019 Give these instructions: Credit American Express Financial Advisors Account #0000030015 for personal account # (your account number) for (your name). Please be sure to include all 10 digits of the American Express Financial Advisors account number, including the zeros. If this information is not included, the order may be rejected, and all money received by the Fund, less any costs the Fund or American Express Client Service Corporation (AECSC) incurs, will be return(e)d promptly. Minimum amounts Each wire investment: $1,000 - -------------------------------------------------------------------------------- 11p PROSPECTUS -- JULY 30, 2001 TRANSACTIONS THROUGH AMERICAN EXPRESS BROKERAGE OR THIRD PARTIES You may buy or sell shares through American Express Brokerage, certain 401(k) plans, banks, broker-dealers, financial advisors or other investment professionals. These organizations may charge you a fee for this service and may have different policies. Some policy differences may include different minimum investment amounts, exchange privileges, fund choices and cutoff times for investments. The Fund and the Distributor are not responsible for the failure of one of these organizations to carry out its obligations to its customers. Some organizations may receive compensation from the Distributor or its affiliates for shareholder recordkeeping and similar services. Where authorized by the Fund, some organizations may designate selected agents to accept purchase or sale orders on the Fund's behalf. To buy or sell shares through American Express Brokerage or third parties or to determine if there are policy differences, please consult the American Express Brokerage Web site or your selling agent. For other pertinent information related to buying or selling shares, please refer to the appropriate section in the prospectus. SALES CHARGES Class A -- initial sales charge alternative When you purchase Class A shares, you pay a sales charge as shown in the following table: Total Market Value Sales charge as percentage of: Public offering price* Net amount invested Up to $49,999 4.75% 4.99% $50,000 - $99,999 4.50 4.71 $100,000 - $249,999 3.75 3.90 $250,000 - $499,999 2.50 2.56 $500,000 - $999,999 2.00** 2.04** $1,000,000 or more 0.00 0.00 * Offering price includes the sales charge. ** The sales charge will be waived until Dec. 31, 2001. The sales charge on Class A shares may be lower than 4.75%, based on the combined market value of: o your current investment in this Fund, o your previous investment in this Fund, and o investments you and your primary household group have made in other American Express mutual funds that have a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. For purposes of this policy, domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) AXP Tax-Free Money Fund and Class A shares of AXP Cash Management Fund do not have sales charges. - -------------------------------------------------------------------------------- 12p AXP FEDERAL INCOME FUND Other Class A sales charge policies: o IRA purchases or other employee benefit plan purchases made through a payroll deduction plan or through a plan sponsored by an employer, association of employers, employee organization or other similar group, may be added together to reduce sales charges for all shares purchased through that plan, and o if you intend to invest more than $50,000 over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. If purchasing shares in a brokerage account or through a third party, you must request the reduced sales charge when you buy shares. For more details, please contact your financial advisor or see the SAI. Waivers of the sales charge for Class A shares Sales charges do not apply to: o current or retired board members, officers or employees of the Fund or AEFC or its subsidiaries, their spouses or domestic partners, children and parents. o current or retired American Express financial advisors, employees of financial advisors, their spouses or domestic partners, children and parents. o registered representatives and other employees of brokers, dealers or other financial institutions having a sales agreement with the Distributor, including their spouses, domestic partners, children and parents. o investors who have a business relationship with a newly associated financial advisor who joined the Distributor from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with the Distributor, (2) the purchase is made with proceeds of shares sold that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds are the result of a sale of an equal or greater value where a sales load was assessed. o qualified employee benefit plans offering participants daily access to American Express mutual funds. Eligibility must be determined in advance. For assistance, please contact your financial advisor. (Participants in certain qualified plans where the initial sales charge is waived may be subject to a deferred sales charge of up to 4%.) o shareholders who have at least $1 million in American Express mutual funds. Until Dec. 31, 2001, the sales charge does not apply to shareholders who have at least $500,000 in American Express mutual funds. If the investment is sold less than one year after purchase, a CDSC of 1% will be charged. During that year, the CDSC will be waived only in the circumstances described for waivers for Class B and Class C shares. o purchases made within 90 days after a sale of shares (up to the amount sold): -- of American Express mutual funds in a qualified plan subject to a deferred sales charge, or -- in a qualified plan or account where American Express Trust Company has a recordkeeping, trustee, investment management, or investment servicing relationship. Send the Fund a written request along with your payment, indicating the date and the amount of the sale. - -------------------------------------------------------------------------------- 13p PROSPECTUS -- JULY 30, 2001 o purchases made: -- with dividend or capital gain distributions from this Fund or from the same class of another American Express mutual fund, -- through or under a wrap fee product or other investment product sponsored by the Distributor or another authorized broker-dealer, investment advisor, bank or investment professional, -- within the University of Texas System ORP, -- within a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, -- within the University of Massachusetts After-Tax Savings Program, or -- through or under a subsidiary of AEFC offering Personal Trust Services' Asset-Based pricing alternative. o shareholders whose original purchase was in a Strategist fund merged into an American Express fund in 2000. Class B and Class C -- contingent deferred sales charge (CDSC) alternative For Class B, the CDSC is based on the sale amount and the number of calendar years -- including the year of purchase -- between purchase and sale. The following table shows how CDSC percentages on sales decline after a purchase: If the sale is made during the: The CDSC percentage rate is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% For Class C, a 1% CDSC is charged if you sell your shares less than one year after purchase. For both Class B and Class C, if the amount you are selling causes the value of your investment to fall below the cost of the shares you have purchased, the CDSC is based on the lower of the cost of those shares purchased or market value. Because the CDSC is imposed only on sales that reduce your total purchase payments, you never have to pay a CDSC on any amount that represents appreciation in the value of your shares, income earned by your shares, or capital gains. In addition, the CDSC on your sale, if any, will be based on your oldest purchase payment. The CDSC on the next amount sold will be based on the next oldest purchase payment. - -------------------------------------------------------------------------------- 14p AXP FEDERAL INCOME FUND Example: Assume you had invested $10,000 in Class B shares and that your investment had appreciated in value to $12,000 after 15 months, including reinvested dividends and capital gain distributions. You could sell up to $2,000 worth of shares without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you sold $2,500 worth of shares, the CDSC would apply to the $500 representing part of your original purchase price. The CDSC rate would be 4% because the sale was made during the second year after the purchase. Waivers of the sales charge for Class B and Class C shares The CDSC will be waived on sales of shares: o in the event of the shareholder's death, o held in trust for an employee benefit plan, or o held in IRAs or certain qualified plans if American Express Trust Company is the custodian, such as Keogh plans, tax-sheltered custodial accounts or corporate pension plans, provided that the shareholder is: -- at least 59 1/2 years old AND -- taking a retirement distribution (if the sale is part of a transfer to an IRA or qualified plan, or a custodian-to-custodian transfer, the CDSC will not be waived) OR -- selling under an approved substantially equal periodic payment arrangement. EXCHANGING/SELLING SHARES Exchanges You can exchange your Fund shares at no charge for shares of the same class of any other publicly offered American Express mutual fund. Exchanges into AXP Tax-Free Money Fund may only be made from Class A shares. For complete information on the other fund, including fees and expenses, read that fund's prospectus carefully. Your exchange will be priced at the next NAV calculated after we receive your transaction request in good order. You may make up to three exchanges (1 1/2 round trips) within any 30-day period. These limits do not apply to scheduled exchange programs and certain employee benefit plans. Exceptions may be allowed with pre-approval of the Fund. Other exchange policies: o Exchanges must be made into the same class of shares of the new fund. o If your exchange creates a new account, it must satisfy the minimum investment amount for new purchases. o Once we receive your exchange request, you cannot cancel it. o Shares of the new fund may not be used on the same day for another exchange. o If your shares are pledged as collateral, the exchange will be delayed until AECSC receives written approval from the secured party. AECSC and the Fund reserve the right to reject any exchange, limit the amount, or modify or discontinue the exchange privilege, to prevent abuse or adverse effects on the Fund and its shareholders. For example, if exchanges are too numerous or too large, they may disrupt the Fund's investment strategies or increase its costs. - -------------------------------------------------------------------------------- 15p PROSPECTUS -- JULY 30, 2001 Selling Shares You can sell your shares at any time. The payment will be mailed within seven days after accepting your request. When you sell shares, the amount you receive may be more or less than the amount you invested. Your sale price will be the next NAV calculated after your request is accepted by the Fund, minus any applicable CDSC. You can change your mind after requesting a sale and use all or part of the proceeds to purchase new shares in the same account from which you sold. If you reinvest in Class A, you will purchase the new shares at NAV rather than the offering price on the date of a new purchase. If you reinvest in Class B or Class C, any CDSC you paid on the amount you are reinvesting also will be reinvested. To take advantage of this option, send a written request within 90 days of the date your sale request was received and include your account number. This privilege may be limited or withdrawn at any time and may have tax consequences. The Fund reserves the right to redeem in kind. For more details and a description of other sales policies, please see the SAI. - -------------------------------------------------------------------------------- 16p AXP FEDERAL INCOME FUND To sell or exchange shares held through an American Express Brokerage Account or with entities other than American Express Financial Advisors, please consult your selling agent. The following section explains how you can exchange or sell shares held with American Express Financial Advisors. Requests to sell shares of the Fund are not allowed within 30 days of a telephoned-in address change. Important: If you request a sale of shares you recently purchased by a check or money order that is not guaranteed, the Fund will wait for your check to clear. It may take up to 10 days from the date of purchase before payment is made. (Payment may be made earlier if your bank provides evidence satisfactory to the Fund and AECSC that your check has cleared.) Two ways to request an exchange or sale of shares 1 By letter: Include in your letter: o the name of the fund(s), o the class of shares to be exchanged or sold, o your mutual fund account number(s) (for exchanges, both funds must be registered in the same ownership), o your Social Security number or Employer Identification number, o the dollar amount or number of shares you want to exchange or sell, o signature(s) of all registered account owners, o for sales,indicate how you want your money delivered to you, and o any paper certificates of shares you hold. Regular or express mail: American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 2 By telephone: American Express Client Service Corporation Telephone Transaction Service (800) 437-3133 o The Fund and AECSC will use reasonable procedures to confirm authenticity of telephone exchange or sale requests. o Telephone exchange and sale privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts. You may request that these privileges NOT apply by writing AECSC. Each registered owner must sign the request. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Telephone privileges may be modified or discontinued at any time. Minimum sale amount: $100 Maximum sale amount: $100,000 - -------------------------------------------------------------------------------- 17p PROSPECTUS -- JULY 30, 2001 Three ways to receive payment when you sell shares 1 By regular or express mail: o Mailed to the address on record. o Payable to names listed on the account. NOTE:The express mail delivery charges you pay will vary depending on the courier you select. 2 By wire or electronic funds transfer: o Minimum wire: $1,000. o Request that money be wired to your bank. o Bank account must be in the same ownership as the American Express mutual fund account. NOTE:Pre-authorization required. For instructions, contact your financial advisor or AECSC. 3 By scheduled payout plan: o Minimum payment: $50. o Contact your financial advisor or AECSC to set up regular payments on a monthly, bimonthly, quarterly, semiannual or annual basis. o Purchasing new shares while under a payout plan may be disadvantageous because of the sales charges. Distributions and Taxes As a shareholder you are entitled to your share of the Fund's net income and net gains. The Fund distributes dividends and capital gains to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS The Fund's net investment income is distributed to you as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Each realized capital gain or loss is long-term or short-term depending on the length of time the Fund held the security. Realized capital gains and losses offset each other. The Fund offsets any net realized capital gains by any available capital loss carryovers. Net short-term capital gains are included in net investment income. Net realized long-term capital gains, if any, are distributed by the end of the calendar year as capital gain distributions. REINVESTMENTS Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request distributions in cash, or o you direct the Fund to invest your distributions in the same class of any publicly offered American Express mutual fund for which you have previously opened an account. We reinvest the distributions for you at the next calculated NAV after the distribution is paid. If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. - -------------------------------------------------------------------------------- 18p AXP FEDERAL INCOME FUND TAXES Distributions are subject to federal income tax and may be subject to state and local taxes in the year they are declared. You must report distributions on your tax returns, even if they are reinvested in additional shares. If you buy shares shortly before the record date of a distribution, you may pay taxes on money earned by the Fund before you were a shareholder. You will pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which may be taxable. For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held for more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. Selling shares held in an IRA or qualified retirement account may subject you to federal taxes, penalties and reporting requirements. Please consult your tax advisor. Important: This information is a brief and selective summary of some of the tax rules that apply to this Fund. Because tax matters are highly individual and complex, you should consult a qualified tax advisor. - -------------------------------------------------------------------------------- 19p PROSPECTUS -- JULY 30, 2001 Master/Feeder Structure This Fund uses a master/feeder structure. This means that the Fund (a feeder fund) invests all of its assets in the Portfolio (the master fund). The master/feeder structure offers the potential for reduced costs because it spreads fixed costs of portfolio management over a larger pool of assets. The Fund may withdraw its assets from the Portfolio at any time if the Fund's board determines that it is best. In that event, the board would consider what action should be taken, including whether to hire an investment advisor to manage the Fund's assets directly or to invest all of the Fund's assets in another pooled investment entity. Here is an illustration of the structure: Investors buy shares in the Fund The Fund buys units in the Portfolio The Portfolio invests in securities, such as stocks or bonds Other feeders may include mutual funds and institutional accounts. These feeders buy the Portfolio's securities on the same terms and conditions as the Fund and pay their proportionate share of the Portfolio's expenses. However, their operating costs and sales charges are different from those of the Fund. Therefore, the investment returns for other feeders are different from the returns of the Fund. Other Information INVESTMENT MANAGER The investment manager of the Portfolio is AEFC, 200 AXP Financial Center, Minneapolis, MN 55474. The Portfolio pays AEFC a fee for managing its assets. The Fund pays its proportionate share of the fee. Under the Investment Management Services Agreement, the fee for the most recent fiscal year was 0.51% of its average daily net assets. Under the agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory expenses. AEFC or an affiliate may make payments from its own resources, which include profits from management fees paid by the Fund, to compensate broker-dealers or other persons for providing distribution assistance. AEFC is a wholly-owned subsidiary of American Express Company, a financial services company with headquarters at American Express Tower, World Financial Center, New York, NY 10285. - -------------------------------------------------------------------------------- 20p AXP FEDERAL INCOME FUND Financial Highlights Class A Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $4.59 $4.94 $5.08 $4.98 $4.92 Income from investment operations: Net investment income (loss) .27 .27 .27 .30 .32 Net gains (losses) (both realized and unrealized) .19 (.27) (.07) .10 .06 Total from investment operations .46 -- .20 .40 .38 Less distributions: Dividends from net investment income (.27) (.28) (.27) (.30) (.32) Distributions from realized gains -- (.07) (.07) -- -- Total distributions (.27) (.35) (.34) (.30) (.32) Net asset value, end of period $4.78 $4.59 $4.94 $5.08 $4.98 Ratios/supplemental data Net assets, end of period (in millions) $1,047 $1,139 $1,723 $1,403 $1,267 Ratio of expenses to average daily net assets(c) .98% .92% .88% .86% .90% Ratio of net investment income (loss) to average daily net assets 5.72% 5.71% 5.36% 5.89% 6.37% Portfolio turnover rate (excluding short-term securities) 366% 674% 278% 159% 146% Total return(e) 10.19% (.01%) 4.07% 8.15% 7.73% Class B Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $4.59 $4.94 $5.08 $4.98 $4.92 Income from investment operations: Net investment income (loss) .24 .24 .23 .26 .28 Net gains (losses) (both realized and unrealized) .18 (.28) (.07) .10 .06 Total from investment operations .42 (.04) .16 .36 .34 Less distributions: Dividends from net investment income (.23) (.24) (.23) (.26) (.28) Distributions from realized gains -- (.07) (.07) -- -- Total distributions (.23) (.31) (.30) (.26) (.28) Net asset value, end of period $4.78 $4.59 $4.94 $5.08 $4.98 Ratios/supplemental data Net assets, end of period (in millions) $912 $981 $1,498 $1,045 $820 Ratio of expenses to average daily net assets(c) 1.73% 1.68% 1.63% 1.61% 1.66% Ratio of net investment income (loss) to average daily net assets 4.96% 4.95% 4.61% 5.13% 5.60% Portfolio turnover rate (excluding short-term securities) 366% 674% 278% 159% 146% Total return(e) 9.36% (.77%) 3.31% 7.32% 6.90% See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 21p PROSPECTUS -- JULY 30, 2001 Class C Per share income and capital changes(a) Fiscal period ended May 31, 2001(b) Net asset value, beginning of period $4.63 Income from investment operations: Net investment income (loss) .22 Net gains (losses) (both realized and unrealized) .14 Total from investment operations .36 Less distributions: Dividends from net investment income (.21) Distributions from realized gains -- Total distributions (.21) Net asset value, end of period $4.78 Ratios/supplemental data Net assets, end of period (in millions) $7 Ratio of expenses to average daily net assets(c) 1.73%(d) Ratio of net investment income (loss) to average daily net assets 4.93%(d) Portfolio turnover rate (excluding short-term securities) 366% Total return(e) 8.08% Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $4.59 $4.94 $5.08 $4.98 $4.92 Income from investment operations: Net investment income (loss) .28 .28 .28 .30 .32 Net gains (losses) (both realized and unrealized) .19 (.28) (.07) .10 .06 Total from investment operations .47 -- .21 .40 .38 Less distributions: Dividends from net investment income (.28) (.28) (.28) (.30) (.32) Distributions from realized gains -- (.07) (.07) -- -- Total distributions (.28) (.35) (.35) (.30) (.32) Net asset value, end of period $4.78 $4.59 $4.94 $5.08 $4.98 Ratios/supplemental data Net assets, end of period (in millions) $161 $175 $191 $119 $115 Ratio of expenses to average daily net assets(c) .82% .78% .80% .78% .73% Ratio of net investment income (loss) to average daily net assets 5.89% 5.92% 5.44% 5.97% 6.54% Portfolio turnover rate (excluding short-term securities) 366% 674% 278% 159% 146% Total return(e) 10.36% .15% 4.15% 8.23% 7.91% See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 22p AXP FEDERAL INCOME FUND Notes to financial highlights a For a share outstanding throughout the period. Rounded to the nearest cent. b Inception date was June 26, 2000. c Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. d Adjusted to an annual basis. e Total return does not reflect payment of a sales charge. The information in these tables has been audited by KPMG LLP, independent auditors. The independent auditors' report and additional information about the performance of the Fund are contained in the Fund's annual report which, if not included with this prospectus, may be obtained without charge. - -------------------------------------------------------------------------------- 23p PROSPECTUS -- JULY 30, 2001 This Fund, along with the other American Express mutual funds, is distributed by American Express Financial Advisors Inc. and can be purchased from an American Express financial advisor or from other authorized broker-dealers or third parties. The Funds can be found under the "Amer Express" banner in most mutual fund quotations. Additional information about the Fund and its investments is available in the Fund's Statement of Additional Information (SAI), annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of market conditions and investment strategies that significantly affected the Fund during its last fiscal year. The SAI is incorporated by reference in this prospectus. For a free copy of the SAI, the annual report or the semiannual report, contact your selling agent or American Express Client Service Corporation. American Express Funds 70100 AXP Financial Center, Minneapolis, MN 55474 (800) 862-7919 TTY: (800) 846-4852 Web site address: americanexpress.com You may review and copy information about the Fund, including the SAI, at the Securities and Exchange Commission's (Commission) Public Reference Room in Washington, D.C. (for information about the public reference room call 1-202-942-8090). Reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at (http://www.sec.gov). Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the Commission, Washington, D.C. 20549-0102. Investment Company Act File #811-4260 Ticker Symbol Class A: IFINX Class B: ISHOX Class C: N/A Class Y: IDFYX (American Express logo) S-6042-99 V (7/01) STATEMENT OF ADDITIONAL INFORMATION FOR AXP(R)FEDERAL INCOME FUND (the Fund) July 30, 2001 This Statement of Additional Information (SAI) is not a prospectus. It should be read together with the prospectus and the financial statements contained in the most recent Annual Report to shareholders (Annual Report) that may be obtained from your financial advisor or by writing to American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474 or by calling 800-862-7919. The Independent Auditors' Report and the Financial Statements, including Notes to the Financial Statements and the Schedule of Investments in Securities, contained in the Annual Report are incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. The prospectus for the Fund, dated the same date as this SAI, also is incorporated in this SAI by reference. AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Mutual Fund Checklist..............................................p. 3 Fundamental Investment Policies....................................p. 4 Investment Strategies and Types of Investments.....................p. 5 Information Regarding Risks and Investment Strategies..............p. 6 Security Transactions.............................................p. 18 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation....................p. 20 Performance Information...........................................p. 20 Valuing Fund Shares...............................................p. 22 Investing in the Fund.............................................p. 22 Selling Shares....................................................p. 24 Pay-out Plans.....................................................p. 25 Capital Loss Carryover............................................p. 25 Taxes.............................................................p. 25 Agreements........................................................p. 27 Organizational Information........................................p. 28 Board Members and Officers........................................p. 31 Compensation for Board Members....................................p. 32 Independent Auditors..............................................p. 33 Appendix: Description of Ratings..................................p. 34 -2- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Mutual Fund Checklist [X] Mutual funds are NOT guaranteed or insured by any bank or government agency. You can lose money. [X] Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. [X] A higher rate of return typically involves a higher risk of loss. [X] Past performance is not a reliable indicator of future performance. [X] ALL mutual funds have costs that lower investment return. [X] You can buy some mutual funds by contacting them directly. Others, like this one, are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay a sales charge. [X] Shop around. Compare a mutual fund with others of the same type before you buy. OTHER IDEAS FOR SUCCESSFUL MUTUAL FUND INVESTING: Develop a Financial Plan Have a plan -- even a simple plan can help you take control of your financial future. Review your plan with your advisor at least once a year or more frequently if your circumstances change. Dollar-Cost Averaging An investment technique that works well for many investors is one that eliminates random buy and sell decisions. One such system is dollar-cost averaging. Dollar-cost averaging involves building a portfolio through the investment of fixed amounts of money on a regular basis regardless of the price or market condition. This may enable an investor to smooth out the effects of the volatility of the financial markets. By using this strategy, more shares will be purchased when the price is low and less when the price is high. As the accompanying chart illustrates, dollar-cost averaging tends to keep the average price paid for the shares lower than the average market price of shares purchased, although there is no guarantee. While this does not ensure a profit and does not protect against a loss if the market declines, it is an effective way for many shareholders who can continue investing through changing market conditions to accumulate shares to meet long-term goals. Dollar-cost averaging: Regular Market Price Shares Investment of a Share Acquired $100 $ 6.00 16.7 100 4.00 25.0 100 4.00 25.0 100 6.00 16.7 100 5.00 20.0 $500 $25.00 103.4 Average market price of a share over 5 periods: $5.00 ($25.00 divided by 5) The average price you paid for each share: $4.84 ($500 divided by 103.4) Diversify Diversify your portfolio. By investing in different asset classes and different economic environments you help protect against poor performance in one type of investment while including investments most likely to help you achieve your important goals. Understand Your Investment Know what you are buying. Make sure you understand the potential risks, rewards, costs, and expenses associated with each of your investments. -3- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Fundamental Investment Policies The Fund pursues its investment objective by investing all of its assets in Government Income Portfolio (the Portfolio) of Income Trust (the Trust), a separate investment company, rather than by directly investing in and managing its own portfolio of securities. The Portfolio has the same investment objectives, policies, and restrictions as the Fund. References to "Fund" in this SAI, where applicable, refer to the Fund and Portfolio, collectively, to the Fund, singularly, or to the Portfolio, singularly. Fundamental investment policies adopted by the Fund cannot be changed without the approval of a majority of the outstanding voting securities of the Fund as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Notwithstanding any of the Fund's other investment policies, the Fund may invest its assets in an open-end management investment company having substantially the same investment objectives, policies, and restrictions as the Fund for the purpose of having those assets managed as part of a combined pool. The policies below are fundamental policies that apply to the Fund and may be changed only with shareholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund will not: o Act as an underwriter (sell securities for others). However, under the securities laws, the Fund may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. o Borrow money or property, except as a temporary measure for extraordinary or emergency purposes, in an amount not exceeding one-third of the market value of its total assets (including borrowings) less liabilities (other than borrowings) immediately after the borrowing. o Make cash loans if the total commitment amount exceeds 5% of the Fund's total assets. o Purchase more than 10% of the outstanding voting securities of an issuer. o Invest more than 5% of its total assets in securities of any one company, government, or political subdivision thereof, except the limitation will not apply to investments in securities issued by the U.S. government, its agencies, or instrumentalities, and except that up to 25% of the Fund's total assets may be invested without regard to this 5% limitation. o Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business or real estate investment trusts. For purposes of this policy, real estate includes real estate limited partnerships. o Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by, or whose value is derived from, physical commodities. o Make a loan of any part of its assets to American Express Financial Corporation (AEFC), to the board members and officers of AEFC or to its own board members and officers. o Lend Fund securities in excess of 30% of its net assets. o Issue senior securities, except as permitted under the 1940 Act. o Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means that up to 25% of the Fund's total assets, based on current market value at time of purchase, can be invested in any one industry. Except for the fundamental investment policies listed above, the other investment policies described in the prospectus and in this SAI are not fundamental and may be changed by the board at any time. -4- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Investment Strategies and Types of Investments This table shows various investment strategies and investments that many funds are allowed to engage in and purchase. It is intended to show the breadth of investments that the investment manager may make on behalf of the Fund. For a description of principal risks, please see the prospectus. Notwithstanding the Fund's ability to utilize these strategies and techniques, the investment manager is not obligated to use them at any particular time. For example, even though the investment manager is authorized to adopt temporary defensive positions and is authorized to attempt to hedge against certain types of risk, these practices are left to the investment manager's sole discretion. Investment strategies & types of investments: Allowable for the Fund? Agency and Government Securities yes Borrowing yes Cash/Money Market Instruments yes Collateralized Bond Obligations yes Commercial Paper yes Common Stock no Convertible Securities no Corporate Bonds yes Debt Obligations yes Depositary Receipts no Derivative Instruments yes Foreign Currency Transactions no Foreign Securities yes High-Yield (High-Risk) Securities (Junk Bonds) no Illiquid and Restricted Securities yes Indexed Securities yes Inverse Floaters yes Investment Companies yes Lending of Portfolio Securities yes Loan Participations yes Mortgage- and Asset-Backed Securities yes Mortgage Dollar Rolls yes Municipal Obligations yes Preferred Stock no Real Estate Investment Trusts yes Repurchase Agreements yes Reverse Repurchase Agreements yes Short Sales yes Sovereign Debt yes Structured Products yes Variable- or Floating-Rate Securities yes Warrants yes When-Issued Securities yes Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities yes -5- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- The following are guidelines that may be changed by the board at any time: o Under normal market conditions, at least 65% of the Fund's total assets will be invested in securities issued or guaranteed as to principal and interest by the U.S. government, its agencies or instrumentalities. o No more than 5% of the Fund's net assets can be used at any one time for good faith deposits on futures and premiums for options on futures that do not offset existing investment positions. o No more than 10% of the Fund's net assets will be held in securities and other instruments that are illiquid. o Ordinarily, less than 25% of the Fund's total assets are invested in money market instruments. o The Fund will not buy on margin, but it may make margin payments in connection with interest rate futures contracts. o The Fund will not invest more than 10% of its total assets in securities of investment companies. o The Fund will not invest in a company to control or manage it. Information Regarding Risks and Investment Strategies RISKS The following is a summary of common risk characteristics. Following this summary is a description of certain investments and investment strategies and the risks most commonly associated with them (including certain risks not described below and, in some cases, a more comprehensive discussion of how the risks apply to a particular investment or investment strategy). Please remember that a mutual fund's risk profile is largely defined by the fund's primary securities and investment strategies. However, most mutual funds are allowed to use certain other strategies and investments that may have different risk characteristics. Accordingly, one or more of the following types of risk may be associated with the Fund at any time (for a description of principal risks, please see the prospectus): Call/Prepayment Risk The risk that a bond or other security might be called (or otherwise converted, prepaid, or redeemed) before maturity. This type of risk is closely related to "reinvestment risk." Correlation Risk The risk that a given transaction may fail to achieve its objectives due to an imperfect relationship between markets. Certain investments may react more negatively than others in response to changing market conditions. Credit Risk The risk that the issuer of a security, or the counterparty to a contract, will default or otherwise become unable to honor a financial obligation (such as payments due on a bond or a note). The price of junk bonds may react more to the ability of the issuing company to pay interest and principal when due than to changes in interest rates. Junk bonds have greater price fluctuations and are more likely to experience a default than investment grade bonds. Event Risk Occasionally, the value of a security may be seriously and unexpectedly changed by a natural or industrial accident or occurrence. Foreign/Emerging Markets Risk The following are all components of foreign/emerging markets risk: Country risk includes the political, economic, and other conditions of a country. These conditions include lack of publicly available information, less government oversight (including lack of accounting, auditing, and financial reporting standards), the possibility of government-imposed restrictions, and even the nationalization of assets. Currency risk results from the constantly changing exchange rate between local currency and the U.S. dollar. Whenever the Fund holds securities valued in a foreign currency or holds the currency, changes in the exchange rate add or subtract from the value of the investment. Custody risk refers to the process of clearing and settling trades. It also covers holding securities with local agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard of care of the local market. Governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. The less developed a country's securities market is, the greater the likelihood of problems occurring. Emerging markets risk includes the dramatic pace of change (economic, social, and political) in emerging market countries as well as the other considerations listed above. These markets are in early stages of development and are extremely volatile. They can be marked by extreme inflation, devaluation of currencies, dependence on trade partners, and hostile relations with neighboring countries. Inflation Risk Also known as purchasing power risk, inflation risk measures the effects of continually rising prices on investments. If an investment's yield is lower than the rate of inflation, your money will have less purchasing power as time goes on. -6- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Interest Rate Risk The risk of losses attributable to changes in interest rates. This term is generally associated with bond prices (when interest rates rise, bond prices fall). In general, the longer the maturity of a bond, the higher its yield and the greater its sensitivity to changes in interest rates. Issuer Risk The risk that an issuer, or the value of its stocks or bonds, will perform poorly. Poor performance may be caused by poor management decisions, competitive pressures, breakthroughs in technology, reliance on suppliers, labor problems or shortages, corporate restructurings, fraudulent disclosures, or other factors. Legal/Legislative Risk Congress and other governmental units have the power to change existing laws affecting securities. A change in law might affect an investment adversely. Leverage Risk Some derivative investments (such as options, futures, or options on futures) require little or no initial payment and base their price on a security, a currency, or an index. A small change in the value of the underlying security, currency, or index may cause a sizable gain or loss in the price of the instrument. Liquidity Risk Securities may be difficult or impossible to sell at the time that the Fund would like. The Fund may have to lower the selling price, sell other investments, or forego an investment opportunity. Management Risk The risk that a strategy or selection method utilized by the investment manager may fail to produce the intended result. When all other factors have been accounted for and the investment manager chooses an investment, there is always the possibility that the choice will be a poor one. Market Risk The market may drop and you may lose money. Market risk may affect a single issuer, sector of the economy, industry, or the market as a whole. The market value of all securities may move up and down, sometimes rapidly and unpredictably. Reinvestment Risk The risk that an investor will not be able to reinvest income or principal at the same rate it currently is earning. Sector/Concentration Risk Investments that are concentrated in a particular issuer, geographic region, or industry will be more susceptible to changes in price (the more you diversify, the more you spread risk). Small Company Risk Investments in small and medium companies often involve greater risks than investments in larger, more established companies because small and medium companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In addition, in many instances the securities of small and medium companies are traded only over-the-counter or on regional securities exchanges and the frequency and volume of their trading is substantially less than is typical of larger companies. INVESTMENT STRATEGIES The following information supplements the discussion of the Fund's investment objectives, policies, and strategies that are described in the prospectus and in this SAI. The following describes many strategies that many mutual funds use and types of securities that they purchase. Please refer to the section entitled Investment Strategies and Types of Investments to see which are applicable to the Fund. Agency and Government Securities The U.S. government and its agencies issue many different types of securities. U.S. Treasury bonds, notes, and bills and securities including mortgage pass through certificates of the Government National Mortgage Association (GNMA) are guaranteed by the U.S. government. Other U.S. government securities are issued or guaranteed by federal agencies or government-sponsored enterprises but are not guaranteed by the U.S. government. This may increase the credit risk associated with these investments. Government-sponsored entities issuing securities include privately owned, publicly chartered entities created to reduce borrowing costs for certain sectors of the economy, such as farmers, homeowners, and students. They include the Federal Farm Credit Bank System, Farm Credit Financial Assistance Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored entities may issue discount notes (with maturities ranging from overnight to 360 days) and bonds. Agency and government securities are subject to the same concerns as other debt obligations. (See also Debt Obligations and Mortgage- and Asset-Backed Securities.) -7- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Although one or more of the other risks described in this SAI may apply, the largest risks associated with agency and government securities include: Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and Reinvestment Risk. Borrowing The Fund may borrow money from banks for temporary or emergency purposes and make other investments or engage in other transactions permissible under the 1940 Act that may be considered a borrowing (such as derivative instruments). Borrowings are subject to costs (in addition to any interest that may be paid) and typically reduce the Fund's total return. Except as qualified above, however, the Fund will not buy securities on margin. Although one or more of the other risks described in this SAI may apply, the largest risks associated with borrowing include: Inflation Risk and Management Risk. Cash/Money Market Instruments The Fund may maintain a portion of its assets in cash and cash-equivalent investments. Cash-equivalent investments include short-term U.S. and Canadian government securities and negotiable certificates of deposit, non-negotiable fixed-time deposits, bankers' acceptances, and letters of credit of banks or savings and loan associations having capital, surplus, and undivided profits (as of the date of its most recently published annual financial statements) in excess of $100 million (or the equivalent in the instance of a foreign branch of a U.S. bank) at the date of investment. The Fund also may purchase short-term notes and obligations of U.S. and foreign banks and corporations and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.) These types of instruments generally offer low rates of return and subject the Fund to certain costs and expenses. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with cash/money market instruments include: Credit Risk, Inflation Risk, and Management Risk. Collateralized Bond Obligations Collateralized bond obligations (CBOs) are investment grade bonds backed by a pool of junk bonds. CBOs are similar in concept to collateralized mortgage obligations (CMOs), but differ in that CBOs represent different degrees of credit quality rather than different maturities. (See also Mortgage- and Asset-Backed Securities.) Underwriters of CBOs package a large and diversified pool of high-risk, high-yield junk bonds, which is then separated into "tiers." Typically, the first tier represents the higher quality collateral and pays the lowest interest rate; the second tier is backed by riskier bonds and pays a higher rate; the third tier represents the lowest credit quality and instead of receiving a fixed interest rate receives the residual interest payments--money that is left over after the higher tiers have been paid. CBOs, like CMOs, are substantially overcollateralized and this, plus the diversification of the pool backing them, earns them investment-grade bond ratings. Holders of third-tier CBOs stand to earn high yields or less money depending on the rate of defaults in the collateral pool. (See also High-Yield (High-Risk) Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, and Management Risk. Commercial Paper Commercial paper is a short-term debt obligation with a maturity ranging from 2 to 270 days issued by banks, corporations, and other borrowers. It is sold to investors with temporary idle cash as a way to increase returns on a short-term basis. These instruments are generally unsecured, which increases the credit risk associated with this type of investment. (See also Debt Obligations and Illiquid and Restricted Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with commercial paper include: Credit Risk, Liquidity Risk, and Management Risk. Common Stock Common stock represents units of ownership in a corporation. Owners typically are entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. The price of common stock is generally determined by corporate earnings, type of products or services offered, projected growth rates, experience of management, liquidity, and general market conditions for the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with common stock include: Issuer Risk, Management Risk, Market Risk, and Small Company Risk. -8- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Convertible Securities Convertible securities are bonds, debentures, notes, preferred stocks, or other securities that may be converted into common, preferred or other securities of the same or a different issuer within a particular period of time at a specified price. Some convertible securities, such as preferred equity-redemption cumulative stock (PERCs), have mandatory conversion features. Others are voluntary. A convertible security entitles the holder to receive interest normally paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted, or exchanged. Convertible securities have unique investment characteristics in that they generally (i) have higher yields than common stocks but lower yields than comparable non-convertible securities, (ii) are less subject to fluctuation in value than the underlying stock since they have fixed income characteristics, and (iii) provide the potential for capital appreciation if the market price of the underlying common stock increases. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security's investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. Generally, the conversion value decreases as the convertible security approaches maturity. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Although one or more of the other risks described in this SAI may apply, the largest risks associated with convertible securities include: Call/Prepayment Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and Reinvestment Risk. Corporate Bonds Corporate bonds are debt obligations issued by private corporations, as distinct from bonds issued by a government agency or a municipality. Corporate bonds typically have four distinguishing features: (1) they are taxable; (2) they have a par value of $1,000; (3) they have a term maturity, which means they come due all at once; and (4) many are traded on major exchanges. Corporate bonds are subject to the same concerns as other debt obligations. (See also Debt Obligations and High-Yield (High-Risk) Securities.) Corporate bonds may be either secured or unsecured. Unsecured corporate bonds are generally referred to as "debentures." See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with corporate bonds include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Debt Obligations Many different types of debt obligations exist (for example, bills, bonds, or notes). Issuers of debt obligations have a contractual obligation to pay interest at a specified rate on specified dates and to repay principal on a specified maturity date. Certain debt obligations (usually intermediate- and long-term bonds) have provisions that allow the issuer to redeem or "call" a bond before its maturity. Issuers are most likely to call these securities during periods of falling interest rates. When this happens, an investor may have to replace these securities with lower yielding securities, which could result in a lower return. The market value of debt obligations is affected primarily by changes in prevailing interest rates and the issuers perceived ability to repay the debt. The market value of a debt obligation generally reacts inversely to interest rate changes. When prevailing interest rates decline, the price usually rises, and when prevailing interest rates rise, the price usually declines. In general, the longer the maturity of a debt obligation, the higher its yield and the greater the sensitivity to changes in interest rates. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. As noted, the values of debt obligations also may be affected by changes in the credit rating or financial condition of their issuers. Generally, the lower the quality rating of a security, the higher the degree of risk as to the payment of interest and return of principal. To compensate investors for taking on such increased risk, those issuers deemed to be less creditworthy generally must offer their investors higher interest rates than do issuers with better credit ratings. (See also Agency and Government Securities, Corporate Bonds, and High-Yield (High-Risk) Securities.) All ratings limitations are applied at the time of purchase. Subsequent to purchase, a debt security may cease to be rated or its rating may be reduced below the minimum required for purchase by the Fund. Neither event will require the sale of such a security, but it will be a factor in considering whether to continue to hold the security. To the extent that ratings change as a result of changes in a rating organization or their rating systems, the Fund will attempt to use comparable ratings as standards for selecting investments. See the appendix for a discussion of securities ratings. -9- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Although one or more of the other risks described in this SAI may apply, the largest risks associated with debt obligations include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment Risk. Depositary Receipts Some foreign securities are traded in the form of American Depositary Receipts (ADRs). ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities of foreign issuers. European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts typically issued by foreign banks or trust companies, evidencing ownership of underlying securities issued by either a foreign or U.S. issuer. Generally, depositary receipts in registered form are designed for use in the U.S. and depositary receipts in bearer form are designed for use in securities markets outside the U.S. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts involve the risks of other investments in foreign securities. In addition, ADR holders may not have all the legal rights of shareholders and may experience difficulty in receiving shareholder communications. (See also Common Stock and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with depositary receipts include: Foreign/Emerging Markets Risk, Issuer Risk, Management Risk, and Market Risk. Derivative Instruments Derivative instruments are commonly defined to include securities or contracts whose values depend, in whole or in part, on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to options or forward contracts. Such instruments may be used to maintain cash reserves while remaining fully invested, to offset anticipated declines in values of investments, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns. Derivative instruments are characterized by requiring little or no initial payment. Their value changes daily based on a security, a currency, a group of securities or currencies, or an index. A small change in the value of the underlying security, currency, or index can cause a sizable percentage gain or loss in the price of the derivative instrument. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, and exchange-traded futures. Forward-based derivatives are sometimes referred to generically as "futures contracts." Option-based derivatives include privately negotiated, over-the-counter (OTC) options (including caps, floors, collars, and options on futures) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or futures in different ways, and by applying these structures to a wide range of underlying assets. Options. An option is a contract. A person who buys a call option for a security has the right to buy the security at a set price for the length of the contract. A person who sells a call option is called a writer. The writer of a call option agrees for the length of the contract to sell the security at the set price when the buyer wants to exercise the option, no matter what the market price of the security is at that time. A person who buys a put option has the right to sell a security at a set price for the length of the contract. A person who writes a put option agrees to buy the security at the set price if the purchaser wants to exercise the option during the length of the contract, no matter what the market price of the security is at that time. An option is covered if the writer owns the security (in the case of a call) or sets aside the cash or securities of equivalent value (in the case of a put) that would be required upon exercise. The price paid by the buyer for an option is called a premium. In addition to the premium, the buyer generally pays a broker a commission. The writer receives a premium, less another commission, at the time the option is written. The premium received by the writer is retained whether or not the option is exercised. A writer of a call option may have to sell the security for a below-market price if the market price rises above the exercise price. A writer of a put option may have to pay an above-market price for the security if its market price decreases below the exercise price. When an option is purchased, the buyer pays a premium and a commission. It then pays a second commission on the purchase or sale of the underlying security when the option is exercised. For record keeping and tax purposes, the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions. One of the risks an investor assumes when it buys an option is the loss of the premium. To be beneficial to the investor, the price of the underlying security must change within the time set by the option contract. Furthermore, the change must be sufficient to cover the premium paid, the commissions paid both in the acquisition of the option and in a closing transaction or in the exercise of the option and sale (in the case of a call) or purchase (in the case of a put) of the underlying security. Even then, the price change in the underlying security does not ensure a profit since prices in the option market may not reflect such a change. Options on many securities are listed on options exchanges. If the Fund writes listed options, it will follow the rules of the options exchange. Options are valued at the close of the New York Stock Exchange. An option listed on a national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price or, if such a price is not readily available, at the mean of the last bid and ask prices. Options on certain securities are not actively traded on any exchange, but may be entered into directly with a dealer. These options may be more difficult to close. If an investor is unable to effect a closing purchase transaction, it will not be able to sell the underlying security until the call written by the investor expires or is exercised. -10- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Futures Contracts. A futures contract is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. Many futures contracts trade in a manner similar to the way a stock trades on a stock exchange and the commodity exchanges. Generally, a futures contract is terminated by entering into an offsetting transaction. An offsetting transaction is effected by an investor taking an opposite position. At the time a futures contract is made, a good faith deposit called initial margin is set up. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day a buyer would pay out cash in an amount equal to any decline in the contract's value or receive cash equal to any increase. At the time a futures contract is closed out, a nominal commission is paid, which is generally lower than the commission on a comparable transaction in the cash market. Futures contracts may be based on various securities, securities indices (such as the S&P 500 Index), foreign currencies and other financial instruments and indices. Options on Futures Contracts. Options on futures contracts give the holder a right to buy or sell futures contracts in the future. Unlike a futures contract, which requires the parties to the contract to buy and sell a security on a set date (some futures are settled in cash), an option on a futures contract merely entitles its holder to decide on or before a future date (within nine months of the date of issue) whether to enter into a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Further, because the value of the option is fixed at the point of sale, there are no daily payments of cash to reflect the change in the value of the underlying contract. However, since an option gives the buyer the right to enter into a contract at a set price for a fixed period of time, its value does change daily. One of the risks in buying an option on a futures contract is the loss of the premium paid for the option. The risk involved in writing options on futures contracts an investor owns, or on securities held in its portfolio, is that there could be an increase in the market value of these contracts or securities. If that occurred, the option would be exercised and the asset sold at a lower price than the cash market price. To some extent, the risk of not realizing a gain could be reduced by entering into a closing transaction. An investor could enter into a closing transaction by purchasing an option with the same terms as the one previously sold. The cost to close the option and terminate the investor's obligation, however, might still result in a loss. Further, the investor might not be able to close the option because of insufficient activity in the options market. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. Options on Stock Indexes. Options on stock indexes are securities traded on national securities exchanges. An option on a stock index is similar to an option on a futures contract except all settlements are in cash. A fund exercising a put, for example, would receive the difference between the exercise price and the current index level. Tax Treatment. As permitted under federal income tax laws and to the extent the Fund is allowed to invest in futures contacts, the Fund intends to identify futures contracts as mixed straddles and not mark them to market, that is, not treat them as having been sold at the end of the year at market value. If the Fund is using short futures contracts for hedging purposes, the Fund may be required to defer recognizing losses incurred on short futures contracts and on underlying securities. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether the option is a section 1256 contract. If the option is a non-equity option, the Fund will either make a 1256(d) election and treat the option as a mixed straddle or mark to market the option at fiscal year end and treat the gain/loss as 40% short-term and 60% long-term. The IRS has ruled publicly that an exchange-traded call option is a security for purposes of the 50%-of-assets test and that its issuer is the issuer of the underlying security, not the writer of the option, for purposes of the diversification requirements. Accounting for futures contracts will be according to generally accepted accounting principles. Initial margin deposits will be recognized as assets due from a broker (the Fund's agent in acquiring the futures position). During the period the futures contract is open, changes in value of the contract will be recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments will be made or received depending upon whether gains or losses are incurred. All contracts and options will be valued at the last-quoted sales price on their primary exchange. Other Risks of Derivatives. The primary risk of derivatives is the same as the risk of the underlying asset, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose an investor to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the investment manager's ability to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will succeed. -11- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Another risk is the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately-negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately-negotiated instruments, there is no similar clearing agency guarantee. In all transactions, an investor will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and its hedge are not perfectly correlated. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investment, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. Derivatives also are subject to the risk that they cannot be sold, closed out, or replaced quickly at or very close to their fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. Another risk is caused by the legal unenforcibility of a party's obligations under the derivative. A counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (See also Foreign Currency Transactions.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with derivative instruments include: Leverage Risk, Liquidity Risk, and Management Risk. Foreign Currency Transactions Since investments in foreign countries usually involve currencies of foreign countries, the value of an investor's assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency exchange rates and exchange control regulations. Also, an investor may incur costs in connection with conversions between various currencies. Currency exchange rates may fluctuate significantly over short periods of time causing a fund's NAV to fluctuate. Currency exchange rates are generally determined by the forces of supply and demand in the foreign exchange markets, actual or anticipated changes in interest rates, and other complex factors. Currency exchange rates also can be affected by the intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments. Many funds utilize diverse types of derivative instruments in connection with their foreign currency exchange transactions. (See also Derivative Instruments and Foreign Securities.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign currency transactions include: Correlation Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk. Foreign Securities Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involve special risks, including those set forth below, which are not typically associated with investing in U.S. securities. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards comparable to those applicable to domestic companies. Additionally, many foreign stock markets, while growing in volume of trading activity, have substantially less volume than the New York Stock Exchange, and securities of some foreign companies are less liquid and more volatile than securities of domestic companies. Similarly, volume and liquidity in most foreign bond markets are less than the volume and liquidity in the U.S. and, at times, volatility of price can be greater than in the U.S. Further, foreign markets have different clearance, settlement, registration, and communication procedures and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions making it difficult to conduct such transactions. Delays in such procedures could result in temporary periods when assets are uninvested and no return is earned on them. The inability of an investor to make intended security purchases due to such problems could cause the investor to miss attractive investment opportunities. Payment for securities without delivery may be required in certain foreign markets and, when participating in new issues, some foreign countries require payment to be made in advance of issuance (at the time of issuance, the market value of the security may be more or less than the purchase price). Some foreign markets also have compulsory depositories (i.e., an investor does not have a choice as to where the securities are held). Fixed commissions on some foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Further, an investor may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. There is generally less government supervision and regulation -12- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- of business and industry practices, stock exchanges, brokers, and listed companies than in the U.S. It may be more difficult for an investor's agents to keep currently informed about corporate actions such as stock dividends or other matters that may affect the prices of portfolio securities. Communications between the U.S. and foreign countries may be less reliable than within the U.S., thus increasing the risk of delays or loss of certificates for portfolio securities. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation, the imposition of additional withholding or confiscatory taxes, political, social, or economic instability, diplomatic developments that could affect investments in those countries, or other unforeseen actions by regulatory bodies (such as changes to settlement or custody procedures). The risks of foreign investing may be magnified for investments in emerging markets, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. The introduction of a single currency, the euro, on January 1, 1999 for participating European nations in the Economic and Monetary Union ("EU") presents unique uncertainties, including the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; the establishment and maintenance of exchange rates; the fluctuation of the euro relative to non-euro currencies during the transition period from January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax or labor regimes of European countries participating in the euro will converge over time; and whether the conversion of the currencies of other EU countries such as the United Kingdom and Greece into the euro and the admission of other non-EU countries such as Poland, Latvia, and Lithuania as members of the EU may have an impact on the euro. Although one or more of the other risks described in this SAI may apply, the largest risks associated with foreign securities include: Foreign/Emerging Markets Risk, Issuer Risk, and Management Risk. High-Yield (High-Risk) Securities (Junk Bonds) High yield (high-risk) securities are sometimes referred to as "junk bonds." They are non-investment grade (lower quality) securities that have speculative characteristics. Lower quality securities, while generally offering higher yields than investment grade securities with similar maturities, involve greater risks, including the possibility of default or bankruptcy. They are regarded as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. The special risk considerations in connection with investments in these securities are discussed below. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) The lower-quality and comparable unrated security market is relatively new and its growth has paralleled a long economic expansion. As a result, it is not clear how this market may withstand a prolonged recession or economic downturn. Such conditions could severely disrupt the market for and adversely affect the value of such securities. All interest-bearing securities typically experience appreciation when interest rates decline and depreciation when interest rates rise. The market values of lower-quality and comparable unrated securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates. Lower-quality and comparable unrated securities also tend to be more sensitive to economic conditions than are higher-rated securities. As a result, they generally involve more credit risks than securities in the higher-rated categories. During an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower-quality securities may experience financial stress and may not have sufficient revenues to meet their payment obligations. The issuer's ability to service its debt obligations also may be adversely affected by specific corporate developments, the issuer's inability to meet specific projected business forecasts, or the unavailability of additional financing. The risk of loss due to default by an issuer of these securities is significantly greater than issuers of higher-rated securities because such securities are generally unsecured and are often subordinated to other creditors. Further, if the issuer of a lower quality security defaulted, an investor might incur additional expenses to seek recovery. Credit ratings issued by credit rating agencies are designed to evaluate the safety of principal and interest payments of rated securities. They do not, however, evaluate the market value risk of lower-quality securities and, therefore, may not fully reflect the true risks of an investment. In addition, credit rating agencies may or may not make timely changes in a rating to reflect changes in the economy or in the condition of the issuer that affect the market value of the securities. Consequently, credit ratings are used only as a preliminary indicator of investment quality. An investor may have difficulty disposing of certain lower-quality and comparable unrated securities because there may be a thin trading market for such securities. Because not all dealers maintain markets in all lower quality and comparable unrated securities, there is no established retail secondary market for many of these securities. To the extent a secondary trading market does exist, it is generally not as liquid as the secondary market for higher-rated securities. The lack of a liquid secondary market may have an adverse impact on the market price of the security. The lack of a liquid secondary market for certain securities also may make it more difficult for an investor to obtain accurate market quotations. Market quotations are generally available on many lower-quality and comparable unrated issues only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. -13- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Legislation may be adopted from time to time designed to limit the use of certain lower quality and comparable unrated securities by certain issuers. Although one or more of the other risks described in this SAI may apply, the largest risks associated with high-yield (high-risk) securities include: Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and Management Risk. Illiquid and Restricted Securities The Fund may invest in illiquid securities (i.e., securities that are not readily marketable). These securities may include, but are not limited to, certain securities that are subject to legal or contractual restrictions on resale, certain repurchase agreements, and derivative instruments. To the extent the Fund invests in illiquid or restricted securities, it may encounter difficulty in determining a market value for such securities. Disposing of illiquid or restricted securities may involve time-consuming negotiations and legal expense, and it may be difficult or impossible for the Fund to sell such an investment promptly and at an acceptable price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with illiquid and restricted securities include: Liquidity Risk and Management Risk. Indexed Securities The value of indexed securities is linked to currencies, interest rates, commodities, indexes, or other financial indicators. Most indexed securities are short- to intermediate-term fixed income securities whose values at maturity or interest rates rise or fall according to the change in one or more specified underlying instruments. Indexed securities may be more volatile than the underlying instrument itself and they may be less liquid than the securities represented by the index. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with indexed securities include: Liquidity Risk, Management Risk, and Market Risk. Inverse Floaters Inverse floaters are created by underwriters using the interest payment on securities. A portion of the interest received is paid to holders of instruments based on current interest rates for short-term securities. The remainder, minus a servicing fee, is paid to holders of inverse floaters. As interest rates go down, the holders of the inverse floaters receive more income and an increase in the price for the inverse floaters. As interest rates go up, the holders of the inverse floaters receive less income and a decrease in the price for the inverse floaters. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with inverse floaters include: Interest Rate Risk and Management Risk. Investment Companies The Fund may invest in securities issued by registered and unregistered investment companies. These investments may involve the duplication of advisory fees and certain other expenses. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the securities of other investment companies include: Management Risk and Market Risk. Lending of Portfolio Securities The Fund may lend certain of its portfolio securities to broker-dealers. The current policy of the Fund's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Fund receives the market price in cash, U.S. government securities, letters of credit, or such other collateral as may be permitted by regulatory agencies and approved by the board. If the market price of the loaned securities goes up, the Fund will get additional collateral on a daily basis. The risks are that the borrower may not provide additional collateral when required or return the securities when due. During the existence of the loan, the Fund receives cash payments equivalent to all interest or other distributions paid on the loaned securities. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the interest earned on the cash or money market instruments held as collateral to the borrower or placing broker. The Fund will receive reasonable interest on the loan or a flat fee from the borrower and amounts equivalent to any dividends, interest, or other distributions on the securities loaned. Although one or more of the other risks described in this SAI may apply, the largest risks associated with the lending of portfolio securities include: Credit Risk and Management Risk. Loan Participations Loans, loan participations, and interests in securitized loan pools are interests in amounts owed by a corporate, governmental, or other borrower to a lender or consortium of lenders (typically banks, insurance companies, investment banks, government agencies, or international agencies). Loans involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to an investor in the event of fraud or misrepresentation. Although one or more of the other risks described in this SAI may apply, the largest risks associated with loan participations include: Credit Risk and Management Risk. -14- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Mortgage- and Asset-Backed Securities Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and Collateralized Mortgage Obligations (CMOs). These securities may be issued or guaranteed by U.S. government agencies or instrumentalities (see also Agency and Government Securities), or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers, and special purpose entities. Mortgage-backed securities issued by private lenders may be supported by pools of mortgage loans or other mortgage-backed securities that are guaranteed, directly or indirectly, by the U.S. government or one of its agencies or instrumentalities, or they may be issued without any governmental guarantee of the underlying mortgage assets but with some form of non-governmental credit enhancement. Stripped mortgage-backed securities are a type of mortgage-backed security that receive differing proportions of the interest and principal payments from the underlying assets. Generally, there are two classes of stripped mortgage-backed securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder to receive distributions consisting of all or a portion of the interest on the underlying pool of mortgage loans or mortgage-backed securities. POs entitle the holder to receive distributions consisting of all or a portion of the principal of the underlying pool of mortgage loans or mortgage-backed securities. The cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments (including prepayments) on the underlying mortgage loans or mortgage-backed securities. A rapid rate of principal payments may adversely affect the yield to maturity of IOs. A slow rate of principal payments may adversely affect the yield to maturity of POs. If prepayments of principal are greater than anticipated, an investor in IOs may incur substantial losses. If prepayments of principal are slower than anticipated, the yield on a PO will be affected more severely than would be the case with a traditional mortgage-backed security. CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans or other mortgage-related securities, such as mortgage pass through securities or stripped mortgage-backed securities. CMOs may be structured into multiple classes, often referred to as "tranches," with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than its stated maturity. The yield characteristics of mortgage-backed securities differ from those of other debt securities. Among the differences are that interest and principal payments are made more frequently on mortgage-backed securities, usually monthly, and principal may be repaid at any time. These factors may reduce the expected yield. Asset-backed securities have structural characteristics similar to mortgage-backed securities. Asset-backed debt obligations represent direct or indirect participation in, or secured by and payable from, assets such as motor vehicle installment sales contracts, other installment loan contracts, home equity loans, leases of various types of property, and receivables from credit card or other revolving credit arrangements. The credit quality of most asset-backed securities depends primarily on the credit quality of the assets underlying such securities, how well the entity issuing the security is insulated from the credit risk of the originator or any other affiliated entities, and the amount and quality of any credit enhancement of the securities. Payments or distributions of principal and interest on asset-backed debt obligations may be supported by non-governmental credit enhancements including letters of credit, reserve funds, overcollateralization, and guarantees by third parties. The market for privately issued asset-backed debt obligations is smaller and less liquid than the market for government sponsored mortgage-backed securities. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage- and asset-backed securities include: Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and Management Risk. Mortgage Dollar Rolls Mortgage dollar rolls are investments whereby an investor would sell mortgage-backed securities for delivery in the current month and simultaneously contract to purchase substantially similar securities on a specified future date. While an investor would forego principal and interest paid on the mortgage-backed securities during the roll period, the investor would be compensated by the difference between the current sales price and the lower price for the future purchase as well as by any interest earned on the proceeds of the initial sale. The investor also could be compensated through the receipt of fee income equivalent to a lower forward price. Although one or more of the other risks described in this SAI may apply, the largest risks associated with mortgage dollar rolls include: Credit Risk, Interest Rate Risk, and Management Risk. Municipal Obligations Municipal obligations include debt obligations issued by or on behalf of states, territories, possessions, or sovereign nations within the territorial boundaries of the United States (including the District of Columbia and Puerto Rico). The interest on these obligations is generally exempt from federal income tax. Municipal obligations are generally classified as either "general obligations" or "revenue obligations." -15- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- General obligation bonds are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of interest and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users. Municipal notes are issued to meet the short-term funding requirements of state, regional, and local governments. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes, tax and revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes, and similar instruments. Municipal lease obligations may take the form of a lease, an installment purchase, or a conditional sales contract. They are issued by state and local governments and authorities to acquire land, equipment, and facilities. An investor may purchase these obligations directly, or it may purchase participation interests in such obligations. Municipal leases may be subject to greater risks than general obligation or revenue bonds. State constitutions and statutes set forth requirements that states or municipalities must meet in order to issue municipal obligations. Municipal leases may contain a covenant by the state or municipality to budget for and make payments due under the obligation. Certain municipal leases may, however, provide that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated for this purpose each year. Yields on municipal bonds and notes depend on a variety of factors, including money market conditions, municipal bond market conditions, the size of a particular offering, the maturity of the obligation, and the rating of the issue. The municipal bond market has a large number of different issuers, many having smaller sized bond issues, and a wide choice of different maturities within each issue. For these reasons, most municipal bonds do not trade on a daily basis and many trade only rarely. Because many of these bonds trade infrequently, the spread between the bid and offer may be wider and the time needed to develop a bid or an offer may be longer than other security markets. See the appendix for a discussion of securities ratings. (See also Debt Obligations.) Taxable Municipal Obligations. There is another type of municipal obligation that is subject to federal income tax for a variety of reasons. These municipal obligations do not qualify for the federal income exemption because (a) they did not receive necessary authorization for tax-exempt treatment from state or local government authorities, (b) they exceed certain regulatory limitations on the cost of issuance for tax-exempt financing or (c) they finance public or private activities that do not qualify for the federal income tax exemption. These non-qualifying activities might include, for example, certain types of multi-family housing, certain professional and local sports facilities, refinancing of certain municipal debt, and borrowing to replenish a municipality's underfunded pension plan. Although one or more of the other risks described in this SAI may apply, the largest risks associated with municipal obligations include: Credit Risk, Event Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market Risk. Preferred Stock Preferred stock is a type of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. The price of a preferred stock is generally determined by earnings, type of products or services, projected growth rates, experience of management, liquidity, and general market conditions of the markets on which the stock trades. Although one or more of the other risks described in this SAI may apply, the largest risks associated with preferred stock include: Issuer Risk, Management Risk, and Market Risk. Real Estate Investment Trusts Real estate investment trusts (REITs) are entities that manage a portfolio of real estate to earn profits for their shareholders. REITs can make investments in real estate such as shopping centers, nursing homes, office buildings, apartment complexes, and hotels. REITs can be subject to extreme volatility due to fluctuations in the demand for real estate, changes in interest rates, and adverse economic conditions. Additionally, the failure of a REIT to continue to qualify as a REIT for tax purposes can materially affect its value. Although one or more of the other risks described in this SAI may apply, the largest risks associated with REITs include: Issuer Risk, Management Risk, and Market Risk. Repurchase Agreements The Fund may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement, the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. Although one or more of the other risks described in this SAI may apply, the largest risks associated with repurchase agreements include: Credit Risk and Management Risk. -16- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Reverse Repurchase Agreements In a reverse repurchase agreement, the investor would sell a security and enter into an agreement to repurchase the security at a specified future date and price. The investor generally retains the right to interest and principal payments on the security. Since the investor receives cash upon entering into a reverse repurchase agreement, it may be considered a borrowing. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with reverse repurchase agreements include: Credit Risk, Interest Rate Risk, and Management Risk. Short Sales With short sales, an investor sells a security that it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the investor must borrow the security to make delivery to the buyer. The investor is obligated to replace the security that was borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the investor sold the security. A fund that is allowed to utilize short sales will designate cash or liquid securities to cover its open short positions. Those funds also may engage in "short sales against the box," a form of short-selling that involves selling a security that an investor owns (or has an unconditioned right to purchase) for delivery at a specified date in the future. This technique allows an investor to hedge protectively against anticipated declines in the market of its securities. If the value of the securities sold short increased between the date of the short sale and the date on which the borrowed security is replaced, the investor loses the opportunity to participate in the gain. A "short sale against the box" will result in a constructive sale of appreciated securities thereby generating capital gains to the Fund. Although one or more of the other risks described in this SAI may apply, the largest risks associated with short sales include: Management Risk and Market Risk. Sovereign Debt A sovereign debtor's willingness or ability to repay principal and pay interest in a timely manner may be affected by a variety of factors, including its cash flow situation, the extent of its reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor's policy toward international lenders, and the political constraints to which a sovereign debtor may be subject. (See also Foreign Securities.) With respect to sovereign debt of emerging market issuers, investors should be aware that certain emerging market countries are among the largest debtors to commercial banks and foreign governments. At times, certain emerging market countries have declared moratoria on the payment of principal and interest on external debt. Certain emerging market countries have experienced difficulty in servicing their sovereign debt on a timely basis that led to defaults and the restructuring of certain indebtedness. Sovereign debt includes Brady Bonds, which are securities issued under the framework of the Brady Plan, an initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. Although one or more of the other risks described in this SAI may apply, the largest risks associated with sovereign debt include: Credit Risk, Foreign/Emerging Markets Risk, and Management Risk. Structured Products Structured products are over-the-counter financial instruments created specifically to meet the needs of one or a small number of investors. The instrument may consist of a warrant, an option, or a forward contract embedded in a note or any of a wide variety of debt, equity, and/or currency combinations. Risks of structured products include the inability to close such instruments, rapid changes in the market, and defaults by other parties. (See also Derivative Instruments.) Although one or more of the other risks described in this SAI may apply, the largest risks associated with structured products include: Credit Risk, Liquidity Risk, and Management Risk. Variable- or Floating-Rate Securities The Fund may invest in securities that offer a variable- or floating-rate of interest. Variable-rate securities provide for automatic establishment of a new interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.). Floating-rate securities generally provide for automatic adjustment of the interest rate whenever some specified interest rate index changes. Variable- or floating-rate securities frequently include a demand feature enabling the holder to sell the securities to the issuer at par. In many cases, the demand feature can be exercised at any time. Some securities that do not have variable or floating interest rates may be accompanied by puts producing similar results and price characteristics. Variable-rate demand notes include master demand notes that are obligations that permit the Fund to invest fluctuating amounts, which may change daily without penalty, pursuant to direct arrangements between the Fund as lender, and the borrower. The interest rates on -17- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- these notes fluctuate from time to time. The issuer of such obligations normally has a corresponding right, after a given period, to prepay in its discretion the outstanding principal amount of the obligations plus accrued interest upon a specified number of days' notice to the holders of such obligations. Because these obligations are direct lending arrangements between the lender and borrower, it is not contemplated that such instruments generally will be traded. There generally is not an established secondary market for these obligations. Accordingly, where these obligations are not secured by letters of credit or other credit support arrangements, the Fund's right to redeem is dependent on the ability of the borrower to pay principal and interest on demand. Such obligations frequently are not rated by credit rating agencies and may involve heightened risk of default by the issuer. Although one or more of the other risks described in this SAI may apply, the largest risks associated with variable- or floating-rate securities include: Credit Risk and Management Risk. Warrants Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights and they do not represent any rights in the assets of the issuer. Warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities, and a warrant ceases to have value if it is not exercised prior to its expiration date. Although one or more of the other risks described in this SAI may apply, the largest risks associated with warrants include: Management Risk and Market Risk. When-Issued Securities and Forward Commitments When-issued securities and forward commitments involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Normally, the settlement date occurs within 45 days of the purchase although in some cases settlement may take longer. The investor does not pay for the securities or receive dividends or interest on them until the contractual settlement date. Such instruments involve the risk of loss if the value of the security to be purchased declines prior to the settlement date and the risk that the security will not be issued as anticipated. If the security is not issued as anticipated, the Fund may lose the opportunity to obtain a price and yield considered to be advantageous. Although one or more of the other risks described in this SAI may apply, the largest risks associated with when-issued securities and forward commitments include: Credit Risk and Management Risk. Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities These securities are debt obligations that do not make regular cash interest payments (see also Debt Obligations). Zero-coupon and step-coupon securities are sold at a deep discount to their face value because they do not pay interest until maturity. Pay-in-kind securities pay interest through the issuance of additional securities. Because these securities do not pay current cash income, the price of these securities can be extremely volatile when interest rates fluctuate. See the appendix for a discussion of securities ratings. Although one or more of the other risks described in this SAI may apply, the largest risks associated with zero-coupon, step-coupon, and pay-in-kind securities include: Credit Risk, Interest Rate Risk, and Management Risk. Security Transactions Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's investment goal and policies, which securities will be purchased, held, or sold. The description of policies and procedures in this section also applies to any Fund subadviser. In determining where the buy and sell orders are to be placed, AEFC has been directed to use its best efforts to obtain the best available price and the most favorable execution except where otherwise authorized by the board. In selecting broker-dealers to execute transactions, AEFC may consider the price of the security, including commission or mark-up, the size and difficulty of the order, the reliability, integrity, financial soundness, and general operation and execution capabilities of the broker, the broker's expertise in particular markets, and research services provided by the broker. The Fund, AEFC, any subadviser and American Express Financial Advisors Inc. (the Distributor) each have a strict Code of Ethics that prohibits affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for the Fund. The Fund's securities may be traded on a principal rather than an agency basis. In other words, AEFC will trade directly with the issuer or with a dealer who buys or sells for its own account, rather than acting on behalf of another client. AEFC does not pay the dealer commissions. Instead, the dealer's profit, if any, is the difference, or spread, between the dealer's purchase and sale price for the security. -18- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- On occasion, it may be desirable to compensate a broker for research services or for brokerage services by paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge. The board has adopted a policy authorizing AEFC to do so to the extent authorized by law, if AEFC determines, in good faith, that such commission is reasonable in relation to the value of the brokerage or research services provided by a broker or dealer, viewed either in the light of that transaction or AEFC's overall responsibilities with respect to the Fund and the other American Express mutual funds for which it acts as investment manager. Research provided by brokers supplements AEFC's own research activities. Such services include economic data on, and analysis of, U.S. and foreign economies; information on specific industries; information about specific companies, including earnings estimates; purchase recommendations for stocks and bonds; portfolio strategy services; political, economic, business, and industry trend assessments; historical statistical information; market data services providing information on specific issues and prices; and technical analysis of various aspects of the securities markets, including technical charts. Research services may take the form of written reports, computer software, or personal contact by telephone or at seminars or other meetings. AEFC has obtained, and in the future may obtain, computer hardware from brokers, including but not limited to personal computers that will be used exclusively for investment decision-making purposes, which include the research, portfolio management, and trading functions and other services to the extent permitted under an interpretation by the SEC. When paying a commission that might not otherwise be charged or a commission in excess of the amount another broker might charge, AEFC must follow procedures authorized by the board. To date, three procedures have been authorized. One procedure permits AEFC to direct an order to buy or sell a security traded on a national securities exchange to a specific broker for research services it has provided. The second procedure permits AEFC, in order to obtain research, to direct an order on an agency basis to buy or sell a security traded in the over-the-counter market to a firm that does not make a market in that security. The commission paid generally includes compensation for research services. The third procedure permits AEFC, in order to obtain research and brokerage services, to cause the Fund to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Fund that it is necessary to do business with a number of brokerage firms on a continuing basis to obtain such services as the handling of large orders, the willingness of a broker to risk its own money by taking a position in a security, and the specialized handling of a particular group of securities that only certain brokers may be able to offer. As a result of this arrangement, some portfolio transactions may not be effected at the lowest commission, but AEFC believes it may obtain better overall execution. AEFC has represented that under all three procedures the amount of commission paid will be reasonable and competitive in relation to the value of the brokerage services performed or research provided. All other transactions will be placed on the basis of obtaining the best available price and the most favorable execution. In so doing, if in the professional opinion of the person responsible for selecting the broker or dealer, several firms can execute the transaction on the same basis, consideration will be given by such person to those firms offering research services. Such services may be used by AEFC in providing advice to all American Express mutual funds even though it is not possible to relate the benefits to any particular fund. Each investment decision made for the Fund is made independently from any decision made for another portfolio, fund, or other account advised by AEFC or any of its subsidiaries. When the Fund buys or sells the same security as another portfolio, fund, or account, AEFC carries out the purchase or sale in a way the Fund agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Fund, the Fund hopes to gain an overall advantage in execution. On occasion the Fund may purchase and sell a security simultaneously in order to profit from short-term price disparities. On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and the overall reasonableness of their commissions. The review evaluates execution, operational efficiency, and research services. The Fund paid total brokerage commissions of $2,227,147 for fiscal year ended May 31, 2001, $5,510,415 for fiscal year 2000, and $2,478,231 for fiscal year 1999. Substantially all firms through whom transactions were executed provide research services. No transactions were directed to brokers because of research services they provided to the Fund. As of the end of the most recent fiscal year, the Fund held no securities of its regular brokers or dealers or of the parent of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities. The portfolio turnover rate was 366% in the most recent fiscal year, and 674% in the year before. Higher turnover rates may result in higher brokerage expenses. -19- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation Affiliates of American Express Company (of which AEFC is a wholly-owned subsidiary) may engage in brokerage and other securities transactions on behalf of the Fund according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. Subject to approval by the board, the same conditions apply to transactions with broker-dealer affiliates of any subadviser. AEFC will use an American Express affiliate only if (i) AEFC determines that the Fund will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Fund and (ii) the affiliate charges the Fund commission rates consistent with those the affiliate charges comparable unaffiliated customers in similar transactions and if such use is consistent with terms of the Investment Management Services Agreement. No brokerage commissions were paid to brokers affiliated with AEFC for the three most recent fiscal years. Performance Information The Fund may quote various performance figures to illustrate past performance. Average annual total return and current yield quotations, if applicable, used by the Fund are based on standardized methods of computing performance as required by the SEC. An explanation of the methods used by the Fund to compute performance follows below. AVERAGE ANNUAL TOTAL RETURN The Fund may calculate average annual total return for a class for certain periods by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value, according to the following formula: P(1+T)(to the power of n) = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) AGGREGATE TOTAL RETURN The Fund may calculate aggregate total return for a class for certain periods representing the cumulative change in the value of an investment in the Fund over a specified period of time according to the following formula: ERV - P ------- P where: P = a hypothetical initial payment of $1,000 ERV = ending redeemable value of a hypothetical $1,000 payment, made at the beginning of a period, at the end of the period (or fractional portion thereof) -20- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- ANNUALIZED YIELD The Fund may calculate an annualized yield for a class by dividing the net investment income per share deemed earned during a 30-day period by the net asset value per share on the last day of the period and annualizing the results. Yield is calculated according to the following formula: Yield = 2[(a-b + 1)(to the power of 6) - 1] --- cd where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period The Fund's annualized yield was 4.97% for Class A, 4.46% for Class B, 4.19% for Class C and 5.38% for Class Y for the 30-day period ended May 31, 2001. The Fund's yield, calculated as described above according to the formula prescribed by the SEC, is a hypothetical return based on market value yield to maturity for the Fund's securities. It is not necessarily indicative of the amount which was or may be paid to the Fund's shareholders. Actual amounts paid to Fund shareholders are reflected in the distribution yield. DISTRIBUTION YIELD Distribution yield is calculated according to the following formula: D divided by POPF equals DY --- ---- 30 30 where: D = sum of dividends for 30-day period POP = sum of public offering price for 30-day period F = annualizing factor DY = distribution yield The Fund's distribution yield was 4.80% for Class A, 4.27% for Class B, 4.26% for Class C and 5.20% for Class Y for the 30-day period ended May 31, 2001. In its sales material and other communications, the Fund may quote, compare or refer to rankings, yields, or returns as published by independent statistical services or publishers and publications such as The Bank Rate Monitor National Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund Report, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, Institutional Investor, Investor's Business Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and Wiesenberger Investment Companies Service. The Fund also may compare its performance to a wide variety of indexes or averages. There are similarities and differences between the investments that the Fund may purchase and the investments measured by the indexes or averages and the composition of the indexes or averages will differ from that of the Fund. Ibbotson Associates provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the CPI) and combinations of various capital markets. The performance of these capital markets is based on the returns of different indexes. The Fund may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. The Fund may quote various measures of volatility in advertising. Measures of volatility seek to compare a fund's historical share price fluctuations or returns to those of a benchmark. The Distributor may provide information designed to help individuals understand their investment goals and explore various financial strategies. Materials may include discussions of asset allocation, retirement investing, brokerage products and services, model portfolios, saving for college or other goals, and charitable giving. -21- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Valuing Fund Shares As of the end of the most recent fiscal year, the computation looked like this: Net assets Shares outstanding Net asset value of one share Class A $1,046,578,655 divided by 218,957,024 equals $4.78 Class B 911,548,363 190,742,034 4.78 Class C 6,969,263 1,457,848 4.78 Class Y 160,585,368 33,601,602 4.78 In determining net assets before shareholder transactions, the Fund's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): o Securities traded on a securities exchange for which a last-quoted sales price is readily available are valued at the last-quoted sales price on the exchange where such security is primarily traded. o Securities traded on a securities exchange for which a last-quoted sales price is not readily available are valued at the mean of the closing bid and asked prices, looking first to the bid and asked prices on the exchange where the security is primarily traded and, if none exist, to the over-the-counter market. o Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. o Securities included in the NASDAQ National Market System for which a last-quoted sales price is not readily available, and other securities traded over-the-counter but not included in the NASDAQ National Market System are valued at the mean of the closing bid and asked prices. o Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. o Foreign securities traded outside the United States are generally valued as of the time their trading is complete, which is usually different from the close of the Exchange. Foreign securities quoted in foreign currencies are translated into U.S. dollars at the current rate of exchange. Occasionally, events affecting the value of such securities may occur between such times and the close of the Exchange that will not be reflected in the computation of the Fund's net asset value. If events materially affecting the value of such securities occur during such period, these securities will be valued at their fair value according to procedures decided upon in good faith by the board. o Short-term securities maturing more than 60 days from the valuation date are valued at the readily available market price or approximate market value based on current interest rates. Short-term securities maturing in 60 days or less that originally had maturities of more than 60 days at acquisition date are valued at amortized cost using the market value on the 61st day before maturity. Short-term securities maturing in 60 days or less at acquisition date are valued at amortized cost. Amortized cost is an approximation of market value determined by systematically increasing the carrying value of a security if acquired at a discount, or reducing the carrying value if acquired at a premium, so that the carrying value is equal to maturity value on the maturity date. o Securities without a readily available market price and other assets are valued at fair value as determined in good faith by the board. The board is responsible for selecting methods it believes provide fair value. When possible, bonds are valued by a pricing service independent from the Fund. If a valuation of a bond is not available from a pricing service, the bond will be valued by a dealer knowledgeable about the bond if such a dealer is available. Investing in the Fund Investors should understand that the purpose and function of the initial sales charge and distribution fee for Class A shares is the same as the purpose and function of the CDSC and distribution fee for Class B and Class C shares. The sales charges and distribution fees applicable to each class pay for the distribution of shares of the Fund. SALES CHARGE Shares of the Fund are sold at the public offering price. The public offering price is the NAV of one share adjusted for the sales charge for Class A. For Class B, Class C and Class Y, there is no initial sales charge so the public offering price is the same as the NAV. Using the sales charge schedule in the table below, for Class A, the public offering price for an investment of less than $50,000, made on the last day of the most recent fiscal year, was determined by dividing the NAV of one share, $4.78, by 0.9525 (1.00 - 0.0475) for a maximum 4.75% sales charge for a public offering price of $5.02. The sales charge is paid to the Distributor by the person buying the shares. -23- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Class A -- Calculation of the Sales Charge Amount of Investment Sales charge as a percentage of: Public Offering Price Net Amount Invested Up to $49,999 4.75% 4.99% $50,000 - $99,999 4.50 4.71 $100,000 - $249,999 3.75 3.90 $250,000 - $499,999 2.50 2.56 $500,000 - $999,999 2.00* 2.04* $1,000,000 or more 0.00 0.00 * The sales charge will be waived until Dec. 31, 2001. The initial sales charge is waived for certain qualified plans. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The Fund will waive the deferred sales charge on certain redemptions if the redemption is a result of a participant's death, disability, retirement, attaining age 591/2, loans, or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of Participants Total Plan Assets 1-99 100 or more Less than $1 million 4% 0% $1 million or more 0% 0% Class A - Reducing the Sales Charge The market value of your investments in the Fund determines your sales charge. For example, suppose you have made an investment that now has a value of $20,000 and you later decide to invest $40,000 more. The value of your investments would be $60,000. As a result, your $40,000 investment qualifies for the lower 4.50% sales charge that applies to investments of more than $50,000 and up to $100,000. Class A -- Letter of Intent (LOI) If you intend to invest more than $50,000 over a period of time, you can reduce the sales charge in Class A by filing a LOI and committing to invest a certain amount. The agreement can start at any time and you will have up to 13 months to fulfill your commitment. The LOI start date can be backdated by up to 90 days. Your holdings in American Express funds acquired more than 90 days before receipt of your signed LOI in the home office will not be counted towards the completion of the LOI. Your investments will be charged the sales charge that applies to the amount you have committed to invest. Five percent of the commitment amount will be placed in escrow. If your commitment amount is reached within the 13-month period, the LOI will end and the shares will be released from escrow. Once the LOI has ended, future sales charges will be determined by the total value of the new investment combined with the market value of the existing American Express mutual fund investments. If you do not invest the commitment amount by the end of the 13 months, the remaining unpaid sales charge will be redeemed from the escrowed shares and the remaining balance released from escrow. The commitment amount does not include purchases in any class of American Express funds other than Class A; purchases in American Express funds held within a wrap product; and purchases of AXP Cash Management Fund and AXP Tax-Free Money Fund unless they are subsequently exchanged to Class A shares of an American Express mutual fund within the 13 month period. A LOI is not an option (absolute right) to buy shares. If you purchase shares in an American Express brokerage account or through a third party, you must inform the Distributor about the LOI when placing any purchase orders during the period of the LOI. Class Y Shares Class Y shares are offered to certain institutional investors. Class Y shares are sold without a front-end sales charge or a CDSC and are not subject to a distribution fee. The following investors are eligible to purchase Class Y shares: o Qualified employee benefit plans* if the plan: -- uses a daily transfer recordkeeping service offering participants daily access to American Express mutual funds and has -- at least $10 million in plan assets or -- 500 or more participants; or -- does not use daily transfer recordkeeping and has -- at least $3 million invested in American Express mutual funds or -- 500 or more participants. -23- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These institutions must have at least $10 million in American Express mutual funds. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit described above. o State sponsored college savings plans established under Section 529 of the Internal Revenue Code. * Eligibility must be determined in advance. To do so, contact your financial advisor. SYSTEMATIC INVESTMENT PROGRAMS After you make your initial investment of $100 or more, you must make additional payments of $100 or more on at least a monthly basis until your balance reaches $2,000. These minimums do not apply to all systematic investment programs. You decide how often to make payments -- monthly, quarterly, or semiannually. You are not obligated to make any payments. You can omit payments or discontinue the investment program altogether. The Fund also can change the program or end it at any time. AUTOMATIC DIRECTED DIVIDENDS Dividends, including capital gain distributions, paid by another American Express mutual fund may be used to automatically purchase shares in the same class of this Fund. Dividends may be directed to existing accounts only. Dividends declared by a fund are exchanged to this Fund the following day. Dividends can be exchanged into the same class of another American Express mutual fund but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: o Between a non-custodial account and an IRA, or 401(k) plan account or other qualified retirement account of which American Express Trust Company acts as custodian; o Between two American Express Trust Company custodial accounts with different owners (for example, you may not exchange dividends from your IRA to the IRA of your spouse); and o Between different kinds of custodial accounts with the same ownership (for example, you may not exchange dividends from your IRA to your 401(k) plan account, although you may exchange dividends from one IRA to another IRA). Dividends may be directed from accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) only into other UGMA or UTMA accounts with identical ownership. The Fund's investment goal is described in its prospectus along with other information, including fees and expense ratios. Before exchanging dividends into another fund, you should read that fund's prospectus. You will receive a confirmation that the automatic directed dividend service has been set up for your account. REJECTION OF BUSINESS The Fund or AECSC reserves the right to reject any business, in its sole discretion. Selling Shares You have a right to sell your shares at any time. For an explanation of sales procedures, please see the prospectus. During an emergency, the board can suspend the computation of NAV, stop accepting payments for purchase of shares, or suspend the duty of the Fund to redeem shares for more than seven days. Such emergency situations would occur if: o The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or o Disposal of the Fund's securities is not reasonably practicable or it is not reasonably practicable for the Fund to determine the fair value of its net assets, or o The SEC, under the provisions of the 1940 Act, declares a period of emergency to exist. Should the Fund stop selling shares, the board may make a deduction from the value of the assets held by the Fund to cover the cost of future liquidations of the assets so as to distribute fairly these costs among all shareholders. The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which obligates the Fund to redeem shares in cash, with respect to any one shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of the period. Although redemptions in excess of this limitation would normally be paid in cash, the Fund reserves the right to make these payments in whole or in part in securities or other assets in case of an emergency, or if the payment of a redemption in cash would be detrimental to the existing shareholders of the Fund as determined by the board. In these circumstances, the securities distributed would be valued as set forth in this SAI. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. -24- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Pay-out Plans You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem shares, you may be subject to a contingent deferred sales charge as discussed in the prospectus. While the plans differ on how the pay-out is figured, they all are based on the redemption of your investment. Net investment income dividends and any capital gain distributions will automatically be reinvested, unless you elect to receive them in cash. If you are redeeming a tax-qualified plan account for which American Express Trust Company acts as custodian, you can elect to receive your dividends and other distributions in cash when permitted by law. If you redeem an IRA or a qualified retirement account, certain restrictions, federal tax penalties, and special federal income tax reporting requirements may apply. You should consult your tax advisor about this complex area of the tax law. Applications for a systematic investment in a class of the Fund subject to a sales charge normally will not be accepted while a pay-out plan for any of those funds is in effect. Occasional investments, however, may be accepted. To start any of these plans, please consult your selling agent or write American Express Client Service Corporation, 70100 AXP Financial Center, Minneapolis, MN 55474, or call 800-437-3133. Your authorization must be received at least five days before the date you want your payments to begin. The initial payment must be at least $50. Payments will be made on a monthly, bimonthly, quarterly, semiannual, or annual basis. Your choice is effective until you change or cancel it. The following pay-out plans are designed to take care of the needs of most shareholders in a way AEFC can handle efficiently and at a reasonable cost. If you need a more irregular schedule of payments, it may be necessary for you to make a series of individual redemptions, in which case you will have to send in a separate redemption request for each pay-out. The Fund reserves the right to change or stop any pay-out plan and to stop making such plans available. Plan #1: Pay-out for a fixed period of time If you choose this plan, a varying number of shares will be redeemed at regular intervals during the time period you choose. This plan is designed to end in complete redemption of all shares in your account by the end of the fixed period. Plan #2: Redemption of a fixed number of shares If you choose this plan, a fixed number of shares will be redeemed for each payment and that amount will be sent to you. The length of time these payments continue is based on the number of shares in your account. Plan #3: Redemption of a fixed dollar amount If you decide on a fixed dollar amount, whatever number of shares is necessary to make the payment will be redeemed in regular installments until the account is closed. Plan #4: Redemption of a percentage of net asset value Payments are made based on a fixed percentage of the net asset value of the shares in the account computed on the day of each payment. Percentages range from 0.25% to 0.75%. For example, if you are on this plan and arrange to take 0.5% each month, you will get $50 if the value of your account is $10,000 on the payment date. Capital Loss Carryover For federal income tax purposes, the Fund had total capital loss carryovers of $197,677,589 at the end of the most recent fiscal year, that if not offset by subsequent capital gains will expire as follows: 2007 2008 2009 2010 ---- ---- ---- ---- $15,230 $58,055,865 $117,356,906 $22,249,588 It is unlikely that the board will authorize a distribution of any net realized capital gains until the available capital loss carryover has been offset or has expired except as required by Internal Revenue Service rules. Taxes For tax purposes, an exchange is considered a sale and purchase, and may result in a gain or loss. A sale is a taxable transaction. If you sell shares for less than their cost, the difference is a capital loss. If you sell shares for more than their cost, the difference is a capital gain. Your gain may be short term (for shares held for one year or less) or long term (for shares held more than one year). If you buy Class A shares and within 91 days exchange into another fund, you may not include the sales charge in your calculation of tax gain or loss on the sale of the first fund you purchased. The sales charge may be included in the calculation of your tax gain or loss on a subsequent sale of the second fund you purchased. For example: You purchase 100 shares of one fund having a public offering price of $10.00 per share. With a sales load of 4.75%, you pay $47.50 in sales load. With a NAV of $9.525 per share, the value of your investment is $952.50. Within 91 days of purchasing that fund, you decide to exchange -25- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- out of that fund, now at a NAV of $11.00 per share, up from the original NAV of $9.525, and purchase into a second fund, at a NAV of $15.00 per share. The value of your investment is now $1,100.00 ($11.00 x 100 shares). You cannot use the $47.50 paid as a sales load when calculating your tax gain or loss in the sale of the first fund shares. So instead of having a $100.00 gain ($1,100.00 -- $1,000.00), you have a $147.50 gain ($1,100.00 -- $952.50). You can include the $47.50 sales load in the basis of your shares in the second fund. If you have a nonqualified investment in the Fund and you wish to move part or all of those shares to an IRA or qualified retirement account in the Fund, you can do so without paying a sales charge. However, this type of exchange is considered a redemption of shares and may result in a gain or loss for tax purposes. In addition, this type of exchange may result in an excess contribution under IRA or qualified plan regulations if the amount exchanged plus the amount of the initial sales charge applied to the amount exchanged exceeds annual contribution limitations. For example: If you were to exchange $2,000 in Class A shares from a nonqualified account to an IRA without considering the 4.75% ($95) initial sales charge applicable to that $2,000, you may be deemed to have exceeded current IRA annual contribution limitations. You should consult your tax advisor for further details about this complex subject. Net investment income dividends received should be treated as dividend income for federal income tax purposes. Corporate shareholders are generally entitled to a deduction equal to 70% of that portion of the Fund's dividend that is attributable to dividends the Fund received from domestic (U.S.) securities. For the most recent fiscal year, none of the Fund's net investment income dividends qualified for the corporate deduction. The Fund may be subject to U.S. taxes resulting from holdings in a passive foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or more of its gross income for the taxable year is passive income or 50% or more of the average value of its assets consists of assets that produce or could produce passive income. Income earned by the Fund may have had foreign taxes imposed and withheld on it in foreign countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of the Fund's total assets at the close of its fiscal year consists of securities of foreign corporations, the Fund will be eligible to file an election with the Internal Revenue Service under which shareholders of the Fund would be required to include their pro rata portions of foreign taxes withheld by foreign countries as gross income in their federal income tax returns. These pro rata portions of foreign taxes withheld may be taken as a credit or deduction in computing the shareholders' federal income taxes. If the election is filed, the Fund will report to its shareholders the per share amount of such foreign taxes withheld and the amount of foreign tax credit or deduction available for federal income tax purposes. Capital gain distributions, if any, received by shareholders should be treated as long-term capital gains regardless of how long they owned their shares. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. A special 28% rate on capital gains may apply to sales of precious metals, if any, owned directly by the Fund. A special 25% rate on capital gains may apply to investments in REITs. Under the Internal Revenue Code of 1986 (the Code), gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues interest or other receivables, or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, gains or losses on disposition of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition also are treated as ordinary gains or losses. These gains or losses, referred to under the Code as "section 988" gains or losses, may increase or decrease the amount of the Fund's investment company taxable income to be distributed to its shareholders as ordinary income. Under federal tax law, by the end of a calendar year the Fund must declare and pay dividends representing 98% of ordinary income for that calendar year and 98% of net capital gains (both long-term and short-term) for the 12-month period ending Oct. 31 of that calendar year. The Fund is subject to an excise tax equal to 4% of the excess, if any, of the amount required to be distributed over the amount actually distributed. The Fund intends to comply with federal tax law and avoid any excise tax. The Internal Revenue Code imposes two asset diversification rules that apply to the Fund as of the close of each quarter. First, as to 50% of its holdings, the Fund may hold no more than 5% of its assets in securities of one issuer and no more than 10% of any one issuer's outstanding voting securities. Second, the Fund cannot have more than 25% of its assets in any one issuer. For purposes of the excise tax distributions, "section 988" ordinary gains and losses are distributable based on an Oct. 31 year end. This is an exception to the general rule that ordinary income is paid based on a calendar year end. If a mutual fund is the holder of record of any share of stock on the record date for any dividend payable with respect to such stock, such dividend shall be included in gross income by the Fund as of the later of (1) the date such share became ex-dividend or (2) the date the Fund acquired such share. Because the dividends on some foreign equity investments may be received some time after the stock goes ex-dividend, and in certain rare cases may never be received by the Fund, this rule may cause the Fund to take into income dividend income that it has not received and pay such income to its shareholders. To the extent that the dividend is never received, the Fund will take a loss at the time that a determination is made that the dividend will not be received. This is a brief summary that relates to federal income taxation only. Shareholders should consult their tax advisor as to the application of federal, state, and local income tax laws to Fund distributions. -26- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Agreements INVESTMENT MANAGEMENT SERVICES AGREEMENT AEFC, a wholly-owned subsidiary of American Express Company, is the investment manager for the Fund. Under the Investment Management Services Agreement, AEFC, subject to the policies set by the board, provides investment management services. For its services, AEFC is paid a fee based on the following schedule. Each class of the Fund pays its proportionate share of the fee. Assets Annual rate at (billions) each asset level First $1.0 0.520% Next 1.0 0.495 Next 1.0 0.470 Next 3.0 0.445 Next 3.0 0.420 Over 9.0 0.395 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.505% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of business two business days prior to the day for which the calculation is made. The management fee is paid monthly. Under the agreement, the total amount paid was $10,598,814 for fiscal year 2001, $15,111,807 for fiscal year 2000, and $14,751,038 for fiscal year 1999. Under the agreement, the Fund also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees; audit and certain legal fees; fidelity bond premiums; registration fees for shares; office expenses; postage of confirmations except purchase confirmations; consultants' fees; compensation of board members, officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities; and expenses properly payable by the Fund, approved by the board. Under the agreement, nonadvisory expenses, net of earnings credits, paid by the Fund were $1,206,145 for fiscal year 2001, $877,638 for fiscal year 2000, and $2,029,728 for fiscal year 1999. Administrative Services Agreement The Fund has an Administrative Services Agreement with AEFC. Under this agreement, the Fund pays AEFC for providing administration and accounting services. The fee is calculated as follows: Assets Annual rate at (billions) each asset level First $1.0 0.050% Next 1.0 0.045 Next 1.0 0.040 Next 3.0 0.035 Next 3.0 0.030 Over 9.0 0.025 On the last day of the most recent fiscal year, the daily rate applied to the Fund's net assets was equal to 0.047% on an annual basis. The fee is calculated for each calendar day on the basis of net assets as of the close of business two business days prior to the day for which the calculation is made. Under the agreement, the Fund paid fees of $994,228 for fiscal year 2001, $1,375,017 for fiscal year 2000, and $1,347,684 for fiscal year 1999. Third parties with which AEFC contracts to provide services for the Fund or its shareholders may pay a fee to AEFC to help defray the cost of providing administrative and accounting services. The amount of any such fee is negotiated separately with each service provider and does not constitute compensation for investment advisory, distribution, or other services. Payment of any such fee neither increases nor reduces fees or expenses paid by shareholders of the Fund. TRANSFER AGENCY AGREEMENT The Fund has a Transfer Agency Agreement with American Express Client Service Corporation (AECSC). This agreement governs AECSC's responsibility for administering and/or performing transfer agent functions, for acting as service agent in connection with dividend and distribution functions and for performing shareholder account administration agent functions in connection with the issuance, exchange and redemption or repurchase of the Fund's shares. Under the agreement, AECSC will earn a fee from the Fund determined by multiplying the number of shareholder accounts at the end of the day by a rate determined for each class per year and -27- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- dividing by the number of days in the year. The rate for Class A is $19.50 per year, for Class B is $20.50 per year, for Class C is $20 per year and for Class Y is $17.50 per year. The fees paid to AECSC may be changed by the board without shareholder approval. DISTRIBUTION AGREEMENT American Express Financial Advisors Inc. is the Fund's principal underwriter (the Distributor). The Fund's shares are offered on a continuous basis. Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to the Distributor daily. These charges amounted to $10,766,105 for fiscal year 2001. After paying commissions to personal financial advisors, and other expenses, the amount retained was $(3,851,979). The amounts were $30,808,112 and $(8,661,734) for fiscal year 2000, and $46,524,933 and $(13,459,275) for fiscal year 1999. Part of the sales charge may be paid to selling dealers who have agreements with the Distributor. The Distributor will retain the balance of the sales charge. At times the entire sales charge may be paid to selling dealers. SHAREHOLDER SERVICE AGREEMENT With respect to Class Y shares, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of average daily net assets. PLAN AND AGREEMENT OF DISTRIBUTION For Class A, Class B and Class C shares, to help defray the cost of distribution and servicing not covered by the sales charges received under the Distribution Agreement, the Fund and the Distributor entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays a fee up to actual expenses incurred at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Each class has exclusive voting rights on the Plan as it applies to that class. In addition, because Class B shares convert to Class A shares, Class B shareholders have the right to vote on any material change to expenses charged under the Class A plan. Expenses covered under this Plan include sales commissions; business, employee and financial advisor expenses charged to distribution of Class A, Class B and Class C shares; and overhead appropriately allocated to the sale of Class A, Class B and Class C shares. These expenses also include costs of providing personal service to shareholders. A substantial portion of the costs are not specifically identified to any one of the American Express mutual funds. The Plan must be approved annually by the board, including a majority of the disinterested board members, if it is to continue for more than a year. At least quarterly, the board must review written reports concerning the amounts expended under the Plan and the purposes for which such expenditures were made. The Plan and any agreement related to it may be terminated at any time by vote of a majority of board members who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan, or by vote of a majority of the outstanding voting securities of the relevant class of shares or by the Distributor. The Plan (or any agreement related to it) will terminate in the event of its assignment, as that term is defined in the 1940 Act. The Plan may not be amended to increase the amount to be spent for distribution without shareholder approval, and all material amendments to the Plan must be approved by a majority of the board members, including a majority of the board members who are not interested persons of the Fund and who do not have a financial interest in the operation of the Plan or any agreement related to it. The selection and nomination of disinterested board members is the responsibility of the other disinterested board members. No board member who is not an interested person, has any direct or indirect financial interest in the operation of the Plan or any related agreement. For the most recent fiscal year, the Fund paid fees of $2,621,716 for Class A shares, $8,823,724 for Class B shares and $31,046 for Class C shares. The fee is not allocated to any one service (such as advertising, payments to underwriters, or other uses). However, a significant portion of the fee is generally used for sales and promotional expenses. CUSTODIAN AGREEMENT The Fund's securities and cash are held by American Express Trust Company, 200 AXP Financial Center, Minneapolis, MN 55474, through a custodian agreement. The custodian is permitted to deposit some or all of its securities in central depository systems as allowed by federal law. For its services, the Fund pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. Organizational Information The Fund is an open-end management investment company. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. SHARES The shares of the Fund represent an interest in that fund's assets only (and profits or losses), and, in the event of liquidation, each share of the Fund would have the same rights to dividends and assets as every other share of that Fund. -28- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- VOTING RIGHTS As a shareholder in the Fund, you have voting rights over the Fund's management and fundamental policies. You are entitled to one vote for each share you own. Each class, if applicable, has exclusive voting rights with respect to matters for which separate class voting is appropriate under applicable law. All shares have cumulative voting rights with respect to the election of board members. This means that you have as many votes as the number of shares you own, including fractional shares, multiplied by the number of members to be elected. DIVIDEND RIGHTS Dividends paid by the Fund, if any, with respect to each class of shares, if applicable, will be calculated in the same manner, at the same time, on the same day, and will be in the same amount, except for differences resulting from differences in fee structures. AMERICAN EXPRESS FINANCIAL CORPORATION AEFC has been a provider of financial services since 1894. Its family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. In addition to managing assets of more than $87 billion for the American Express Funds, AEFC manages investments for itself and its subsidiaries, American Express Certificate Company and IDS Life Insurance Company. Total assets owned and managed as of the end of the most recent fiscal year were more than $233 billion. The Distributor serves individuals and businesses through its nationwide network of more than 600 supervisory offices, more than 3,800 branch offices and more than 9,800 financial advisors.
FUND HISTORY TABLE FOR ALL PUBLICLY OFFERED AMERICAN EXPRESS FUNDS* Date of Form of State of Fiscal Fund Organization Organization Organization Year End Diversified AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes AXP Bond Fund, Inc. 6/27/74, 6/31/86*** Corporation NV/MN 8/31 Yes AXP California Tax-Exempt Trust 4/7/86 Business Trust**** MA 6/30 AXP California Tax-Exempt Fund No AXP Discovery Fund, Inc. 4/29/81, 6/13/86*** Corporation NV/MN 7/31 Yes AXP Equity Select Fund, Inc.** 3/18/57, 6/13/86*** Corporation NV/MN 11/30 Yes AXP Extra Income Fund, Inc. 8/17/83 Corporation MN 5/31 Yes AXP Federal Income Fund, Inc. 3/12/85 Corporation MN 5/31 Yes AXP Global Series, Inc. 10/28/88 Corporation MN 10/31 AXP Emerging Markets Fund Yes AXP Global Balanced Fund Yes AXP Global Bond Fund No AXP Global Growth Fund Yes AXP Innovations Fund Yes AXP Growth Series, Inc. 5/21/70, 6/13/86*** Corporation NV/MN 7/31 AXP Growth Fund Yes AXP Research Opportunities Fund Yes AXP High Yield Tax-Exempt Fund, Inc. 12/21/78, 6/13/86*** Corporation NV/MN 11/30 Yes AXP International Fund, Inc. 7/18/84 Corporation MN 10/31 AXP European Equity Fund No AXP International Fund Yes AXP Investment Series, Inc. 1/18/40, 6/13/86*** Corporation NV/MN 9/30 AXP Diversified Equity Income Fund Yes AXP Mutual Yes AXP Managed Series, Inc. 10/9/84 Corporation MN 9/30 AXP Managed Allocation Fund Yes AXP Market Advantage Series, Inc. 8/25/89 Corporation MN 1/31 AXP Blue Chip Advantage Fund Yes AXP International Equity Index Fund No
-29- AXP Federal Income Fund, Inc. - --------------------------------------------------------------------------------
Date of Form of State of Fiscal Fund Organization Organization Organization Year End Diversified AXP Market Advantage Series, Inc. (cont.) AXP Mid Cap Index Fund No AXP Nasdaq 100 Index Fund No AXP S&P 500 Index Fund No AXP Small Company Index Fund Yes AXP Total Stock Market Index Fund No AXP Money Market Series, Inc. 8/22/75, 6/13/86*** Corporation NV/MN 7/31 AXP Cash Management Fund Yes AXP New Dimensions Fund, Inc. 2/20/68, 6/13/86*** Corporation NV/MN 7/31 AXP Growth Dimensions Fund Yes AXP New Dimensions Fund Yes AXP Precious Metals Fund, Inc. 10/5/84 Corporation MN 3/31 No AXP Progressive Fund, Inc. 4/23/68, 6/13/86*** Corporation NV/MN 9/30 Yes AXP Selective Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 5/31 Yes AXP Stock Fund, Inc. 2/10/45, 6/13/86*** Corporation NV/MN 9/30 Yes AXP Partners International Series, Inc. 5/9/01 Corporation MN 10/31 AXP Partners International Aggressive Growth Fund Yes AXP Partners International Select Value Fund Yes AXP Partners Series, Inc. 3/20/01 Corporation MN 5/31 AXP Partners Fundamental Value Fund Yes AXP Partners Small Cap Value Fund No AXP Partners Value Fund Yes AXP Special Tax-Exempt Series Trust 4/7/86 Business Trust**** MA 6/30 AXP Insured Tax-Exempt Fund Yes AXP Massachusetts Tax-Exempt Fund No AXP Michigan Tax-Exempt Fund No AXP Minnesota Tax-Exempt Fund No AXP New York Tax-Exempt Fund No AXP Ohio Tax-Exempt Fund No AXP Strategy Series, Inc. 1/24/84 Corporation MN 3/31 AXP Equity Value Fund** Yes AXP Focus 20 Fund No AXP Small Cap Advantage Fund Yes AXP Small Cap Growth Fund Yes AXP Strategy Aggressive Fund** Yes AXP Tax-Exempt Series, Inc. 9/30/76, 6/13/86*** Corporation NV/MN 11/30 AXP Intermediate Tax-Exempt Fund Yes AXP Tax-Exempt Bond Fund Yes AXP Tax-Free Money Fund, Inc. 2/29/80, 6/13/86*** Corporation NV/MN 12/31 Yes AXP Utilities Income Fund, Inc. 3/25/88 Corporation MN 6/30 Yes
* At the shareholders meeting held on June 16, 1999, shareholders approved the name change from IDS to AXP. In addition to substituting AXP for IDS, the following series changed their names: IDS Growth Fund, Inc. to AXP Growth Series, Inc., IDS Managed Retirement Fund, Inc. to AXP Managed Series, Inc., IDS Strategy Fund, Inc. to AXP Strategy Series, Inc., and IDS Tax-Exempt Bond Fund, Inc. to AXP Tax-Exempt Series, Inc. ** At the shareholders meeting held on Nov. 9, 1994, IDS Equity Plus Fund, Inc. changed its name to IDS Equity Select Fund, Inc. At that same time IDS Strategy Aggressive Equity Fund changed its name to IDS Strategy Aggressive Fund, and IDS Strategy Equity Fund changed its name to IDS Equity Value Fund. *** Date merged into a Minnesota corporation incorporated on 4/7/86. **** Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the trust itself is unable to meet its obligations. -30- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- BOARD MEMBERS AND OFFICERS - -------------------------------------------------------------------------------- Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 15 Master Trust portfolios and 65 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
- -------------------------------------------------------------------------------- Independent Board Members - -------------------------------------------------------------------------------- Position held with Principal Name, Registrant occupations address, and length during past Other Committee age of service 5 years directorships Memberships - ---------------------------------- -------------- ---------------------- -------------------------- ---------------- H. Brewster Atwater, Jr. Board member Retired chairman and Merck & Co., Inc. Board 4900 IDS Tower since 1996 chief executive (pharmaceuticals) Effectiveness, Minneapolis, MN 55402 officer, General Investment Mills, Inc. Review Born in 1931 (consumer foods) - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Arne H. Carlson Chair of the Chairman, Board Contracts, 901 S. Marquette Ave. Board since Services Corporation Executive, Minneapolis, MN 55402 1999 (provides Investment administrative Review, Board Born in 1934 services to boards) Effectiveness Former Governor of Minnesota - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Lynne V. Cheney Board member Distinguished The Reader's Digest Joint Audit, American Enterprise Institute since 1994 Fellow, AEI Association Inc. Contracts for Public Policy Research (AEI) 1150 17th St., N.W. Washington, D.C. 20036 Born in 1941 - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Livio D. DeSimone Board member Retired chair of the Cargill, Incorporated Joint Audit, 30 Seventh Street since 2001 board and chief (commodity merchants and Contracts St. Paul, MN 55101-4901 executive officer, processors), Target Minnesota Mining and Corporation (department Born in 1936 Manufacturing (3M) stores), General Mills, Inc. (consumer foods) and Vulcan Materials Company (construction materials/ chemicals) - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Ira D. Hall Board member Treasurer, Texaco Joint Audit, Texaco, Inc. since 2001 Inc. since 1998. Investment 2000 Westchester Avenue Prior to that, Review White Plains, NY 10650 director, International Born in 1944 Operations IBM Corp. - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Heinz F. Hutter Board member Retired president Board P.O. Box 2187 since 1994 and chief operating Effectiveness, Minneapolis, MN 55402 officer, Cargill, Investment Incorporated Review Born in 1929 (commodity merchants and processors) - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Anne P. Jones Board member Attorney and Motorola, Inc. Joint Audit, 5716 Bent Branch Rd. since 1985 telecommunications (electronics). Board Bethesda, MD 20816 consultant Effectiveness Born in 1935 - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- William R. Pearce Board member RII Weyerhaeuser Executive, 2050 One Financial Plaza since 1980 World Timberfund, Investment Minneapolis, MN 55402 L.P. (develops Review, Board timber resources) - Effectiveness Born in 1927 management committee; Former chair, American Express Funds - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Alan K. Simpson Board member Former three-term Biogen, Inc. Joint Audit, 1201 Sunshine Ave. since 1997 United States (bio-pharmaceuticals). Contracts Cody, WY 82414 Senator for Wyoming Born in 1931 - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- C. Angus Wurtele Board member Retired chair of the The Valspar Corporation Contracts, Suite 1700 since 1994 board and chief (paints), Bemis Investment Foshay Tower executive officer, Corporation (packaging). Review Minneapolis, MN 55402 The Valspar Corporation Born in 1934 - ---------------------------------- -------------- ---------------------- -------------------------- -----------------
-31- AXP Federal Income Fund, Inc. - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------- Board Members Affiliated with American Express Financial Corporation (AEFC) Position held with Principal Name, Registrant occupations age, and length during past Other Committee address of service 5 years directorships memberships - ---------------------------------- -------------- ---------------------- --------------------------- ----------------- David R. Hubers Board member Retired chief Chronimed Inc. 50643 AXP Financial Center since 1993 executive officer (specialty pharmaceutical Minneapolis, MN 55474 and director and distribution), RTW Inc. current chair of the (manages worker's Born in 1943 board of AEFC compensation programs), Lawson Software, Inc. (technology based business applications) - ---------------------------------- -------------- ---------------------- --------------------------- ----------------- John R. Thomas Board member Senior vice Executive, 50652 AXP Financial Center since 1987, president - Investment Minneapolis, MN 55474 president information and Review since 1997 technology of AEFC Born in 1937 - ---------------------------------- -------------- ---------------------- --------------------------- ----------------- The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Thomas, who is president, the Fund's other officers are: - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Other Officers Position held with Principal Name, Registrant occupations address, and length during past Other Committee age of service 5 years directorships memberships - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- John M. Knight Treasurer Vice president - 50005 AXP Financial Center since 1999 investment Minneapolis, MN 55474 accounting of AEFC Born in 1952 - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Leslie L. Ogg Vice President of Board 901 S. Marquette Ave. president, Services Corporation Minneapolis, MN 55402 general counsel, and Born in 1938 secretary since 1978 - ---------------------------------- -------------- ---------------------- -------------------------- ----------------- Frederick C. Quirsfeld Vice Senior vice 53609 AXP Financial Center president president - fixed Minneapolis, MN 55474 since 1998 income and director of AEFC Born in 1947 - ---------------------------------- -------------- ---------------------- -------------------------- -----------------
Compensation for Board Members During the most recent fiscal year, the independent members of the Fund and Portfolio boards, for attending up to 25 meetings, received the following compensation: Compensation Table
Total cash compensation from Aggregate Aggregate American Express Funds and Board member compensation from the Fund compensation from the Portfolio Preferred Master Trust Group H. Brewster Atwater, Jr. $1,430 $1,738 $134,367 Lynne V. Cheney 908 1,100 86,800 Livio D. DeSimone 475 575 48,483 Ira D. Hall 825 975 79,733 Heinz F. Hutter 1,280 1,588 123,917 Anne P. Jones 1,280 1,588 123,567 William R. Pearce 1,308 1,617 125,917 Alan K. Simpson 1,108 1,417 111,217 C. Angus Wurtele 1,230 1,538 119,967
As of 30 days prior to the date of this SAI, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. -32- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Independent Auditors The financial statements contained in the Annual Report were audited by independent auditors, KPMG LLP, 4200 Wells Fargo Center, 90 S. Seventh St., Minneapolis, MN 55402-3900. The independent auditors also provide other accounting and tax-related services as requested by the Fund. -33- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- APPENDIX DESCRIPTION OF RATINGS Standard & Poor's Debt Ratings A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of such information or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: o Likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation. o Nature of and provisions of the obligation. o Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Investment Grade Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. Speculative grade Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions. Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category also is used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category also is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. The rating CI is reserved for income bonds on which no interest is being paid. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. -35- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Moody's Long-Term Debt Ratings Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risk appear somewhat larger than in Aaa securities. A -- Bonds that are rated A possess many favorable investment attributes and are to be considered as upper-medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment some time in the future. Baa -- Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba -- Bonds that are rated Ba are judged to have speculative elements--their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B -- Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or maintenance of other terms of the contract over any long period of time may be small. Caa -- Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C -- Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. SHORT-TERM RATINGS Standard & Poor's Commercial Paper Ratings A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from A-1 for the highest quality obligations to D for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with doubtful capacity for payment. D Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. -35- AXP Federal Income Fund, Inc. - -------------------------------------------------------------------------------- Standard & Poor's Note Ratings An S&P note rating reflects the liquidity factors and market-access risks unique to notes. Notes maturing in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. Note rating symbols and definitions are as follows: SP-1 Strong capacity to pay principal and interest. Issues determined to possess very strong characteristics are given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. SP-3 Speculative capacity to pay principal and interest. Moody's Short-Term Ratings Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers: Issuers rated Prime-l (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-l repayment ability will often be evidenced by many of the following characteristics: (i) leading market positions in well-established industries, (ii) high rates of return on funds employed, (iii) conservative capitalization structure with moderate reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed financial charges and high internal cash generation, and (v) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. Moody's & S&P's Short-Term Muni Bonds and Notes Short-term municipal bonds and notes are rated by Moody's and by S&P. The ratings reflect the liquidity concerns and market access risks unique to notes. Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large as in the preceding group. Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal and interest. Standard & Poor's rating SP-3 indicates speculative capacity to pay principal and interest. S-6042-20 V (7/01) Independent Auditors' Report THE BOARD AND SHAREHOLDERS AXP FEDERAL INCOME FUND, INC. We have audited the accompanying statement of assets and liabilities of AXP Federal Income Fund, Inc. as of May 31, 2001, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2001, and the financial highlights for each of the years in the five-year period ended May 31, 2001. 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 auditing standards generally accepted in the United States of America. 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. 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 AXP Federal Income Fund, Inc. as of May 31, 2001, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with acccounting principles generally accepted in the United States of America. /s/ KPMG LLP -------- KPMG LLP Minneapolis, Minnesota July 6, 2001 - -------------------------------------------------------------------------------- 11 ANNUAL REPORT -- 2001 Financial Statements Statement of assets and liabilities AXP Federal Income Fund, Inc. May 31, 2001 Assets Investment in Government Income Portfolio (Note 1) $2,127,823,071 Capital shares receivable 299,055 ------- Total assets 2,128,122,126 ------------- Liabilities Dividends payable to shareholders 1,888,604 Accrued distribution fee 32,188 Accrued service fee 439 Accrued transfer agency fee 6,078 Accrued administrative services fee 2,730 Other accrued expenses 510,438 ------- Total liabilities 2,440,477 --------- Net assets applicable to outstanding capital stock $2,125,681,649 ============== Represented by Capital stock -- $.01 par value (Note 1) $ 4,447,585 Additional paid-in capital 2,334,881,600 Undistributed net investment income 1,050,228 Accumulated net realized gain (loss) (Note 5) (240,587,784) Unrealized appreciation (depreciation) on investments 25,890,020 ---------- Total -- representing net assets applicable to outstanding capital stock $2,125,681,649 ============== Net assets applicable to outstanding shares: Class A $1,046,578,655 Class B $ 911,548,363 Class C $ 6,969,263 Class Y $ 160,585,368 Net asset value per share of outstanding capital stock: Class A shares 218,957,024 $ 4.78 Class B shares 190,742,034 $ 4.78 Class C shares 1,457,848 $ 4.78 Class Y shares 33,601,602 $ 4.78 See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 12 AXP FEDERAL INCOME FUND Statement of operations AXP Federal Income Fund, Inc. Year ended May 31, 2001 Investment income Income: Interest $139,968,434 ------------ Total income 139,968,434 ----------- Expenses (Note 2): Expenses allocated from Government Income Portfolio 11,299,777 Distribution fee Class A 2,621,716 Class B 8,823,724 Class C 31,046 Transfer agency fee 2,099,937 Incremental transfer agency fee Class A 110,154 Class B 140,312 Class C 462 Service fee -- Class Y 155,473 Administrative services fees and expenses 994,228 Compensation of board members 9,844 Printing and postage 496,464 Registration fees 164,947 Audit fees 11,750 Other 8,704 ----- Total expenses 26,968,538 Earnings credits on cash balances (Note 2) (187,564) -------- Total net expenses 26,780,974 ---------- Investment income (loss) -- net 113,187,460 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 35,605,406 Short positions in securities 3,313,913 Futures contracts (87,623,758) Options contracts written 31,115,153 ---------- Net realized gain (loss) on investments (17,589,286) Net change in unrealized appreciation (depreciation) on investments 103,404,118 ----------- Net gain (loss) on investments 85,814,832 ---------- Net increase (decrease) in net assets resulting from operations $199,002,292 ============ See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 13 ANNUAL REPORT -- 2001
Statements of changes in net assets AXP Federal Income Fund, Inc. Year ended May 31, 2001 2000 Operations and distributions Investment income (loss) -- net $ 113,187,460 $ 164,697,414 Net realized gain (loss) on investments (17,589,286) (161,971,636) Net change in unrealized appreciation (depreciation) on investments 103,404,118 (11,748,639) ----------- ----------- Net increase (decrease) in net assets resulting from operations 199,002,292 (9,022,861) Distributions to shareholders from: Net investment income Class A (59,338,208) (87,267,267) Class B (43,267,360) (67,081,101) Class C (145,067) -- Class Y (9,058,042) (10,938,490) Net realized gain Class A -- (22,696,103) Class B -- (20,384,476) Class Y -- (2,771,806) ------------ ---------- Total distributions (111,808,677) (211,139,243) ------------ ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Notes 2 and 6) 557,031,191 957,959,429 Class B shares 616,334,169 1,101,306,020 Class C shares 11,695,359 -- Class Y shares 73,132,540 90,422,090 Reinvestment of distributions at net asset value Class A shares 50,921,168 91,983,422 Class B shares 40,707,729 82,266,629 Class C shares 135,612 -- Class Y shares 9,136,754 13,501,446 Payments for redemptions Class A shares (743,174,447) (1,525,008,689) Class B shares (Note 2) (763,027,277) (1,604,093,987) Class C shares (Note 2) (4,929,639) -- Class Y shares (102,610,026) (107,104,930) ------------ ------------ Increase (decrease) in net assets from capital share transactions (254,646,867) (898,768,570) ------------ ------------ Total increase (decrease) in net assets (167,453,252) (1,118,930,674) Net assets at beginning of year 2,293,134,901 3,412,065,575 ------------- ------------- Net assets at end of year $2,125,681,649 $ 2,293,134,901 ============== =============== Undistributed (excess of distributions over) net investment income $ 1,050,228 $ (328,697) -------------- ---------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 14 AXP FEDERAL INCOME FUND Notes to Financial Statements AXP Federal Income Fund, Inc. 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 has 10 billion authorized shares of capital stock. Class C shares of the Fund were offered to the public on June 26, 2000. Prior to this date, American Express Financial Corporation (AEFC) purchased 862 shares of capital stock at $4.64 per share, which represented the initial capital in Class C. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth calendar year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, incremental transfer agency fee and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Government Income Portfolio The Fund invests all of its assets in Government Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in U.S. government and government agency securities. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund as of May 31, 2001 was 99.99%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities, and contingent assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. - -------------------------------------------------------------------------------- 15 ANNUAL REPORT -- 2001 Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, accumulated net realized loss has been increased by $555 resulting in a net reclassification adjustment to increase paid-in capital by $555. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets in reducing percentages from 0.05% to 0.025% annually. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $19.50 o Class B $20.50 o Class C $20.00 o Class Y $17.50 The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. - -------------------------------------------------------------------------------- 16 AXP FEDERAL INCOME FUND Sales charges received by the Distributor for distributing Fund shares were $9,699,250 for Class A and $1,063,950 for Class B for the year ended May 31, 2001 and $2,905 for Class C for the period ended May 31, 2001. During the year ended May 31, 2001, the Fund's transfer agency fees were reduced by $187,564 as a result of earnings credits from overnight cash balances. 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2001 Class A Class B Class C* Class Y Sold 117,838,668 130,460,620 2,468,176 15,440,033 Issued for reinvested distributions 10,793,813 8,634,876 28,527 1,937,886 Redeemed (157,861,929) (162,183,223) (1,038,855) (21,830,395) ------------ ------------ ---------- ----------- Net increase (decrease) (29,229,448) (23,087,727) 1,457,848 (4,452,476) ----------- ----------- --------- ----------
* Inception date was June 26, 2000.
Year ended May 31, 2000 Class A Class B Class C Class Y Sold 199,298,363 229,059,887 N/A 18,947,351 Issued for reinvested distributions 19,251,663 17,223,651 N/A 2,832,909 Redeemed (319,120,358) (335,745,653) N/A (22,473,696) ------------ ------------ ----------- Net increase (decrease) (100,570,332) (89,462,115) N/A (693,436) ------------ ----------- --- --------
4. BANK BORROWINGS The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than five business days plus 367% of advances over five business days. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.05% per annum. The Fund had no borrowings outstanding during the year ended May 31, 2001. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund has a capital loss carry-over of $197,677,589 as of May 31, 2001, that if not offset by subsequent capital gains, will expire in 2008 through 2010. It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. - -------------------------------------------------------------------------------- 17 ANNUAL REPORT -- 2001 6. FUND MERGER As of the close of business on July 14, 2000, AXP Federal Income Fund acquired the assets and assumed the identified liabilities of Strategist Government Income Fund. The aggregate net assets of AXP Federal Income Fund immediately before the acquisition were $2,204,113,847. The merger was accomplished by a tax-free exchange of 185,105 shares of Strategist Government Income Fund valued at $836,876. In exchange for the Strategist Government Income Fund shares and net assets, AXP Federal Income Fund issued the following number of shares: Shares Net assets Class A 179,930 $836,876 Strategist Government Income Fund's net assets at that date consisted of capital stock of $907,578, accumulated net realized loss of $56,041 and unrealized depreciation of $14,661. 7. NEW ACCOUNTING PRONOUNCEMENT In November 2000, the AICPA issued a revised Audit and Accounting Guide, Audits of Investment Companies, which is effective for fiscal years beginning after Dec. 15, 2000. Adopting the revised Guide is not expected to have a significant impact on the Fund's financial position, results of operations or changes in its net assets. - -------------------------------------------------------------------------------- 18 AXP FEDERAL INCOME FUND 8. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $4.59 $4.94 $5.08 $4.98 $4.92 Income from investment operations: Net investment income (loss) .27 .27 .27 .30 .32 Net gains (losses) (both realized and unrealized) .19 (.27) (.07) .10 .06 Total from investment operations .46 -- .20 .40 .38 Less distributions: Dividends from net investment income (.27) (.28) (.27) (.30) (.32) Distributions from realized gains -- (.07) (.07) -- -- Total distributions (.27) (.35) (.34) (.30) (.32) Net asset value, end of period $4.78 $4.59 $4.94 $5.08 $4.98 Ratios/supplemental data Net assets, end of period (in millions) $1,047 $1,139 $1,723 $1,403 $1,267 Ratio of expenses to average daily net assets(c) .98% .92% .88% .86% .90% Ratio of net investment income (loss) to average daily net assets 5.72% 5.71% 5.36% 5.89% 6.37% Portfolio turnover rate (excluding short-term securities) 366% 674% 278% 159% 146% Total return(e) 10.19% (.01%) 4.07% 8.15% 7.73%
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $4.59 $4.94 $5.08 $4.98 $4.92 Income from investment operations: Net investment income (loss) .24 .24 .23 .26 .28 Net gains (losses) (both realized and unrealized) .18 (.28) (.07) .10 .06 Total from investment operations .42 (.04) .16 .36 .34 Less distributions: Dividends from net investment income (.23) (.24) (.23) (.26) (.28) Distributions from realized gains -- (.07) (.07) -- -- Total distributions (.23) (.31) (.30) (.26) (.28) Net asset value, end of period $4.78 $4.59 $4.94 $5.08 $4.98 Ratios/supplemental data Net assets, end of period (in millions) $912 $981 $1,498 $1,045 $820 Ratio of expenses to average daily net assets(c) 1.73% 1.68% 1.63% 1.61% 1.66% Ratio of net investment income (loss) to average daily net assets 4.96% 4.95% 4.61% 5.13% 5.60% Portfolio turnover rate (excluding short-term securities) 366% 674% 278% 159% 146% Total return(e) 9.36% (.77%) 3.31% 7.32% 6.90%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 20 ANNUAL REPORT -- 2001 Class C Per share income and capital changes(a) Fiscal period ended May 31, 2001b Net asset value, beginning of period $4.63 Income from investment operations: Net investment income (loss) .22 Net gains (losses) (both realized and unrealized) .14 Total from investment operations .36 Less distributions: Dividends from net investment income (.21) Distributions from realized gains -- Total distributions (.21) Net asset value, end of period $4.78 Ratios/supplemental data Net assets, end of period (in millions) $7 Ratio of expenses to average daily net assets(c) 1.73%(d) Ratio of net investment income (loss) to average daily net assets 4.93%(d) Portfolio turnover rate (excluding short-term securities) 366% Total return(e) 8.08%
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2001 2000 1999 1998 1997 Net asset value, beginning of period $4.59 $4.94 $5.08 $4.98 $4.92 Income from investment operations: Net investment income (loss) .28 .28 .28 .30 .32 Net gains (losses) (both realized and unrealized) .19 (.28) (.07) .10 .06 Total from investment operations .47 -- .21 .40 .38 Less distributions: Dividends from net investment income (.28) (.28) (.28) (.30) (.32) Distributions from realized gains -- (.07) (.07) -- -- Total distributions (.28) (.35) (.35) (.30) (.32) Net asset value, end of period $4.78 $4.59 $4.94 $5.08 $4.98 Ratios/supplemental data Net assets, end of period (in millions) $161 $175 $191 $119 $115 Ratio of expenses to average daily net assets(c) .82% .78% .80% .78% .73% Ratio of net investment income (loss) to average daily net assets 5.89% 5.92% 5.44% 5.97% 6.54% Portfolio turnover rate (excluding short-term securities) 366% 674% 278% 159% 146% Total return(e) 10.36% .15% 4.15% 8.23% 7.91%
See accompanying notes to financial highlights. - -------------------------------------------------------------------------------- 20 AXP FEDERAL INCOME FUND Notes to financial highlights (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 21 ANNUAL REPORT -- 2001 Independent Auditors' Report THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Government Income Portfolio (a series of Income Trust) as of May 31, 2001, 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 May 31, 2001. These financial statements are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2001, by correspondence with the custodian and brokers. 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 Government Income Portfolio as of May 31, 2001, and the results of its operations and the changes in its net assets for the periods stated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP -------- KPMG LLP Minneapolis, Minnesota July 6, 2001 - -------------------------------------------------------------------------------- 22 AXP FEDERAL INCOME FUND Financial Statements
Statement of assets and liabilities Government Income Portfolio May 31, 2001 Assets Investments in securities, at value (Note 1) (identified cost $2,363,698,823) $2,396,200,718 Cash in bank on demand deposit 32,208 Accrued interest receivable 16,261,973 Receivable for investment securities sold 194,494,886 ----------- Total assets 2,606,989,785 ------------- Liabilities Payable for investment securities purchased 87,359,893 Payable for securities purchased on a when-issued basis (Note 1) 132,749,987 Payable upon return of securities loaned (Note 5) 216,970,625 Accrued investment management services fee 29,341 Other accrued expenses 107,164 Securities sold short, at value (proceeds $40,806,641) (Note 3) 40,826,563 Options contracts written, at value (premium received $1,120,852) (Note 6) 1,014,856 --------- Total liabilities 479,058,429 ----------- Net assets $2,127,931,356 ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 23 ANNUAL REPORT -- 2001
Statement of operations Government Income Portfolio Year ended May 31, 2001 Investment income Income: Interest $139,998,463 Expenses (Note 2): ------------ Investment management services fee 10,598,814 Compensation of board members 12,136 Custodian fees 631,670 Audit fees 35,500 Other 44,032 ------ Total expenses 11,322,152 Earnings credits on cash balances (Note 2) (21,338) ------- Total net expenses 11,300,814 ---------- Investment income (loss) -- net 128,697,649 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 35,611,335 Short positions in securities 3,313,526 Futures contracts (87,629,466) Options contracts written (Note 6) 31,116,941 ---------- Net realized gain (loss) on investments (17,587,664) Net change in unrealized appreciation (depreciation) on investments 103,416,833 ----------- Net gain (loss) on investments 85,829,169 ---------- Net increase (decrease) in net assets resulting from operations $214,526,818 ============
Statements of changes in net assets Government Income Portfolio Year ended May 31, 2001 2000 Operations Investment income (loss) -- net $ 128,697,649 $ 187,300,474 Net realized gain (loss) on investments (17,587,664) (162,014,369) Net change in unrealized appreciation (depreciation) on investments 103,416,833 (11,756,905) Net increase (decrease) in net assets ----------- ------------ resulting from operations 214,526,818 13,529,200 Net contributions (withdrawals) from partners (384,017,781) (1,130,555,315) ------------- --------------- Total increase (decrease) in net assets (169,490,963) (1,117,026,115) Net assets at beginning of year 2,297,422,319 3,414,448,434 ------------- ------------- Net assets at end of year $2,127,931,356 $ 2,297,422,319 ============== ===============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 24 AXP FEDERAL INCOME FUND Notes to Financial Statements Government Income Portfolio 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Government Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio seeks to provide a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to accounting principles generally accepted in the United States of America requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and sell put and call options and write put and call options. This may include purchasing mortgage-backed security (MBS) put spread options and writing 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 Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio 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 Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. The Portfolio also may write over-the-counter options where completing the obligation depends 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 Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio 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. - -------------------------------------------------------------------------------- 25 ANNUAL REPORT -- 2001 Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio 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 Portfolio 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 Portfolio recognizes a realized gain or loss when the contract is closed or expires. Short sales The Portfolio may engage in short sales. In these transactions, the Portfolio sells a security that it does not own. The Portfolio is obligated to replace the security that was short by purchasing it at the market price at the time of replacement or entering into an offsetting transaction with the broker. The price at such time may be more or less than the price at which the Portfolio sold the security. Securities purchased on a when-issued basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment or when-issued basis can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's gross assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its commitment. As of May 31, 2001, the Portfolio had entered into outstanding when-issued or forward-commitments of $132,749,987. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. 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. - -------------------------------------------------------------------------------- 26 AXP FEDERAL INCOME FUND 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with AEFC to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets in reducing percentages from 0.52% to 0.395% annually. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. During the year ended May 31, 2001, the Portfolio's custodian fees were reduced by $21,338 as a result of earnings credits from overnight cash balances. The Portfolio also pays custodian fees to American Express Trust Company, an affiliate of AEFC. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $7,943,789,075 and $9,027,124,153, respectively, for the year ended May 31, 2001. For the same period, the portfolio turnover rate was 366%. Realized gains and losses are determined on an identified cost basis. As of May 31, 2001, the following security was sold short: Principal Issuer amount Proceeds Value Federal Natl Mtge Assn 6.00% 2030 $42,500,000 $40,806,641 $40,826,563 4. INTEREST RATE FUTURES CONTRACTS As of May 31, 2001, investments in securities included securities valued at $63,158,360 that were pledged as collateral to cover initial margin deposits on 4,262 open purchase contracts and 5,175 open sale contracts. The notional market value of the open purchase contracts as of May 31, 2001, was $1,003,506,113 with a net unrealized loss of $1,633,423. The notional market value of the open sale contracts as of May 31, 2001, was $650,874,750 with a net unrealized loss of $5,063,164. See "Summary of significant accounting policies." 5. LENDING OF PORTFOLIO SECURITIES As of May 31, 2001, securities valued at $210,153,940 were on loan to brokers. For collateral, the Portfolio received $216,970,625 in cash. Income from securities lending amounted to $201,347 for the year ended May 31, 2001. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. - -------------------------------------------------------------------------------- 27 ANNUAL REPORT -- 2001 6. OPTIONS CONTRACTS WRITTEN Contracts and premium amounts associated with options contracts written are as follows: Year ended May 31, 2001 Puts Calls Contracts Premium Contracts Premium Balance May 31, 2000 10,922 $ 3,542,529 21,149 $ 9,776,220 Opened 85,360 15,451,861 116,579 26,029,317 Closed (27,836) (9,495,319) (46,647) (11,829,391) Exercised -- -- (31,508) (20,925,968) Expired (63,558) (8,714,654) (58,935) (2,713,743) ------- ---------- ------- ---------- Balance May 31, 2001 4,888 $ 784,417 638 $ 336,435 ----- ----------- --- ------------ See "Summary of significant accounting policies." 7. NEW ACCOUNTING PRONOUNCEMENT In November 2000, the AICPA issued a revised Audit and Accounting Guide, Audits of Investment Companies, which is effective for fiscal years beginning after Dec. 15, 2000. Adopting the revised Guide is not expected to have a significant impact on the Portfolio's financial position, results of operations or changes in its net assets. - -------------------------------------------------------------------------------- 28 AXP FEDERAL INCOME FUND Investments in Securities Government Income Portfolio May 31, 2001 (Percentages represent value of investments compared to net assets) Bonds (97.4%) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (80.6%) Federal Home Loan Mtge Corp 07-01-03 6.50% $3,193 $3,192 11-15-03 6.38 40,000,000 41,443,600 09-01-09 6.50 2,834,576 2,873,536 10-01-10 7.00 7,314,487 7,533,179 01-01-13 6.00 8,739,022 8,733,086 02-01-13 6.50 588,098 594,326 05-01-14 6.50 864,702 872,599 06-01-14 6.50 4,753,607 4,797,079 07-01-14 6.50 30,724,411 31,005,021 08-01-14 6.50 2,745,333 2,770,406 09-01-14 6.50 5,452,460 5,502,258 10-01-14 6.50 1,315,452 1,327,466 11-01-14 6.50 13,100,969 13,220,622 12-01-14 7.50 2,029,853 2,093,598 01-01-15 7.50 109,322 112,755 03-01-15 6.50 3,691,104 3,724,816 03-01-15 7.50 536,095 552,930 04-01-15 7.50 180,110,106 185,767,273 05-01-15 7.50 3,930,073 4,057,243 06-01-15 7.50 6,831,425 7,045,955 12-01-15 8.00 2,225,033 2,308,208 11-01-23 8.00 7,766,145 8,168,311 05-01-24 7.50 3,302,355 3,406,857 07-01-24 8.00 959,399 1,007,813 07-01-24 8.00 3,530,909(f) 3,689,059 01-01-25 9.00 3,633,048 3,869,701 06-01-25 8.00 5,831,223 6,086,339 08-01-25 8.00 1,451,973 1,520,618 05-01-26 9.00 7,661,726 8,172,466 01-01-28 6.00 2,407,416 2,331,620 02-01-28 6.00 14,760,589 14,284,595 06-01-29 7.00 21,649,390 21,873,859 07-01-29 7.00 23,027,056(f) 23,265,808 Collateralized Mtge Obligation 11-15-23 4.00 2,767,431 2,741,821 Interest Only 01-01-20 10.00 71,533(c) 16,802 01-15-31 6.00 41,536,798(c) 11,422,619 Principal Only 09-15-03 6.46 3,769,291(d) 3,597,498 05-15-08 7.14 3,743,979(d) 3,574,462 05-15-08 8.13 5,422,941(d) 4,934,415 11-15-23 7.86 834,511(d) 807,006 03-15-09 7.38 2,394,838(d) 2,300,838 Federal Natl Mtge Assn 11-14-03 4.75 20,000,000 20,002,800 05-14-04 5.63 131,500,000 133,891,854 08-15-04 6.50 95,000,000 98,959,410 09-01-07 8.50 1,411,467 1,468,007 05-01-13 6.00 4,395,021 4,380,822 06-01-13 6.00 37,729,454 37,607,561 09-01-13 6.00 86,734 86,454 10-01-13 6.00 13,865,276 13,820,481 11-01-13 6.00 14,704,111 14,656,605 12-01-13 5.50 22,950,781 22,365,314 12-01-13 6.00 3,207,960 3,197,596 01-01-14 5.50 41,710,439 40,646,419 01-01-14 6.00 2,377,759 2,370,077 02-01-14 5.50 4,210,569 4,103,159 03-01-14 5.50 5,939,557 5,788,041 03-01-14 6.00 3,943,715 3,930,974 04-01-14 5.50 114,932,085 112,000,202 06-01-14 6.50 52,540,992 53,044,300 07-01-14 5.50 86,416,683 84,212,219 07-01-14 6.50 198,374 199,980 08-01-14 6.50 20,670,632 20,837,996 09-01-14 6.00 341,409 339,606 09-01-14 6.50 2,692,630 2,714,431 10-01-14 7.00 996,980 1,019,472 11-01-14 6.50 6,159,671 6,209,543 03-01-15 7.00 2,399,002 2,453,125 03-01-15 7.00 22,820,251(f) 23,335,092 07-01-15 6.50 82,000,000(b) 82,333,125 08-01-15 5.50 20,138,362 19,624,639 11-01-21 8.00 1,430,020 1,502,783 03-01-23 9.00 911,736 975,918 07-01-23 7.50 20,363,516 5,200,418 08-25-23 6.00 14,400,000 13,963,680 09-01-23 6.50 32,621,517 32,470,316 11-01-23 6.00 8,358,289 8,107,979 12-01-23 7.00 10,213,160 10,373,687 01-01-24 6.50 8,902,601 8,861,338 06-01-24 9.00 3,051,213 3,263,336 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 29 ANNUAL REPORT -- 2001 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 09-01-25 6.50% $15,856,309 $15,749,941 02-01-26 6.00 450,485 436,151 02-01-26 8.00 1,393,717 1,459,851 05-01-26 7.50 10,351,597 10,651,284 04-01-27 7.00 6,035,699 6,102,913 09-01-27 7.00 5,074,218 5,130,725 10-01-27 5.50 13,539,131 12,706,420 03-01-28 6.00 5,744,852 5,555,869 04-01-28 6.00 41,042,041 39,662,930 04-01-28 6.00 8,969,886(f) 8,677,370 05-01-28 6.00 7,960,123 7,692,400 07-01-28 6.00 8,332,048 8,051,817 09-01-28 6.00 39,309,481 37,987,386 10-01-28 6.00 15,263,356 14,750,003 11-01-28 6.00 4,739,717 4,580,306 12-01-28 6.00 9,381,910 9,066,367 01-01-29 6.00 10,091,061 9,751,668 01-01-29 7.50 311,116 319,081 02-01-29 6.00 7,377,605 7,129,474 03-01-29 6.00 3,160,776 3,053,699 05-01-29 7.50 151,242 155,114 06-01-29 6.00 3,576,670 3,456,375 07-01-29 6.00 1,002,151 968,446 07-01-29 7.00 42,500,000(b) 42,725,781 08-01-29 7.50 371,946 380,612 09-01-29 7.00 9,742,450 9,836,679 09-01-29 7.50 7,345,675 7,513,669 10-01-29 7.00 5,590,291 5,644,361 12-01-29 7.50 13,414,437 13,726,983 01-01-30 7.50 1,363,960 1,395,739 02-01-30 7.50 17,908,237 18,325,484 03-01-30 7.50 3,778,615 3,866,653 04-01-31 6.50 19,945,421 19,708,958 07-01-31 8.50 3,145 3,303 Collateralized Mtge Obligation 11-25-08 5.50 1,477,381 1,486,141 07-25-12 7.00 2,367,417 2,408,610 01-25-19 3.00 482,468 480,555 08-25-21 4.50 2,441,361 2,427,850 08-25-23 6.50 15,000,000 14,991,450 Interest Only 08-01-18 9.50 35,095(c) 7,727 01-15-20 10.00 1,623,769(c) 380,776 02-25-22 9.50 246,695(c) 56,625 07-25-22 8.50 5,715,121(c) 1,370,661 Inverse Floater 03-25-24 12.86 420,781(h) 437,344 Principal Only 06-25-21 12.57 198,497(d) 164,607 Govt Natl Mtge Assn 08-20-19 11.00 107,354 118,654 Total 1,714,285,226 U.S. government obligations & agencies (16.8%) Resolution Funding Corp Zero Coupon 04-15-06 5.75 4,803,000(i) 3,722,421 U.S. Treasury 12-31-02 5.13 209,000,000(e) 212,135,000 01-31-03 4.75 42,500,000(e) 42,882,075 02-15-03 10.75 15,000,000(f) 16,582,050 11-15-03 4.25 1,950,000 1,940,562 02-15-04 4.75 29,500,000(e) 29,652,220 05-15-04 12.38 7,000,000 8,465,590 05-15-05 6.75 12,750,000 13,606,673 08-15-05 6.50 5,000,000 5,300,800 08-15-05 10.75 4,750,000(f) 5,781,653 05-15-06 6.88 12,600,000 13,611,906 02-15-10 6.50 4,450,000 4,778,188 Total 358,459,138 Total bonds (Cost: $2,040,162,224) $2,072,744,364 Options purchased (--%) Issuer Notional Exercise Expiration Value(a) amount price date Call Sept. Eurodollar Bonds $215,000,000 $ 96.25 Sept. 2001 $204,250 Puts Federal Natl Mtge Assn 42,500,000 98 Sept. 2001 351,953 July U.S. Treasury Note 42,600,000 100 June 2001 33,279 Total options purchased (Cost: $592,442) $589,482 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 30 AXP FEDERAL INCOME FUND Short-term securities (15.2%)(g) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (14.5%) Federal Home Loan Bank Disc Nts 06-08-01 4.83% $10,000,000 $9,988,754 06-20-01 4.59 16,000,000 15,960,087 06-22-01 4.24 20,000,000 19,948,300 07-05-01 4.49 1,000,000 995,850 Federal Home Loan Mtge Corp Disc Nts 06-08-01 4.60 17,800,000 17,779,981 06-20-01 4.54 23,100,000 23,042,376 06-21-01 4.54 16,000,000 15,957,405 06-21-01 4.64 9,500,000 9,474,709 07-10-01 3.90 25,000,000 24,892,220 07-30-01 3.86 33,800,000 33,574,667 Federal Natl Mtge Assn Disc Nts 06-07-01 4.87 6,500,000 6,493,705 06-19-01 3.96 14,200,000 14,170,396 06-21-01 4.58 11,300,000 11,269,917 06-28-01 4.20 10,000,000 9,965,611 07-19-01 4.19 5,600,000 5,568,391 07-31-01 3.89 48,300,000 47,972,634 08-23-01 3.87 41,400,000 41,013,600 Total 308,068,603 Commercial paper (0.7%) AEGON Funding 06-01-01 4.21 14,800,000(j) 14,798,269 Total short-term securities (Cost: $322,944,157) $322,866,872 Total investments in securities (Cost: $2,363,698,823)(k) $2,396,200,718 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 31 ANNUAL REPORT -- 2001 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2001, the cost of securities purchased, including interest purchased, on a when-issued or forward-commitment basis was $132,749,987. (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) 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 original yield based upon the estimated timing of future cash flows. (e) Security is partially or fully on loan. See Note 5 to the financial statements. (f) 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 Eurodollar March 2002, 90-day $ 53,000,000 Eurodollar March 2003, 90-day 148,750,000 Eurodollar March 2004, 90-day 157,750,000 Eurodollar June 2002, 90-day 53,000,000 Eurodollar June 2003, 90-day 148,750,000 Eurodollar June 2004, 90-day 73,000,000 Eurodollar Sept. 2002, 90-day 53,000,000 Eurodollar Sept. 2003, 90-day 148,250,000 Eurodollar Sept. 2004, 90-day 33,750,000 Eurodollar Dec. 2002, 90-day 53,000,000 Eurodollar Dec. 2003, 90-day 143,250,000 Sale contracts Eurodollar June 2001, 90-day 26,250,000 Eurodollar Sept. 2001, 90-day 205,000,000 U.S. Treasury Note June 2001, 5-year 28,700,000 U.S. Treasury Note Sept. 2001, 5-year 163,800,000 U.S. Treasury Notes June 2001, 10-year 11,100,000 U.S. Treasury Notes Sept. 2001, 10-year 221,400,000 - -------------------------------------------------------------------------------- 32 AXP FEDERAL INCOME FUND Notes to investments in securities (continued) (g) At May 31, 2001, cash or short-term securities were designated to cover open call options written as follows (see Note 6 to the financial statements):
Issuer Notional Exercise Expiration Value(a) amount price date U.S. Treasury Bonds Sept. 2001 $42,500,000 $104 Aug. 2001 $192,576 U.S. Treasury Notes Sept. 2001 10-year 21,300,000 105 Aug. 2001 132,273 ---------- --- --------- ------- Total value $324,849 --------
At May 31, 2001, cash or short-term securities were designated to cover open put options written as follows (see Note 6 to the financial statements):
Issuer Notional Exercise Expiration Value(a) amount price date Federal Natl Mtge Assn $42,500,000 $ 98 Sept. 2001 $351,952 U.S. Treasury Bond Sept. 2001 42,500,000 96 Aug. 2001 239,063 U.S. Treasury Notes Sept. 2001 10-year 21,300,000 100 Aug. 2001 98,992 ---------- --- --------- ------ Total value $690,007 --------
(h) 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, 2001. Inverse floaters in the aggregate represent 0.02% of the Portfolio's net assets as of May 31, 2001. (i) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (j) Commercial paper sold within terms of a private placement memorandum, exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and may be sold only to dealers in that program or other "accredited investors." This security has been determined to be liquid under guidelines established by the board. (k) At May 31, 2001, the cost of securities for federal income tax purposes was $2,365,921,138 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $37,749,105 Unrealized depreciation (7,469,525) ----------- Net unrealized appreciation $30,279,580 ----------- - -------------------------------------------------------------------------------- 33 ANNUAL REPORT -- 2001 Federal Income Tax Information (Unaudited) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Federal Income Fund, Inc. Fiscal year ended May 31, 2001 Class A Income distributions taxable as dividend income, none qualifying for deduction by corporations. Payable date Per share June 21, 2000 $0.02200 July 24, 2000 0.02530 Aug. 24, 2000 0.02314 Sept. 21, 2000 0.02284 Oct. 24, 2000 0.02577 Nov. 21, 2000 0.02074 Dec. 20, 2000 0.03194 Jan. 26, 2001 0.02407 Feb. 26, 2001 0.01912 March 26, 2001 0.01708 April 26, 2001 0.01845 May 24, 2001 0.01797 Total distributions $0.26842 Class B Income distributions taxable as dividend income, none qualifying for deduction by corporations. Payable date Per share June 21, 2000 $0.01941 July 24, 2000 0.02209 Aug. 24, 2000 0.02014 Sept. 21, 2000 0.02012 Oct. 24, 2000 0.02257 Nov. 21, 2000 0.01802 Dec. 20, 2000 0.02911 Jan. 26, 2001 0.02043 Feb. 26, 2001 0.01606 March 26, 2001 0.01431 April 26, 2001 0.01539 May 24, 2001 0.01520 Total distributions $0.23285 - -------------------------------------------------------------------------------- 34 AXP FEDERAL INCOME FUND Class C Income distributions taxable as dividend income, none qualifying for deduction by corporations. Payable date Per share July 24, 2000 $0.02048 Aug. 24, 2000 0.02053 Sept. 21, 2000 0.02028 Oct. 24, 2000 0.02278 Nov. 21, 2000 0.01811 Dec. 20, 2000 0.02915 Jan. 26, 2001 0.02049 Feb. 26, 2001 0.01617 March 26, 2001 0.01435 April 26, 2001 0.01547 May 24, 2001 0.01517 Total distributions $0.21298 Class Y Income distributions taxable as dividend income, none qualifying for deduction by corporations. Payable date Per share June 21, 2000 $0.02255 July 24, 2000 0.02595 Aug. 24, 2000 0.02378 Sept. 21, 2000 0.02342 Oct. 24, 2000 0.02645 Nov. 21, 2000 0.02131 Dec. 20, 2000 0.03255 Jan. 26, 2001 0.02484 Feb. 26, 2001 0.01977 March 26, 2001 0.01766 April 26, 2001 0.01910 May 24, 2001 0.01856 Total distributions $0.27594 - -------------------------------------------------------------------------------- 35 ANNUAL REPORT -- 2001 PART C. OTHER INFORMATION Item 23. Exhibits (a)(1) Articles of Incorporation, as amended October 17, 1988, filed as Exhibit 1 to Registrant's Post-Effective Amendment No. 7 to Registration Statement No. 2-96512, are incorporated by reference. (a)(2) Articles of Amendment to the Articles of Incorporation dated June 16, 1999, are filed electronically herewith. (b) By-laws, as amended January 11, 2001 are filed electronically herewith. (c) Stock Certificate for common stock, filed as Exhibit No. 4 to Registration Statement No. 2-96512, is incorporated by reference. (d) Investment Management Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, filed electronically as Exhibit 5 to Registrant's Post-Effective Amendment No. 19 to Registration Statement No. 2-96512, is incorporated by reference. The agreement was assumed by the Portfolio when the Fund adopted the master/feeder structure. (e) Distribution Agreement, dated July 8, 1999, between AXP Utilities Income Fund, Inc. and American Express Financial Advisors Inc. is incorporated by reference to Exhibit (e) to AXP Utilities Income Fund, Inc. Post-Effective Amendment No. 22, to Registration Statement File No. 33-20872 filed on or about August 27, 1999. Registrant's Distribution Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (f) All employees are eligible to participate in a profit sharing plan. Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year an amount up to 15 percent of their annual salaries, the maximum deductible amount permitted under Section 404(a) of the Internal Revenue Code. (g)(1) Custodian Agreement between Registrant and American Express Trust Company, dated March 20, 1995, is incorporated by reference to Exhibit 8(a) to Registrant's Post-Effective Amendment No. 26 filed on or about July 30, 1998. (g)(2) Addendum to Custodian Agreement between IDS Federal Income Fund, Inc., American Express Trust Company and American Express Financial Corporation, dated June 10, 1996, filed electronically as Exhibit 8(c) to Registrant's Post-Effective Amendment No. 24 to Registration Statement No. 2-96512, is incorporated by reference. (g)(3) Custodian Agreement Amendment between IDS International Fund, Inc. and American Express Trust Company, dated October 9, 1997, filed electronically on or about December 23, 1997 as Exhibit 8(c) to IDS International Fund, Inc.'s Post-Effective Amendment No. 26 to Registration Statement No. 2-92309, is incorporated by reference. Registrant's Custodian Agreement Amendment differs from the one incorporated by reference only by the fact that Registrant is one executing party. (h)(1) Administrative Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, is incorporated by reference to Exhibit 9(e) to Registrant's Post-Effective Amendment No. 26 filed on or about July 30, 1998. (h)(2) License Agreement between Registrant and IDS Financial Corporation, dated January 25, 1988, filed as Exhibit 9(b) to Post-Effective Amendment No. 7 to Registration Statement No. 2-96512, is incorporated by reference. (h)(3) License Agreement, dated June 17, 1999, between American Express Funds and American Express Company filed electronically on or about Sept. 23, 1999 as Exhibit (h)(4) to AXP Stock Fund, Inc.'s Post-Effective Amendment No. 98 to Registration Statement No. 2-11358, is incorporated by reference. (h)(4) Agreement and Plan of Reorganization, dated Sept. 8, 1994, between IDS Strategy Fund, Inc, and IDS Federal Income Fund, Inc., filed electronically as Exhibit 4 to Registrant's Pre-Effective Amendment No. 1, on Form N-14, is incorporated by reference. (h)(5) Agreement and Plan of Reorganization, dated March 10, 2000, between Strategist Income Fund, Inc. on behalf of Strategist Government Income Fund and AXP Federal Income Fund, Inc. is incorporated by reference to Exhibit (h)(8) to Registrant's Post- Effective Amendment No. 30 filed on or about July 28, 2000. (h)(6) Class Y Shareholder Service Agreement between IDS Precious Metals Fund, Inc. and American Express Financial Advisors Inc., dated May 9, 1997, filed electronically on or about May 27, 1997 as Exhibit 9(e) to IDS Precious Metals Fund, Inc.'s Post-Effective Amendment No. 30 to Registration Statement No. 2-93745, is incorporated by reference. Registrant's Class Y Shareholder Service Agreement differs from the one incorporated by reference only by the fact that Registrant is one executing party. (h)(7) Transfer Agency Agreement dated May 10, 2001 between Registrant and American Express Client Service Corporation is filed electronically herewith. (i) Opinion and consent of counsel as to the legality of the securities being registered is filed electronically herewith. (j) Independent Auditors' Consent is filed electronically herewith. (k) Omitted Financial Statements: Not Applicable (l) Letter of IDS Financial Services Inc. as sole shareholder, filed as Exhibit No. 13 to Pre-Effective Amendment No. 2 to Registration Statement No. 2-96512, is incorporated by reference. (m)(1) Plan and Agreement of Distribution dated July 1, 1999 between AXP Discovery Fund, Inc. and American Express Financial Advisors Inc. is incorporated by reference to Exhibit (m) to AXP Discovery Fund, Inc. Post-Effective Amendment No. 36 to Registration Statement File No. 2-72174 filed on or about July 30, 1999. Registrant's Plan and Agreement of Distribution differs from the one incorporated by reference only by the fact that Registrant is one executing party. (m)(2) Plan and Agreement of Distribution For Class C Shares dated March 9, 2000 between AXP Bond Fund, Inc. and American Express Financial Advisors Inc. is incorporated by reference to Exhibit (m)(2) to AXP Bond Fund, Inc.'s Post-Effective Amendment No. 51 to Registration Statement File No. 2-51586 filed on or about June 26, 2000. Registrant's Plan and Agreement of Distribution for Class C Shares differs from the one incorporated by reference only by the fact that Registrant is one executing party. (n) Rule 18f-3 Plan, dated March 9, 2000, is incorporated by reference to Exhibit (n) to AXP Bond Fund Inc.'s Post-Effective Amendment No. 51 to Registration Statement File No. 2-51586 filed on or about June 26, 2000. (o) Reserved. (p)(1) Code of Ethics adopted under Rule 17j-1 for Registrant filed electronically on or about March 30, 2000 as Exhibit (p)(1) to AXP Market Advantage Series, Inc.'s Post-Effective Amendment No. 24 to Registration Statement No. 33-30770 is incorporated by reference. (p)(2) Code of Ethics adopted under Rule 17j-1 for Registrant's investment advisor and principal underwriter filed electronically on or about March 30, 2000 as Exhibit (p)(1) to AXP Market Advantage Series, Inc.'s Post-Effective Amendment No. 24 to Registration Statement No. 33-30770 is incorporated by reference. (q)(1) Directors' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 11, 2001, is filed electronically herewith. (q)(2) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 11, 2001, is filed electronically herewith. (q)(3) Trustees' Power of Attorney, dated Jan. 11, 2001, is filed electronically herewith. (q)(4) Officers' Power of Attorney, dated Jan. 11, 2001, is filed electronically herewith. Item 24. Persons Controlled by or Under Common Control with Registrant None. Item 25. Indemnification The Articles of Incorporation of the registrant provide that the Fund shall indemnify any person who was or is a party or is threatened to be made a party, by reason of the fact that she or he is or was a director, officer, employee or agent of the Fund, or is or was serving at the request of the Fund as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, to any threatened, pending or completed action, suit or proceeding, wherever brought, and the Fund may purchase liability insurance and advance legal expenses, all to the fullest extent permitted by the laws of the State of Minnesota, as now existing or hereafter amended. The By-laws of the registrant provide that present or former directors or officers of the Fund made or threatened to be made a party to or involved (including as a witness) in an actual or threatened action, suit or proceeding shall be indemnified by the Fund to the full extent authorized by the Minnesota Business Corporation Act, all as more fully set forth in the By-laws filed as an exhibit to this registration statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Any indemnification hereunder shall not be exclusive of any other rights of indemnification to which the directors, officers, employees or agents might otherwise be entitled. No indemnification shall be made in violation of the Investment Company Act of 1940.
Item 26. Business and Other Connections of Investment Adviser (American Express Financial Corporation) Directors and officers of American Express Financial Corporation who are directors and/or officers of one or more other companies: Name and Title Other company(s) Address Title within other company(s) - ------------------------- ----------------------- ------------------------- ----------------------- Ronald G. Abrahamson, American Express Client 200 AXP Financial Center Director and Vice Vice President - Business Service Corporation Minneapolis, MN 55474 President - Business Transformation Transformation American Express Financial 70100 AXP Financial Center Vice President - Business Advisors Inc. Minneapolis, MN 55747 Transformation Public Employee Payment Director and Vice President Company Douglas A. Alger, American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Human Resources President - Human Resources Gumer C. Alvero American Centurion Life 20 Madison Ave. Extension Director Vice President - Variable Assurance Company P.O. Box 5555 Annuities Albany, NY 12205-0555 American Enterprise Life 829 AXP Financial Center Director, Executive Vice Insurance Company Minneapolis, MN 55474 President - Assured Assets, Member of Investment Committee American Express Financial 70100 AXP Financial Center Vice President - Annuities Advisors Inc. Minneapolis, MN 55747 American Partners Life 1751 AXP Financial Center Director, President, Insurance Company Minneapolis MN 55474 Member of Investment Committee IDS Life Insurance Company 20 Madison Ave. Extension Executive Vice President - P.O. Box 5555 Assured Assets, Member of Albany, NY 12205-0555 Investment Committee IDS Life Insurance Company P.O. Box 5144 Director of New York Albany, NY 12205 IDS Life Variable Annuity Chairman of the Board and Funds A & B President Peter J. Anderson, Advisory Capital 200 AXP Financial Center Director Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55474 President - Investment Operations American Express Asset Director and Chairman of Management Group Inc. the Board American Express Asset Director, Chairman of the Management International, Board and Executive Vice Inc. President American Express Financial 70100 AXP Financial Center Senior Vice President - Advisors Inc. Minneapolis, MN 55747 Investment Operations American Partner Life 1751 AXP Financial Center Member of Investment Insurance Company Minneapolis, MN 55474 Committee IDS Capital Holdings Inc. Director and President IDS Futures Corporation Director NCM Capital Management 2 Mutual Plaza Director Group, Inc. 501 Willard Street Durham, NC 27701 Ward D. Armstrong, American Express Financial 70100 AXP Financial Center Senior Vice President - Senior Vice President - Advisors Inc. Minneapolis, MN 55747 Retirement Services Retirement Services American Express Service Vice President - Workplace Corporation Financial Services American Express Trust Director and Chairman of Company the Board John M. Baker, American Express Financial 70100 AXP Financial Center Vice President - Plan Vice President - Plan Sponsor Advisors Inc. Minneapolis, MN 55747 Sponsor Services Services American Express Trust Senior Vice President Company Dudley Barksdale American Express Financial 70100 AXP Financial Center Vice President - Service Vice President - Service Advisors Inc. Minneapolis, MN 55747 Development Development Joseph M. Barsky III, American Express Financial 70100 AXP Financial Center Vice President - Mutual Vice President - Mutual Fund Advisors Inc. Minneapolis, MN 55747200 Fund Equities Equities AXP Financial Center Minneapolis, MN 55474 Timothy V. Bechtold, American Centurion Life 20 Madison Ave. Extension Director and President Vice President - Risk Assurance Company P.O. Box 5555 Management Products Albany, NY 12205-0555 American Express Financial 70100 AXP Financial Center Vice President - Risk Advisors Inc. Minneapolis, MN 55747 Management Products American Express Insurance Director and President Agency of Arizona Inc. American Express Insurance Director and President Agency of Idaho Inc. American Express Insurance Director and President Agency of Nevada Inc. American Express Insurance Director and President Agency of Oregon Inc. American Partners Life Member of Investment Insurance Company Committee IDS Insurance Agency of Director and President Alabama Inc. IDS Insurance Agency of Director and President Arkansas Inc. IDS Insurance Agency of Director and President Massachusetts Inc. IDS Insurance Agency of Director and President New Mexico Inc. IDS Insurance Agency of Director and President Ohio Inc. IDS Insurance Agency of Director and President Wyoming Inc. IDS Life Insurance Company 70100 AXP Financial Center President, Executive Vice Minneapolis, MN 55747 President - Risk Management Products, Member of Investment Committee IDS Life Insurance Company P.O. Box 5144 President and Chief of New York Albany, NY 12205 Executive Officer IDS Life Series Fund, Inc. 200 AXP Financial Center Director and President Minneapolis, MN 55474 IDS Life Variable Annuity 70100 AXP Financial Center Manager Funds A & B Minneapolis, MN 55474 Douglas W. Brewers, American Express Financial 70100 AXP Financial Center Vice President - Sales Vice President - Sales Support Advisors Inc. Minneapolis, MN 55747 Support Kenneth I. Chenaut American Express Company American Express Tower President and Chief Director World Financial Center Operating Officer New York, NY 10285 Kenneth J. Ciak, AMEX Assurance Company 200 AXP Financial Center Director and President Vice President and General Minneapolis, MN 55474 Manager - IDS Property Casualty American Express Financial 70100 AXP Financial Center Vice President and General Advisors Inc. Minneapolis, MN 55747 Manager - IDS Property Casualty IDS Property Casualty 1 WEG Blvd. Director and President Insurance Company DePere, WI 54115 Paul A. Connolly, American Express Financial 70100 AXP Financial Center Vice President - Retail Vice President - Retail Advisors Inc. Minneapolis, MN 55747 Distribution Services Distribution Services James M. Cracchiolo American Express Financial 70100 AXP Financial Center President and Chief President and Chief Executive Advisors Inc. Minneapolis, MN 55747 Executive Officer Officer Colleen Curran, American Express Financial 70100 AXP Financial Center Vice President and Vice President and Assistant Advisors Inc. Minneapolis, MN 55747 Assistant General Counsel General Counsel American Express Service Vice President and Chief Corporation Legal Counsel Luz Maria Davis American Express Financial 70100 AXP Financial Center Vice President - Vice President - Advisors Inc. Minneapolis, MN 55747 Communications Communications Robert M. Elconin, American Express Financial 70100 AXP Financial Center Vice President - Vice President - Government Advisors Inc. Minneapolis, MN 55747 Government Relations Relations IDS Life Insurance Company 70100 AXP Financial Center Vice President Minneapolis, MN 55747 Gordon M. Fines, American Express Asset 200 AXP Financial Center Senior Vice President and Vice President - Mutual Fund Management Group Inc. Minneapolis, MN 55474 Chief Investment Officer Equity Investments American Express Financial 70100 AXP Financial Center Vice President - Mutual Advisors Inc. Minneapolis, MN 55747 Fund Equity Investments Douglas L. Forsberg, American Centurion Life 20 Madison Ave. Extension Director Vice President - International Assurance Company P.O. Box 5555 Albany, NY 12205-0555 American Express Financial 70100 AXP Financial Center Vice President - Advisors Inc. Minneapolis, MN 55747 International American Express Financial 70100 AXP Financial Center Director, President and Advisors Japan Inc. Minneapolis, MN 55747 Chief Executive Officer Peter A. Gallus American Express Financial 70100 AXP Financial Center Vice President - Vice President - Investment Advisors Inc. Minneapolis, MN 55747 Investment Administration Administration Derek M. Gledhill American Express Financial 70100 AXP Financial Center Vice President - Vice President - Integrated Advisors Inc. Minneapolis, MN 55747 Integrated Financial Financial Services Field Services Field Implementation Implementation Harvey Golub, American Express Company American Express Tower Chairman and Chief Director World Financial Center Executive Officer New York, NY 10285 American Express Travel Chairman and Chief Related Services Company, Executive Officer Inc. David A. Hammer, American Express Financial 70100 AXP Financial Center Vice President and Vice President and Marketing Advisors Inc. Minneapolis, MN 55747 Marketing Controller Controller IDS Plan Services of Director and Vice President California, Inc. Teresa A. Hanratty American Express Financial 70100 AXP Financial Center Senior Vice Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 President-Field Management President - Field Management Lorraine R. Hart, AMEX Assurance Company 200 AXP Financial Center Vice President - Vice President - Insurance Minneapolis, MN 55474 Investments Investments American Centurion Life 20 Madison Ave. Extension Vice President Assurance Company P.O. Box 5555 Albany, NY 12205-0555 American Enterprise Life 829 AXP Financial Center Vice President Insurance Company Minneapolis, MN 55474 American Express Director Corporation American Express Financial 70100 AXP Financial Center Vice President - Insurance Advisors Inc. Minneapolis, MN 55747 Investments American Partners Life 1751 AXP Financial Center Director and Vice Insurance Company Minneapolis, MN 55474 President IDS Certificate Company Vice President IDS Life Insurance Company 70100 AXP Financial Center Vice President Minneapolis, MN 55747 IDS Life Series Fund, Inc. 200 AXP Financial Center Vice President Minneapolis, MN 55474 IDS Life Variable Annuity 70100 AXP Financial Center Vice President Funds A and B Minneapolis, MN 55747 Investors Syndicate Director and Vice Development Corp. President IDS Life Insurance Company P.O. Box 5144 Vice President of New York Albany, NY 12205 IDS Property Casualty 1 WEG Blvd. Vice President Insurance Company DePere, WI 54115 Janis K. Heaney, American Express Financial 70100 AXP Financial Center Vice President - Incentive Vice President - Incentive Advisors Inc. Minneapolis, MN 55747 Management Management Brian M. Heath American Express Financial 70100 AXP Financial Center Senior Vice President and Director, Senior Vice Advisors Inc. Minneapolis, MN 55747 General Sales Manager President and General Sales Manager Carol A. Holton American Express Financial 70100 AXP Financial Center Vice President - Third Vice President - Third Party Advisors Inc. Minneapolis, MN 55747 Party Distribution Distribution American Enterprise Life 829 AXP Financial Center Director, President and Insurance Company Minneapolis, MN 55474 Chief Executive Officer IDS Life Insurance Company 70100 AXP Financial Center Director Minneapolis, MN 55747 IDS Life Insurance Company 20 Madison Ave. Extension Director of New York P.O. Box 5555 Albany, NY 12205-0555 Darryl G. Horsman, American Express Trust 200 AXP Financial Center Director and President Vice President - Product Company Minneapolis, MN 55474 Development and Technology, American Express Retirement Services American Express Asset Vice President Management International Inc. David R. Hubers, AMEX Assurance Company 200 AXP Financial Center Director Chairman of the Board Minneapolis, MN 55474 American Express Financial 70100 AXP Financial Center Chairman of the Board Advisors Inc. Minneapolis, MN 55747 Debra A. Hutchinson American Express Financial 70100 AXP Financial Center Vice President - Vice President - Relationship Advisors Inc. Minneapolis, MN 55747 Relationship Leader Leader James M. Jensen, American Express Financial 70100 AXP Financial Center Vice President - Advice Vice President - Advice and Advisors Inc. Minneapolis, MN 55747 and Retail Distribution Retail Distribution Group, Group, Product, Product, Compensation and Compensation and Field Field Administration Administration IDS Life Insurance Company 70100 AXP Financial Center Vice President Minneapolis, MN 55747 Marietta L. Johns, American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Field Management President - Field Management Nancy E. Jones, American Express Financial 70100 AXP Financial Center Vice President - Business Vice President - Business Advisors Inc. Minneapolis, MN 55747 Development Development American Express Service Vice President - Business Corporation Development John C. Junek American Express Financial 70100 AXP Financial Center Senior Vice President and Director, Senior Vice Advisors Inc. Minneapolis, MN 55747 General Counsel President and General Counsel Ora J. Kaine, American Express Financial 70100 AXP Financial Center Vice President - Financial Vice President - Financial Advisors Inc. Minneapolis, MN 55747 Advisory Services Advisory Services Linda B. Keene, American Express Financial 70100 AXP Financial Center Vice President - Market Vice President - Market Advisors Inc. Minneapolis, MN 55747 Development Development John M. Knight American Express Financial 70100 AXP Financial Center Vice President - Vice President - Investment Advisors Minneapolis, MN 55747 Investment Accounting Accounting Claire Kolmodin, American Express Financial 70100 AXP Financial Center Vice President - Service Vice President - Service Advisors Inc. Minneapolis, MN 55747 Quality Quality Steven C. Kumagai, American Express Financial 70100 AXP Financial Center Director and Senior Vice Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 President-Direct and President - Direct and Interactive Group Interactive Group AMEX Assurance Company 200 AXP Financial Center Director Minneapolis, MN 55474 IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 Kurt A Larson, American Express Financial 70100 AXP Financial Center Vice President - Senior Vice President - Senior Advisors Inc. Minneapolis, MN 55747 Portfolio Manager Portfolio Manager Lori J. Larson, American Express Financial 70100 AXP Financial Center Vice President - Brokerage Vice President - Brokerage Advisors Inc. Minneapolis, MN 55747 and Direct Services and Direct Services Daniel E. Laufenberg, American Express Financial 70100 AXP Financial Center Vice President and Chief Vice President and Chief U.S. Advisors Inc. Minneapolis, MN 55747 U.S. Economist Economist Jane W. Lee American Express Financial 70100 AXP Financial Center Vice President - New Vice President - New Business Advisors Inc. Minneapolis, MN 55747 Business Development and Development and Marketing Marketing Peter A. Lefferts, American Express Financial 70100 AXP Financial Center Senior Vice President - Senior Vice President - Advisors Inc. Minneapolis, MN 55747 Corporate Strategy and Corporate Strategy and Development Development American Express Trust Director Company IDS Plan Services of Director California, Inc. Fred A. Mandell, American Express Financial 70100 AXP Financial Center Vice President - Vice President - Distribution Advisors Inc. Minneapolis, MN 55747 Distribution Channel Channel Marketing Marketing Timothy J. Masek American Express Financial 70100 AXP Financial Center Vice President and Vice President and Director Advisors Inc. Minneapolis, MN 55747 Director of Global Research of Global Research Paula R. Meyer, American Express Director Vice President - Mutual Funds Corporation American Express Financial 70100 AXP Financial Center Vice President - Mutual Advisors Inc. Minneapolis, MN 55747 Funds IDS Certificate Company Director and President Investors Syndicate Director, Chairman of the Development Corporation Board and President Shashank B. Modak American Express Financial 70100 AXP Financial Center Vice President - Vice President - Technology Advisors Inc. Minneapolis, MN 55747 Technology Leader Leader Pamela J. Moret, American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Products Group President - Products Group American Express Trust Vice President Company American Partners Life 20 Madison Ave. Extension Director, Chairman of the Insurance Company P.O. Box 5555 Board Albany, NY 12205-0555 AMEX Assurance Company 200 AXP Financial Center Director Minneapolis, MN 55474 IDS Certificate Company Director IDS Life Insurance Company 70100 AXP Financial Center Chairman of the Board, Minneapolis, MN 55747 Chief Executive Officer and Member of Investment Committee IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 Barry J. Murphy, American Express Client 200 AXP Financial Center Director and President Director and Executive Vice Service Corporation Minneapolis, MN 55474 President - U.S. Retail Group American Enterprise Director Investment Services, Inc. American Express Financial 70100 AXP Financial Center Senior Vice President Advisors Inc. Minneapolis, MN 55747 IDS Life Insurance Company 70100 AXP Financial Center Director and Executive Minneapolis, MN 55747 Vice President Mary Owens Neal, American Express Financial 70100 AXP Financial Center Vice President - Consumer Vice President - Consumer Advisors Inc. Minneapolis, MN 55747 Marketing Marketing Michael J. O'Keefe, American Express Financial 70100 AXP Financial Center Vice President - Advisory Vice President - Advisory Advisors Inc. Minneapolis, MN 55747 Business Systems Business Systems James R. Palmer, American Express Director Vice President - Taxes Corporation American Express Financial 70100 AXP Financial Center Vice President - Taxes Advisors Inc. Minneapolis, MN 55747 IDS Life Insurance Company 70100 AXP Financial Center Vice President Minneapolis, MN 55747 Carla P. Pavone, American Express Financial 70100 AXP Financial Center Vice President - Product Vice President - Product Advisors Inc. Minneapolis, MN 55747 Business Development Business Development Public Employee Payment Director and President Company Kris Petersen American Express Financial 70100 AXP Financial Center Vice President - Vice President - Advisors Inc. Minneapolis, MN 55747 Non-propriety Products Non-propriety Products IDS Cable Corporation Director IDS Futures Corporation President IDS Management Corporation Director and President IDS Realty Corporation Director and President Susan B. Plimpton, American Express Financial 70100 AXP Financial Center Vice President - Marketing Vice President - Marketing Advisors Inc. Minneapolis, MN 55747 Services Services Ronald W. Powell, American Express Financial 70100 AXP Financial Center Vice President and Vice President and Assistant Advisors Inc. Minneapolis, MN 55747 Assistant General Counsel General Counsel IDS Cable Corporation Vice President and Assistant Secretary IDS Cable II Corporation Vice President and Assistant Secretary IDS Management Corporation Vice President and Assistant Secretary IDS Partnership Services Vice President and Corporation Assistant Secretary IDS Plan Services of Vice President and California, Inc. Assistant Secretary IDS Realty Corporation Vice President and Assistant Secretary James M. Punch, American Express Financial 70100 AXP Financial Center Vice President - Branded Vice President and Project Advisors Inc. Minneapolis, MN 55747 Platform Project Manager - Branded Platform Project Frederick C. Quirsfeld, American Express Asset 200 AXP Financial Center Senior Vice President and Director and Senior Vice Management Group Inc. Minneapolis, MN 55474 Senior Portfolio Manager President - Fixed Income American Express Financial 70100 AXP Financial Center Senior Vice President - Advisors Inc. Minneapolis, MN 55747 Fixed Income Teresa J. Rasmussen American Express Financial 200 AXP Financial Center Vice President and Vice President and Assistant Advisors Inc. Minneapolis, MN 55474 Assistant General Counsel General Counsel Rollyn C. Renstrom, American Express Financial 70100 AXP Financial Center Vice President - Corporate Vice President - Corporate Advisors Inc. Minneapolis, MN 55747 Planning and Analysis Planning and Analysis ReBecca K. Roloff, American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Field Management and President - Field Management Financial Advisory Services and Financial Advisory Services Stephen W. Roszell, Advisory Capital 200 AXP Financial Center Director Director and Senior Vice Strategies Group Inc. Minneapolis, MN 55474 President - Institutional Group American Express Asset Director, President and Management Group Inc. Chief Executive Officer American Express Asset Director Management International, Inc. American Express Asset Director Management Ltd. American Express Financial 70100 AXP Financial Center Senior Vice President - Advisors Inc. Minneapolis, MN 55747 Institutional American Express Trust Director Company Erven A. Samsel, American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Field Management President - Field Management American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of Vice President New Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. Theresa M. Sapp American Express Financial 70100 AXP Financial Center Vice President - Vice President - Relationship Advisors Inc. Minneapolis, MN 55747 Relationship Leader Leader Stuart A. Sedlacek, American Enterprise Life 829 AXP Financial Center Executive Vice President Director, Senior Vice Insurance Company Minneapolis, MN 55474 President and Chief Financial Officer American Express Financial 70100 AXP Financial Center Senior Vice President and Advisors Inc. Minneapolis, MN 55747 Chief Financial Officer American Express Trust Director Company American Partners Life 1751 AXP Financial Center Director and Vice President Insurance Company Minneapolis, MN 55474 IDS Certificate Company Director and President IDS Life Insurance Company 70100 AXP Financial Center Executive Vice President Minneapolis, MN 55747 and Controller Donald K. Shanks, AMEX Assurance Company 200 AXP Financial Center Senior Vice President Vice President - Property Minneapolis, MN 55474 Casualty American Express Financial 70100 AXP Financial Center Vice President - Property Advisors Inc. Minneapolis, MN 55747 Casualty IDS Property Casualty 1 WEG Blvd. Senior Vice President Insurance Company DePere, WI 54115 Judy P. Skoglund, American Express Financial 70100 AXP Financial Center Vice President - Quality Vice President - Quality and Advisors Inc. Minneapolis, MN 55747 and Service Support Service Support Bridget Sperl, American Express Client 200 AXP Financial Center Senior Vice President - Senior Vice President - Service Corporation Minneapolis, MN 55474 Client Service Client Service American Express Financial 70100 AXP Financial Center Vice President Advisors Inc. Minneapolis, MN 55747 Public Employee Payment Director and President Company Lisa A. Steffes, American Express Financial 70100 AXP Financial Center Vice President - Marketing Vice President - Marketing Advisors Inc. Minneapolis, MN 55747 Offer Development Offer Development AMEX Assurance Company 200 AXP Financial Center Director Minneapolis, MN 55474 IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 James J. Strauss, American Express Financial 70100 AXP Financial Center Vice President and General Vice President and General Advisors Inc. Minneapolis, MN 55747 Auditor Auditor Jeffrey J. Stremcha, American Express Financial 70100 AXP Financial Center Vice President - Vice President - Information Advisors Inc. Minneapolis, MN 55747 Information Resource Resource Management/ISD Management/ISD John R. Thomas American Express Financial 70100 AXP Financial Center Senior Vice President Senior Vice President - Advisors Inc. Minneapolis, MN 55747 Information and Technology Keith N. Tufte American Express Financial 70100 AXP Financial Center Vice President and Vice President and Director Advisors Inc. Minneapolis, MN 55747 Director of Equity Research of Equity Research Norman Weaver Jr., American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Alliance Group President - Alliance Group American Express Insurance Vice President Agency of Arizona Inc. American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of Vice President New Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. Michael L. Weiner, American Express Financial 70100 AXP Financial Center Vice President - Tax Vice President - Tax Research Advisors Inc. Minneapolis, MN 55747 Research and Audit and Audit IDS Capital Holdings Inc. Vice President IDS Futures Brokerage Group Vice President IDS Futures Corporation Vice President, Treasurer and Secretary IDS Sales Support Inc. Director, Vice President and Assistant Treasurer Jeffry F. Welter, American Express Financial 70100 AXP Financial Center Vice President - Equity Vice President - Equity and Advisors Inc. Minneapolis, MN 55747 and Fixed Income Trading Fixed Income Trading Edwin M. Wistrand, American Express Financial 70100 AXP Financial Center Vice President and Vice President and Assistant Advisors Inc. Minneapolis, MN 55747 Assistant General Counsel General Counsel American Express Financial 70100 AXP Financial Center Vice President and Chief Advisors Japan Inc. Minneapolis, MN 55747 Legal Officer Michael D. Wolf, American Express Asset 200 AXP Financial Center Executive Vice President Vice President - Senior Management Group Inc. Minneapolis, MN 55474 and Senior Portfolio Portfolio Manager Manager American Express Financial 70100 AXP Financial Center Vice President - Senior Advisors Inc. Minneapolis, MN 55747 Portfolio Manager Michael R. Woodward, American Express Financial 70100 AXP Financial Center Senior Vice President - Director and Senior Vice Advisors Inc. Minneapolis, MN 55747 Field Management President - Field Management American Express Insurance Vice President Agency of Idaho Inc. American Express Insurance Vice President Agency of Nevada Inc. American Express Insurance Vice President Agency of Oregon Inc. American Express Property Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Vice President Alabama Inc. IDS Insurance Agency of Vice President Arkansas Inc. IDS Insurance Agency of Vice President Massachusetts Inc. IDS Insurance Agency of Vice President New Mexico Inc. IDS Insurance Agency of Vice President North Carolina Inc. IDS Insurance Agency of Vice President Ohio Inc. IDS Insurance Agency of Vice President Wyoming Inc. IDS Life Insurance Company P.O. Box 5144 Director of New York Albany, NY 12205 David L. Yowan American Enterprise Vice President and Vice President and Corporate Investment Services Treasurer Treasurer American Enterprise Life 829 AXP Financial Center Vice President and Insurance Company Minneapolis, MN 55747 Treasurer American Express Asset Vice President and Management Group Inc. Treasurer American Express Asset Vice President and Management International Treasurer Inc. American Express Vice President and Certificate Company Treasurer American Express Client 200 AXP Financial Center Vice President and Service Corporation Minneapolis, MN 55474 Treasurer American Express Vice President and Corporation Treasurer American Express Financial 70100 AXP Financial Center Vice President and Advisors Inc. Minneapolis, MN 55747 Treasurer American Express Financial Vice President and Advisors Japan Inc. Treasurer American Express Insurance Vice President and Agency of Arizona Inc. Treasurer American Express Insurance Vice President and Agency of Idaho Inc. Treasurer American Express Insurance Vice President and Agency of Nevada Inc. Treasurer American Express Insurance Vice President and Agency of Oregon Inc. Treasurer American Express Personal Treasurer Trust Services, FSB American Express Property Vice President and Casualty Insurance Agency Treasurer of Kentucky Inc. American Express Property Vice President and Casualty Insurance Agency Treasurer of Maryland Inc. American Express Property Vice President and Casualty Insurance Agency Treasurer of Pennsylvania Inc. American Partners Life 1751 AXP Financial Center Vice President and Insurance Company Minneapolis, MN 55474 Treasurer IDS Cable Corporation Vice President and Treasurer IDS Capital Holdings Inc. Vice President, Treasurer and Assistant Secretary IDS Insurance Agency of Vice President and Alabama Inc. Treasurer IDS Insurance Agency of Vice President and Arkansas Inc. Treasurer IDS Insurance Agency of Vice President and Massachusetts Inc. Treasurer IDS Insurance Agency of Vice President and New Mexico Inc. Treasurer IDS Insurance Agency of Vice President and New Ohio Inc. Treasurer IDS Insurance Agency of Vice President and Wyoming Inc. Treasurer IDS Life Insurance Company 20 Madison Ave. Extension Vice President, Treasurer P.O. Box 5555 and Assistant Secretary Albany, NY 12205-0555 IDS Life Insurance Company P.O. Box 5144 Vice President and of New York Albany, NY 12205 Treasurer IDS Life Series Fund, Inc. 200 AXP Financial Center Vice President and Minneapolis, MN 55474 Treasurer IDS Life Variable Annuity 70100 AXP Financial Center Vice President and Funds A & B Minneapolis, MN 55474 Treasurer IDS Management Corporation Director, Vice President and Treasurer IDS Partnership Services Vice President and Corporation Treasurer IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer Insurance Company DePere, WI 54115 and Assistant Secretary IDS Real Estate Services, Vice President and Inc. Treasurer IDS Realty Corporation Vice President and Treasurer Investors Syndicate Vice President and Development Corporation Treasurer Public Employee Payment Vice President and Company Treasurer
Item 27. Principal Underwriters. (a) American Express Financial Advisors acts as principal underwriter for the following investment companies: AXP Bond Fund, Inc.; AXP California Tax-Exempt Trust; AXP Discovery Fund, Inc.; AXP Equity Select Fund, Inc.; AXP Extra Income Fund, Inc.; AXP Federal Income Fund, Inc.; AXP Global Series, Inc.; AXP Growth Series, Inc.; AXP High Yield Tax-Exempt Fund, Inc.; AXP International Fund, Inc.; AXP Investment Series, Inc.; AXP Managed Series, Inc.; AXP Market Advantage Series, Inc.; AXP Money Market Series, Inc.; AXP New Dimensions Fund, Inc.; AXP Partners Series, Inc.; AXP Precious Metals Fund, Inc.; AXP Progressive Fund, Inc.; AXP Selective Fund, Inc.; AXP Special Tax-Exempt Series Trust; AXP Stock Fund, Inc.; AXP Strategy Series, Inc.; AXP Tax-Exempt Series, Inc.; AXP Tax-Free Money Fund, Inc.; AXP Utilities Income Fund, Inc., Growth Trust; Growth and Income Trust; Income Trust; Tax-Free Income Trust; World Trust; American Express Certificate Company. (b) As to each director, officer or partner of the principal underwriter: Name and Principal Position and Offices with Offices with Registrant Business Address Underwriter Ronald G. Abrahamson Vice President - None 200 AXP Financial Center Business Transformation Minneapolis, MN 55474 Douglas A. Alger Senior Vice President - None 200 AXP Financial Center Human Resources Minneapolis, MN 55474 Gumer C. Alvero Vice President - None 200 AXP Financial Center Annuities Minneapolis, MN 55474 Peter J. Anderson Senior Vice President - Board member 200 AXP Financial Center Investment Group and Vice Minneapolis, MN 55474 President - Investments Ward D. Armstrong Senior Vice President - None 200 AXP Financial Center Retirement Services Minneapolis, MN 55474 John M. Baker Vice President - Plan None 200 AXP Financial Center Sponsor Services Minneapolis, MN 55474 Dudley Barksdale Vice President - Service None 200 AXP Financial Center Development Minneapolis, MN 55474 Joseph M. Barsky III Vice President - Mutual None 200 AXP Financial Center Fund Equities Minneapolis, MN 55474 Timothy V. Bechtold Vice President - Risk None 200 AXP Financial Center Management Products Minneapolis, MN 55474 John D. Begley Group Vice President - None Suite 100 Ohio/Indiana 7760 Olentangy River Rd. Columbus, OH 43235 Brent L. Bisson Group Vice President - None Suite 900, E. Westside Twr Los Angeles Metro 11835 West Olympic Blvd. Los Angeles, CA 90064 Walter K. Booker Group Vice President - None Suite 200, 3500 Market New Jersey Street Camp Hill, NJ 17011 Bruce J. Bordelon Group Vice President - None 1333 N. California Blvd., San Francisco Bay Area Suite 200 Walnut Creek, CA 94596 Charles R. Branch Group Vice President - None Suite 200 Northwest West 111 North River Dr. Spokane, WA 99201 Douglas W. Brewers Vice President - Sales None 200 AXP Financial Center Support Minneapolis, MN 55474 Kenneth J. Ciak Vice President and None IDS Property Casualty General Manager - IDS 1400 Lombardi Avenue Property Casualty Green Bay, WI 54304 Paul A. Connolly Vice President - Retail None 200 AXP Financial Center Distribution Services Minneapolis, MN 55474 Henry J. Cormier Group Vice President - None Commerce Center One Connecticut 333 East River Drive East Hartford, CT 06108 James M. Crachhiolo Director, President and None 200 AXP Financial Center Chief Executive Officer Minneapolis, MN 55474 John M. Crawford Group Vice President - None Suite 200 Arkansas/ 10800 Financial Ctr Pkwy Springfield/Memphis Little Rock, AR 72211 Kevin F. Crowe Group Vice President - None Suite 312 Carolinas/Eastern Georgia 7300 Carmel Executive Pk Charlotte, NC 28226 Colleen Curran Vice President and None 200 AXP Financial Center Assistant General Counsel Minneapolis, MN 55474 Luz Maria Davis Vice President - None 200 AXP Financial Center Communications Minneapolis, MN 55474 Arthur E. Delorenzo Group Vice President - None 4 Atrium Drive, #100 Upstate New York Albany, NY 12205 Scott M. DiGiammarino Group Vice President - None Suite 500, 8045 Leesburg Washington/Baltimore Pike Vienna, VA 22182 Bradford L. Drew Group Vice President - None Two Datran Center Eastern Florida Penthouse One B 9130 S. Dadeland Blvd. Miami, FL 33156 Douglas K. Dunning Vice President - Assured None 200 AXP Financial Center Assets Product Minneapolis, MN 55474 Development and Management James P. Egge Group Vice President - None 4305 South Louise, Suite Western Iowa, Nebraska, 202 Dakotas Sioux Falls, SD 57103 Robert M. Elconin Vice President - None 200 AXP Financial Center Government Relations Minneapolis, MN 55474 W. Phillip Evans Group Vice President - None Suite 600 Rocky Mountain 6985 Union Park Center Midvale, UT 84047 - 4177 Gordon M. Fines Vice President - Mutual None 200 AXP Financial Center Fund Equity Investments Minneapolis, MN 55474 Terrence J. Flynn Vice President - None 200 AXP Financial Center Brokerage Clearing Minneapolis, MN 55474 Operations Douglas L. Forsberg Vice President - None 200 AXP Financial Center International Minneapolis, MN 55474 Peter A. Gallus Vice President - None 200 AXP Financial Center Investment Minneapolis, MN 55474 Administration Derek G. Gledhill Vice President - None 200 AXP Financial Center Integrated Financial Minneapolis, MN 55474 Services Field Implementation David A. Hammer Vice President and None 200 AXP Financial Center Marketing Controller Minneapolis, MN 55474 Teresa A. Hanratty Senior Vice President - None Suites 6&7 Field Management 169 South River Road Bedford, NH 03110 Robert L. Harden Group Vice President - None Two Constitution Plaza Boston Metro Boston, MA 02129 Lorraine R. Hart Vice President - None 200 AXP Financial Center Insurance Investments Minneapolis, MN 55474 Janis K. Heaney Vice President - None 200 AXP Financial Center Incentive Management Minneapolis, MN 55474 Brian M. Heath Senior Vice President None Suite 150 and General Sales Manager 801 E. Campbell Road Richardson, TX 75081 Jon E. Hjelm Group Vice President - None 319 Southbridge Street Rhode Island/Central - Auburn, MA 01501 Western Massachusetts David J. Hockenberry Group Vice President - None 30 Burton Hills Blvd. Tennessee Valley Suite 175 Nashville, TN 37215 Carol A. Holton Vice President - Third None 200 AXP Financial Center Party Distribution Minneapolis, MN 55474 David R. Hubers Chairman of the Board Board member 200 AXP Financial Center Minneapolis, MN 55474 Debra A. Hutchinson Vice President - None 200 AXP Financial Center Relationship Leader Minneapolis, MN 55474 Diana R. Iannarone Group Vice President - None 3030 N.W. Expressway Kansas/Oklahoma Suite 900 Oklahoma City, OK 73112 Theodore M. Jenkin Group Vice President - None 200 AXP Financial Center Cleveland Metro Minneapolis, MN 55474 James M. Jensen Vice President and None 200 AXP Financial Center Controller - Advice and Minneapolis, MN 55474 Retail Distribution Group, Product, Compensation and Field Administration Marietta L. Johns Senior Vice President - None 200 AXP Financial Center Field Management Minneapolis, MN 55474 Nancy E. Jones Vice President - None 200 AXP Financial Center Business Development Minneapolis, MN 55474 John C. Junek Senior Vice President, None 200 AXP Financial Center General Counsel Minneapolis, MN 55474 Ora J. Kaine Vice President - None 200 AXP Financial Center Financial Advisory Minneapolis, MN 55474 Services Linda B. Keene Vice President - Market None 200 AXP Financial Center Development Minneapolis, MN 55474 Raymond G. Kelly Group Vice President - None Suite 250 North Texas 801 East Campbell Road Richardson, TX 75081 John M. Knight Vice President - Treasurer 200 AXP Financial Center Investment Accounting Minneapolis, MN 55474 Claire Kolmodin Vice President - Service None 200 AXP Financial Center Quality Minneapolis, MN 55474 David S. Kreager Group Vice President - None Suite 108 Greater Michigan Trestle Bridge V 5136 Lovers Lane Kalamazoo, MI 49002 Steven C. Kumagai Director and Senior Vice None 200 AXP Financial Center President - Direct and Minneapolis, MN 55474 Interactive Group Mitre Kutanovski Group Vice President - None Suite 680 Chicago Metro 8585 Broadway Merrillville, IN 48410 Kurt A. Larson Vice President - Senior None 200 AXP Financial Center Portfolio Manager Minneapolis, MN 55474 Lori J. Larson Vice President - None 200 AXP Financial Center Brokerage and Direct Minneapolis, MN 55474 Services Daniel E. Laufenberg Vice President and Chief None 200 AXP Financial Center U.S. Economist Minneapolis, MN 55474 Jane W. Lee Vice President - New None 200 AXP Financial Center Business Development and Minneapolis, MN 55474 Marketing Peter A. Lefferts Senior Vice President - None 200 AXP Financial Center Corporate Strategy and Minneapolis, MN 55474 Development Fred A. Mandell Vice President - None 200 AXP Financial Center Distribution Channel Minneapolis, MN 55474 Marketing Daniel E. Martin Group Vice President - None Suite 650 Pittsburgh Metro 5700 Corporate Drive Pittsburgh, PA 15237 Timothy J. Masek Vice President and None 200 AXP Financial Center Director of Global Minneapolis, MN 55474 Research Paula R. Meyer Vice President - Mutual None 200 AXP Financial Center Funds Minneapolis, MN 55474 Shashank B. Modak Vice President - None 200 AXP Financial Center Technology Leader Minneapolis, MN 55474 Pamela J. Moret Senior Vice President - None 200 AXP Financial Center Products Group Minneapolis, MN 55474 Barry J. Murphy Executive Vice President None 200 AXP Financial Center - U.S. Retail Group Minneapolis, MN 55474 Mary Owens Neal Vice President - None 200 AXP Financial Center Consumer Marketing Minneapolis, MN 55474 Scott M. Nelson Vice President - None 200 AXP Financial Center Alternative Investments Minneapolis, MN 55474 Thomas V. Nicolosi Group Vice President - None Suite 220 New York Metro Area 500 Mamaroneck Ave. Harrison, NY 10528 Michael J. O'Keefe Vice President - None 200 AXP Financial Center Advisory Business Systems Minneapolis, MN 55474 James R. Palmer Vice President - Taxes None 200 AXP Financial Center Minneapolis, MN 55474 Marc A. Parker Group Vice President - None 10200 SW. Greenburg Rd. Portland/Eugene Suite 110 Portland, OR. 97223 Carla P. Pavone Vice President - None 200 AXP Financial Center Business Development Minneapolis, MN 55474 Kris Petersen Vice President - None 200 AXP Financial Center Non-propriety Products Minneapolis, MN 55474 Susan B. Plimpton Vice President - None 200 AXP Financial Center Marketing Services Minneapolis, MN 55474 Larry M. Post Group Vice President - None One Tower Bridge Philadelphia Metro and 100 Front Street 8th Fl Northern New England West Conshohocken, PA 19428 Ronald W. Powell Vice President and None 200 AXP Financial Center Assistant General Counsel Minneapolis, MN 55474 James M. Punch Vice President - Branded None 200 AXP Financial Center Platform Project Minneapolis, MN 55474 Frederick C. Quirsfeld Senior Vice President - Vice President - 200 AXP Financial Center Fixed Income Fixed Income Minneapolis, MN 55474 Investments Teresa J. Rasmussen Vice President and None 200 AXP Financial Center Assistant Counsel Minneapolis, MN 55474 Rollyn C. Renstrom Vice President - None 200 AXP Financial Center Corporate Planning and Minneapolis, MN 55474 Analysis Ralph D. Richardson III Group Vice President - None Suite 800 Southern Texas Arboretum Plaza One 9442 Capital of Texas Hyw. N. Austin, TX 78759 ReBecca K. Roloff Senior Vice President - None 200 AXP Financial Center Field Management and Minneapolis, MN 55474 Financial Advisory Service Stephen W. Roszell Senior Vice President - None 200 AXP Financial Center Institutional Minneapolis, MN 55474 Max G. Roth Group Vice President - None Suite 201 S. IDS Ctr Wisconsin/Upper Michigan 1400 Lombardi Avenue Green Bay, WI 54304 Diane M. Ruebling Group Vice President - None 200 AXP Financial Center Central Minneapolis, MN 55474 California/Western Nevada Erven A. Samsel Senior Vice President - None 45 Braintree Hill Park Field Management Suite 402 Braintree, MA 02184 Theresa M. Sapp Vice President - None 200 AXP Financial Center Relationship Leader Minneapolis, MN 55474 Russell L. Scalfano Group Vice President - None Suite 201 Illinois/Indiana/Kentucky 101 Plaza East Blvd. Evansville, IN 47715 William G. Scholz Group Vice President - None Suite 205 Arizona/Las Vegas 7333 E. Doubletree Ranch Rd. Scottsdale AZ. 85258 Stuart A. Sedlacek Senior Vice President None 200 AXP Financial Center and Chief Financial Minneapolis, MN 55474 Officer Donald K. Shanks Vice President - None 200 AXP Financial Center Property Casualty Minneapolis, MN 55474 Judy P. Skoglund Vice President - Quality None 200 AXP Financial Center and Service Support Minneapolis, MN 55474 James B. Solberg Group Vice President - None 200 AXP Financial Center Eastern Iowa Area Minneapolis, MN 55474 Bridget Sperl Senior Vice President - None 200 AXP Financial Center Client Service Minneapolis, MN 55474 Paul J. Stanislaw Group Vice President - None Suite 1100 Southern California Two Park Plaza Irvine, CA 92714 Lisa A. Steffes Vice President - None 200 AXP Financial Center Marketing Offer Minneapolis, MN 55474 Development Lois A. Stilwell Group Vice President - None Suite 433 Outstate Minnesota 9900 East Bren Rd. Area/North Minnetonka, MN 55343 Dakota/Western Wisconsin James J. Strauss Vice President and None 200 AXP Financial Center General Auditor Minneapolis, MN 55474 Jeffrey J. Stremcha Vice President - None 200 AXP Financial Center Information Resource Minneapolis, MN 55474 Management/ISD Barbara Stroup Stewart Vice President - Channel None 200 AXP Financial Center Development Minneapolis, MN 55474 Craig P. Taucher Group Vice President - None Suite 150 Orlando/Jacksonville 4190 Belfort Rd. Jackonville, FL 32216 Neil G. Taylor Group Vice President - None Suite 425 Seattle/Tacoma/Hawaii 101 Elliot Avenue West Seattle, WA 98119 John R. Thomas Senior Vice President Board Member 200 AXP Financial Center and President Minneapolis, MN 55474 Keith N. Tufte Vice President and None 200 AXP Financial Center Director of Equity Minneapolis, MN 55474 Research Peter S. Velardi Group Vice President - None Suite 180 Atlanta/Birmingham 1200 Ashwood Parkway Atlanta, GA 30338 Charles F. Wachendorfer Group Vice President - None Suite 100 Detroit Metro Stanford Plaza II 7979 East Tufts Ave. Pkwy. Denver, CO 80237 Donald F. Weaver Group Vice President - None 3500 Market Street, Suite Greater Pennsylvania 200 Camp Hill, PA 17011 Norman Weaver Jr. Senior Vice President - None 1010 Main St., Suite 2B Alliance Group Huntington Beach, CA 92648 Michael L. Weiner Vice President - Tax None 200 AXP Financial Center Research and Audit Minneapolis, MN 55474 Jeffry M. Welter Vice President - Equity None 200 AXP Financial Center and Fixed Income Trading Minneapolis, MN 55474 Thomas L. White Group Vice President - None Suite 200 Cleveland Metro 28601 Chagrin Blvd. Woodmere, OH 44122 Eric S. Williams Group Vice President - None Suite 250 Virginia 3951 Westerre Parkway Richmond, VA 23233 William J. Williams Group Vice President - None 200 AXP Financial Center Twin Cities Metro Minneapolis, MN 55474 Edwin M. Wistrand Vice President and None 200 AXP Financial Center Assistant General Counsel Minneapolis, MN 55474 Michael D. Wolf Vice President - Senior None 200 AXP Financial Center Portfolio Manager Minneapolis, MN 55474 Michael R. Woodward Senior Vice President - None 32 Ellicott St Field Management Suite 100 Batavia, NY 14020 David L. Yowan Vice President and None American Express Company Treasurer New York Rande L. Zellers Group Vice President - None 1 Galleria Blvd., Suite Gulf States 1900 Metairie, LA 70001
Item 27 (c). Not Applicable. Item 28. Location of Accounts and Records American Express Financial Corporation 70100 AXP Financial Center Minneapolis, MN 55474 Item 29. Management Services Not Applicable. Item 30. Undertakings Not Applicable. SIGNATURES Pursuant to the requirements of the Securities Act and the Investment Company Act, the Registrant, AXP Federal Income Fund, Inc. certifies that it meets all of the requirements for effectiveness of this registration statement under rule 485(b) under the Securities Act and has duly caused this amendment to its registration statement to be signed on its behalf by the undersigned, duly authorized, in the City of Minneapolis and the State of Minnesota on the 25th day of July, 2001. AXP FEDERAL INCOME FUND, INC. By /s/ John R. Thomas** ------------------------- John R. Thomas, President By /s/ Paul D. Pearson ------------------------- Paul D. Pearson, Assistant Treasurer Pursuant to the requirements of the Securities Act, this amendment to the registration statement has been signed below by the following persons in the capacities indicated on the 25th day of July, 2001. Signature Capacity /s/ H. Brewster Atwater, Jr.* Director ------------------------- H. Brewster Atwater, Jr. /s/ Arne H. Carlson* Chairman of the Board ------------------------- Arne H. Carlson /s/ Lynne V. Cheney* Director ------------------------- Lynne V. Cheney /s/ Livio D. DeSimone* Director ------------------------- Livio D. DeSimone /s/ Ira D. Hall* Director ------------------------- Ira D. Hall /s/ David R. Hubers* Director ------------------------- David R. Hubers /s/ Heinz F. Hutter* Director ------------------------- Heinz F. Hutter /s/ Anne P. Jones* Director ------------------------- Anne P. Jones /s/ William R. Pearce* Director ------------------------- William R. Pearce /s/ Alan K. Simpson* Director ------------------------- Alan K. Simpson Signature Capacity /s/ John R. Thomas* Director ------------------------- John R. Thomas /s/ C. Angus Wurtele* Director ------------------------- C. Angus Wurtele * Signed pursuant to Directors' Power of Attorney, dated Jan. 11, 2001, filed electronically herewith as Exhibit (q)(1) by: /s/ Leslie L. Ogg ------------------------- Leslie L. Ogg ** Signed pursuant to Officers' Power of Attorney, dated Jan. 11, 2001, filed electronically herewith as Exhibit (q)(2) by: /s/ Leslie L. Ogg ------------------------- Leslie L. Ogg SIGNATURES Pursuant to the requirements of the Securities Act and the Investment Company Act, INCOME TRUST consents to the filing of this amendment to the registration statement of AXP Federal Income Fund, Inc. signed on its behalf by the undersigned, duly authorized, in the City of Minneapolis and the State of Minnesota on the 25th day of July, 2001: INCOME TRUST By /s/ John R. Thomas**** ------------------------- John R. Thomas, President By /s/ Paul D. Pearson ------------------------- Paul D. Pearson, Assistant Treasurer Pursuant to the requirements of the Securities Act, this amendment to the registration statement has been signed below by the following persons in the capacities indicated on the 25th day of July, 2001. Signature Capacity /s/ H. Brewster Atwater, Jr.*** Trustee ------------------------- H. Brewster Atwater, Jr. /s/ Arne H. Carlson*** Chairman of the Board ------------------------- Arne H. Carlson /s/ Lynne V. Cheney*** Trustee ------------------------- Lynne V. Cheney /s/ Livio D. DeSimone*** Trustee ------------------------- Livio D. DeSimone /s/ Ira D. Hall*** Trustee ------------------------- Ira D. Hall /s/ David R. Hubers*** Trustee ------------------------- David R. Hubers /s/ Heinz F. Hutter*** Trustee ------------------------- Heinz F. Hutter /s/ Anne P. Jones*** Trustee ------------------------- Anne P. Jones /s/ William R. Pearce*** Trustee ------------------------- William R. Pearce /s/ Alan K. Simpson*** Trustee ------------------------- Alan K. Simpson Signature Capacity /s/ John R. Thomas*** Trustee ------------------------- John R. Thomas /s/ C. Angus Wurtele*** Trustee ------------------------- C. Angus Wurtele *** Signed pursuant to Trustees' Power of Attorney, dated Jan. 11, 2001, filed electronically herewith as Exhibit (q)(3) by: /s/ Leslie L. Ogg ------------------------- Leslie L. Ogg **** Signed pursuant to Officers' Power of Attorney, dated Jan. 11, 2001, filed electronically herewith as Exhibit (q)(4) by: /s/ Leslie L. Ogg ------------------------- Leslie L. Ogg CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 31 TO REGISTRATION STATEMENT NO. 2-96512 This Post-Effective Amendment comprises the following papers and documents: The facing sheet. Part A. The prospectus. Part B. The Statement of Additional Information. The Financial Statements. Part C. Other information. Exhibits. The signatures. EX-99 2 exindex.txt EXHIBIT INDEX AXP FEDERAL INCOME FUND, INC. EXHIBIT INDEX Exhibit Index (a)(2) Articles of Amendment to the Articles of Incorporation dated June 16, 1999. (b) By-laws, as amended January 11, 2001. (h)(7) Transfer Agency Agreement dated May 10, 2001 between Registrant and American Express Client Service Corporation. (i) Opinion and Consent of Counsel. (j) Independent Auditors' Consent. (q)(1) Directors' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 11, 2001. (q)(2) Officers' Power of Attorney to sign Amendments to this Registration Statement, dated Jan. 11, 2001. (q)(3) Trustees' Power of Attorney for the Master Fund, dated Jan. 11, 2001. (q)(4) Officers' Power of Attorney for the Master Fund, dated Jan. 11, 2001. EX-99.A(2)ARTCLEAM 3 articles.txt ARTICLES OF AMENDMENT TO ARTICLES OF INCORPORATION ARTICLES OF AMENDMENT OF IDS Federal Income Fund, Inc. Pursuant to Section 302A.135 of the Minnesota Business Corporation Act, IDS Federal Income Fund, Inc., incorporated under the laws of the State of Minnesota on March 12, 1985, amends its Articles of Incorporation to change the name of the corporation to AXP Federal Income Fund, Inc. The new Article I shall be: ARTICLE I - NAME The name of this corporation (hereinafter called the "Fund") is: AXP Federal Income Fund, Inc. The resolution to amend the Articles of Incorporation was approved by the affirmative vote of a majority of the shares present and entitled to vote at a regular meeting of shareholders on June 16, 1999, held pursuant to a written notice given to each shareholder in the manner provided in Section 302A.435. Dated this 16th day of June, 1999. AXP Federal Income Fund, Inc. By /s/ Leslie L. Ogg ------------------ Leslie L. Ogg STATE OF MINNESOTA) )ss. COUNTY OF DAKOTA) The foregoing instrument was acknowledge before me this 16th day of June, 1999. By /s/ Diane R. Kepp ----------------- Diane R. Kepp (notary symbol) Notary Public (Diane R. Kepp) (NOTARY PUBLIC-MINNESOTA) (DAKOTA COUNTY) (rubber stamp) (JUN 17, 1999) (Mary Kiffmeyer) (Secretary of State) EX-99.BBYLAWS 4 bylaws.txt BY-LAWS Effective: June 12, 1986 Amended: 5/14/87, 1/12/89, 1/10/96, 9/8/99, 1/11/01 BY-LAWS OF AXP FEDERAL INCOME FUND, INC. ARTICLE I Corporate Seal The corporate seal shall bear the inscription "Seal." 9/8/99 ARTICLE II Meeting of Shareholders Section 1. No regular meeting of shareholders need be held, however, a majority of directors present at a duly held meeting may call a regular meeting of shareholders by fixing the date, time and place for a meeting. A regular meeting of the shareholders shall include an election of directors. No meeting shall be considered a regular meeting unless specifically designated as such in the notice of meeting. Regular meetings may be held no more frequently than once per year. If a regular meeting of shareholders has not been held during the immediately preceding 15 months, a shareholder or shareholders holding three percent or more of the voting power of all shares entitled to vote may demand a regular meeting of shareholders by written notice of demand given to the chief executive officer or chief financial officer of the Fund. Within 30 days after receipt of the demand by one of those officers, the Board of Directors shall cause a regular meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, all at the expense of the Fund. If the Board fails to cause a regular meeting to be called, the shareholder or shareholders making the demand may call the regular meeting by giving notice as required by the laws of Minnesota at the expense of the Fund. Section 2. The holders of at least ten percent (10%) of the shares outstanding and entitled to vote, present in person or by proxy, shall constitute a quorum, but the holders of a smaller amount may adjourn from time to time without further notice, other than by notice at the time, until a quorum is secured at any such adjourned meeting. In case a quorum is not present, the meeting may be adjourned from time to time without notice other than by notice at the meeting. At any adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Section 3. At each meeting of the shareholders, the polls may be opened and closed, the proxies and ballots may be received and taken in charge, and all questions touching the qualification of voters, the validity of proxies, and acceptances or rejections of votes may be decided by two (2) inspectors of election. Inspectors may be appointed by the Board of Directors before or at the meeting. If no such appointment shall have been made or if any inspector be absent or fails to act, the presiding officer at the meeting shall appoint a person or persons to fill such vacancy. Inspectors shall take charge of the polls and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law. Section 4. Special meetings of the shareholders may be called at any time as provided for by the laws of the State of Minnesota. Section 5. Shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of the shares present and entitled to vote except where a larger portion is otherwise required. ARTICLE III Directors 9/8/99 Section 1. An organizational meeting of the Board of Directors shall be held as soon as convenient to a majority of the directors, after the final adjournment of each regular meeting of the shareholders, and no notice shall be required. Other meetings of the Board of Directors may be previously scheduled or called by the Chair of the Board and Chief Executive Officer or any two directors. Notice of specially called meetings shall be sufficient if given to each director at least five days prior thereto by mail or one day prior thereto by telephone, telegraph or in person, unless such notice period is waived by each director. Section 2. The Board of Directors shall fix and change, as it may from time to time determine, by majority vote, the compensation to be paid the directors, officers and all employees appointed by the Board of Directors. Section 3. A director may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes of the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 4. A majority of the directors shall constitute a quorum, but a smaller number may adjourn from time to time without notice, other than by announcement at the meeting, until a quorum is secured; and, likewise, in case a quorum is present, the meeting may be adjourned from time to time without notice other than by announcement at the meeting. At any adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. Section 5. The Board of Directors may, by resolution passed by a majority of the whole Board, designate an Executive Committee of two or more directors, which may meet at stated times or on notice to all by any of their number during intervals between meetings of the Board. The Executive Committee shall advise with and aid the officers of the Fund in all matters concerning its interests and the management of its business, and generally perform such duties and exercise such powers as may be delegated to it from time to time by the Board of Directors. Vacancies in the membership of such Executive Committee shall be filled by the Board of Directors. Section 6. From time to time the Board of Directors may, by resolution passed by a majority of the whole Board, appoint any other committee or committees for any purpose or purposes, which committee or committees shall have such powers as shall be specified in the resolution of appointment. Section 7. The quorum for such committee established by the Board of Directors is two members regardless of the number of members serving on the committee. Section 8. Any action required or permitted to be taken at any meeting of the Board of Directors or of a duly appointed committee of the Board of Directors may be taken in any manner permitted by law. Section 9. The Board of Directors shall elect one independent member to serve a Chair of the Board whose duties shall include serving as the lead independent director. 1/11/01 ARTICLE IV Officers Section 1. The Fund shall have a President, a Treasurer and may have such other officers as the Board of Directors may choose from time to time. 1/11/01 9/8/99 Section 2. The Treasurer shall be the chief financial officer of the Fund, shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the Fund, and shall perform such other duties as the Board of Directors may from time to time prescribe or require. Section 3. Any person designated by the Board of Directors as President or Vice President shall be vested with all the powers and required to perform all the duties of the Chair of the Board and Chief Executive Officer in the Chair's absence or disability, shall at all times be vested with the same power as the Chair to sign and deliver in the name of the Fund any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Fund, and shall perform such other duties as may be prescribed by the Board of Directors. 9/8/99 Section 4. Any person designated by the Board of Directors as Secretary shall attend all meetings of the shareholders of the Fund, the Board of Directors, and such other meetings as may be designated by the Board of Directors. The Secretary shall record all of the proceedings of such meetings in a book or books to be kept for that purpose; shall have custody of the seal, stock certificate books and minute books of the Fund; may affix the seal of the Fund to any instrument and perform such additional duties as shall be assigned by the Board of Directors. Section 5. The officers of the Fund shall hold office until their successors are chosen and qualify in their stead. Any officer chosen and appointed by the Board of Directors may be removed either with or without cause at any time by the Board of Directors. ARTICLE V Capital Stock Shares of capital stock shall be uncertificated. 1/12/89 ARTICLE VI Transfers 1/12/89 Section 1. Shares of stock of the Fund shall be transferred on the books of the Fund at the request of the holder thereof in person or of her or his duly authorized attorney upon surrender of the certificate or certificates therefor, if any, or in their absence by a request for transfer in a form acceptable to the Fund that may include the request be in writing, and be signed by the registered holder or by his duly authorized attorney in the manner specified by the Fund. No transfer or assignment of shares shall affect the right of the Fund to pay any dividend due upon the shares, or to treat the holder of record as the holder in fact, until such transfer or assignment is registered on the books of the Fund and the Fund shall be entitled to treat the holder of record of any of its shares as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such shares on the part of any person whether or not it shall have express or other notice thereof, save as may be expressly provided by law. Section 2. The Board of Directors shall have power and authority from time to time to appoint one or more transfer agents and/or clerks and registrars for the securities issued by the Fund and to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of such securities. Section 3. If any security issued by the Fund be lost, stolen, mutilated or destroyed, the security may be transferred upon giving of a satisfactory bond of indemnity in an amount which, in the judgment of the Board of Directors, is sufficient to indemnify the Fund against any claim that may result therefrom. ARTICLE VII Definitions For all purposes of the Articles of Incorporation and these By-Laws, the term "business day" shall be defined as a day with respect to which the New York Stock Exchange is open for business. ARTICLE VIII Custodian or Trustee Agreements The Fund shall enter into a custodian or trustee agreement with a bank or trust company having aggregate capital, surplus and undivided profits of not less than $2,000,000 for the custody of the Fund's securities and other assets. All securities and cash assets owned or acquired by the Fund shall be held by such custodian or trustee pursuant to the terms of such agreement and the Fund shall deposit or cause to be deposited with such custodian or trustee all such securities and cash assets. The agreement between the Fund and the custodian or trustee may be terminated at any time by a vote of a majority of the outstanding shares of the Fund. ARTICLE IX Miscellaneous 1/10/96 Section 1. The fiscal year of the Fund shall begin on the first day of June in each year and end on the thirty-first day of May following. Section 2. If the sale of shares issued by the Fund shall at any time be discontinued, the Board of Directors may in its discretion, pursuant to resolution, deduct from the value of the assets an amount equal to the brokerage commissions, transfer taxes, and charges, if any, which would be payable on the sale of such securities if they were then being sold. ARTICLE X Indemnification 5/14/87 Section 1. Each person made or threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or proceeding whether civil, criminal, administrative, arbitration, or investigative, including a proceeding by or in the right of the Fund by reason of the former or present capacity as a director or officer of the Fund or who, while a director or officer of the Fund, is or was serving at the request of the Fund or whose duties as a director or officer involve or involved service as a director, officer, partner, trustee or agent of another organization or employee benefit plan, whether the basis of any proceeding is alleged action in an official capacity or in any capacity while serving as a director, officer, partner, trustee or agent, shall be indemnified and held harmless by the Fund to the full extent authorized by the Minnesota Business Corporation Act, as the same or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Fund to provide broader indemnification rights than the law permitted the Fund to provide prior to such amendment, or by any other applicable law as then in effect, against judgments, penalties, fines including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys' fees and disbursements, incurred in connection therewith and such indemnification shall continue as to any person who has ceased to be a director or officer and shall inure to the benefit of the person's heirs, executors and administrators provided, however, in an action brought against the Fund to enforce rights to indemnification, the director or officer shall be indemnified only if the action was authorized by the Board of Directors of the Fund. The right to indemnification conferred by this Section shall be a contract right and shall include the right to be paid by the Fund in advance of the final disposition of a proceeding for expenses incurred in connection therewith provided, however, such payment of expenses shall be made only upon receipt of a written undertaking by the director or officer to repay all amounts so paid if it is ultimately determined that the director or officer is not entitled to indemnification. Section 2. Each person who upon written request to the Fund has not received payment within thirty days may at any time thereafter bring suit against the Fund to recover any unpaid amount and, to the extent successful, in whole or in part, shall be entitled to be paid the expenses of prosecuting such suit. Each person shall be presumed to be entitled to indemnification upon filing a written request for payment and the Fund shall have the burden of proof to overcome the presumption that the director or officer is not so entitled. Neither the determination by the Fund, whether by the Board of Directors, special legal counsel or by shareholder, nor the failure of the Fund to have made any determination shall be a defense or create the presumption that the director or officer is not entitled to indemnification. Section 3. The right to indemnification and to the payment of expenses prior to any final determination shall not be exclusive of any other right which any person may have or hereinafter acquire under any statute, provision of the Articles of Incorporation, by-law, agreement, vote of shareholders or otherwise and notwithstanding any provisions in this Article X, the Fund is not obligated to make any payment with respect to any claim for which payment is required to be made to or on behalf of the director or officer under any insurance policy, except with respect to any excess beyond the amount of required payment under such insurance and no indemnification will be made in violation of the provisions of the Investment Company Act of 1940. EX-99.HOTHMATCONT 5 xferag.txt TRANSFER AGENCY AGREEMENT TRANSFER AGENCY AGREEMENT AGREEMENT dated as of May 10, 2001 between AXP Federal Income Fund, Inc., a Minnesota corporation, (the "Company" or "Fund"), and American Express Client Service Corporation (the "Transfer Agent"), a Minnesota corporation. In consideration of the mutual promises set forth below, the Company and the Transfer Agent agree as follows: 1. Appointment of the Transfer Agent. The Company hereby appoints the Transfer Agent, as transfer agent for its shares and as shareholder servicing agent for the Company, and the Transfer Agent accepts such appointment and agrees to perform the duties set forth below. 2. Compensation. The Company will compensate the Transfer Agent for the performance of its obligations as set forth in Schedule A. Schedule A does not include out-of-pocket disbursements of the Transfer Agent for which the Transfer Agent shall be entitled to bill the Company separately. The Transfer Agent will bill the Company monthly. The fee provided for hereunder shall be paid in cash by the Company to the Transfer Agent within five (5) business days after the last day of each month. Out-of-pocket disbursements shall include, but shall not be limited to, the items specified in Schedule B. Reimbursement by the Company for expenses incurred by the Transfer Agent in any month shall be made as soon as practicable after the receipt of an itemized bill from the Transfer Agent. Any compensation jointly agreed to hereunder may be adjusted from time to time by attaching to this Agreement a revised Schedule A, dated and signed by an officer of each party. 3. Documents. The Company will furnish from time to time such certificates, documents or opinions as the Transfer Agent deems to be appropriate or necessary for the proper performance of its duties. 4. Representations of the Company and the Transfer Agent. (a) The Company represents to the Transfer Agent that all outstanding shares are validly issued, fully paid and non-assessable by the Company. When shares are hereafter issued in accordance with the terms of the Company's Articles of Incorporation and its By-laws, such shares shall be validly issued, fully paid and non-assessable by the Company. (b) The Transfer Agent represents that it is registered under Section 17A(c) of the Securities Exchange Act of 1934. The Transfer Agent agrees to maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this agreement and to comply with all applicable laws. 5. Duties of the Transfer Agent. The Transfer Agent shall be responsible, separately and through its subsidiaries or affiliates, for the following functions: (a) Sale of Fund Shares. (1) On receipt of an application and payment, wired instructions and payment, or payment identified as being for the account of a shareholder, the Transfer Agent will deposit the payment, prepare and present the necessary report to the Custodian and record the purchase of shares in a timely fashion in accordance with the terms of the Fund's prospectus. All shares shall be held in book entry form and no certificate shall be issued unless the Fund is permitted to do so by its prospectus and the purchaser so requests. (2) On receipt of notice that payment was dishonored, the Transfer Agent shall stop redemptions of all shares owned by the purchaser related to that payment, place a stop payment on any checks that have been issued to redeem shares of the purchaser and take such other action as it deems appropriate. (b) Redemption of Fund Shares. On receipt of instructions to redeem shares in accordance with the terms of the Fund's prospectus, the Transfer Agent will record the redemption of shares of the Fund, prepare and present the necessary report to the Custodian and pay the proceeds of the redemption to the shareholder, an authorized agent or legal representative upon the receipt of the monies from the Custodian. (c) Transfer or Other Change Pertaining to Fund Shares. On receipt of instructions or forms acceptable to the Transfer Agent to transfer the shares to the name of a new owner, change the name or address of the present owner or take other legal action, the Transfer Agent will take such action as is requested. (d) Exchange of Fund Shares. On receipt of instructions to exchange the shares of the Fund for the shares of another American Express(R) Fund or other American Express Financial Corporation product in accordance with the terms of the prospectus, the Transfer Agent will process the exchange in the same manner as a redemption and sale of shares. (e) Right to Seek Assurance. The Transfer Agent may refuse to transfer, exchange or redeem shares of the Fund or take any action requested by a shareholder until it is satisfied that the requested transaction or action is legally authorized or until it is satisfied there is no basis for any claims adverse to the transaction or action. It may rely on the provisions of the Uniform Act for the Simplification of Fiduciary Security Transfers or the Uniform Commercial Code. The Company shall indemnify the Transfer Agent for any act done or omitted to be done in reliance on such laws or for refusing to transfer, exchange or redeem shares or taking any requested action if it acts on a good faith belief that the transaction or action is illegal or unauthorized. (f) Shareholder Records, Reports and Services. (1) The Transfer Agent shall maintain all shareholder accounts, which shall contain all required tax, legally imposed and regulatory information; shall provide shareholders, and file with federal and state agencies, all required tax and other reports pertaining to shareholder accounts; shall prepare shareholder mailing lists; shall cause to be printed and mailed all required prospectuses, annual reports, semiannual reports, statements of additional information (upon request), proxies and other mailings to shareholders; and shall cause proxies to be tabulated. (2) The Transfer Agent shall respond to all valid inquiries related to its duties under this Agreement. (3) The Transfer Agent shall create and maintain all records in accordance with all applicable laws, rules and regulations, including, but not limited to, the records required by Section 31(a) of the Investment Company Act of 1940. (g) Dividends and Distributions. The Transfer Agent shall prepare and present the necessary report to the Custodian and shall cause to be prepared and transmitted the payment of income dividends and capital gains distributions or cause to be recorded the investment of such dividends and distributions in additional shares of the Fund or as directed by instructions or forms acceptable to the Transfer Agent. (h) Confirmations and Statements. The Transfer Agent shall confirm each transaction either at the time of the transaction or through periodic reports as may be legally permitted. (i) Lost or Stolen Checks. The Transfer Agent will replace lost or stolen checks issued to shareholders upon receipt of proper notification and will maintain any stop payment orders against the lost or stolen checks as it is economically desirable to do. (j) Reports to Company. The Transfer Agent will provide reports pertaining to the services provided under this Agreement as the Company may request to ascertain the quality and level of services being provided or as required by law. (k) Other Duties. The Transfer Agent may perform other duties for additional compensation if agreed to in writing by the parties to this Agreement. 6. Ownership and Confidentiality of Records. (a) General. The Transfer Agent agrees that all records prepared or maintained by it relating to the services to be performed by it under the terms of this Agreement are the property of the Company and may be inspected by the Company or any person retained by the Company at reasonable times. The Company and Transfer Agent agree to protect the confidentiality of those records. (b) Regulation S-P. (1) In accordance with Regulation S-P of the Securities and Exchange Commission "Nonpublic Personal Information" includes (1) all personally identifiable financial information; (2) any list, description, or other grouping of consumers (and publicly available information pertaining to them) that is derived using any personally identifiable financial information that is not publicly available information; and (3) any information derived therefrom. (2) The Transfer Agent must not use or disclose Nonpublic Personal Information for any purpose other than to carry out the purpose for which Nonpublic Personal Information was provided to the Transfer Agent as set forth in this Agreement, and agrees to cause the Transfer Agent, and its employees, agents, representatives, or any other party to whom the Transfer Agent may provide access to or disclose Nonpublic Personal Information to limit the use and disclosure of Nonpublic Personal Information to that purpose. (3) The Transfer Agent agrees to implement appropriate measures designed to ensure the security and confidentiality of Nonpublic Personal Information, to protect such information against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, Nonpublic Personal Information that could result in substantial harm or inconvenience to any customer of the Company; the Transfer Agent further agrees to cause all its agents, representatives, subcontractors, or any other party to whom the Transfer Agent may provide access to, or disclose, Nonpublic Personal Information to implement appropriate measures designed to meet the objectives set forth in this paragraph. (4) With respect only to the provisions of this Section 6(b), the Transfer Agent agrees to indemnify and hold harmless the Company, and any officer or director of the Company, against losses, claims, damages, expenses, or liabilities to which the Company, or any officer or director of the Company, may become subject as the result of (1) a material breach of the provisions of this section of the Agreement or (2) any acts or omissions of the Transfer Agent, or of any of its officers, directors, employees, or agents, that are not in substantial accordance with this Agreement, including, but not limited to, any violation of any federal statute or regulation. Notwithstanding the foregoing, no party shall be entitled to indemnification pursuant to this Section 6(b)(4) if such loss, claim, damage, expense, or liability is due to the willful misfeasance, bad faith, gross negligence, or reckless disregard of duty by the party seeking indemnification. 7. Action by Board and Opinion of Counsel. The Transfer Agent may rely on resolutions of the Board of Directors (the "Board") or the Executive Committee of the Board and on opinion of counsel for the Company. 8. Duty of Care. It is understood and agreed that, in furnishing the Company with the services as herein provided, neither the Transfer Agent, nor any officer, director or agent thereof shall be held liable for any loss arising out of or in connection with their actions under this Agreement so long as they act in good faith and with due diligence, and are not negligent or guilty of any willful misconduct. It is further understood and agreed that the Transfer Agent may rely upon information furnished to it reasonably believed to be accurate and reliable. In the event the Transfer Agent is unable to perform its obligations under the terms of this Agreement because of an act of God, strike or equipment or transmission failure reasonably beyond its control, the Transfer Agent shall not be liable for any damages resulting from such failure. 9. Term and Termination. This Agreement shall become effective on the date first set forth above (the "Effective Date") and shall continue in effect from year to year thereafter as the parties may mutually agree; provided that either party may terminate this Agreement by giving the other party notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. In the event such notice is given by the Company, it shall be accompanied by a vote of the Board, certified by the Secretary, electing to terminate this Agreement and designating a successor transfer agent or transfer agents. Upon such termination and at the expense of the Company, the Transfer Agent will deliver to such successor a certified list of shareholders of the Fund (with name, address and taxpayer identification or Social Security number), a historical record of the account of each shareholder and the status thereof, and all other relevant books, records, correspondence, and other data established or maintained by the Transfer Agent under this Agreement in the form reasonably acceptable to the Company, and will cooperate in the transfer of such duties and responsibilities, including provisions for assistance from the Transfer Agent's personnel in the establishment of books, records and other data by such successor or successors. 10. Amendment. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. 11. Subcontracting. The Company agrees that the Transfer Agent may subcontract for certain of the services described under this Agreement with the understanding that there shall be no diminution in the quality or level of the services and that the Transfer Agent remains fully responsible for the services. Except for out-of-pocket expenses identified in Schedule B, the Transfer Agent shall bear the cost of subcontracting such services, unless otherwise agreed by the parties. 12. Miscellaneous. (a) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party. (b) This Agreement shall be governed by the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers as of the day and year written above. AXP FEDERAL INCOME FUND, INC. By: /s/ Leslie L. Ogg ----------------- Leslie L. Ogg Vice President AMERICAN EXPRESS CLIENT SERVICE CORPORATION By: /s/ Bridget Sperl ----------------- Bridget Sperl Senior Vice President Schedule A AXP FEDERAL INCOME FUND, INC. FEE The annual per account fee for services under this agreement, accrued daily and payable monthly, is as follows: Class A Class B Class C Class Y $19.50 $20.50 $20.00 $17.50 Schedule B OUT-OF-POCKET EXPENSES The Company shall reimburse the Transfer Agent monthly for the following out-of-pocket expenses: o typesetting, printing, paper, envelopes, postage and return postage for proxy soliciting material, and proxy tabulation costs o printing, paper, envelopes and postage for dividend notices, dividend checks, records of account, purchase confirmations, exchange confirmations and exchange prospectuses, redemption confirmations, redemption checks, confirmations on changes of address and any other communication required to be sent to shareholders o typesetting, printing, paper, envelopes and postage for prospectuses, annual and semiannual reports, statements of additional information, supplements for prospectuses and statements of additional information and other required mailings to shareholders o stop orders o outgoing wire charges o other expenses incurred at the request or with the consent of the Company EX-99.ILEGALOPININ 6 iacon_01.txt OPINION AND CONSENT OF COUNSEL Independent auditors' consent - ---------------------------------------------------------------------- The board and shareholders AXP Federal Income Fund, Inc.: The board of trustees and unitholders Income Trust: Government Income Portfolio We consent to the use of our reports incorporated herein by reference and to the references to our Firm under the headings "Financial Highlights" in Part A and "INDEPENDENT AUDITORS" in Part B of the Registration Statement. /s/ KPMG LLP -------- KPMG LLP Minneapolis, Minnesota July 25, 2001 EX-99.JOTHEROPININ 7 opin_01.txt INDEPENDENT AUDITORS' CONSENT July 25, 2001 AXP Federal Income Fund, Inc. 200 AXP Financial Center Minneapolis, Minnesota 55474 Gentlemen: I have examined the Articles of Incorporation and the By-Laws of AXP Federal Income Fund, Inc. (the Company) and all necessary certificates, permits, minute books, documents and records of the Company, and the applicable statutes of the State of Minnesota, and it is my opinion that the shares sold in accordance with applicable federal and state securities laws will be legally issued, fully paid and nonassessable. This opinion may be used in connection with the Post-Effective Amendment. Sincerely, /s/ Leslie L. Ogg - ----------------- Leslie L. Ogg Attorney at Law 901 S. Marquette Ave., Suite 2810 Minneapolis, Minnesota 55402-3268 EX-99.Q(1)POA 8 poa_dir.txt DIRECTORS' POWER OF ATTY DIRECTORS/TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as directors and trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission: 1933 Act 1940 Act Reg. Number Reg. Number ----------- ----------- AXP Bond Fund, Inc. 2-51586 811-2503 AXP California Tax-Exempt Trust 33-5103 811-4646 AXP Discovery Fund, Inc. 2-72174 811-3178 AXP Equity Select Fund, Inc. 2-13188 811-772 AXP Extra Income Fund, Inc. 2-86637 811-3848 AXP Federal Income Fund, Inc. 2-96512 811-4260 AXP Global Series, Inc. 33-25824 811-5696 AXP Growth Series, Inc. 2-38355 811-2111 AXP High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901 AXP International Fund, Inc. 2-92309 811-4075 AXP Investment Series, Inc. 2-11328 811-54 AXP Managed Series, Inc. 2-93801 811-4133 AXP Market Advantage Series, Inc. 33-30770 811-5897 AXP Money Market Series, Inc. 2-54516 811-2591 AXP New Dimensions Fund, Inc. 2-28529 811-1629 AXP Precious Metals Fund, Inc. 2-93745 811-4132 AXP Progressive Fund, Inc. 2-30059 811-1714 AXP Selective Fund, Inc. 2-10700 811-499 AXP Special Tax-Exempt Series Trust 33-5102 811-4647 AXP Stock Fund, Inc. 2-11358 811-498 AXP Strategy Series, Inc. 2-89288 811-3956 AXP Tax-Exempt Series, Inc. 2-57328 811-2686 AXP Tax-Free Money Fund, Inc. 2-66868 811-3003 AXP Utilities Income Fund, Inc. 33-20872 811-5522 hereby constitutes and appoints Arne H. Carlson and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 11th day of January, 2001. /s/ Peter J. Anderson /s/ Heinz F. Hutter - ---------------------- ------------------- Peter J. Anderson Heinz F. Hutter /s/ H. Brewster Atwater, Jr /s/ Anne P. Jones - ---------------------------- ----------------- H. Brewster Atwater, Jr Anne P. Jones /s/ Arne H. Carlson /s/ William R. Pearce - -------------------- --------------------- Arne H. Carlson William R. Pearce /s/ Lynne V. Cheney /s/ Alan K. Simpson - -------------------- ------------------- Lynne V. Cheney Alan K. Simpson /s/ Livio D. DeSimone /s/ John R. Thomas - ---------------------- ------------------ Livio D. DeSimone John R. Thomas /s/ Ira D. Hall /s/ C. Angus Wurtele - ---------------- -------------------- Ira D. Hall C. Angus Wurtele /s/ David R. Hubers - --------------------- David R. Hubers EX-99.Q(2)POA 9 poa_ofcr.txt OFFICERS' POWER OF ATTY OFFICERS' POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as officers of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission: 1933 Act 1940 Act Reg. Number Reg. Number ----------- --------- AXP Bond Fund, Inc. 2-51586 811-2503 AXP California Tax-Exempt Trust 33-5103 811-4646 AXP Discovery Fund, Inc. 2-72174 811-3178 AXP Equity Select Fund, Inc. 2-13188 811-772 AXP Extra-Income Fund, Inc. 2-86637 811-3848 AXP Federal Income Fund, Inc. 2-96512 811-4260 AXP Global Series, Inc. 33-25824 811-5696 AXP Growth Series, Inc. 2-38355 811-2111 AXP High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901 AXP International Fund, Inc. 2-92309 811-4075 AXP Investment Series, Inc. 2-11328 811-54 AXP Variable Portfolio-Investment Series, Inc. 2-73115 811-3218 AXP Variable Portfolio-Managed Series, Inc. 2-96367 811-4252 AXP Variable Portfolio-Money Market Series, Inc. 2-72584 811-3190 AXP Variable Portfolio-Income Series, Inc. 2-73113 811-3219 AXP Managed Series, Inc. 2-93801 811-4133 AXP Market Advantage Series, Inc. 33-30770 811-5897 AXP Money Market Series, Inc. 2-54516 811-2591 AXP New Dimensions Fund, Inc. 2-28529 811-1629 AXP Precious Metals Fund, Inc. 2-93745 811-4132 AXP Progressive Fund, Inc. 2-30059 811-1714 AXP Selective Fund, Inc. 2-10700 811-499 AXP Special Tax-Exempt Series Trust 33-5102 811-4647 AXP Stock Fund, Inc. 2-11358 811-498 AXP Strategy Series, Inc. 2-89288 811-3956 AXP Tax-Exempt Series, Inc. 2-57328 811-2686 AXP Tax-Free Money Fund, Inc. 2-66868 811-3003 AXP Utilities Income Fund, Inc. 33-20872 811-5522 hereby constitutes and appoints the other as his attorney-in-fact and agent, to sign for him in his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 11th day of January, 2001. /s/ Arne H. Carlson /s/ Leslie L. Ogg - ------------------- ----------------- Arne H. Carlson Leslie L. Ogg /s/ John R. Thomas /s/ Peter J. Anderson - ------------------ --------------------- John R. Thomas Peter J. Anderson /s/ Frederick C. Quirsfeld /s/ John M. Knight - -------------------------- ------------------ Frederick C. Quirsfeld John M. Knight EX-99.Q(3)POA 10 poatrstt.txt TRUSTEES' POWER OF ATTY TRUSTEES POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as trustees of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Investment Company Act of 1940 with the Securities and Exchange Commission: 1940 Act Reg. Number ----------- Growth Trust 811-07395 Growth and Income Trust 811-07393 Income Trust 811-07307 Tax-Free Income Trust 811-07397 World Trust 811-07399 hereby constitutes and appoints Arne H. Carlson and Leslie L. Ogg or either one of them, as her or his attorney-in-fact and agent, to sign for her or him in her or his name, place and stead any and all further amendments to said registration statements filed pursuant to said Act and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 11th day of January, 2001. /s/ Peter J. Anderson /s/ Heinz F. Hutter - ---------------------- ------------------- Peter J. Anderson Heinz F. Hutter /s/ H. Brewster Atwater, Jr /s/ Anne P. Jones - ---------------------------- ----------------- H. Brewster Atwater, Jr Anne P. Jones /s/ Arne H. Carlson /s/ William R. Pearce - -------------------- --------------------- Arne H. Carlson William R. Pearce /s/ Lynne V. Cheney /s/ Alan K. Simpson - -------------------- ------------------- Lynne V. Cheney Alan K. Simpson /s/ Livio D. DeSimone /s/ John R. Thomas - ---------------------- ------------------ Livio D. DeSimone John R. Thomas /s/ Ira D. Hall /s/ C. Angus Wurtele - ---------------- -------------------- Ira D. Hall C. Angus Wurtele /s/ David R. Hubers - --------------------- David R. Hubers EX-99.Q(4)POA 11 poatrsto.txt TRUST OFFICERS' POWER OF ATTY OFFICERS' POWER OF ATTORNEY City of Minneapolis State of Minnesota Each of the undersigned, as officers of the below listed open-end, diversified investment companies that previously have filed registration statements and amendments thereto pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940 with the Securities and Exchange Commission: 1940 Act Reg. Number ----------- Growth Trust 811-07395 Growth and Income Trust 811-07393 Income Trust 811-07307 Tax-Free Income Trust 811-07397 World Trust 811-07399 hereby constitutes and appoints the other as his attorney-in-fact and agent, to sign for him in his name, place and stead any and all further amendments to said registration statements filed pursuant to said Acts and any rules and regulations thereunder, and to file such amendments with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting to either of them the full power and authority to do and perform each and every act required and necessary to be done in connection therewith. Dated the 11th day of January, 2001. /s/ Arne H. Carlson /s/ Leslie L. Ogg - ------------------- ----------------- Arne H. Carlson Leslie L. Ogg /s/ John R. Thomas /s/ Peter J. Anderson - ------------------ --------------------- John R. Thomas Peter J. Anderson /s/ Frederick C. Quirsfeld /s/ John M. Knight - -------------------------- ------------------ Frederick C. Quirsfeld John M. Knight -----END PRIVACY-ENHANCED MESSAGE-----