-----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, TUWVosB/hocndtZuePcU/JwszEFSjjc3wmGA8nDihj+bhvZyzjmmfdwYTbno/Sks /MkVZvNjy3/5eNtGkcDWZA== 0000820027-98-000494.txt : 19980803 0000820027-98-000494.hdr.sgml : 19980803 ACCESSION NUMBER: 0000820027-98-000494 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19980729 EFFECTIVENESS DATE: 19980729 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS FEDERAL INCOME FUND INC CENTRAL INDEX KEY: 0000764802 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-96512 FILM NUMBER: 98673170 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-04260 FILM NUMBER: 98673171 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 485BPOS 1 IDS 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. 26 (File No. 2-96512) X ------ -- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 29 (File No. 811-4260) X ------ - IDS FEDERAL INCOME FUND, INC. IDS Tower 10 Minneapolis, Minnesota 55440-0010 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, 1998 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. IDS 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. Cross reference sheet showing the location in the prospectus and Statement of Additional Information of the information called for by items enumerated in Parts A and B of Form N-1A. Negative answers omitted are so indicated. PART A Item No. Section in Prospectus 1 Cover page of prospectus 2 (a) Sales charge and Fund expenses (b) The Fund in brief (c) The Fund in brief 3 (a) Financial highlights (b) NA (c) Performance (d) Financial highlights 4 (a) The Fund in brief; Investment policies and risks; How the Fund and Portfolio are organized (b) Investment policies and risks (c) Investment policies and risks 5 (a) Board members and officers (b)(i) Investment manager; About American Express Financial Corporation - General information (b)(ii) Investment manager (b)(iii) Investment manager (c) Portfolio manager (d) Administrator and transfer agent (e) Administrator and transfer agent (f) Distributor (g) Investment manager; About American Express Financial Corporation - General information 5A(a) * (b) * 6 (a) Shares; Voting rights (b) NA (c) NA (d) Voting rights (e) Cover page; Special shareholder services (f) Dividend and capital gain distributions; Reinvestments (g) Taxes (h) Alternative purchase arrangements; Special considerations regarding master/feeder structure 7 (a) Distributor (b) Valuing Fund shares (c) How to purchase, exchange or redeem shares (d) How to purchase shares (e) NA (f) Distributor (g) Alternative purchase arrangements; Reductions and waivers of the sales charge 8 (a) How to redeem shares (b) NA (c) How to purchase shares: Three ways to invest (d) How to purchase, exchange or redeem shares: Redemption policies - "Important..." 9 None PART B Item No. Section in Statement of Additional Information 10 Cover page of SAI 11 Table of Contents 12 NA 13 (a) Additional Investment Policies; all appendices except Dollar-Cost Averaging (b) Additional Investment Policies (c) Additional Investment Policies (d) Security Transactions 14 (a) Board members and officers**; Board Members and Officers (b) Board Members and Officers (c) Board Members and Officers 15 (a) NA (b) Principal Holders of Securities, if applicable (c) Board Members and Officers 16 (a)(i) How the Fund and Portfolio are organized; About American Express Financial Corporation** (a)(ii) Agreements: Investment Management Services Agreement, Plan and Agreement of Distribution (a)(iii) Agreements: Investment Management Services Agreement (b) Agreements: Investment Management Services Agreement (c) NA (d) Agreements: Administrative Services Agreement, Shareholder Service Agreement (e) NA (f) Agreements: Distribution Agreement (g) NA (h) Custodian Agreement; Independent Auditors (i) Agreements: Transfer Agency Agreement; Custodian Agreement 17 (a) Security Transactions (b) Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation (c) Security Transactions (d) Security Transactions (e) Security Transactions 18 (a) Shares; Voting rights** (b) NA 19(a) Investing in the Fund (b) Valuing Fund Shares; Investing in the Fund (c) Redeeming Shares 20 Taxes 21 (a) Agreements: Distribution Agreement (b) NA (c) NA 22 (a) Performance Information (for money market funds only) (b) Performance Information (for all funds except money market funds) 23 Financial Statements * Designates information is located in annual report. ** Designates location in prospectus. Prospectus July 30, 1998 The goal of IDS Federal Income Fund, Inc. is to provide shareholders with a high level of current income and safety of principal consistent with investment in U.S. government and government agency securities. The Fund seeks to achieve its goal by investing all of its assets in Government Income Portfolio of Income Trust. The Portfolio is managed by American Express Financial Corporation and has the same goal as the Fund. This arrangement is commonly known as a master/feeder structure. This prospectus contains facts that can help you decide if the Fund is the right investment for you. Read it before you invest and keep it for future reference. Additional facts about the Fund are in a Statement of Additional Information (SAI), filed with the Securities and Exchange Commission (SEC) and available for reference, along with other related materials, on the SEC Internet web site (http://www.sec.gov). The SAI is incorporated by reference. For a free copy, contact American Express Shareholder Service. Like all mutual fund shares, these securities have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission, nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Please note that the 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 American Express Shareholder Service P.O. Box 534 Minneapolis, MN 55440-0534 800-862-7919 TTY: 800-846-4852 Web site address: http://www.americanexpress.com/advisors Table of contents The Fund in brief Goal Investment policies and risks Structure of the Fund Manager and distributor Portfolio manager Alternative purchase arrangements Sales charge and Fund expenses Performance Financial highlights Total returns Yield Investment policies and risks Facts about investments and their risks Valuing Fund shares How to purchase, exchange or redeem shares Alternative purchase arrangements How to purchase shares How to exchange shares How to redeem shares Reductions and waivers of the sales charge Special shareholder services Services Quick telephone reference Distributions and taxes Dividend and capital gain distributions Reinvestments Taxes How to determine the correct TIN How the Fund and Portfolio are organized Shares Voting rights Shareholder meetings Special considerations regarding master/feeder structure Board members and officers Investment manager Administrator and transfer agent Distributor About American Express Financial Corporation General information Year 2000 Appendix Descriptions of derivative instruments The Fund in brief Goal IDS 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. It does so by investing all of its assets in Government Income Portfolio (the Portfolio) of Income Trust (the Trust) rather than by directly investing in and managing its own portfolio of securities. Both the Fund and the Portfolio are diversified investment companies that have the same goal. Because any investment involves risk, achieving this goal cannot be guaranteed. The goal can be changed only by holders of a majority of outstanding securities. The Fund may withdraw its assets from the Portfolio at any time if the board determines that it is in the best interests of the Fund to do so. In that event, the Fund would consider what action should be taken, including whether to retain an investment advisor to manage the Fund's assets directly or to reinvest all of the Fund's assets in another pooled investment entity. Investment policies and risks Both the Fund and the Portfolio have the same investment policies. Accordingly, the Portfolio invests at least 65% of its total assets in securities issued or guaranteed as to principal and interest by the U.S. government and its agencies. Most investments are in pools of mortgage loans. The Portfolio also may invest in non-governmental debt securities, derivative instruments and money market instruments. Some of the Portfolio's investments may be considered speculative and involve additional investment risks. For further information, refer to the later section in the prospectus titled "Investment policies and risks." Structure of the Fund This Fund uses what is commonly known as a master/feeder structure. This means that the Fund (the feeder fund) invests all of its assets in the Portfolio (the master fund). The Portfolio invests in and manages the securities and has the same goal and investment policies as the Fund. This structure is described in more detail in the section captioned "Special considerations regarding master/feeder structure." Here is an illustration of the structure: Investors buy shares in the Fund The Fund invests in the Portfolio The Portfolio invests in securities, such as stocks or bonds Manager and distributor The Portfolio is managed by American Express Financial Corporation (AEFC), a provider of financial services since 1894. AEFC currently manages more than $78 billion in assets for the IDS MUTUAL FUND GROUP. Shares of the Fund are sold through American Express Financial Advisors Inc. (AEFA), a wholly-owned subsidiary of AEFC. Portfolio manager Jim Snyder joined AEFC in 1989 as an investment analyst and currently serves as vice president and senior portfolio manager. He serves as portfolio manager of the Portfolio and has managed the assets of the Fund since 1993 after having served as associate portfolio manager of this Fund from 1992 to 1993. Alternative purchase arrangements The Fund offers its shares in three classes. Class A shares are subject to a sales charge at the time of purchase. Class B shares are subject to a contingent deferred sales charge (CDSC) on redemptions made within six years of purchase and an annual distribution (12b-1) fee. Class Y shares are sold without a sales charge to qualifying institutional investors. Sales charge and Fund expenses Shareholder transaction expenses are incurred directly by an investor on the purchase or redemption of Fund shares. Fund operating expenses are paid out of Fund assets for each class of shares and include expenses charged by both the Fund and the Portfolio. Operating expenses are reflected in the Fund's daily share price and dividends, and are not charged directly to shareholder accounts. Shareholder transaction expenses Class A Class B Class Y Maximum sales charge on purchases* (as a percentage of offering price) 5% 0% 0% Maximum deferred sales charge imposed on redemptions (as a percentage of original purchase price) 0% 5% 0% Annual Fund and allocated Portfolio operating expenses (as a percentage of average daily net assets): Class A Class B Class Y Management fee** 0.50% 0.50% 0.50% 12b-1 fee 0.00% 0.75% 0.00% Other expenses*** 0.36% 0.36% 0.28% Total 0.86% 1.61% 0.78% *This charge may be reduced depending on your total investments in IDS funds. See "Reductions of the sales charge." **The management fee is paid by the Trust on behalf of the Portfolio. ***Other expenses include an administrative services fee, a shareholder services fee, a transfer agency fee and other nonadvisory expenses. Example: Suppose for each year for the next 10 years, Fund expenses are as above and annual return is 5%. If you sold your shares at the end of the following years, for each $1,000 invested, you would pay total expenses of: 1 year 3 years 5 years 10 years Class A $58 $76 $ 95 $151 Class B $66 $91 $108 $171** Class B* $16 $51 $ 88 $171** Class Y $ 8 $25 $ 43 $ 97 *Assuming Class B shares are not redeemed at the end of the period. **Based on conversion of Class B shares to Class A shares in the ninth year. This example does not represent actual expenses, past or future. Actual expenses may be higher or lower than those shown. Because Class B pays annual distribution (12b-1) fees, long-term shareholders of Class B may indirectly pay an equivalent of more than a 6.25% sales charge, the maximum permitted by the National Association of Securities Dealers. Performance Financial highlights
Fiscal period ended May 31, Per share income and capital changesa Class A 1998 1997 1996b 1995 1994 1993 1992 1991 1990 1989 1988 Net asset value, $4.98 $4.92 $4.97 $4.85 $5.30 $5.19 $5.10 $5.00 $5.02 $5.02 $5.01 beginning of period Income from investment operations: Net investment .30 .32 .28 .32 .29 .32 .36 .42 .42 .40 .41 income (loss) Net gains (losses) .10 .06 (.04) .11 (.31) .13 .09 .09 (.02) -- .01 (both realized and unrealized) Total from investment .40 .38 .24 .43 (.02) .45 .45 .51 .40 .40 .42 operations Less distributions: Dividends from net (.30) (.32) (.29) (.31) (.29) (.32) (.36) (.41) (.42) (.40) (.41) investment income Distributions from -- -- -- -- (.14) (.02) -- -- -- -- -- realized gains Total distributions (.30) (.32) (.29) (.31) (.43) (.34) (.36) (.41) (.42) (.40) (.41) Net asset value, $5.08 $4.98 $4.92 $4.97 $4.85 $5.30 $5.19 $5.10 $5.00 $5.02 $5.02 end of period Ratios/supplemental data Class A 1998 1997 1996b 1995 1994 1993 1992 1991 1990 1989 1988 Net assets, end of period $1,403 $1,267 $1,095 $977 $1,025 $1,025 $834 $397 $234 $183 $183 (in millions) Ratio of expenses to .86% .90% .91%c .79% .76% .77% .79% .80% .82% .79% .80% average daily net assetsd Ratio of net income (loss) 5.89% 6.37% 6.34%c 6.59% 5.64% 6.03% 6.93% 8.20% 8.53% 8.15% 8.24% to average daily net assets Portfolio turnover rate 159% 146% 115% 213% 304% 227% 104% 52% 104% 81% 143% (excluding short-term securities) Total returne 8.2% 7.7% 5.0% 9.3% (.5%) 9.0% 9.0% 10.8% 8.3% 8.4% 8.8%
a For a share outstanding throughout the period. Rounded to the nearest cent. b The Fund's fiscal year-end was changed from June 30 to May 31, effective 1996. c Adjusted to an annual basis. d Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. e Total return does not reflect payment of a sales charge.
IDS Federal Income Fund, Inc. Performance Financial highlights Fiscal period ended May 31, Per share income and capital changesa Class B Class Y 1998 1997 1996c 1995b 1998 1997 1996c 1995b Net asset value, $4.98 $4.92 $4.96 $4.87 $4.98 $4.92 $4.97 $4.87 beginning of period Income from investment operations: Net investment .26 .28 .26 .06 .30 .32 .29 .07 income (loss) Net gains (losses) .10 .06 (.04) .14 .10 .06 (.04) .15 both realized and unrealized) Total from investment .36 .34 .22 .20 .40 .38 .25 .22 operations Less distributions: Dividends from net (.26) (.28) (.26) (.11) (.30) (.32) (.30) (.12) investment income Net asset value, $5.08 $4.98 $4.92 $4.96 $5.08 $4.98 $4.92 $4.97 end of period Ratios/supplemental data
Class B Class Y 1998 1997 1996c 1995b 1998 1997 1996c 1995b Net assets, end of $1,045 $820 $520 $292 $119 $115 $99 $85 period (in millions) Ratio of expenses to 1.61% 1.66% 1.67%e 1.74%e .78% .73% .74%e .75%e average daily net assetsd Ratio of net income (loss)5.13% 5.60% 5.59%e 6.21%e 5.97% 6.54% 6.53%e 7.20%e to average daily net assets Portfolio turnover rate 159% 146% 115% 213% 159% 146% 115% 213% (excluding short-term securities) Total returnf 7.3% 6.9% 4.3% 4.1% 8.2% 7.9% 5.2% 4.5%
a For a share outstanding throughout the period. Rounded to the nearest cent. b Inception date was March 20, 1995. c The Fund's fiscal year-end was changed from June 30 to May 31, effective 1996. d Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. e Adjusted to an annual basis. f Total return does not reflect payment of a sales charge. The information in these tables has been audited by KPMG Peat Marwick 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. Total returns Total return is the sum of all of your returns for a given period, assuming you reinvest all distributions. It is calculated by taking the total value of shares you own at the end of the period (including shares acquired by reinvestment), less the price of shares you purchased at the beginning of the period. Average annual total return is the annually compounded rate of return over a given time period (usually two or more years). It is the total return for the period converted to an equivalent annual figure. Average annual total returns as of May 31, 1998
Purchase 1 year Since 5 years 10 years made ago inception ago ago - ----------------------------- ------------------ ------------------- --------------------- ----------------- Federal Income: Class A +2.75% --% +5.07% +7.04% Class B +3.32% +6.35%* --% --% Class Y +8.23% +8.12%* --% --% Lehman Aggregate +10.92% +9.06%** +7.02% +9.20% Bond Index Merrill Lynch 1 to 5 Year Government Index +7.71% +7.21%** +5.86% +7.73%
*Inception date was March 20, 1995. **Measurement period started April 1, 1995. Cumulative total returns as of May 31, 1998
Purchase 1 year Since 5 years 10 years made ago inception ago ago - ----------------------------- ------------------ ------------------- --------------------- ----------------- Federal Income: Class A +2.75% --% +28.06% +97.46% Class B +3.32% +21.76%* --% --% Class Y +8.23% +28.38%* --% --% Lehman Aggregate +10.92% +31.70%** +40.38% +141.09% Bond Index Merrill Lynch 1 to 5 Year Government Index +7.71% +24.75%** +32.94% +110.58%
*Inception date was March 20, 1995. **Measurement period started April 1, 1995. These examples show total returns from hypothetical investments in Class A, Class B and Class Y shares of the Fund. These returns are compared to those of popular indexes for the same periods. The performance of Class B and Class Y will vary from the performance of Class A based on 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. For purposes of calculation, information about the Fund assumes: o a sales charge of 5% for Class A shares o redemption at the end of the period and deduction of the applicable contingent deferred sales charge for Class B shares o no sales charge for Class Y shares o no adjustments for taxes an investor may have paid on the reinvested income and capital gains o a period of widely fluctuating securities prices. Returns shown should not be considered a representation of the Fund's future performance. Lehman Aggregate Bond Index is an unmanaged index made up of a representative list of government and corporate bonds as well as asset-backed securities and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. However, the securities used to create the index may not be representative of the bonds held in the Portfolio. Merrill Lynch 1 to 5 Year Government Index is an unmanaged index made up of a representative list of government bonds. The index is frequently used as a general measure of government bond performance. However, the securities used to create the index may not be representative of the bonds held in the Portfolio. The indexes reflect reinvestment of all distributions and changes in market prices, but exclude brokerage commissions or other fees. Yield Yield is the net investment income earned per share for a specified time period, divided by the offering price at the end of the period. The Fund's annualized yield for the 30-day period ended May 29, 1998, was 5.72% for Class A, 5.26% for Class B and 6.09% for Class Y. The Fund calculates this 30-day annualized yield by dividing: o net investment income per share deemed earned during a 30-day period by o the public offering price per share on the last day of the period, and o converting the result to a yearly equivalent figure This yield calculation does not include any contingent deferred sales charge, ranging from 5% to 0% on Class B shares, which would reduce the yield quoted. The Fund's yield varies from day to day, mainly because share values and offering prices (which are calculated daily) vary in response to changes in interest rates. Net investment income normally changes much less in the short run. Thus, when interest rates rise and share values fall, yield tends to rise. When interest rates fall, yield tends to follow. Past yields should not be considered an indicator of future yields. Investment policies and risks The policies described below apply both to the Fund and the Portfolio. The Portfolio invests primarily in securities issued or guaranteed as to principal and interest by the U.S. government, its agencies and instrumentalities. Under normal market conditions, at least 65% of the Portfolio's total assets will be invested in such securities. Although the Portfolio may invest in any U.S. government securities, it is anticipated that most of the Portfolio will consist of U.S. government securities representing part ownership of pools of mortgage loans. Under federal law, the interest income earned from U.S. Treasury securities is exempt from state and local taxes. All states allow mutual funds to pass such exemptions to their shareholders, although there are conditions to this treatment in some states. The various types of investments the investment manager uses to achieve investment performance are described in more detail in the next section and in the SAI. Facts about investments and their risks Government 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 direct obligations of the U.S. government. These include securities supported by the right of the issuer to borrow from the Treasury, such as obligations of Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) bonds. Because the U.S. government is not obligated to provide financial support to its instrumentalities, the Portfolio will invest only in securities issued by those instrumentalities where the investment manager is satisfied the credit risk is minimal. Mortgage-backed securities: A mortgage pass-through certificate represents an interest in a pool, or group, of mortgage loans assembled by GNMA, FNMA, or FHLMC or non-governmental entities. In pass-through certificates, both principal and interest payments, including prepayments, are passed through to the holder of the certificate. Prepayments on underlying mortgages result in a loss of anticipated interest, and the actual yield (or total return) to the Portfolio, which is influenced by both stated interest rates and market conditions, may be different than the quoted yield on the certificates. The Portfolio also may invest in non-governmental mortgage-related securities and debt securities, such as bonds, debentures and collateralized mortgage obligations secured by mortgages on commercial real estate or residential rental properties, provided such securities are rated A or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation or, if not rated, are of equivalent investment quality as determined by the investment manager. Some U.S. government securities may be purchased on a when-issued basis, which means that it may take as long as 45 days after the purchase before the securities are delivered to the Portfolio. The Portfolio may invest in stripped mortgage-backed securities 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. The Portfolio may purchase mortgage-backed security (MBS) put spread options and write covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. MBS spread options are traded in the OTC market and are of short duration, typically one to two months. The Portfolio would buy or sell covered MBS call spread options in situations where mortgage-backed securities are expected to under perform like-duration Treasury securities. 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. Debt securities: The price of bonds generally falls as interest rates increase, and rises as interest rates decrease. The price of bonds also fluctuates if the credit rating is upgraded or downgraded. A fund portfolio consisting primarily of debt securities will also react in this manner. Generally, the longer the maturity of a debt security, the higher its yield and the greater its sensitivity to changes in interest rates. Securities that are subsequently downgraded in quality may continue to be held by the Portfolio and will be sold only when the investment manager believes it is advantageous to do so. Derivative instruments: The investment manager may use derivative instruments in addition to securities to achieve investment performance. Derivative instruments include futures, options and 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 and a daily change in price based on or derived from a security, a currency, a group of securities or currencies, or an index. A number of strategies or combination of instruments can be used to achieve the desired investment performance characteristics. A small change in the value of the underlying security, currency or index will cause a sizable gain or loss in the price of the derivative instrument. Derivative instruments allow the investment manager to change the investment performance characteristics very quickly and at lower costs. Risks include losses of premiums, rapid changes in prices, defaults by other parties and inability to close such instruments. The Portfolio will use derivative instruments only to achieve the same investment performance characteristics it could achieve by directly holding those securities and currencies permitted under the investment policies. The Portfolio will designate cash or appropriate liquid assets to cover its portfolio obligations. No more than 5% of the Portfolio'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. This does not, however, limit the portion of the Portfolio's assets at risk to 5%. Certain of the investments previously discussed, including mortgage-backed securities, are also generally regarded as derivatives. The Portfolio is not limited as to the percentage of its assets that may be invested in permissible investments, including derivatives, except as otherwise explicitly provided in this prospectus or the SAI. For descriptions of these and other types of derivative instruments, see the Appendix to this prospectus and the SAI. Securities and other instruments that are illiquid: A security or other instrument is illiquid if it cannot be sold quickly in the normal course of business. Some investments cannot be resold to the U.S. public because of their terms or government regulations. Securities and instruments, however, can be sold in private sales, and many may be sold to other institutions and qualified buyers or on foreign markets. The investment manager will follow guidelines established by the board and consider relevant factors such as the nature of the security and the number of likely buyers when determining whether a security is illiquid. No more than 10% of the Portfolio's net assets will be held in securities and other instruments that are illiquid. Money market instruments: Short-term debt securities rated in the top two grades or the equivalent are used to meet daily cash needs and at various times to hold assets until better investment opportunities arise. Generally, less than 25% of the Portfolio's total assets are in these money market instruments. However, for temporary defensive purposes these investments could exceed that amount for a limited period of time. The investment policies described above may be changed by the boards. Lending portfolio securities: The Portfolio may lend its securities to earn income so long as borrowers provide collateral equal to the market value of the loans. The risks are that borrowers will not provide collateral when required or return securities when due. Unless a majority of the outstanding voting securities approve otherwise, loans may not exceed 30% of the Portfolio's net assets. Valuing Fund shares The public offering price is the net asset value (NAV) adjusted for the sales charge for Class A. It is the NAV for Class B and Class Y. The NAV is the value of a single Fund share. The NAV usually changes daily, and is calculated at the close of business, normally 3 p.m. Central time, each business day (any day the New York Stock Exchange is open). NAV generally declines as interest rates increase and rises as interest rates decline. To establish the net assets, all securities held by the Portfolio are valued as of the close of each business day. In valuing assets: o Securities and assets with available market values are valued on that basis o Securities maturing in 60 days or less are valued at amortized cost o Assets without readily available market values are valued according to methods selected in good faith by the board How to purchase, exchange or redeem shares Alternative purchase arrangements The Fund offers three different classes of shares - Class A, Class B and Class Y. The primary differences among the classes are in the sales charge structures and in their ongoing expenses. These differences are summarized in the table below. You may choose the class that best suits your circumstances and objectives.
Sales charge and distribution (12b-1) fee Service fee Other information Class A Maximum initial sales 0.175% of average daily net Initial sales charge waived charge of 5%; no 12b-1 fee assets or reduced for certain purchases Class B No initial sales charge; 0.175% of average daily net Shares convert to Class A maximum CDSC of 5% assets in the ninth year of declines to 0% after six ownership; CDSC waived in years; 12b-1 fee of 0.75% certain circumstances of average daily net assets Class Y None 0.10% of average daily net Available only to certain assets qualifying institutional investors
Conversion of Class B shares to Class A shares - During the ninth calendar year of owning your Class B shares, Class B shares will convert to Class A shares and will no longer be subject to a distribution fee. Class B shares that convert to Class A shares are not subject to a sales charge. 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. This means more of your money will be put to work for you. Considerations in determining whether to purchase Class A or Class B shares - You should consider the information below in determining whether to purchase Class A or Class B shares. The distribution fee (included in "Ongoing expenses") and sales charges are structured so that you will have approximately the same total return at the end of eight years regardless of which class you chose. Sales charges on purchase or redemption If you purchase Class A shares o You will not have all of your purchase price invested. Part of your purchase price will go to pay the sales charge. You will not pay a sales charge when you redeem your shares. o You will be able to take advantage of reductions in the sales charge. If you purchase Class B shares o All of your money is invested in shares of stock. However, you will pay a sales charge if you redeem your shares within six years of purchase. o No reductions of the sales charge are available for large purchases. If your investments in IDS funds that are subject to a sales charge total $250,000 or more, you are better off paying the reduced sales charge in Class A than paying the higher fees in Class B. If you qualify for a waiver of the sales charge, you should purchase Class A shares. Ongoing expenses If you purchase Class A shares o Your shares will have a lower expense ratio than Class B shares because Class A does not pay a distribution fee and the transfer agency fee for Class A is lower than the fee for Class B. As a result, Class A shares will pay higher dividends than Class B shares. If you purchase Class B shares o The distribution and transfer agency fees for Class B will cause your shares to have a higher expense ratio and to pay lower dividends than Class A shares. In the ninth year of ownership, Class B shares will convert to Class A shares and you will no longer be subject to higher fees. You should consider how long you plan to hold your shares and whether the accumulated higher fees and CDSC on Class B shares prior to conversion would be less than the initial sales charge on Class A shares. Also consider to what extent the difference would be offset by the lower expenses on Class A shares. To help you in this analysis, the example in the "Sales charge and Fund expenses" section of the prospectus illustrates the charges applicable to each class of shares. 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 IDS 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 funds of the IDS MUTUAL FUND GROUP or - 500 or more participants. o Trust companies or similar institutions, and charitable organizations that meet the definition in Section 501(c)(3) of the Internal Revenue Code.* These organizations must have at least $10 million invested in funds of the IDS MUTUAL FUND GROUP. o Nonqualified deferred compensation plans* whose participants are included in a qualified employee benefit plan described above. * Eligibility must be determined in advance by AEFA. To do so, contact your financial advisor. How to purchase shares If you are investing in this Fund for the first time, you will need to set up an account. 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. Important: When opening an account, you must provide your correct Taxpayer Identification Number (Social Security or Employer Identification number). See "Distributions and taxes." When you purchase shares for a new or existing account, the price you pay per share is determined at the close of business on the day your investment is received and accepted at the Minneapolis headquarters. Purchase policies: o Investments must be received and accepted in the Minneapolis headquarters on a business day before 3 p.m. Central time to be included in your account that day and to receive that day's share price. Otherwise, your purchase will be processed the next business day and you will pay the next day's share price. o The minimums allowed for investment may change from time to time. o Wire orders can be accepted only on days when your bank, American Express Client Service Corporation (AECSC), the Fund and Norwest Bank Minneapolis are open for business. o Wire purchases are completed when wired payment is received and the Fund accepts the purchase. o AECSC and the Fund are not responsible for any delays that occur in wiring funds, including delays in processing by the bank. o You must pay any fee the bank charges for wiring. o The Fund reserves the right to reject any application for any reason. o If your application does not specify which class of shares you are purchasing, it will be assumed that you are investing in Class A shares. Three ways to invest 1 By regular account Send your check and application (or your name and account number if you have an established account) to: American Express Financial Advisors Inc. P.O. Box 74 Minneapolis, MN 55440-0074 Your financial advisor will help you with this process. Minimum amounts Initial investment: $ 2,000 Additional investments: $ 100 Account balances: $ 300* Qualified retirement accounts: none 2 By scheduled investment plan Contact your financial advisor to set up one of the following scheduled plans: o automatic payroll deduction o bank authorization o direct deposit of Social Security check o other plan approved by the Fund Minimum amounts Initial investment: $100 Additional investments: $100/each payment for nonqualified accounts $ 50/each payment for qualified accounts Account balances: none (on active plans of monthly payments) If account balance is below $2,000, frequency of payments must be at least monthly. 3 By wire If you have an established account, you may wire money to: Norwest Bank Minneapolis Routing No. 091000019 Minneapolis, MN Attn: Domestic Wire Dept. Give these instructions: Credit IDS Account #00-30-015 for personal account # (your account number) for (your name). If this information is not included, the order may be rejected and all money received by the Fund, less any costs the Fund or AECSC incurs, will be returned promptly. Minimum amounts Each wire investment: $ 1,000 *If your account balance falls below $300, you will be asked in writing to bring it up to $300 or establish a scheduled investment plan. If you do not do so within 30 days, your shares can be redeemed and the proceeds mailed to you. If you are in a "wrap-fee" program sponsored by AEFA and your wrap program balance falls below the required program minimum or is terminated, your shares will be redeemed and the proceeds mailed to you. How to exchange shares You can exchange your shares of the Fund at no charge for shares of the same class of any other publicly offered fund in the IDS MUTUAL FUND GROUP available in your state. Exchanges into IDS Tax-Free Money Fund must be made from Class A shares. For complete information on any other fund, including fees and expenses, read that fund's prospectus carefully. If your exchange request arrives at the Minneapolis headquarters before the close of business, your shares will be redeemed at the net asset value set for that day. The proceeds will be used to purchase new fund shares the same day. Otherwise, your exchange will take place the next business day at that day's net asset value. For tax purposes, an exchange represents a redemption and purchase and may result in a gain or loss. However, you cannot use the sales charge imposed on the purchase of Class A shares to create or increase a tax loss (or reduce a taxable gain) by exchanging from the Fund within 91 days of your purchase. For further explanation, see the SAI. How to redeem shares You can redeem your shares at any time. American Express Shareholder Service will mail payment within seven days after receiving your request. When you redeem shares, the amount you receive may be more or less than the amount you invested. Your shares will be redeemed at net asset value, minus any applicable sales charge, at the close of business on the day your request is accepted at the Minneapolis headquarters. If your request arrives after the close of business, the price per share will be the net asset value, minus any applicable sales charge, at the close of business on the next business day. A redemption is a taxable transaction. If the proceeds from your redemption are more or less than the cost of your shares, you will have a gain or loss, which can affect your tax liability. Redeeming shares held in an IRA or qualified retirement account may subject you to certain federal taxes, penalties and reporting requirements. Consult your tax advisor. Two ways to request an exchange or redemption 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 redeemed o your account number(s) (for exchanges, both funds must be registered in the same ownership) o your Taxpayer Identification Number (TIN) o the dollar amount or number of shares you want to exchange or redeem o signature of all registered account owners o for redemptions, indicate how you want your money delivered to you o any paper certificates of shares you hold Regular mail: American Express Shareholder Service Attn: Redemptions P.O. Box 534 Minneapolis, MN 55440-0534 Express mail: American Express Shareholder Service Attn: Redemptions 733 Marquette Ave. Minneapolis, MN 55402 2 By phone American Express Financial Advisors Telephone Transaction Service: 800-437-3133 or 612-671-3800 o The Fund and AECSC will honor any telephone exchange or redemption request believed to be authentic and will use reasonable procedures to confirm that they are. This includes asking identifying questions and tape recording calls. If reasonable procedures are followed, the Fund or AECSC will not be liable for any loss resulting from fraudulent requests. o Phone exchange and redemption privileges automatically apply to all accounts except custodial, corporate or qualified retirement accounts unless you request these privileges NOT apply by writing American Express Shareholder Service. Each registered owner must sign the request. o AECSC answers phone requests promptly, but you may experience delays when call volume is high. If you are unable to get through, use mail procedure as an alternative. o Acting on your instructions, your financial advisor may conduct telephone transactions on your behalf. o Phone privileges may be modified or discontinued at any time. Minimum amount Redemption: $100 Maximum amount Redemption: $50,000 Exchange policies: o You may make up to three exchanges within any 30-day period, with each limited to $300,000. These limits do not apply to scheduled exchange programs and certain employee benefit plans or other arrangements through which one shareholder represents the interests of several. Exceptions may be allowed with pre-approval of the Fund. 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 written approval is obtained from the secured party. o 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. Redemption policies: o A "change of mind" option allows you to change your mind after requesting a redemption and to use all or part of the proceeds to purchase new shares in the same account from which you redeemed. If you reinvest in Class A, you will purchase the new shares at net asset value rather than the offering price on the date of a new purchase. If you reinvest in Class B, 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 30 days of the date your redemption request was received. Include your account number and mention this option. This privilege may be limited or withdrawn at any time, and it may have tax consequences. o A telephone redemption request will not be allowed within 30 days of a phoned-in address change. Important: If you request a redemption 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 a check is mailed to you. (A check may be mailed earlier if your bank provides evidence satisfactory to the Fund and AECSC that your check has cleared.) Three ways to receive payment when you redeem shares 1 By regular or express mail o Mailed to the address on record o Payable to names listed on the account NOTE: You will be charged a fee if you request express mail delivery. 2 By wire o Minimum wire redemption: $1,000 o Request that money be wired to your bank o Bank account must be in the same ownership as the IDS fund account NOTE: Pre-authorization required. For instructions, contact your financial advisor or American Express Shareholder Service. 3 By scheduled payout plan o Minimum payment: $50 o Contact your financial advisor or American Express Shareholder Service to set up regular payments to you 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 Reductions and waivers of the sales charge Class A - initial sales charge alternative On purchases of Class A shares, you pay a 5% sales charge on the first $50,000 of your total investment and less on investments after the first $50,000: Total investment Sales charge as a percentage of:* Public Net offering amount price invested Up to $50,000 5.0% 5.26% Next $50,000 4.5 4.71 Next $400,000 3.8 3.95 Next $500,000 2.0 2.04 $1,000,000 or more 0.0 0.00 * To calculate the actual sales charge on an investment greater than $50,000 and less than $1,000,000, amounts for each applicable increment must be totaled. See the SAI. Reductions of the sales charge on Class A shares Your sales charge may be reduced, depending on the totals of: o the amount you are investing in this Fund now; o the amount of your existing investment in this Fund, if any; and o the amount you and your primary household group are investing or have in other funds in the IDS MUTUAL FUND GROUP that carry a sales charge. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. Domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) Other policies that affect your sales charge: o IDS Tax-Free Money Fund and Class A shares of IDS Cash Management Fund do not carry sales charges. However, you may count investments in these funds if you acquired shares in them by exchanging shares from IDS funds that carry sales charges. 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 entity, may be added together to reduce sales charges for all shares purchased through that plan. o If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a letter of intent. For more details, 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 and unmarried children under 21. o Current or retired American Express financial advisors, their spouses and unmarried children under 21. o Investors who have a business relationship with a newly associated financial advisor who joined AEFA from another investment firm provided that (1) the purchase is made within six months of the advisor's appointment date with AEFA, (2) the purchase is made with proceeds of a redemption of shares that were sponsored by the financial advisor's previous broker-dealer, and (3) the proceeds must be the result of a redemption of an equal or greater value where a sales load was previously assessed. o Qualified employee benefit plans* using a daily transfer recordkeeping system offering participants daily access to IDS funds. (Participants in certain qualified plans for which the initial sales charge is waived may be subject to a deferred sales charge of up to 4% on certain redemptions. For more information, see the SAI.) o Shareholders who have at least $1 million invested in funds of the IDS MUTUAL FUND GROUP. If the investment is redeemed in the first year after purchase, a CDSC of 1% will be charged on the redemption. The CDSC will be waived only in the circumstances described for waivers for Class B shares. o Purchases made within 30 days after a redemption of shares (up to the amount redeemed): - of a product distributed by AEFA in a qualified plan subject to a deferred sales charge or - in a qualified plan 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 amount of the redemption and the date on which it occurred. o Purchases made with dividend or capital gain distributions from the same class of another fund in the IDS MUTUAL FUND GROUP that has a sales charge. o Purchases made through or under a "wrap fee" product sponsored by AEFA (total amount of all investments must be $50,000); the University of Massachusetts After-Tax Savings Program; the University of Texas System ORP; or a segregated separate account offered by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company. o Purchases made with the proceeds from IDS Life Real Estate Variable Annuity surrenders. * Eligibility must be determined in advance by AEFA. To do so, contact your financial advisor. Class B - contingent deferred sales charge alternative Where a CDSC is imposed on a redemption, it is based on the amount of the redemption and the number of calendar years, including the year of purchase, between purchase and redemption. The following table shows the declining scale of percentages that apply to redemptions during each year after a purchase: If a redemption is The percentage rate made during the for the CDSC is: First year 5% Second year 4% Third year 4% Fourth year 3% Fifth year 2% Sixth year 1% Seventh year 0% If the amount you are redeeming reduces the current net asset value of your investment in Class B shares below the total dollar amount of all your purchase payments during the last six years (including the year in which your redemption is made), the CDSC is based on the lower of the redeemed purchase payments or market value. The following example illustrates how the CDSC is applied. 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 dividend and capital gain distributions. You could redeem any amount up to $2,000 without paying a CDSC ($12,000 current value less $10,000 purchase amount). If you redeemed $2,500, the CDSC would apply only to the $500 that represented part of your original purchase price. The CDSC rate would be 4% because a redemption after 15 months would take place during the second year after purchase. Because the CDSC is imposed only on redemptions that reduce the total of your purchase payments, you never have to pay a CDSC on any amount you redeem that represents appreciation in the value of your shares, income earned by your shares or capital gains. In addition, when determining the rate of any CDSC, your redemption will be made from the oldest purchase payment you made. Of course, once a purchase payment is considered to have been redeemed, the next amount redeemed is the next oldest purchase payment. By redeeming the oldest purchase payments first, lower CDSCs are imposed than would otherwise be the case. Waivers of the contingent deferred sales charge The CDSC on Class B shares will be waived on redemptions of shares: o In the event of the shareholder's death, o Purchased by any board member, officer or employee of a fund or AEFC or its subsidiaries, o Held in a trusteed employee benefit plan, o Held in IRAs or certain qualified plans for which American Express Trust Company acts as 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 redemption is part of a transfer to an IRA or qualified plan in a product distributed by AEFA, or a custodian-to-custodian transfer to a product not distributed by AEFA, the CDSC will not be waived), or - redeeming under an approved substantially equal periodic payment arrangement. Special shareholder services Services To help you track and evaluate the performance of your investments, AECSC provides these services: Quarterly statements featuring: (1) a list of all your holdings and transactions during the previous three months and (2) personalized mutual fund performance information about your specific account. Yearly tax statements featuring average-cost-basis reporting of capital gains or losses if you redeem your shares along with distribution information which simplifies tax calculations. A personalized mutual fund progress report detailing returns on your initial investment and cash-flow activity in your account. It calculates a total return to reflect your individual history in owning Fund shares. This report is available from your financial advisor. Quick telephone reference American Express Financial Advisors Telephone Transaction Service Redemptions and exchanges, dividend payments or reinvestments and automatic payment arrangements National/Minnesota: 800-437-3133 Mpls./St. Paul area: 671-3800 TTY Service For the hearing impaired 800-846-4852 American Express Financial Advisors Easy Access Line Automated account information (TouchTone(R) phones only), including current Fund prices and performance, account values and recent account transactions 800-862-7919 Distributions and taxes As a shareholder you are entitled to your share of the Fund's net income and any net gains realized on its investments. The Fund distributes dividends and capital gain distributions to qualify as a regulated investment company and to avoid paying corporate income and excise taxes. Dividend and capital gain distributions will have tax consequences you should know about. Dividend and capital gain distributions The Portfolio allocates investment income from dividends and interest and net realized capital gains or losses, if any, to the Fund. The Fund deducts direct and allocated expenses from the investment income. The Fund's net investment income is distributed to you monthly as dividends. Capital gains are realized when a security is sold for a higher price than was paid for it. Short-term capital gains are distributed at the end of the calendar year and are included in net investment income. Long-term capital gains are realized when a security is held for more than one year. The Fund will offset any net realized capital gains by any available capital loss carryovers. Net realized long-term capital gains, if any, are distributed at the end of the calendar year as capital gain distributions. These long-term capital gains will be subject to differing tax rates depending on the holding period of the underlying investments. Before they are distributed, net long-term capital gains are included in the value of each share. After they are distributed, the value of each share drops by the per-share amount of the distribution. (If your distributions are reinvested, the total value of your holdings will not change.) Dividends for each class will be calculated at the same time, in the same manner and will be the same amount prior to deduction of expenses. Expenses attributable solely to a class of shares will be paid exclusively by that class. Reinvestments Dividends and capital gain distributions are automatically reinvested in additional shares in the same class of the Fund, unless: o you request the Fund in writing or by phone to pay distributions to you in cash, or o you direct the Fund to invest your distributions in the same class of another publicly available IDS fund for which you have previously opened an account. The reinvestment price is the net asset value at close of business on the day the distribution is paid. (Your quarterly statement will confirm the amount invested and the number of shares purchased.) If you choose cash distributions, you will receive cash only for distributions declared after your request has been processed. If the U.S. Postal Service cannot deliver the checks for the cash distributions, we will reinvest the checks into your account at the then-current net asset value and make future distributions in the form of additional shares. Prior to reinvestment, no interest will accrue on amounts represented by uncashed distribution or redemption checks. Taxes The Fund has received a Private Letter Ruling from the Internal Revenue Service stating that, for purposes of the Internal Revenue Code, the Fund will be regarded as directly holding its allocable share of the income and gain realized by the Portfolio. Distributions are subject to federal income tax. In certain states, Fund distributions, to the extent they consist of interest from securities of the U.S. government and certain of its agencies or instrumentalities, may be exempt from state and local taxes. Interest from obligations which are merely guaranteed by the U.S. government or one of its agencies, such as GNMA certificates, is generally not entitled to this exemption. Distributions are taxable in the year the Fund declares them regardless of whether you take them in cash or reinvest them. Each January, you will receive a tax statement showing the kinds and total amount of all distributions you received during the previous year. You must report distributions on your tax returns, even if they are reinvested in additional shares. Buying a dividend creates a tax liability. This means buying shares shortly before a capital gain distribution. You pay the full pre-distribution price for the shares, then receive a portion of your investment back as a distribution, which is taxable. Redemptions and exchanges subject you to a tax on any capital gain. 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). Long-term capital gains will be taxed at rates that vary depending upon the holding period. Long-term capital gains are divided into two holding periods: (1) shares held more than one year but not more than 18 months and (2) shares held more than 18 months. Your Taxpayer Identification Number (TIN) is important. As with any financial account you open, you must list your current and correct Taxpayer Identification Number (TIN) -- either your Social Security or Employer Identification number. The TIN must be certified under penalties of perjury on your application when you open an account. If you do not provide the TIN, or the TIN you report is incorrect, 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 o criminal penalties for falsifying information You also could be subject to backup withholding because you failed to report interest or dividends on your tax return as required. How to determine the correct TIN
Use the Social Security or For this type of account: Employer Identification number of: Individual or joint account The individual or individuals listed on the account Custodian account of a minor (Uniform The minor Gifts/Transfers to Minors Act) A living trust The grantor-trustee (the person who puts the money into the trust) An irrevocable trust, The legal entity (not the personal representative pension trust or estate 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 organization The organization
For details on TIN requirements, ask your financial advisor or local American Express Financial Advisors office for federal Form W-9, "Request for Taxpayer Identification Number and Certification." Important: This information is a brief and selective summary of certain federal tax rules that apply to this Fund. Tax matters are highly individual and complex, and you should consult a qualified tax advisor about your personal situation. How the Fund and Portfolio are organized Shares The Fund is owned by its shareholders. The Fund issues shares in three classes - Class A, Class B and Class Y. Each class has different sales arrangements and bears different expenses. Each class represents interests in the assets of the Fund. Par value is one cent per share. Both full and fractional shares can be issued. The Fund no longer issues stock certificates. Voting rights As a shareholder, you have voting rights over the Fund's management and fundamental policies. You are entitled to one vote for each share you own. Shares of the Fund have cumulative voting rights. Each class has exclusive voting rights with respect to the provisions of the Fund's distribution plan that pertain to a particular class and other matters for which separate class voting is appropriate under applicable law. Shareholder meetings The Fund does not hold annual shareholder meetings. However, the board members may call meetings at their discretion, or on demand by holders of 10% or more of the outstanding shares, to elect or remove board members. Special considerations regarding master/feeder structure The Fund pursues its goal by investing its assets in a master fund called the Portfolio. This means that the Fund does not invest directly in securities; rather the Portfolio invests in and manages its portfolio of securities. The Portfolio is a separate investment company, but it has the same goal and investment policies as the Fund. The goal and investment policies of the Portfolio are described under the captions "Investment policies and risks" and "Facts about investments and their risks." Additional information on investment policies may be found in the SAI. Board considerations: The board considered the advantages and disadvantages of investing the Fund's assets in the Portfolio. The board believes that the master/feeder structure can be in the best interest of the Fund and its shareholders since it offers the opportunity for economies of scale. The Fund may redeem all of its assets from the Portfolio at any time. Should the board determine that it is in the best interest of the Fund and its shareholders to terminate its investment in the Portfolio, it would consider hiring an investment advisor to manage the Fund's assets, or other appropriate options. The Fund would terminate its investment if the Portfolio changed its goal, investment policies or restrictions without the same change being approved by the Fund. Other feeders: The Portfolio sells securities to other affiliated mutual funds and may sell securities to non-affiliated investment companies and institutional accounts (known as feeders). 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. Information about other feeders may be obtained by calling American Express Financial Advisors at 1-800-AXP-SERV. Each feeder that invests in the Portfolio is different and activities of its investors may adversely affect all other feeders, including the Fund. For example, if one feeder decides to terminate its investment in the Portfolio, the Portfolio may elect to redeem in cash or in kind. If cash is used, the Portfolio will incur brokerage, taxes and other costs in selling securities to raise the cash. This may result in less investment diversification if entire investment positions are sold, and it also may result in less liquidity among the remaining assets. If in-kind distribution is made, a smaller pool of assets remains that may affect brokerage rates and investment options. In both cases, expenses may rise since there are fewer assets to cover the costs of managing those assets. Shareholder meetings: Whenever the Portfolio proposes to change a fundamental investment policy or to take any other action requiring approval of its security holders, the Fund will hold a shareholder meeting. The Fund will vote for or against the Portfolio's proposals in proportion to the vote it receives for or against the same proposals from its shareholders. Board members and officers Shareholders elect a board that oversees the operations of the Fund and chooses its officers. Its officers are responsible for day-to-day business decisions based on policies set by the board. The board has named an executive committee that has authority to act on its behalf between meetings. Board members and officers serve 47 IDS and IDS Life funds and 15 Master Trust portfolios, except for William H. Dudley, who does not serve the nine IDS Life funds. The board members also serve as members of the board of the Trust which manages the investments of the Portfolio and other accounts. Should any conflict of interest arise between the interests of the shareholders of the Fund and those of the other accounts, the board will follow written procedures to address the conflict. Independent board members and officers Chairman of the board William R. Pearce* Chairman of the board, Board Services Corporation (provides administrative services to boards including the boards of the IDS and IDS Life funds and Master Trust portfolios). H. Brewster Atwater, Jr. Retired chairman and chief executive officer, General Mills, Inc. Lynne V. Cheney Distinguished fellow, American Enterprise Institute for Public Policy Research. Heinz F. Hutter Retired president and chief operating officer, Cargill, Inc. Anne P. Jones Attorney and telecommunications consultant. Alan K. Simpson Former United States senator for Wyoming. Edson W. Spencer Retired chairman and chief executive officer, Honeywell, Inc. Wheelock Whitney Chairman, Whitney Management Company. C. Angus Wurtele Chairman of the board, The Valspar Corporation. Officer Vice president, general counsel and secretary Leslie L. Ogg* President of Board Services Corporation. Board members and officers associated with AEFC President John R. Thomas* Senior vice president, AEFC. William H. Dudley* Senior advisor to the chief executive officer, AEFC. David R. Hubers* President and chief executive officer, AEFC. Officers associated with AEFC Vice president Peter J. Anderson* Senior vice president, AEFC. Vice president Frederick C. Quirsfeld* Vice president, AEFC. Treasurer Matthew N. Karstetter* Vice president, AEFC. Refer to the SAI for the board members' and officers' biographies. * Interested person as defined by the Investment Company Act of 1940. Investment manager The Portfolio pays AEFC for managing its assets. The Fund pays its proportionate share of the fee. Under the Investment Management Services Agreement, AEFC is paid a fee for these services based on the average daily net assets of the Portfolio, as follows: Assets Annual rate (billions) at 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 For the fiscal year ended May 31, 1998, the Portfolio paid AEFC a total investment management fee of 0.50% of its average daily net assets. Under the Agreement, the Portfolio also pays taxes, brokerage commissions and nonadvisory expenses. Administrator and transfer agent Under an Administrative Services Agreement, the Fund pays AEFC for administration and accounting services at an annual rate of 0.05% decreasing in gradual percentages to 0.025% as assets increase. Under a separate Transfer Agency Agreement, AECSC maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $15.50 o Class B $16.50 o Class Y $15.50 Distributor The Fund has an exclusive distribution agreement with AEFA. Financial advisors representing AEFA provide information to investors about individual investment programs, the Fund and its operations, new account applications, and exchange and redemption requests. The cost of these services is paid partially by the Fund's sales charges. Persons who buy Class A shares pay a sales charge at the time of purchase. Persons who buy Class B shares are subject to a contingent deferred sales charge on a redemption in the first six years and pay an asset-based sales charge (also known as a 12b-1 fee) of 0.75% of the Fund's average daily net assets. Class Y shares are sold without a sales charge and without an asset-based sales charge. Financial advisors may receive different compensation for selling Class A, Class B and Class Y shares. Portions of the sales charge also may be paid to securities dealers who have sold the Fund's shares or to banks and other financial institutions. The amounts of those payments range from 0.8% to 4% of the Fund's offering price depending on the monthly sales volume. Under a Shareholder Service Agreement, the Fund also pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of average daily net assets for Class A and Class B shares and 0.10% for Class Y shares. Total expenses paid by the Fund's Class A shares for the fiscal year ended May 31, 1998, were 0.86% of its average daily net assets. Expenses for Class B and Class Y were 1.61% and 0.78%, respectively. About American Express Financial Corporation General information The AEFC family of companies offers not only mutual funds but also insurance, annuities, investment certificates and a broad range of financial management services. Besides managing investments for all funds in the IDS MUTUAL FUND GROUP, AEFC also manages investments for itself and its subsidiaries, IDS Certificate Company and IDS Life Insurance Company. Total assets under management on May 31, 1998 were more than $195 billion. AEFA serves individuals and businesses through its nationwide network of more than 180 offices and more than 8,700 advisors. Other AEFC subsidiaries provide investment management and related services for pension, profit sharing, employee savings and endowment funds of businesses and institutions. AEFC is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a wholly-owned subsidiary of American Express Company (American Express), a financial services company with headquarters at American Express Tower, World Financial Center, New York, NY 10285. The Portfolio may pay brokerage commissions to broker-dealer affiliates of AEFC. Year 2000 The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in the failure of major systems or miscalculations, which would have a material impact on the operations of the Fund. The Fund has no computer systems of its own but is dependent upon the systems maintained by AEFC and certain other third parties. A comprehensive review of AEFC's computer systems and business processes has been conducted to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken to resolve any potential problems including modification of existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. AEFC's goal is to complete internal remediation and testing of each of its critical systems by the end of 1998 and to continue compliance efforts through 1999. The Year 2000 readiness of other third parties whose system failures could have an impact on the Fund's operations currently is being evaluated. The companies or governments in which the Fund invests also may be adversely affected by Year 2000 issues. This may affect the value of the Fund's investments. The potential materiality of any impact is not known at this time. Appendix Descriptions of derivative instruments What follows are brief descriptions of derivative instruments the Portfolio may use. At various times the Portfolio may use some or all of these instruments and is not limited to these instruments. It may use other similar types of instruments if they are consistent with the Portfolio's investment goal and policies. For more information on these instruments, see the SAI. Options and futures contracts - An option is an agreement to buy or sell an instrument at a set price during a certain period of time. A futures contract is an agreement to buy or sell an instrument for a set price on a future date. The Portfolio may buy and sell options and futures contracts to manage its exposure to changing interest rates, security prices and currency exchange rates. Options and futures may be used to hedge the Portfolio's investments against price fluctuations or to increase market exposure. Asset-backed and mortgage-backed securities - Asset-backed securities include interests in pools of assets such as motor vehicle installment sale contracts, installment loan contracts, leases on various types of real and personal property, receivables from revolving credit (credit card) agreements or other categories of receivables. Mortgage-backed securities include collateralized mortgage obligations and stripped mortgage-backed securities. Interest and principal payments depend on payment of the underlying loans or mortgages. The value of these securities may also be affected by changes in interest rates, the market's perception of the issuers and the creditworthiness of the parties involved. The non-mortgage related asset-backed securities do not have the benefit of a security interest in the related collateral. Stripped mortgage-backed securities include interest only (IO) and principal only (PO) securities. Cash flows and yields on IOs and POs are extremely sensitive to the rate of principal payments on the underlying mortgage loans or mortgage-backed securities. 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. 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. 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. STATEMENT OF ADDITIONAL INFORMATION FOR IDS FEDERAL INCOME FUND July 30, 1998 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 Annual Report which may be obtained from your American Express financial advisor or by writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534. This SAI is dated July 30, 1998, and it is to be used with the prospectus dated July 30, 1998, and the Annual Report for the fiscal year ended May 31, 1998. TABLE OF CONTENTS Goal and Investment Policies.................................See Prospectus Additional Investment Policies........................................p. 3 Security Transactions.................................................p. 7 Brokerage Commissions Paid to Brokers Affiliated with American Express Financial Corporation................................p. 9 Performance Information...............................................p. 10 Valuing Fund Shares...................................................p. 12 Investing in the Fund.................................................p. 14 Redeeming Shares......................................................p. 18 Pay-out Plans.........................................................p. 19 Taxes.................................................................p. 20 Agreements............................................................p. 21 Organizational Information............................................p. 24 Board Members and Officers............................................p. 25 Compensation for Fund and Portfolio Board Members.....................p. 29 Independent Auditors..................................................p. 30 Financial Statements......................................See Annual Report Prospectus............................................................p. 30 Appendix A: Description of Commercial Paper Ratings..................p. 31 Appendix B: Options and Interest Rate Futures Contracts..............p. 32 Appendix C: Mortgage Pass-Through Certificates.......................p. 38 Appendix D: Dollar-Cost Averaging....................................p. 41 ADDITIONAL INVESTMENT POLICIES IDS Federal Income Fund, Inc. (the Fund) pursues its goals 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. Fundamental investment policies adopted by the Fund or Portfolio cannot be changed without the approval of a majority of the outstanding voting securities of the Fund or Portfolio, respectively, as defined in the Investment Company Act of 1940, as amended (the 1940 Act). Whenever the Fund is requested to vote on a change in the investment policies of the corresponding Portfolio, the Fund will hold a meeting of Fund shareholders and will cast the Fund's vote as instructed by the shareholders. 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. These are investment policies in addition to those presented in the prospectus. The policies below are fundamental policies that apply to both the Fund and the Portfolio and may be changed only with shareholder/unitholder approval. Unless holders of a majority of the outstanding voting securities agree to make the change, the Fund and Portfolio will not: `Act as an underwriter (sell securities for others). However, under the securities laws, the Portfolio may be deemed to be an underwriter when it purchases securities directly from the issuer and later resells them. `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. The Portfolio and Fund have not borrowed in the past and have no present intention to borrow. `Make cash loans if the total commitment amount exceeds 5% of the Portfolio's total assets. `Purchase more than 10% of the outstanding voting securities of an issuer. `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 Portfolio's total assets may be invested without regard to this 5% limitation. `Buy or sell real estate, unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Portfolio 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. `Buy or sell physical commodities unless acquired as a result of ownership of securities or other instruments, except this shall not prevent the Portfolio 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. `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. `Purchase securities of an issuer if the board members and officers of the Fund, the Portfolio and of AEFC hold more than a certain percentage of the issuer's outstanding securities. If the holdings of all board members and officers of the Fund, the Portfolio and of AEFC who own more than 0.5% of an issuer's securities are added together, and if in total they own more than 5%, the Portfolio will not purchase securities of that issuer. `Lend Portfolio securities in excess of 30% of its net assets. The current policy of the Portfolio's board is to make these loans, either long- or short-term, to broker-dealers. In making loans, the Portfolio 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 Portfolio 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 Portfolio receives cash payments equivalent to all interest or other distributions paid on the loaned securities. A loan will not be made unless the investment manager believes the opportunity for additional income outweighs the risks. `Issue senior securities, except this restriction shall not be deemed to prohibit the Portfolio from borrowing from banks, using options or futures contracts, lending its securities or entering into repurchase agreements. `Buy any property or security (other than securities issued by the Portfolio) from any board member or officer of AEFC or the Portfolio, nor will the Portfolio sell any property or security to them. `Concentrate in any one industry. According to the present interpretation by the Securities and Exchange Commission (SEC), this means no more than 25% of the Portfolio's total assets, based on current market value at the time of purchase, can be invested in any one industry. Unless changed by the board, the Fund and Portfolio will not: `Buy on margin or sell short, except the Portfolio may enter into interest rate futures contracts. `Pledge or mortgage its assets beyond 15% of total assets. If the Portfolio were ever to do so, valuation of the pledged or mortgaged assets would be based on market values. For purposes of this policy, collateral arrangements for margin deposits on a futures contract are not deemed to be a pledge of assets. `Invest more than 5% of its total assets in securities of companies, including any predecessors, that have a record of less than three years continuous operations. `Invest more than 5% of its net assets in warrants. `Invest more than 10% of its total assets in securities of investment companies. The Portfolio has no current intention to invest in securities of other investment companies. `Invest in a company to control or manage it. `Invest in exploration or development programs, such as oil, gas or mineral leases. `Invest more than 10% of the Portfolio's net assets in securities and derivative instruments that are illiquid. For purposes of this policy illiquid securities include some privately placed securities, public securities and Rule 144A securities that for one reason or another may no longer have a readily available market, repurchase agreements with maturities greater than seven days, non-negotiable fixed-time deposits and over-the-counter options. In determining the liquidity of Rule 144A securities, which are unregistered securities offered to qualified institutional buyers, and interest-only and principal-only fixed mortgage-backed securities (IOs and POs) issued by the U.S. government or its agencies and instrumentalities, the investment manager, under guidelines established by the board, will consider any relevant factors including the frequency of trades, the number of dealers willing to purchase or sell the security and the nature of marketplace trades. In determining the liquidity of commercial paper issued in transactions not involving a public offering under Section 4(2) of the Securities Act of 1933, the investment manager, under guidelines established by the board, will evaluate relevant factors such as the issuer and the size and nature of its commercial paper programs, the willingness and ability of the issuer or dealer to repurchase the paper, and the nature of the clearance and settlement procedures for the paper. The Portfolio may make contracts to purchase securities for a fixed price at a future date beyond normal settlement time (when-issued securities or forward commitments). Under normal market conditions, the Portfolio does not intend to commit more than 5% of its total assets to these practices. The Portfolio does not pay for the securities or receive dividends or interest on them until the contractual settlement date. The Portfolio will designate cash or liquid high-grade debt securities at least equal in value to its commitments to purchase the securities. When-issued securities or forward commitments are subject to market fluctuations and they may affect the Portfolio's total assets the same as owned securities. The Portfolio may maintain a portion of its assets in cash and cash-equivalent investments. The cash-equivalent investments the Portfolio may use are 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 Portfolio also may purchase short-term commercial paper rated P-2 or better by Moody's Investors Service, Inc. (Moody's) or A-2 or better by Standard & Poor's Corporation (S&P) or the equivalent and may use repurchase agreements with broker-dealers registered under the Securities Exchange Act of 1934 and with commercial banks. A risk of a repurchase agreement is that if the seller seeks the protection of the bankruptcy laws, the Portfolio's ability to liquidate the security involved could be impaired. For a description of commercial paper ratings, see Appendix A. For a discussion on options and interest rate futures contracts, see Appendix B. For a discussion on mortgage pass-through certificates, see Appendix C. SECURITY TRANSACTIONS Subject to policies set by the board, AEFC is authorized to determine, consistent with the Fund's and Portfolio's investment goal and policies, which securities will be purchased, held or sold. 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 most favorable execution except where otherwise authorized by the board. AEFC has a strict Code of Ethics that prohibits its affiliated personnel from engaging in personal investment activities that compete with or attempt to take advantage of planned portfolio transactions for any fund or trust for which it acts as investment manager. AEFC carefully monitors compliance with its Code of Ethics. Normally, the Portfolio's securities are 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. 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 other funds and trusts in the IDS MUTUAL FUND GROUP for which it acts as investment advisor. 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 Portfolio to pay a commission in excess of the amount another broker might have charged. AEFC has advised the Portfolio 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 shall 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 the funds in the IDS MUTUAL FUND GROUP even though it is not possible to relate the benefits to any particular fund or account. Each investment decision made for the Portfolio is made independently from any decision made for another portfolio, fund or other account advised by AEFC or any of its subsidiaries. When the Portfolio buys or sells the same security as another portfolio, fund or account, AEFC carries out the purchase or sale in a way the Portfolio agrees in advance is fair. Although sharing in large transactions may adversely affect the price or volume purchased or sold by the Portfolio, the Portfolio hopes to gain an overall advantage in execution. AEFC has assured the Fund it will continue to seek ways to reduce brokerage costs. 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 Portfolio paid total brokerage commissions of $1,514,430 for the fiscal year ended May 31, 1998, $0 for fiscal year ended 1997, and $666,582 for fiscal year ended 1996. 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 Portfolio. As of the fiscal year ended May 31, 1998, the Portfolio held no securities of its regular brokers or dealers or of the parents of those brokers or dealers that derived more than 15% of gross revenue from securities-related activities. The portfolio turnover rate was 159% in the fiscal year ended May 31, 1998, and 146% in fiscal year 1997. Higher turnover rates may result in higher brokerage expenses. BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH AMERICAN EXPRESS FINANCIAL CORPORATION Affiliates of American Express Company (American Express) (of which AEFC is a wholly-owned subsidiary) may engage in brokerage and other securities transactions on behalf of the Portfolio according to procedures adopted by the board and to the extent consistent with applicable provisions of the federal securities laws. AEFC will use an American Express affiliate only if (i) AEFC determines that the Portfolio will receive prices and executions at least as favorable as those offered by qualified independent brokers performing similar brokerage and other services for the Portfolio and (ii) the affiliate charges the Portfolio 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. AEFC may direct brokerage to compensate an affiliate. AEFC will receive research on South Africa from New Africa Advisors, a wholly-owned subsidiary of Sloan Financial Group. AEFC owns 100% of IDS Capital Holdings Inc. which in turn owns 40% of Sloan Financial Group. New Africa Advisors will send research to AEFC and in turn AEFC will direct trades to a particular broker. The broker will have an agreement to pay New Africa Advisors. All transactions will be on a best execution basis. Compensation received will be reasonable for the services rendered. 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 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)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) Annualized yield The Fund may calculate an annualized yield for a class by dividing the net investment income per share deemed earned during a 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)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 5.72% for Class A, 5.26% for Class B and 6.09% for Class Y for the 30-day period ended May 29, 1998. 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 Portfolio'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 POP F 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 5.53% for Class A, 5.06% for Class B and 5.90% for Class Y for the 30-day period ended May 29, 1998. 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, Donoghue's Money Market Fund Report, Financial Services Week, Financial Times, Financial World, Forbes, Fortune, Global Investor, Institutional Investor, Investor's Daily, Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar, Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today, U.S. News and World Report, The Wall Street Journal and Wiesenberger Investment Companies Service. VALUING FUND SHARES The value of an individual share for each class is determined by using the net asset value before shareholder transactions for the day. On June 1, 1998, the first business day following the end of the fiscal year, the computation looked like this:
Net assets Shares before outstanding at Net asset value shareholder the end of of one share transactions previous day ----------------- ----------------- ----------------- ----------------- ----------------- Class A $1,403,967,962 divided by 276,371,646 equals $5.08 Class B 1,046,449,002 205,993,898 5.08 Class Y 119,082,896 23,441,515 5.08
In determining net assets before shareholder transactions, the Portfolio's securities are valued as follows as of the close of business of the New York Stock Exchange (the Exchange): `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. `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. `Securities included in the NASDAQ National Market System are valued at the last-quoted sales price in this market. `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. `Futures and options traded on major exchanges are valued at the last-quoted sales price on their primary exchange. `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. `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. `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 Portfolio. 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. The Exchange, AEFC and the Fund will be closed on the following holidays: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. INVESTING IN THE FUND Sales Charge Shares of the Fund are sold at the public offering price determined at the close of business on the day an application is accepted. The public offering price is the net asset value of one share adjusted for the sales charge for Class A. For Class B and Class Y, there is no initial sales charge so the public offering price is the same as the net asset value. For Class A, the public offering price for an investment of less than $50,000, made June 1, 1998, was determined by dividing the net asset value of one share, $5.08, by 0.95 (1.00-0.05 for a maximum 5% sales charge) for a public offering price of $5.35. The sales charge is paid to American Express Financial Advisors Inc. (AEFA) by the person buying the shares. Class A - Calculation of the Sales Charge Sales charges are determined as follows: Within each increment, sales charge as a percentage of: --------------------------------------------------- Public Net Amount of Investment Offering Price Amount Invested - --------------------------- ------------------------- ------------------------- First $ 50,000 5.0% 5.26% Next 50,000 4.5 4.71 Next 400,000 3.8 3.95 Next 500,000 2.0 2.04 $1,000,000 or more 0.0 0.00 Sales charges on an investment greater than $50,000 and less than $1,000,000 are calculated for each increment separately and then totaled. The resulting total sales charge, expressed as a percentage of the public offering price and of the net amount invested, will vary depending on the proportion of the investment at different sales charge levels. For example, compare an investment of $60,000 with an investment of $85,000. The $60,000 investment is composed of $50,000 that incurs a sales charge of $2,500 (5.0% x $50,000) and $10,000 that incurs a sales charge of $450 (4.5% x $10,000). The total sales charge of $2,950 is 4.92% of the public offering price and 5.17% of the net amount invested. In the case of the $85,000 investment, the first $50,000 also incurs a sales charge of $2,500 (5.0% x $50,000) and $35,000 incurs a sales charge of $1,575 (4.5% x $35,000). The total sales charge of $4,075 is 4.79% of the public offering price and 5.04% of the net amount invested. The following table shows the range of sales charges as a percentage of the public offering price and of the net amount invested on total investments at each applicable level. On total investment, sales charge as a percentage of: -------------------------------------------- Public Net Offering Price Amount Invested ---------------------- --------------------- Amount of investment ranges from: - ----------------------------------- -------------------------------------------- First $ 50,000 5.00% 5.26% Next 50,000 to 100,000 5.00-4.50 5.26-4.71 Next 100,000 to 500,000 4.50-3.80 4.71-3.95 Next 500,000 to 999,999 3.80-2.00 3.95-2.04 $1,000,000 or more 0.00 0.00 The initial sales charge is waived for certain qualified plans that meet the requirements described in the prospectus. Participants in these qualified plans may be subject to a deferred sales charge on certain redemptions. The deferred sales charge on certain redemptions will be waived if the redemption is a result of a participant's death, disability, retirement, attaining age 59 1/2, loans or hardship withdrawals. The deferred sales charge varies depending on the number of participants in the qualified plan and total plan assets as follows: Deferred Sales Charge Number of Participants Total Plan Assets 1-99 100 or more - ------------------------------------------------------------------ Less than $1 million 4% 0% $1 million or more 0% 0% - ------------------------------------------------------------------ Class A - Reducing the Sales Charge Sales charges are based on the total amount of your investments in the Fund. The amount of all prior investments plus any new purchase is referred to as your "total amount invested." For example, suppose you have made an investment of $20,000 and later decide to invest $40,000 more. Your total amount invested would be $60,000. As a result, $10,000 of your $40,000 investment qualifies for the lower 4.5% sales charge that applies to investments of more than $50,000 and up to $100,000. The total amount invested includes any shares held in the Fund in the name of a member of your primary household group. (The primary household group consists of accounts in any ownership for spouses or domestic partners and their unmarried children under 21. Domestic partners are individuals who maintain a shared primary residence and have joint property or other insurable interests.) For instance, if your spouse already has invested $20,000 and you want to invest $40,000, your total amount invested will be $60,000 and therefore you will pay the lower charge of 4.5% on $10,000 of the $40,000. Until a spouse remarries, the sales charge is waived for spouses and unmarried children under 21 of deceased board members, officers or employees of the Fund or AEFC or its subsidiaries and deceased advisors. The total amount invested also includes any investment you or your immediate family already have in the other publicly offered funds in the IDS MUTUAL FUND GROUP where the investment is subject to a sales charge. For example, suppose you already have an investment of $30,000 in another IDS fund. If you invest $40,000 more in this Fund, your total amount invested in the funds will be $70,000 and therefore $20,000 of your $40,000 investment will incur a 4.5% sales charge. Finally, Individual Retirement Account (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 entity, may be added together to reduce sales charges for shares purchased through that plan. Class A - Letter of Intent (LOI) If you intend to invest $1 million over a period of 13 months, you can reduce the sales charges in Class A by filing a LOI. The agreement can start at any time and will remain in effect for 13 months. Your investment will be charged normal sales charges until you have invested $1 million. At that time, your account will be credited with the sales charges previously paid. Class A investments made prior to signing a LOI may be used to reach the $1 million total, excluding Cash Management Fund and Tax-Free Money Fund. However, we will not adjust for sales charges on investments made prior to the signing of the LOI. If you do not invest $1 million by the end of 13 months, there is no penalty, you'll just miss out on the sales charge adjustment. A LOI is not an option (absolute right) to buy shares. Here's an example. You file a LOI to invest $1 million and make an investment of $100,000 at that time. You pay the normal 5% sales charge on the first $50,000 and 4.5% sales charge on the next $50,000 of this investment. Let's say you make a second investment of $900,000 (bringing the total up to $1 million) one month before the 13-month period is up. On the date that you bring your total to $1 million, AEFC makes an adjustment to your account. The adjustment is made by crediting your account with additional shares, in an amount equivalent to the sales charge previously paid. 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. If there is no obligation, why do it? Putting money aside is an important part of financial planning. With a systematic investment program, you have a goal to work for. How does this work? Your regular investment amount will purchase more shares when the net asset value per share decreases, and fewer shares when the net asset value per share increases. Each purchase is a separate transaction. After each purchase your new shares will be added to your account. Shares bought through these programs are exactly the same as any other fund shares. They can be bought and sold at any time. A systematic investment program is not an option or an absolute right to buy shares. The systematic investment program itself cannot ensure a profit, nor can it protect against a loss in a declining market. If you decide to discontinue the program and redeem your shares when their net asset value is less than what you paid for them, you will incur a loss. For a discussion on dollar-cost averaging, see Appendix D. Automatic Directed Dividends Dividends, including capital gain distributions, paid by another fund in the IDS MUTUAL FUND GROUP subject to a sales charge, may be used to automatically purchase shares in the same class of this Fund without paying a sales charge. 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 fund in the IDS MUTUAL FUND GROUP but cannot be split to make purchases in two or more funds. Automatic directed dividends are available between accounts of any ownership except: 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; 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); 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. REDEEMING SHARES You have a right to redeem your shares at any time. For an explanation of redemption procedures, please see the prospectus. During an emergency, the board can suspend the computation of net asset value, 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: `The Exchange closes for reasons other than the usual weekend and holiday closings or trading on the Exchange is restricted, or `Disposal of the Portfolio's securities is not reasonably practicable or it is not reasonably practicable for the Portfolio to determine the fair value of its net assets, or `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 the prospectus. Should the Fund distribute securities, a shareholder may incur brokerage fees or other transaction costs in converting the securities to cash. PAY-OUT PLANS You can use any of several pay-out plans to redeem your investment in regular installments. If you redeem Class B 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 write American Express Shareholder Service, P.O. Box 534, Minneapolis, MN 55440-0534, or call American Express Financial Advisors Telephone Transaction Service at 800-437-3133 (National/Minnesota) or 612-671-3800 (Mpls./St. Paul). Your authorization must be received in the Minneapolis headquarters 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'll 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. TAXES If you buy shares in the Fund and then exchange into another fund, it is considered a redemption and subsequent purchase of shares. Under the tax laws, if this exchange is done within 91 days, any sales charge waived on Class A shares on a subsequent purchase of shares applies to the new shares acquired in the exchange. Therefore, you cannot create a tax loss or reduce a tax gain attributable to the sales charge when exchanging shares within 91 days. Retirement Accounts 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 5% ($100) 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 fiscal year ended May 31, 1998, none of the Fund's net investment income dividends qualified for the corporate deduction. Capital gain distributions, if any, received by corporate shareholders should be treated as long-term capital gains regardless of how long they owned their shares. Capital gain distributions, if any, received by individuals should be treated as long-term if held for more than one year; however, recent tax laws have divided long-term capital gains into two holding periods: (1) shares held more than one year but not more than 18 months and (2) shares held more than 18 months. Short-term capital gains earned by the Fund are paid to shareholders as part of their ordinary income dividend and are taxable. 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. 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. AGREEMENTS Investment Management Services Agreement The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with AEFC. 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 May 31, 1998, the daily rate applied to the Portfolio's net assets was equal to 0.499% 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 $11,996,865 for the fiscal year ended May 31, 1998, $9,593,937 for fiscal year 1997, and $7,421,829 for fiscal year 1996. Under the agreement, the Portfolio 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; consultants' fees; compensation of board members, Portfolio officers and employees; corporate filing fees; organizational expenses; expenses incurred in connection with lending securities of the Portfolio; and expenses properly payable by the Portfolio, approved by the board. Under the agreement, nonadvisory expenses paid by the Fund and Portfolio were $611,351 for the fiscal year ended May 31, 1998, $1,219,506 for fiscal year 1997, and $1,027,003 for fiscal year 1996. In this section, prior to June 10, 1996, the fees and expenses described were paid directly by the Fund. After that date, the management fees were paid by the Portfolio. 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 (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 May 31, 1998, the daily rate applied to the Fund's net assets was equal to 0.046% 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 $1,114,532 for the fiscal year ended May 31, 1998. 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 dividing by the number of days in the year. The rate for Class A and Class Y is $15.50 per year and for Class B is $16.50 per year. The fees paid to AECSC may be changed from time to time upon agreement of the parties without shareholder approval. Under the agreement, the Fund paid fees of $2,272,858 for the fiscal year ended May 31, 1998. Distribution Agreement Under a Distribution Agreement, sales charges deducted for distributing Fund shares are paid to AEFA daily. These charges amounted to $39,098,555 for the fiscal year ended May 31, 1998. After paying commissions to personal financial advisors, and other expenses, the amount retained was $(10,327,378). The amounts were $33,447,456 and $(7,666,745) for fiscal year 1997, and $26,569,611 and $(3,864,430) for fiscal year 1996. Shareholder Service Agreement The Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of average daily net assets for Class A and Class B and 0.10% for Class Y. Plan and Agreement of Distribution For Class B shares, to help AEFA defray the cost of distribution and servicing, not covered by the sales charges received under the Distribution Agreement, the Fund and AEFA entered into a Plan and Agreement of Distribution (Plan). These costs cover almost all aspects of distributing the Fund's shares except compensation to the sales force. A substantial portion of the costs are not specifically identified to any one fund in the IDS MUTUAL FUND GROUP. Under the Plan, AEFA is paid a fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares. 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 Fund's Class B shares or by AEFA. 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 fiscal year ended May 31, 1998, under the agreement, the Fund paid fees of $6,987,610. Custodian Agreement The Trust's securities and cash are held by American Express Trust Company, 1200 Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a custodian agreement. The Fund also retains the custodian pursuant to 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 Portfolio pays the custodian a maintenance charge and a charge per transaction in addition to reimbursing the custodian's out-of-pocket expenses. Total fees and expenses The Fund paid total fees and nonadvisory expenses, net of earnings credits, of $27,032,045 for the fiscal year ended May 31, 1998. ORGANIZATIONAL INFORMATION The Fund is a diversified, open-end management investment company, as defined in the 1940 Act. It was incorporated on March 12, 1985 in Minnesota. The Fund headquarters are at 901 S. Marquette Ave., Suite 2810, Minneapolis, MN 55402-3268. BOARD MEMBERS AND OFFICERS The following is a list of the Fund's board members. They serve 15 Master Trust portfolios and 47 IDS and IDS Life funds (except for William H. Dudley, who does not serve on the nine IDS Life fund boards). All shares have cumulative voting rights with respect to the election of board members. H. Brewster Atwater, Jr. Born in 1931 4900 IDS Tower Minneapolis, MN Retired chairman and chief executive officer, General Mills, Inc. Director, Merck & Co., Inc. and Darden Restaurants, Inc. Lynne V. Cheney' Born in 1941 American Enterprise Institute for Public Policy Research (AEI) 1150 17th St., N.W. Washington, D.C. Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities. Director, The Reader's Digest Association Inc., Lockheed-Martin and Union Pacific Resources. William H. Dudley** Born in 1932 2900 IDS Tower Minneapolis, MN Senior advisor to the chief executive officer of AEFC. David R. Hubers+** Born in 1943 2900 IDS Tower Minneapolis, MN President, chief executive officer and director of AEFC. Heinz F. Hutter+' Born in 1929 P.O. Box 2187 Minneapolis, MN Retired president and chief operating officer, Cargill, Incorporated (commodity merchants and processors). Anne P. Jones Born in 1935 5716 Bent Branch Rd. Bethesda, MD Attorney and telecommunications consultant. Former partner, law firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), C-Cor Electronics, Inc., and Amnex, Inc. (communications). William R. Pearce+* Born in 1927 901 S. Marquette Ave. Minneapolis, MN Chairman of the board, Board Services Corporation (provides administrative services to boards). Director, trustee and officer of registered investment companies whose boards are served by the company. Retired vice chairman of the board, Cargill, Incorporated (commodity merchants and processors). Alan K. Simpson' Born in 1931 1201 Sunshine Ave. Cody, WY Former three-term United States Senator for Wyoming. Former Assistant Republican Leader, U.S. Senate. Director, PacifiCorp (electric power) and Biogen (pharmaceuticals). Edson W. Spencer+ Born in 1926 4900 IDS Center 80 S. 8th St. Minneapolis, MN President, Spencer Associates Inc. (consulting). Retired chairman of the board and chief executive officer, Honeywell Inc. Director, Boise Cascade Corporation (forest products). Member of International Advisory Council of NEC (Japan). John R. Thomas** Born in 1937 2900 IDS Tower Minneapolis, MN Senior vice president of AEFC. Wheelock Whitney+ Born in 1926 1900 Foshay Tower 821 Marquette Ave. Minneapolis, MN Chairman, Whitney Management Company (manages family assets). C. Angus Wurtele' Born in 1934 Valspar Corporation Suite 1700 Foshay Tower Minneapolis, MN Chairman of the board and retired chief executive officer, The Valspar Corporation (paints). Director, Bemis Corporation (packaging), Donaldson Company (air cleaners & mufflers) and General Mills, Inc. (consumer foods). + Member of executive committee. ' Member of joint audit committee. * Interested person by reason of being an officer and employee of the Fund. **Interested person by reason of being an officer, board member, employee and/or shareholder of AEFC or American Express. The board also has appointed officers who are responsible for day-to-day business decisions based on policies it has established. In addition to Mr. Pearce, who is chairman of the board and Mr. Thomas, who is president, the Fund's other officers are: Leslie L. Ogg Born in 1938 901 S. Marquette Ave. Minneapolis, MN President of Board Services Corporation. Vice president, general counsel and secretary for the Fund. Officers who also are officers and/or employees of AEFC Peter J. Anderson Born in 1942 IDS Tower 10 Minneapolis, MN Director and senior vice president-investments of AEFC. Vice president-investments for the Fund. Frederick C. Quirsfeld Born in 1947 IDS Tower 10 Minneapolis, MN Vice president - taxable mutual fund investments of AEFC. Vice president - fixed income investments for the Fund. Matthew N. Karstetter Born in 1961 IDS Tower 10 Minneapolis, MN Vice president of Investment Accounting for AEFC since 1996. Prior to joining AEFC, he served as vice president of State Street Bank's mutual fund service operation from 1991 to 1996. Treasurer for the Fund. COMPENSATION FOR FUND AND PORTFOLIO BOARD MEMBERS Members of the Fund board who are not officers of the Fund or of AEFC receive an annual fee of $500, and the chair of the Contracts Committee receives an additional fee of $86. Board members receive a $50 per day attendance fee for board meetings. The attendance fee for meetings of the Contracts and Investment Review Committees is $50; for meetings of the Audit Committee and Personnel Committee $25 and for traveling from out-of-state $5. Expenses for attending meetings are reimbursed. Members of the Portfolio board who are not officers of the Portfolio or of AEFC receive an annual fee of $900 and the chair of the Contracts Committee receives an additional $86. Board members receive a $50 per day attendance fee for board meetings. The attendance fee for meetings of the Contracts and Investment Review Committee is $50; for meetings of the Audit and Personnel Committee $25 and for traveling from out-of-state $9. Expenses for attending meeting are reimbursed. During the fiscal year ended May 31, 1998, the independent members of the Fund and Portfolio boards, for attending up to 27 meetings, received the following compensation:
Compensation Table Total cash Pension or compensation Retirement from the IDS benefits MUTUAL FUND Aggregate Aggregate accrued as Estimated GROUP and compensation compensation Fund or annual benefit Preferred Board member from the Fund from the Portfolio upon retirement Master Trust Portfolio expenses Group - ---------------------- ---------------- ----------------- ---------------- ---------------- ---------------- H. Brewster Atwater, $1,233 $1,750 $0 $0 $101,100 Jr. Lynne V. Cheney 1,057 1,604 0 0 92,200 Robert F. Froehlke 550 850 0 0 49,000 Heinz F. Hutter 1,233 1,750 0 0 101,100 Anne P. Jones 1,109 1,654 0 0 95,200 Melvin R. Laird 381 643 0 0 36,800 Alan K. Simpson 929 1,470 0 0 84,200 Edson W. Spencer 1,458 1,975 0 0 114,600 Wheelock Whitney 1,258 1,775 0 0 102,700 C. Angus Wurtele 1,383 1,900 0 0 110,100
On May 31, 1998, the Fund's board members and officers as a group owned less than 1% of the outstanding shares of any class. INDEPENDENT AUDITORS The Fund's and corresponding Portfolio's financial statements contained in the Annual Report to shareholders for the fiscal year ended May 31, 1998 were audited by independent auditors, KPMG Peat Marwick LLP, 4200 Norwest 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. FINANCIAL STATEMENTS 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 to shareholders for the fiscal year ended May 31, 1998, pursuant to Section 30(d) of the 1940 Act, are hereby incorporated in this SAI by reference. No other portion of the Annual Report, however, is incorporated by reference. PROSPECTUS The prospectus for IDS Federal Income Fund, dated July 30, 1998, is hereby incorporated in this SAI by reference. APPENDIX A DESCRIPTION OF COMMERCIAL PAPER RATINGS Commercial paper rated Prime-1 (P-1) by Moody's or A-1 by S&P indicates that the degree of safety regarding timely repayment is either overwhelming or very strong. Commercial paper rated P-2 or A-2 indicates that capacity for timely payment on issues with this designation is strong. APPENDIX B OPTIONS AND INTEREST RATE FUTURES CONTRACTS The Portfolio may buy or write options traded on any U.S. exchange or in the over-the-counter market. The Portfolio may enter into interest rate futures contracts traded on any U.S. exchange. The Portfolio also may buy or write put and call options on these futures. Options in the over-the-counter market will be purchased only when the investment manager believes a liquid secondary market exists for the options and only from dealers and institutions the investment manager believes present a minimal credit risk. Some options are exercisable only on a specific date. In that case, or if a liquid secondary market does not exist, the Portfolio could be required to buy or sell securities at disadvantageous prices, thereby incurring losses. 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 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, 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 (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 the buyer generally pays a broker a commission. The writer receives a premium, less a commission, at the time the option is written. The cash received is retained by the writer 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. Options can be used to produce incremental earnings, protect gains and facilitate buying and selling securities for investment purposes. The use of options and futures contracts may benefit the Portfolio and its shareholders by improving the Portfolio's liquidity and by helping to stabilize the value of its net assets. Buying options. Put and call options may be used as a trading technique to facilitate buying and selling securities for investment reasons. Options are used as a trading technique to take advantage of any disparity between the price of the underlying security in the securities market and its price on the options market. It is anticipated the trading technique will be utilized only to effect a transaction when the price of the security plus the option price will be as good or better than the price at which the security could be bought or sold directly. When the option is purchased, the Portfolio 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 purchase of the underlying security will be the combination of the exercise price, the premium and both commissions. When using options as a trading technique, commissions on the option will be set as if only the underlying securities were traded. Put and call options also may be held by the Portfolio for investment purposes. Options permit the Portfolio to experience the change in the value of a security with a relatively small initial cash investment. The risk the Portfolio assumes when it buys an option is the loss of the premium. To be beneficial to the Portfolio, 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 subsequent 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. Writing covered options. The Portfolio will write covered options when it feels it is appropriate and will follow these guidelines: `Underlying securities will continue to be bought or sold solely on the basis of investment considerations consistent with the Fund's goals. `All options written by the Portfolio will be covered. For covered call options if a decision is made to sell the security, the Portfolio will attempt to terminate the option contract through a closing purchase transaction. Net premiums on call options closed or premiums on expired call options are treated as short-term capital gains. If a covered call option is exercised, the security is sold by the Portfolio. The Portfolio will recognize a capital gain or loss based upon the difference between the proceeds and the security's basis. Options on many securities are listed on options exchanges. If the Portfolio 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, Chicago Board Options 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 asked prices. Options on Government National Mortgage Association (GNMA) certificates and certain other securities are not actively traded on any exchange, but may be entered into directly with a dealer. When the Portfolio writes such an option, the Custodian will segregate assets as appropriate to cover the option. However, since the remaining principal balance of GNMA certificates declines each month as a result of mortgage payments, the Portfolio may find that the GNMA certificates it holds as "cover" no longer have a sufficient remaining principal balance for this purpose. A GNMA certificate held by the Portfolio also may cease to represent cover for the option if the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time is reduced. If either event should occur, the Portfolio will either enter into a closing purchase transaction or replace certificates with certificates that represent cover. When the Portfolio closes its position or replaces certificates, it may realize an unanticipated loss and incur transaction costs. FUTURES CONTRACTS. A futures contract is an agreement between two parties to buy and sell a security for a set price on a future date. They have been established by boards of trade which have been designated contracts markets by the Commodity Futures Trading Commission (CFTC). Futures contracts trade on these markets in a manner similar to the way a stock trades on a stock exchange, and the boards of trade, through their clearing corporations, guarantee performance of the contracts. Currently, there are futures contracts based on such debt securities as long-term U.S. Treasury bonds, Treasury notes, GNMA modified pass-through mortgage-backed securities, three-month U.S. Treasury bills and bank certificates of deposit. While futures contracts based on debt securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are very seldom made. Generally, the futures contract is terminated by entering into an offsetting transaction. An offsetting transaction for a futures contract sale is effected by the Portfolio entering into a futures contract purchase for the same aggregate amount of the specific type of financial instrument and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Portfolio immediately is paid the difference and realizes a gain. If the offsetting purchase price exceeds the sale price, the Portfolio pays the difference and realizes a loss. Similarly, closing out a futures contract purchase is effected by the Portfolio entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the Portfolio realizes a gain, and if the offsetting sale price is less than the purchase price, the Portfolio realizes a loss. At the time a futures contract is made, a good-faith deposit called initial margin is set up within a segregated account at the Portfolio's custodian bank. The initial margin deposit is approximately 1.5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of variation margin is required so that each day the Portfolio 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 markets. The purpose of a futures contract, in the case of a portfolio holding long-term debt securities, is to gain the benefit of changes in interest rates without actually buying or selling long-term debt securities. For example, if the Portfolio owned long-term bonds and interest rates were expected to increase, it might enter into futures contracts to sell securities which would have much the same effect as selling some of the long-term bonds it owned. Futures contracts are based on types of debt securities referred to above, which have historically reacted to an increase or decline in interest rates in a fashion similar to the debt securities the Portfolio owns. If interest rates did increase, the value of the debt securities in the portfolio would decline, but the value of the Portfolio's futures contracts would increase at approximately the same rate, thereby keeping the net asset value of the Portfolio from declining as much as it otherwise would have. If, on the other hand, the Portfolio held cash reserves and interest rates were expected to decline, the Portfolio might enter into interest rate futures contracts for the purchase of securities. If short-term rates were higher than long-term rates, the ability to continue holding these cash reserves would have a very beneficial impact on the Portfolio's earnings. Even if short-term rates were not higher, the Portfolio would still benefit from the income earned by holding these short-term investments. At the same time, by entering into futures contracts for the purchase of securities, the Portfolio could take advantage of the anticipated rise in the value of long-term bonds without actually buying them until the market had stabilized. At that time, the futures contracts could be liquidated and the Portfolio's cash reserves could then be used to buy long-term bonds on the cash market. The Portfolio could accomplish similar results by selling bonds with long maturities and investing in bonds with short maturities when interest rates are expected to increase or by buying bonds with long maturities and selling bonds with short maturities when interest rates are expected to decline. But by using futures contracts as an investment tool, given the greater liquidity in the futures market than in the cash market, it might be possible to accomplish the same result more easily and more quickly. Successful use of futures contracts depends on the investment manager's ability to predict the future direction of interest rates. If the investment manager's prediction is incorrect, the Portfolio would have been better off had it not entered into futures contracts. 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, 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 such a contract. If the holder decides not to enter into the contract, all that is lost is the amount (premium) paid for the option. Furthermore, 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 and that change is reflected in the net asset value of the Portfolio. RISKS. There are risks in engaging in each of the management tools described above. The risk the Portfolio assumes when it buys an option is the loss of the premium paid for the option. Purchasing options also limits the use of monies that might otherwise be available for long-term investments. The risk involved in writing options on futures contracts the Portfolio owns, or on securities held in its portfolio, is that there could be an increase in the market value of such 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. The Portfolio could enter into a closing transaction by purchasing an option with the same terms as the one it had previously sold. The cost to close the option and terminate the Portfolio's obligation, however, might be more or less than the premium received when it originally wrote the option. Furthermore, the Portfolio might not be able to close the option because of insufficient activity in the options market. A risk in employing futures contracts to protect against the price volatility of securities is that the prices of securities subject to futures contracts may not correlate perfectly with the behavior of the cash prices of the Portfolio's securities. The correlation may be distorted because the futures market is dominated by short-term traders seeking to profit from the difference between a contract or security price and their cost of borrowed funds. Such distortions are generally minor and would diminish as the contract approached maturity. Another risk is that the Portfolio's investment manager could be incorrect in anticipating as to the direction or extent of various interest rate movements or the time span within which the movements take place. For example, if the Portfolio sold futures contracts for the sale of securities in anticipation of an increase in interest rates, and interest rates declined instead, the Portfolio would lose money on the sale. TAX TREATMENT. As permitted under federal income tax laws, the Portfolio 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. Such an election may result in the Portfolio being required to defer recognizing losses incurred by entering into futures contracts and losses on underlying securities identified as being hedged against. Federal income tax treatment of gains or losses from transactions in options on futures contracts and indexes will depend on whether such option is a section 1256 contract. If the option is a non-equity option, the Portfolio 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. Certain provisions of the Internal Revenue Code may also limit the Portfolio's ability to engage in futures contracts and related options transactions. For example, at the close of each quarter of the Fund's taxable year, at least 50% of the value of its assets must consist of cash, government securities and other securities, subject to certain diversification requirements. 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 Portfolio'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. APPENDIX C MORTGAGE PASS-THROUGH CERTIFICATES A mortgage pass-through certificate is one that represents an interest in a pool, or group, of mortgage loans assembled by the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) or non-governmental entities. In pass-through certificates, both principal and interest payments, including prepayments, are passed through to the holder of the certificate on a monthly basis. Prepayments on underlying mortgages result in a loss of anticipated interest, and the actual yield (or total return) to the fund, which is influenced by both stated interest rates and market conditions, but may be different than the quoted yield on certificates. GNMA, a wholly-owned U.S. government corporation within the Department of Housing and Urban Development (HUD). GNMA pass-though certificates are guaranteed by the full faith and credit of the United States as to the timely payment of principal and interest. FHLMC and FNMA are government-sponsored entities. These government-sponsored entities are not backed by the full faith and credit of the United States for repayment of mortgage-backed securities, but do have the right to borrow from the Treasury. While GNMA and FNMA guarantee the timely payment of both interest and principal, FHLMC only guarantees the timely payment of interest and the eventual payment of principal. Each certificate issued by GNMA or FNMA evidences an interest in a specific pool of mortgage loans insured by the Farmers Home Administration (FHA) or guaranteed by the Veterans Administration (VA). GNMA and FNMA were developed to support the FHA and VA mortgage market while FHLMC was created by Congress to provide additional support for conventional mortgages not insured by the FHA or VA. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of mortgage loans. Pools created by such non-governmental issuers generally offer a higher rate of interest than U.S. government and government-related pools because there are no direct or indirect U.S. government guarantees of payments. Timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by U.S. government entities, private insurers and the mortgage poolers. Underlying Mortgages of the Pool. Pools consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of 1-4 family homes. The terms and characteristics of the mortgage instruments generally are uniform within a pool but may vary among pools. For example, in addition to fixed-rate fixed-term mortgages, the Portfolio may purchase pools of variable rate mortgages, growing equity mortgages, graduated payment mortgages and other types. All servicers apply standards for qualification to local lending institutions which originate mortgages for the pools. Servicers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, many mortgages included in pools are insured through private mortgage insurance companies. Average Life of Certificates. The average life of certificates varies with the maturities of the underlying mortgage instruments which have maximum maturities of 30 years. The average life is likely to be substantially less than the original maturity of the mortgage pools underlying the securities as the result of prepayments or refinancing of such mortgages. Such prepayments are passed through to the registered holder with the regular monthly payments of principal and interest. As prepayment rates vary widely, it is not possible to accurately predict the average life of a particular pool. It is customary in the mortgage industry in quoting yields on a pool of 30-year mortgages to compute the yield as if the pool were a single loan that is amortized according to a 30-year schedule and that is prepaid in full at the end of the 12th year. For this reason, it is standard practice to treat GNMA certificates as 30-year mortgage-backed securities which prepay fully in the 12th year. In contrast to mortgage loans backing GNMA pass-throughs, which can be assumed by the buyer, conventional loans backing FHLMC and FNMA pass-through certificates are due on sale. The prepayment rate is higher for these types of conventional loans because of the non-assumability of FHLMC and FNMA mortgages. Calculation of Yields. Yields on pass-through securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual pre-payment experience may cause the yield to differ from the assumed average life yield. When mortgage rates drop, pre-payments will increase, thus reducing the yield. Reinvestment of pre-payments may occur at higher or lower interest rates than the original investment, thus affecting the yield of the Portfolio. The compounding effect from reinvestments of monthly payments received by the Portfolio will increase the yield to shareholders compared to bonds that pay interest semi-annually. The yield also may be affected if the certificate was issued at a premium or discount, rather than at par. This also applies after issuance to certificates trading in the secondary market at a premium or discount. "When-Issued" Certificates. Some U.S. government securities may be purchased on a "when-issued" basis, which means that it may take as long as 45 days after the purchase before the securities are delivered to the Portfolio. Payment and interest terms, however, are fixed at the time the purchaser enters into the commitment. However, the yield on a comparable certificate when the transaction is consummated may vary from the yield on the certificate at the time that the when-issued transaction was made. The Portfolio does not pay for the securities or start earning interest on them until the contractual settlement date. When-issued securities are subject to market fluctuations and they may affect the Portfolio's gross assets the same as owned securities. Market for Certificates. Since the inception of the mortgage market in the 1970's, the amount of certificates outstanding has grown rapidly. The size of the market and the active participation in the secondary market by securities dealers and many types of investors make the certificates a highly liquid instrument. Prices of certificates are readily available from securities dealers and depend on, among other things, the level of market interest rates, the certificate's coupon rate and the prepayment experience of the pool of mortgages underlying each certificate. APPENDIX D DOLLAR-COST AVERAGING A 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 technique 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 on a regular basis through changing market conditions, including times when the price of their shares falls or the market declines, to accumulate shares in a fund 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). Independent auditors' report The board and shareholders IDS Federal Income Fund, Inc.: We have audited the accompanying statement of assets and liabilities of IDS Federal Income Fund, Inc. as of May 31, 1998, and the related statement of operations for the year then ended and the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for the two year period ended May 31, 1998, the eleven months ended May 31, 1996 and each of the years in the eight-year period ended June 30, 1995. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDS Federal Income Fund, Inc. at May 31, 1998, and the results of its operations, changes in its net assets and the financial highlights for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 2, 1998
Financial statements Statement of assets and liabilities IDS Federal Income Fund, Inc. May 31, 1998 Assets Investment in Government Income Portfolio (Note 1) $2,568,551,837 -------------- Liabilities Dividends payable to shareholders 808,801 Accrued distribution fee 21,393 Accrued service fee 12,009 Accrued transfer agency fee 6,542 Accrued administrative services fee 3,212 Other accrued expenses 462,214 ------- Total liabilities 1,314,171 --------- Net assets applicable to outstanding capital stock $2,567,237,666 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 5,058,071 Additional paid-in capital 2,549,908,845 Undistributed net investment income 711,325 ------- Accumulated net realized gain (loss) (52,130,109) ----------- Unrealized appreciation (depreciation) on investments 63,689,534 ---------- Total-- representing net assets applicable to outstanding capital stock $2,567,237,666 ============== Net assets applicable to outstanding shares: Class A $1,402,754,837 Class B $1,045,496,588 Class Y $ 118,986,241 Net asset value per share of outstanding capital stock: Class A shares 276,371,646 $ 5.08 Class B shares 205,993,898 $ 5.08 Class Y shares 23,441,515 $ 5.08 See accompanying notes to financial statements.
Financial statements Statement of operations IDS Federal Income Fund, Inc. Year ended May 31, 1998 Investment income Income: Interest $160,572,188 ------------ Expenses (Note 2): Expenses allocated from Government Income Portfolio 12,288,712 Distribution fee -- Class B 6,987,610 Transfer agency fee 2,222,438 Incremental transfer agency fee-- Class B 50,420 Service fee Class A 2,317,759 Class B 1,618,662 Class Y 115,796 Administrative services fees and expenses 1,114,532 Compensation of board members 10,594 Postage279,068 Registration fees 353,790 Reports to shareholders 2,679 Audit fees 10,500 ------ Total expenses 27,372,560 Earnings credits on cash balances (Note 2) (340,515) -------- Total net expenses 27,032,045 ---------- Investment income (loss)-- net 133,540,143 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 40,915,748 Financial futures contracts (59,282,920) Options contracts written 16,865,946 ---------- Net realized gain (loss) on investments (1,501,226) Net change in unrealized appreciation (depreciation) on investments 47,306,927 ---------- Net gain (loss) on investments 45,805,701 ---------- Net increase (decrease) in net assets resulting from operations $179,345,844 ============ See accompanying notes to financial statements.
Statements of changes in net assets IDS Federal Income Fund, Inc. Year ended May 31, Operations and distributions 1998 1997 Investment income (loss)-- net $ 133,540,143 $ 115,437,006 Net realized gain (loss) on investments (1,501,226) (4,113,301) Net change in unrealized appreciation (depreciation) on investments 47,306,927 22,506,159 ---------- ---------- Net increase (decrease) in net assets resulting from operations 179,345,844 133,829,864 ----------- ----------- Distributions to shareholders from: Net investment income Class A (78,592,006) (72,954,437) Class B (47,677,831) (35,396,650) Class Y (6,895,419) (6,929,452) ---------- ---------- Total distributions (133,165,256) (115,280,539) ------------ ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 1,134,422,710 985,973,729 Class B shares 1,136,115,029 900,211,049 Class Y shares 51,390,904 45,145,082 Reinvestment of distributions at net asset value Class A shares 66,667,607 62,856,887 Class B shares 45,475,793 33,971,242 Class Y shares 6,889,995 6,929,452 Payments for redemptions Class A shares (1,091,759,256) (888,331,026) Class B shares (Note 2) (973,988,889) (639,794,803) Class Y shares (56,274,053) (37,361,796) ----------- ----------- Increase (decrease) in net assets from capital share transactions 318,939,840 469,599,816 ----------- ----------- Total increase (decrease) in net assets 365,120,428 488,149,141 Net assets at beginning of year 2,202,117,238 1,713,968,097 ------------- ------------- Net assets at end of year $2,567,237,666 $2,202,117,238 ============== ============== Undistributed net investment income $ 711,325 $ 1,029,490 -------------- -------------- See accompanying notes to financial statements.
Notes to financial statements IDS 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. The Fund offers Class A, Class B and Class Y shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge and such shares automatically convert to Class A shares during the ninth calendar year of ownership. Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend, liquidation and other rights, and the same terms and conditions, except that the level of distribution fee, transfer agency fee and service fee (class specific expenses) differs among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Government Income Portfolio Effective June 10, 1996, the Fund began investing all of its assets in Government Income Portfolio (the Portfolio), a series of Income Trust, an open-end investment company that has the same objectives as the Fund. This was accomplished by transferring the Fund's assets to the Portfolio in return for a proportionate ownership interest in the Portfolio. 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 value that is equal to the Fund's proportionate ownership interest in the net assets of the Portfolio. The percentage of the Portfolio owned by the Fund at May 31, 1998 was 99.97%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements," which are included elsewhere in this report. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Federal taxes Since the Fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders, no provision for income or excise taxes is required. Net investment income (loss) and net realized gains (losses) allocated from the Portfolio may differ for financial statement and tax purposes primarily because of the deferral of 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, undistributed net investment income has been decreased by $693,052 and accumulated net realized loss has been decreased by $693,052. Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2 Expenses and sales charges In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: Effective March 20, 1995, the Fund entered into an agreement with American Express Financial Corporation (AEFC) for providing administrative services. Under its 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. Additional administrative service expenses paid by the Fund are office expenses, consultants' fees and compensation of officers and employees. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees, organizational expenses 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 $15.50 o Class B $16.50 o Class Y $15.50 Also effective March 20, 1995, the Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder servicing-related services. Under a Plan and Agreement of Distribution, the Fund pays a distribution fee at an annual rate of 0.75% of the Fund's average daily net assets attributable to Class B shares for distribution-related services. Under a Shareholder Service Agreement, the Fund pays a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.175% of the Fund's average daily net assets attributable to Class A and Class B shares and 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by American Express Financial Advisors Inc. for distributing Fund shares were $38,166,496 for Class A and $932,059 for Class B for the year ended May 31, 1998. During the year ended May 31, 1998, the Fund's transfer agency fees were reduced by $340,515 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, 1998 Class A Class B Class Y Sold 224,794,922 225,164,813 10,168,756 Issued for reinvested 13,216,392 9,014,209 1,365,952 distributions Redeemed (216,322,833) (192,999,127) (11,146,551) ------------ ------------ ----------- Net increase (decrease) 21,688,481 41,179,895 388,157 Year ended May 31, 1997 Class A Class B Class Y Sold 198,719,225 181,331,273 9,099,651 Issued for reinvested 12,674,720 6,850,794 1,399,915 distributions Redeemed (179,157,262) (128,994,759) (7,537,738) ------------ ------------ ---------- Net increase (decrease) 32,236,683 59,187,308 2,961,828 4 Financial highlights "Financial highlights" showing per share data and selected information is presented on pages 7 and 8 of the prospectus. 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, 1998, and the related statement of operations for the year then ended and the statements of changes in net assets for the year ended May 31, 1998 and for the period from June 10, 1996 (commencement of operations) to May 31, 1997. 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 generally accepted auditing standards. 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. Investment securities held in custody are confirmed to us by the custodian. As to securities purchased and sold but not received or delivered, and securities on loan, we request confirmations from brokers, and where replies are not received, we carry out other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Government Income Portfolio at May 31, 1998, 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 generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota July 2, 1998
Financial statements Statement of assets and liabilities Government Income Portfolio May 31, 1998 Assets Investments in securities, at value (Note 1) (identified cost $2,905,160,601) $2,971,345,554 Cash in bank on demand deposit 283,564 Accrued interest receivable 30,390,354 Receivable for investment securities sold 266,533,508 U.S. government securities held as collateral (Note 5) 91,754,767 ---------- Total assets 3,360,307,747 ------------- Liabilities Payable for investment securities purchased 323,766,128 Payable upon return of securities loaned (Note 5) 335,234,142 Accrued investment management services fee 35,135 Option contracts written, at value (premium received $131,602,834) (Note 6) 132,001,181 ----------- Total liabilities 791,036,586 ----------- Net assets $2,569,271,161 ============== See accompanying notes to financial statements.
Financial statements Statement of operations Government Income Portfolio Year ended May 31, 1998 Investment income Income: Interest $160,738,262 ------------ Expenses (Note 2): Investment management services fee 11,996,865 Compensation of board members 15,370 Custodian fees 178,990 Audit fees 31,500 Other 73,558 ------ Total expenses 12,296,283 Earnings credits on cash balances (Note 2) (4,183) ------ Total net expenses 12,292,100 ---------- Investment income (loss) -- net 148,446,162 ----------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 40,926,986 Financial futures contracts (59,299,211) Options contracts written (Note 6) 16,870,558 ---------- Net realized gain (loss) on investments (1,501,667) Net change in unrealized appreciation (depreciation) on investments 47,320,048 ---------- Net gain (loss) on investments 45,818,381 ---------- Net increase (decrease) in net assets resulting from operations $194,264,543 ============ See accompanying notes to financial statements.
Statements of changes in net assets Government Income Portfolio Operations May 31, 1998 For the period from Year ended June 10, 1996* to May 31, 1997 Investment income (loss)-- net $ 148,446,162 $ 124,973,996 Net realized gain (loss) on investments (1,501,667) (221,211) Net change in unrealized appreciation (depreciation) on investments 47,320,048 22,413,297 ---------- ---------- Net increase (decrease) in net assets resulting from operations 194,264,543 147,166,082 Net contributions (withdrawals) from partners 171,023,648 2,056,776,888 ----------- ------------- Total increase (decrease) in net assets 365,288,191 2,203,942,970 Net assets at beginning of period (Note 1) 2,203,982,970 40,000 Net assets at end of period $2,569,271,161 $2,203,982,970 ============== ============== *Commencement of operations See accompanying notes to financial statements.
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. Government Income 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. On April 15, 1996, American Express Financial Corporation (AEFC) contributed $40,000 to the Portfolio. Operations did not formally commence until June 10, 1996, at which time an existing fund transferred its assets to the Portfolio in return for an ownership percentage of the Portfolio. Significant accounting policies followed by the Portfolio are summarized below: Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increase and decrease in net assets from operations during the period. Actual results could differ from those estimates. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price deemed best to reflect fair value as quoted by dealers who make markets in these securities or by an independant 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 In order to produce incremental earnings, protect gains and facilitate buying and selling of securities for investment purposes, the Portfolio may buy and sell put and call options and write covered call options on portfolio securities and may write cash-secured put and call options on U.S. government securities. The Portfolio also may purchase mortgage-backed security (MBS) put spread options and write covered MBS call spread options. MBS spread options are based upon the changes in the price spread between a specified mortgage-backed security and a like-duration Treasury security. The risk in writing a call option is that the Portfolio gives up the opportunity of 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 not being able to enter into a closing transaction if a liquid secondary market does not exist. The Portfolio also may write over-the-counter options where the completion of the obligation is dependent upon the credit standing of the other party. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss upon expiration or closing of the option transaction. 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. Futures transactions In order to gain exposure to or protect itself from changes in the market, the Portfolio may buy and sell financial futures contracts. Risks of entering into futures contracts and related options include the possibility that there may be an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the 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. 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 high-grade short-term debt securities at least equal to the amount of its commitment. As of May 31, 1998, the Portfolio had entered into outstanding when-issued or forward-commitments of $105,575,128. 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. Accordingly, as a "pass-through" entity, the Portfolio 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. 2 Fees and expenses The Trust, on behalf of the Portfolio, has entered into an Investment Management Services Agreement with AEFC for managing 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. The Portfolio also pays custodian fees to American Express Trust Company, an affiliate of AEFC. During the year ended May 31, 1998, the Portfolio's custodian fees were reduced by $4,183 as a result of earnings credits from overnight cash balances. Pursuant to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the units of the Trust. 3 Securities transactions Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $4,706,904,123 and $4,263,884,740, respectively, for the year ended May 31, 1998. For the same period, the portfolio turnover rate was 159%. Realized gains and losses are determined on an identified cost basis. 4 Interest rate futures contracts At May 31, 1998, investments in securities included securities valued at $48,415,728 that were pledged as collateral to cover initial margin deposits on 2,749 open purchase contracts and 6,950 open sale contracts. The market value of the open purchase contracts at May 31, 1998 was $363,272,344 with a net unrealized gain of $1,031,162. The market value of the open sale contracts at May 31, 1998 was $827,499,125 with a net unrealized loss of $3,110,604. See "Summary of significant accounting policies." 5 Lending of portfolio securities At May 31, 1998, securities valued at $333,428,860 were on loan to brokers. For collateral, the Portfolio received $243,479,375 in cash and U.S. government securities valued at $91,754,767. Income from securities lending amounted to $1,519,994 for the year ended May 31, 1998. 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.
6 Options contracts written The number of contracts and premium amounts associated with option contracts written is as follows: Year ended May 31, 1998 Puts Calls MBS Puts and Calls Contracts Premium Contracts Premium Contracts Premium Balance May 31, 1997 2,209 $ 2,598,052 4,067 $ 6,810,256 13,000 $ 757,616 Opened 26,614 36,259,579 33,092 49,334,853 98,150 645,410,751 Closed (22,209) (29,719,060) (24,395) (38,998,661) (76,200) (521,887,073) Exercised (2,676) (3,870,443) (7,157) (10,019,171) (18,700) (441,484) Expired (1,792) (1,250,480) (3,227) (3,315,496) (4,250) (66,405) ------ ---------- ------ ---------- ------ ------- Balance May 31, 1998 2,146 $ 4,017,648 2,380 $ 3,811,781 12,000 $123,773,405 See "Summary of significant accounting policies."
Investments in securities Government Income Portfolio May 31, 1998 Bonds (114.5%) Issuer Coupon Principal Value(a) rate amount U.S. government obligations (46.1%) U.S. Treasury 01-31-00 5.375% $8,500,000 $8,478,580 02-15-00 8.50 5,000,000(f) 5,237,000 02-29-00 5.50 16,000,000 15,987,840 02-29-00 7.125 4,000,000 4,104,200 04-30-00 6.75 9,250,000 9,448,320 08-15-00 6.00 111,000,000 112,034,520 08-31-00 6.25 10,000,000 10,145,000 11-15-00 5.75 34,000,000 34,153,000 02-15-01 5.375 76,500,000(h) 76,161,105 02-15-01 7.75 30,750,000(f,g) 32,424,030 03-31-01 6.375 22,000,000 22,456,060 04-30-01 6.25 82,100,000(f,g) 83,599,146 06-30-01 6.625 40,000,000 41,165,600 07-31-01 6.625 17,000,000 17,512,380 08-31-01 6.50 8,500,000 8,726,015 11-30-01 5.875 6,000,000 6,053,580 04-30-02 6.625 10,000,000 10,351,600 09-30-02 5.875 4,250,000 4,293,987 02-15-03 10.75 15,000,000 18,140,550 03-31-03 5.50 35,000,000(h) 34,894,300 08-15-03 5.75 18,500,000 18,646,890 05-15-04 12.375 7,000,000 9,360,680 08-15-05 6.50 5,000,000(g,h) 5,254,200 08-15-05 10.75 4,750,000(f,g) 6,163,600 02-15-06 5.625 12,750,000 12,736,867 07-15-06 7.00 23,000,000 24,982,600 10-15-06 6.50 36,100,000(h) 38,072,143 08-15-19 8.125 36,000,000(f) 45,614,520 08-15-20 8.75 11,000,000 14,850,880 08-15-27 6.375 138,250,000(h) 148,541,330 11-15-27 6.125 29,000,000(f,h) 30,322,110 TIPS 07-15-02 3.625 10,000,000(i) 10,002,491 Zero Coupon 11-15-04 5.65 33,000,000(b) 23,073,930 Collateralized Mtge Acceptance Corp 12-15-30 6.50 14,655,101 14,849,739 Collateralized Mtge Securities Corp 12-20-20 13.51 3,750,000 3,834,375 Resolution Funding Corp 10-15-19 8.125 8,000,000 9,941,760 Zero Coupon 04-15-02 6.15 11,170,000(b) 9,002,238 10-15-03 6.36 16,000,000(b) 11,854,880 04-15-05 5.65 62,300,000(b) 42,169,624 01-15-06 5.66 65,371,000(b) 42,434,931 04-15-06 5.74 4,803,000(b) 3,073,968 04-15-08 5.88 21,250,000(b) 12,061,075 07-15-08 6.13 48,500,000(b) 27,109,075 07-15-09 5.91 32,646,000(b) 17,116,951 10-15-12 8.04 8,400,000(b) 3,566,556 04-15-17 7.28 37,700,000(b) 12,085,866 07-15-17 7.28 6,650,000(b) 2,100,003 01-15-18 7.20 8,000,000(b) 2,446,640 10-15-18 7.87 7,500,000(b) 2,191,325 01-15-19 7.01 84,500,000(b) 24,296,285 Total 1,183,124,345 Mortgage-backed securities (66.4%) Federal Home Loan Mtge Corp (18.1%) 08-01-00 7.50 13,642,699 13,770,122 07-01-03 6.50 113,103 113,829 09-01-09 6.50 6,131,656 6,198,737 10-01-10 7.00 16,210,348 16,545,416 01-01-13 6.00 12,510,541 12,369,673 11-01-23 8.00 18,388,746 19,244,926 05-01-24 7.50 6,909,970 7,139,312 07-01-24 8.00 12,020,280 12,516,838 01-01-25 9.00 10,024,861 10,657,630 06-01-25 8.00 17,626,160 18,335,613 08-01-25 8.00 3,644,993 3,792,616 11-18-25 6.50 12,750,000 12,873,968 02-01-26 6.00 18,936,086 18,492,224 05-01-26 9.00 23,604,850 25,094,789 12-01-27 6.00 152,404,406 148,330,636 01-01-28 6.00 2,967,092 2,883,450 02-01-28 6.00 18,158,079 17,650,142 Collateralized Mtge Obligation 04-15-22 8.50 9,150,000 10,128,135 07-15-22 6.75 6,483,264 6,483,264 11-15-22 4.00 44,310,000 39,414,675 11-15-23 4.00 10,441,718 9,940,516 Interest Only 01-01-20 10.00 246,054(c) 70,382 Principal Only 09-15-03 6.46 12,111,272(d) 10,642,066 10-15-07 8.47 5,453,317(d) 4,690,705 05-15-08 8.13 9,163,227(d) 7,677,066 05-15-08 7.14 8,328,020(d) 6,403,467 03-15-09 7.38 5,979,874(d) 4,926,856 11-15-23 7.86 7,408,863(d) 6,315,196 Trust Series Z 04-25-24 8.25 34,972,153(k) 37,861,552 Total 490,563,801 Federal Natl Mtge Assn (47.8%) 12-01-99 7.00 8,262,160 8,346,186 03-15-01 5.625 71,600,000 71,418,852 09-01-07 8.50 4,458,981 4,620,798 02-15-08 5.75 132,875,000(h) 131,438,621 05-01-13 6.00 59,500,000 58,785,405 11-01-21 8.00 3,548,621 3,711,644 05-01-22 8.50 6,766,434 7,120,793 03-01-23 9.00 2,551,556 2,734,145 04-01-23 8.50 9,088,299 9,601,242 08-01-23 8.50 21,277,163 22,391,448 08-25-23 6.00 14,400,000 13,996,613 09-01-23 6.50 48,606,274(f,g) 48,609,190 09-01-23 8.50 33,807,946 35,610,248 11-01-23 6.00 11,512,298 11,223,800 12-01-23 7.00 17,433,686 17,812,868 01-01-24 6.50 18,863,934 18,865,067 06-01-24 9.00 7,746,843 8,301,207 01-01-25 8.50 1,253,833 1,314,795 03-01-25 6.50 106,250,000(j) 105,520,062 05-01-25 8.50 509,196 534,432 06-01-25 8.50% $3,395,935 $3,561,045 09-01-25 6.50 21,121,726 21,070,189 09-01-25 6.50 3,523,901(f,g) 3,515,302 10-01-25 8.50 238,923 250,540 11-01-25 6.50 25,648,576 25,585,993 12-01-25 7.50 7,317,073 7,539,292 12-01-25 8.50 7,408,560 7,768,765 02-01-26 6.00 587,838 573,471 02-01-26 8.00 3,409,888 3,546,488 04-01-26 6.00 332,470 323,929 05-01-26 7.50 22,883,432 23,578,402 02-01-27 6.00 2,596,458 2,525,445 04-01-27 6.00 5,966,298 5,803,120 04-01-27 6.50 16,091,146 16,025,173 04-01-27 7.00 12,788,377 12,984,935 08-01-27 7.00 11,729,330 11,909,609 09-01-27 7.00 94,194,656 95,642,427 03-01-28 6.00 6,923,366 6,722,895 04-01-28 6.00 89,092,455 86,436,845 Collateralized Mtge Obligation 06-25-05 6.10 52,240,000 52,182,862 08-25-08 6.00 4,371,201 4,345,935 09-25-08 4.50 38,000,000 34,805,302 11-25-08 5.50 9,061,594 8,853,721 10-25-10 4.50 8,204,208 7,912,712 07-25-12 7.00 4,746,448 4,788,540 01-25-19 3.00 11,250,000 10,512,000 03-25-19 5.75 40,000,000 39,795,312 07-18-19 5.50 13,976,000 13,729,463 10-25-20 9.00 11,666,000 12,583,298 03-25-21 8.50 12,350,000 13,370,221 01-25-22 5.75 10,000,000 9,744,410 01-25-24 5.00 4,711,261 4,618,166 05-18-26 5.00 17,000,000 15,523,125 Interest Only 07-01-18 10.00 3,826,486(c) 1,034,835 08-01-18 9.50 85,388(c) 22,256 01-15-20 10.00 3,938,909(c) 1,106,912 09-25-20 9.50 1,256,566(c) 322,351 01-25-21 10.50 9,948,821(c) 3,036,868 11-25-21 9.50 3,314,119(c) 893,387 02-25-22 9.50 626,123(c) 157,093 02-25-22 10.00 23,702,833(c) 6,335,293 05-25-22 10.00 7,904,149(c) 2,153,367 07-25-22 8.50 13,074,008(c) 3,157,464 07-25-22 9.50 6,787,674(c) 1,745,790 Inverse Floater 08-25-23 6.53 6,052,314(e) 5,591,612 03-25-24 7.68 4,479,964(e) 4,417,410 Principal Only 02-25-08 7.13 7,000,000(d) 5,399,844 12-25-20 6.12 2,036,330(d) 2,003,885 06-25-21 12.57 521,383(d) 420,599 05-25-23 6.24 10,788,439(d) 7,031,028 10-25-23 9.52 3,300,512(d) 3,226,910 10-25-23 4.95 9,558,975(d) 5,950,462 Total 1,204,093,714 Govt Natl Mtge Assn (0.5%) 08-20-19 11.00 256,749 286,195 08-15-25 7.50 12,448,975 12,852,322 Total 13,138,517 Other (2.0%) California Infrastructure San Diego Gas & Electric 03-25-03 6.07 7,500,000 7,536,675 09-25-05 6.19 6,000,000 6,070,080 Southern California Edison 09-25-08 6.38 12,000,000 12,205,920 Citibank Credit Card Master Trust I Series 1998-2 Cl A 01-15-08 6.05 15,000,000 14,990,250 GMAC Commercial Mtge Securities Series 1997-C2 Cl A1 12-15-04 6.45 9,808,580 9,897,838 Total 50,700,763 Total bonds (Cost: $2,875,366,802) $2,941,621,140
Options purchased (--%) Issuer Number of Exercise Expiration Value(a) contracts price date Put U.S. Treasury Note Sept. 98 510 $109 Aug. 1998 $278,904 U.S. Treasury Note Sept. 98 85 112 Aug. 1998 46,484 Total options purchased (Cost: $394,773) $325,388
Short-term securities (1.1%) Issuer Annualized Amount Value(a) yield on payable at date of maturity purchase Federal Home Loan Mtge Corp Disc Nts 06-05-98 5.44% $400,000 $399,639 06-10-98 5.43 5,200,000 5,191,404 06-26-98 5.44 5,800,000 5,776,466 06-26-98 5.46 15,400,000 15,337,168 06-29-98 5.44 300,000 298,645 Federal Natl Mtge Assn Disc Nt 06-11-98 5.39 2,400,000 2,395,704 Total short-term securities (Cost: $29,399,026) $29,399,026 Total investments in securities (Cost: $2,905,160,601)(l) $2,971,345,554 See accompanying notes to investments in securities.
Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) For zero coupon bonds, the interest rate disclosed represents the annualized effective yield on the date of acquisition. (c) Interest-only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest-only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. (d) Principal-only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal-only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents current yield based upon the current cost basis and estimated timing of future cash flows. (e) 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, 1998. Inverse floaters in the aggregate represent 0.4% of the Portfolio's net assets as of May 31, 1998. (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 U.S. Treasury Bonds June 1998 $ 10,500,000 U.S. Treasury Note June 1998, 2-year notes 62,400,000 U.S. Treasury Note June 1998, 5-year notes 202,000,000 Sale contracts U.S. Treasury Bonds Sept. 1998 492,900,000 U.S. Treasury Note Sept. 1998, 10-year notes 202,100,000
(g) At May 31, 1998, securities valued at $48,415,728 were held to cover open call options written as follows: Issuer Number of Exercise Expiration Value(a) contracts price date U.S. Treasury Bonds Sept. 98 510 $110 Aug. 1998 $270,939 U.S. Treasury Bonds Sept. 98 170 118 Aug. 1998 690,625 U.S. Treasury Bonds Sept. 98 17,000 120 Aug. 1998 4,515,625 Mortgage-Backed Security (MBS Spread) 10,500 103 June 1998 109,003,125 Mortgage-Backed Security (MBS Spread) 1,500 101 June 1998 15,210,938 Total $129,691,252 At May 31, 1998, cash or short-term securities were designated to cover open put options written as follows: Issuer Number of Exercise Expiration Value(a) contracts price date U.S. Treasury Bonds Sept. 98 276 $120 July 1998 $90,561 U.S. Treasury Bonds Sept. 98 552 118 Aug. 1998 327,750 U.S. Treasury Bonds Sept. 98 935 120 Aug. 1998 1,095,698 U.S. Treasury Bonds Sept. 98 383 122 Aug. 1998 795,920 Total $2,309,929
(h) Security is partially or fully on loan. See Note 5 to the financial statements. (i) U.S. Treasury inflation-protection securities (TIPS) are securities in which the principal amount is adjusted for inflation and the semiannual interest payments equal a fixed percentage of the inflation-adjusted principal amount. (j) At May 31, 1998, the cost of securities purchased, including interest purchased, on a when-issued basis was $105,575,128. (k) This security is a collateralized mortgage obligation that pays no interest or principal during its initial accrual period until payment of a previous series within the trust have been paid off. Interest is accrued at an effective yield; similar to a zero coupon bond. (l) At May 31, 1998, the cost of securities for federal income tax purposes was $2,906,183,090 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation .........................................$74,822,871 Unrealized depreciation ..........................................(9,660,407) ---------- Net unrealized appreciation..................................... $65,162,464 PART C. OTHER INFORMATION Item 24. Financial Statements and Exhibits FINANCIAL STATEMENTS List of financial statements filed as part of this Post-Effective Amendment to the Registration Statement: For IDS Federal Income Fund: - Independent auditors' report dated July 2, 1998 - Statement of assets and liabilities, May 31, 1998 - Statement of operations, year ended May 31, 1998 - Statements of changes in net assets for the years ended May 31, 1998 and 1997 - Notes to financial statements For Government Income Portfolio: - Independent auditors' report dated July 2, 1998 - Statement of assets and liabilities, May 31, 1998 - Statement of operations, year ended May 31, 1998 - Statements of changes in net assets for the year ended May 31, 1998 and for the period from June 10, 1996 to May 31, 1997 - Notes to financial statements - Investments in securities, May 31, 1998 - Notes to investments in securities (b) EXHIBITS: 1. Copy of 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, is incorporated herein by reference. 2. Copy of By-laws, as amended January 10, 1996, filed as Exhibit 2 to Registrant's Post-Effective Amendment No. 24 to Registration Statement No. 2-96512, is incorporated herein by reference. 3. Not applicable. 4. Form of Stock Certificate for common stock, filed as Exhibit No. 4 to Registration Statement No. 2-96512, is incorporated herein by reference. 5. Form of Investment Management and 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 herein by reference. The agreement was assumed by the Portfolio when the Fund adopted the master/feeder structure. 6. Copy of Distribution Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, is filed electronically herewith. 7. 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. 8(a). Copy of Custodian Agreement between Registrant and American Express Trust Company, dated March 20, 1995 is filed electronically herewith. 8(b). Copy of Custody Agreement between Morgan Stanley Trust Company and IDS Bank and Trust, dated May, 1993, filed electronically as Exhibit 8(b) to Registrant's Post-Effective Amendment No. 20 to Registration Statement No. 2-96512, is incorporated herein by reference. 8(c). Copy of 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 herein by reference. 8(d). Copy of 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 herein by reference. Registrant's Custodian Agreement Amendment differs from the one incorporated by reference only by the fact that Registrant is one executing party. 9(a). Copy of Transfer Agency Agreement between Registrant and American Express Client Service Corporation, dated January 1, 1998, is filed electronically herewith. 9(b). Copy of 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 herein by reference. 9(c). Copy of Shareholder Service Agreement between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, is filed electronically herewith. 9(d). Copy of 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 herein 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. 9(e). Copy of Administrative Services Agreement between Registrant and American Express Financial Corporation, dated March 20, 1995, is filed electronically herewith. 9(f). Copy of 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 herein by reference. 9(g). Copy of Agreement and Declaration of Unitholders between IDS Federal Income Fund, Inc. and Strategist Income Fund, Inc., dated June 10, 1996, filed electronically as Exhibit 9(f) to Registrant's Post-Effective Amendment No. 24 to Registration Statement No. 2-96512, is incorporated herein by reference. 10. Opinion and consent of counsel as to the legality of the securities being registered is filed electronically herewith. 11. Independent Auditors' Consent is filed electronically herewith. 12. None. 13. Copy of 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 herein by reference. 14. Forms of Keogh, IRA and other retirement plans, filed as Exhibits 14(a) through 14(h) to IDS Growth Fund, Inc., Post-Effective Amendment No. 34 to Registration Statement No. 2-38355 on Sept. 8, 1986, are incorporated herein by reference. 15. Copy of Plan and Agreement of Distribution between Registrant and American Express Financial Advisors Inc., dated March 20, 1995, is filed electronically herewith. 16. Copy of schedule for computation of each performance quotation provided in the Registration Statement in response to Item 22(b), filed concurrently on Form SE as Exhibit 16(b) to Registrant's Post-Effective Amendment No. 13 to Registration Statement No. 2-96512, is incorporated herein by reference. 17. Financial Data Schedules are filed electronically herewith. 18. Copy of 18f-3 Plan, dated May 9, 1997, filed electronically on or about January 27, 1998 as Exhibit 18 to IDS Equity Select Fund, Inc.'s Post-Effective Amendment No. 86 to Registration Statement No. 2-13188, is incorporated herein by reference. 19(a). Directors' Power of Attorney to sign Amendments to this Registration Statement, dated January 7, 1998, is filed electronically herewith. 19(b). Officers' Power of Attorney to sign Amendments to this Registration Statement, dated November 1, 1995, filed electronically as Exhibit 19(b) to Registrant's Post-Effective Amendment No. 22 to Registration Statement No. 2-96512, is incorporated herein by reference. 19(c). Trustees' Power of Attorney to sign Amendments to this Registration Statement, dated January 7, 1998, is filed electronically herewith. 19(d). Officers' Power of Attorney to sign Amendments to this Registration Statement, dated April 11, 1996, filed electronically as Exhibit 19(d) to Registrant's Post-Effective Amendment No. 24 to Registration Statement No. 2-96512, is incorporated herein by reference. Item 25. Persons Controlled by or Under Common Control with Registrant None. Item 26. Number of Holders of Securities (1) (2) Number of Record Holders as of Title of Class July 15, 1998 Class A 73,636 Class B 55,908 Class Y 21,947 Item 27. 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 28. 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 IDS Tower 10 Director and Vice President Vice President Service Corporation Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. North Dakota Public Director and Vice President Employee Payment Company - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas A. Alger, American Express Financial IDS Tower 10 Senior Vice President Senior Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Peter J. Anderson, Advisory Capital Strategies IDS Tower 10 Director Director and Senior Vice Group Inc. Minneapolis, MN 55440 President 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 Senior Vice President Advisors Inc. 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 IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Service Vice President Corporation American Express Trust Director and Chairman of Company the Board - ----------------------------- ----------------------------- ---------------------------- ---------------------------- John M. Baker, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Trust Senior Vice President Company - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Joseph M. Barsky III, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Timothy V. Bechtold, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- John C. Boeder, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Box 5144 Director of New York Albany, NY 12205 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas W. Brewers, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Karl J. Breyer, American Express Financial IDS Tower 10 Senior Vice President Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Minnesota Director Foundation - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Daniel J. Candura, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Cynthia M. Carlson, American Enterprise IDS Tower 10 Director, President and Vice President Investment Services Inc. Minneapolis, MN 55440 Chief Executive Officer American Express Financial Vice President Advisors Inc. American Express Service Vice President Corporation - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and Senior Vice President and Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer Chief Marketing Officer IDS Life Insurance Company Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James E. Choat, American Enterprise Life IDS Tower 10 Director, President and Senior Vice President Insurance Company Minneapolis, MN 55440 Chief Executive Officer American Express Financial Senior Vice President Advisors 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 New Vice President 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. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Kenneth J. Ciak, AMEX Assurance Company IDS Tower 10 Director and President Vice President and General Minneapolis, MN 55440 Manager American Express Financial Vice President and General Advisors Inc. Manager IDS Property Casualty 1 WEG Blvd. Director and President Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Paul A. Connolly, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Colleen Curran, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel American Express Service Vice President and Chief Corporation Legal Counsel - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Regenia David, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Luz Maria Davis American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Gordon L. Eid, American Express Financial IDS Tower 10 Senior Vice President, Director, Senior Vice Advisors Inc. Minneapolis, MN 55440 General Counsel and Chief President, Deputy General Compliance Officer Counsel and Chief Compliance Officer American Express Insurance Director and Vice President Agency of Arizona Inc. American Express Insurance Director and Vice President Agency of Idaho Inc. American Express Insurance Director and Vice President Agency of Nevada Inc. American Express Insurance Director and Vice President Agency of Oregon Inc. American Express Property Director and Vice President Casualty Insurance Agency of Kentucky Inc. American Express Property Director and Vice President Casualty Insurance Agency of Maryland Inc. American Express Property Director and Vice President Casualty Insurance Agency of Pennsylvania Inc. IDS Insurance Agency of Director and Vice President Alabama Inc. IDS Insurance Agency of Director and Vice President Arkansas Inc. IDS Insurance Agency of Director and Vice President Massachusetts Inc. IDS Insurance Agency of New Director and Vice President Mexico Inc. IDS Insurance Agency of Director and Vice President North Carolina Inc. IDS Insurance Agency of Director and Vice President Ohio Inc. IDS Insurance Agency of Director and Vice President Wyoming Inc. IDS Real Estate Services, Vice President Inc. Investors Syndicate Director Development Corp. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Robert M. Elconin, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Gordon M. Fines, American Express Asset IDS Tower 10 Executive Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas L. Forsberg, American Centurion Life IDS Tower 10 Director Vice President Assurance Company Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey P. Fox, American Enterprise Life IDS Tower 10 Vice President and Vice President and Insurance Company Minneapolis, MN 55440 Controller Corporate Controller American Express Financial Vice President and Advisors Inc. Corporate Controller - ----------------------------- ----------------------------- ---------------------------- ---------------------------- 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 IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Marketing Controller Marketing Controller IDS Plan Services of Director and Vice President California, Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President Vice President Minneapolis, MN 55440 American Enterprise Life Vice President Insurance Company American Express Financial Vice President Advisors Inc. American Partners Life Director and Vice Insurance Company President IDS Certificate Company Vice President IDS Life Insurance Company Vice President IDS Life Series Fund, Inc. Vice President IDS Life Variable Annuity Vice President Funds A and B Investors Syndicate Director and Vice Development Corp. President IDS Life Insurance Company P.O. Box 5144 Investment Officer of New York Albany, NY 12205 IDS Property Casualty 1 WEG Blvd. Vice President Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Scott A. Hawkinson, American Centurion Life IDS Tower 10 Chief Actuary Vice President Assurance Company Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Janis K. Heaney, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James G. Hirsh, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Darryl G. Horsman, American Express Trust IDS Tower 10 Director and President Vice President Company Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer Vice President and Minneapolis, MN 55440 and Assistant Secretary Corporate Treasurer American Centurion Life Vice President and Assurance Company Treasurer American Enterprise Vice President and Investment Services Inc. Treasurer American Enterprise Life Vice President and Insurance Company Treasurer American Express Asset Vice President and Management Group Inc. Treasurer American Express Asset Vice President and Management International Treasurer Inc. American Express Client Vice President and Service Corporation Treasurer American Express Corporation Vice President and Treasurer American Express Financial Vice President and Advisors 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 Minnesota Vice President and Foundation Treasurer 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 Express Partners Vice President and Life Insurance Company Treasurer IDS Cable Corporation Director, Vice President and Treasurer IDS Cable II Corporation Director, Vice President and Treasurer IDS Capital Holdings Inc. Vice President, Treasurer and Assistant Secretary IDS Certificate Company Vice President and Treasurer 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 New Vice President and Mexico Inc. Treasurer IDS Insurance Agency of Vice President and North Carolina Inc. Treasurer IDS Insurance Agency of Vice President and Ohio Inc. Treasurer IDS Insurance Agency of Vice President and Wyoming Inc. Treasurer IDS Life Insurance Company Vice President, Treasurer and Assistant Secretary IDS Life Series Fund Inc. Vice President and Treasurer IDS Life Variable Annuity Vice President and Funds A & B Treasurer IDS Management Corporation Director, Vice President and Treasurer IDS Partnership Services Vice President and Corporation Treasurer IDS Plan Services of Vice President and California, Inc. Treasurer IDS Real Estate Services, Vice President and Inc. Treasurer IDS Realty Corporation Vice President and Treasurer IDS Sales Support Inc. Vice President and Treasurer IDS Securities Corporation Vice President and Treasurer Investors Syndicate Vice President and Development Corp. Treasurer IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer Insurance Company DePere, WI 54115 and Assistant Secretary North Dakota Public Vice President and Employee Payment Company Treasurer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- David R. Hubers, AMEX Assurance Company IDS Tower 10 Director Director, President and Minneapolis, MN 55440 Chief Executive Officer American Express Financial Chairman, President and Advisors Inc. Chief Executive Officer American Express Service Director and President Corporation IDS Certificate Company Director IDS Life Insurance Company Director IDS Plan Services of Director and President California, Inc. IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Martin G. Hurwitz, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James M. Jensen, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Marietta L. Johns, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Nancy E. Jones, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Service Vice President Corporation - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James E. Kaarre, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Matthew N. Karstetter, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Linda B. Keene, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- G. Michael Kennedy, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Susan D. Kinder, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President IDS Securities Corporation Director - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Brian C. Kleinberg, American Enterprise IDS Tower 10 Senior Vice President Executive Vice President Investment Services Inc. Minneapolis, MN 55440 American Express Financial Executive Vice President Advisors Inc. American Express Service Director Corporation AMEX Assurance Company Director and Chairman of the Board American Partners Life Executive Vice President Insurance Company IDS Property Casualty 1 WEG Blvd. Director and Chairman of Insurance Company DePere, WI 54115 the Board - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director Director and Senior Vice Minneapolis, MN 55440 President American Centurion Life Director Assurance Company American Enterprise Life Director and Chairman of Insurance Company the Board American Express Corporation Director and President American Express Financial Senior Vice President Advisors Inc. 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 Express Property Director and President Casualty Insurance Agency of Kentucky Inc. American Express Property Director and President Casualty Insurance Agency of Maryland Inc. American Express Property Director and President Casualty Insurance Agency of Pennsylvania Inc. American Express Service Vice President Corporation American Partners Life Director and Chairman of Insurance Company the Board IDS Certificate Company Director and Chairman of the Board 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 New Director and President Mexico Inc. IDS Insurance Agency of Director and President North Carolina Inc. IDS Insurance Agency of Director and President Ohio Inc. IDS Insurance Agency of Director and President Wyoming Inc. IDS Life Insurance Company Director and President IDS Life Series Fund, Inc. Director and President IDS Life Variable Annuity Manager, Chairman of the Funds A and B Board and President IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 IDS Life Insurance Company P.O. Box 5144 Director, Chairman of the of New York Albany, NY 12205 Board and President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Director and Executive Vice President IDS Life Series Fund, Inc. Vice President and Chief Actuary IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Claire Kolmodin, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Steve C. Kumagai, American Express Financial IDS Tower 10 Director and Senior Vice Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Edward Labenski, Jr., American Express Asset IDS Tower 10 Senior Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Kurt A Larson, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lori J. Larson, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Futures Corporation Director - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Daniel E. Laufenberg, American Express Financial IDS Tower 10 Vice President and Chief Vice President and Chief Advisors Inc. Minneapolis, MN 55440 U.S. Economist U.S. Economist - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Peter A. Lefferts, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President American Express Trust Director Company IDS Plan Services of Director California, Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Douglas A. Lennick, American Express Financial IDS Tower 10 Director and Executive Director and Executive Vice Advisors Inc. Minneapolis, MN 55440 Vice President President IDS Securities Corporation Director, President and Chief Executive Officer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Mary J. Malevich, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Fred A. Mandell, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Thomas W. Medcalf, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President Vice President Insurance Company Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. American Partners Life Director and President Insurance Company IDS Certificate Company Director and President IDS Life Insurance Company Director and Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James A. Mitchell, AMEX Assurance Company IDS Tower 10 Director Director and Executive Vice Minneapolis, MN 55440 President American Enterprise Director Investment Services Inc. American Express Financial Executive Vice President Advisors Inc. American Express Service Director and Senior Vice Corporation President American Express Tax and Director Business Services Inc. IDS Certificate Company Director IDS Life Insurance Company Director, Chairman of the Board and Chief Executive Officer IDS Plan Services of Director California, Inc. IDS Property Casualty 1 WEG Blvd. Director Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- William P. Miller, Advisory Capital Strategies IDS Tower 10 Vice President Vice President and Senior Group Inc. Minneapolis, MN 55440 Portfolio Manager American Express Asset Senior Vice President Management Group Inc. American Express Financial Vice President and Senior Advisors Inc. Portfolio Manager - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Pamela J. Moret, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 American Express Trust Vice President Company IDS Life Insurance Company Executive Vice President IDS Life Insurance Company P.O. Box 5144 Vice President of New York Albany, NY 12205 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Barry J. Murphy, American Express Client IDS Tower 10 Director and President Director and Senior Vice Service Corporation Minneapolis, MN 55440 President American Express Financial Senior Vice President Advisors Inc. IDS Life Insurance Company Director and Executive Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Mary Owens Neal, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael J. O'Keefe, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James R. Palmer, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 IDS Life Insurance Company Vice President - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Carla P. Pavone, American Express Client IDS Tower 10 Director and Vice President Vice President Service Corporation Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. North Dakota Public Director and President Employee Payment Company - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Thomas P. Perrine, American Express Financial IDS Tower 10 Senior Vice President Senior Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Susan B. Plimpton, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Ronald W. Powell, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant 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 IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Frederick C. Quirsfeld, American Express Asset IDS Tower 10 Vice President Senior Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Senior Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- - ----------------------------- ----------------------------- ---------------------------- ---------------------------- ReBecca K. Roloff, American Express Financial IDS Tower 10 Senior Vice President Senior Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Stephen W. Roszell, Advisory Capital Strategies IDS Tower 10 Director Senior Vice President Group Inc. Minneapolis, MN 55440 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 Senior Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- John P. Ryan, American Express Financial IDS Tower 10 Vice President and General Vice President and General Advisors Inc. Minneapolis, MN 55440 Auditor Auditor - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Erven A. Samsel, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President 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 New Vice President 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. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Stuart A. Sedlacek, American Centurion Life IDS Tower 10 Director, Chairman and Senior Vice President and Assurance Company Minneapolis, MN 55440 President Chief Financial Officer American Enterprise Life Executive Vice President Insurance Company American Express Financial Senior Vice President and Advisors Inc. Chief Financial Officer American Express Trust Director Company American Partners Life Director and Vice President Insurance Agency IDS Certificate Company Director and President IDS Life Insurance Company Executive Vice President and Controller - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Donald K. Shanks, AMEX Assurance Company IDS Tower 10 Senior Vice President Vice President Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. IDS Property Casualty 1 WEG Blvd. Senior Vice President Insurance Company DePere, WI 54115 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President Vice President Minneapolis, MN 55440 American Enterprise Life Vice President Insurance American Express Financial Vice President Advisors Inc. American Partners Life Vice President Insurance Company IDS Certificate Company Vice President IDS Life Insurance Company Vice President IDS Partnership Services Director and Vice President Corporation IDS Real Estate Services Director and Vice President Inc. IDS Realty Corporation Director and Vice President IDS Life Insurance Company Box 5144 Vice President and of New York Albany, NY 12205 Assistant Treasurer - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Judy P. Skoglund, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- William A. Smith, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Controller Controller - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Bridget Sperl, American Express Client IDS Tower 10 Vice President Vice President Service Corporation Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lisa A. Steffes, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President, Vice President and Insurance Company Minneapolis, MN 55440 General Counsel and Assistant General Counsel Secretary American Express Corporation Director, Vice President and Secretary American Express Financial Vice President and Advisors Inc. Assistant General Counsel American Partners Life Director, Vice President, Insurance Company General Counsel and Secretary IDS Life Insurance Company Vice President, General Counsel and Secretary IDS Life Series Fund Inc. General Counsel and Assistant Secretary IDS Life Variable Annuity General Counsel and Funds A & B Assistant Secretary - ----------------------------- ----------------------------- ---------------------------- ---------------------------- James J. Strauss, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey J. Stremcha, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Barbara Stroup Stewart, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Wesley W. Wadman, American Express Asset IDS Tower 10 Executive Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Asset Director and Senior Vice Management International, President Inc. American Express Asset Director and Vice Chairman Management Ltd. American Express Financial Vice President Advisors Inc. IDS Fund Management Limited Director and Vice Chairman - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Norman Weaver Jr., American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President 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 New Vice President 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 IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 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 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Lawrence J. Welte, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Jeffrey F. Welter, American Express Financial IDS Tower 10 Vice President Vice President Advisors Inc. Minneapolis, MN 55440 - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Edwin M. Wistrand, American Express Financial IDS Tower 10 Vice President and Vice President and Advisors Inc. Minneapolis, MN 55440 Assistant General Counsel Assistant General Counsel - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael D. Wolf, American Express Asset IDS Tower 10 Executive Vice President Vice President Management Group Inc. Minneapolis, MN 55440 American Express Financial Vice President Advisors Inc. - ----------------------------- ----------------------------- ---------------------------- ---------------------------- Michael R. Woodward, American Express Financial IDS Tower 10 Senior Vice President Director and Senior Vice Advisors Inc. Minneapolis, MN 55440 President 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 New Vice President 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 Box 5144 Director of New York Albany, NY 12205 - ----------------------------- ----------------------------- ---------------------------- ----------------------------
Item 29. Principal Underwriters. (a) American Express Financial Advisors acts as principal underwriter for the following investment companies: IDS Bond Fund, Inc.; IDS California Tax-Exempt Trust; IDS Discovery Fund, Inc.; IDS Equity Select Fund, Inc.; IDS Extra Income Fund, Inc.; IDS Federal Income Fund, Inc.; IDS Global Series, Inc.; IDS Growth Fund, Inc.; IDS High Yield Tax-Exempt Fund, Inc.; IDS International Fund, Inc.; IDS Investment Series, Inc.; IDS Managed Retirement Fund, Inc.; IDS Market Advantage Series, Inc.; IDS Money Market Series, Inc.; IDS New Dimensions Fund, Inc.; IDS Precious Metals Fund, Inc.; IDS Progressive Fund, Inc.; IDS Selective Fund, Inc.; IDS Special Tax-Exempt Series Trust; IDS Stock Fund, Inc.; IDS Strategy Fund, Inc.; IDS Tax-Exempt Bond Fund, Inc.; IDS Tax-Free Money Fund, Inc.; IDS Utilities Income Fund, Inc., Growth Trust; Growth and Income Trust; Income Trust, Tax-Free Income Trust, World Trust and IDS Certificate Company. (b) As to each director, officer or partner of the principal underwriter: Name and Principal Business Address Position and Offices with Offices with Registrant Underwriter - --------------------------------------------- --------------------------------- -------------------------- Ronald G. Abrahamson Vice President-Service Quality None IDS Tower 10 and Reengineering Minneapolis, MN 55440 Douglas A. Alger Senior Vice President-Human None IDS Tower 10 Resources Minneapolis, MN 55440 Peter J. Anderson Senior Vice Vice President IDS Tower 10 President-Investment Operations Minneapolis, MN 55440 Ward D. Armstrong Vice President-American None IDS Tower 10 Express, Institutional Services Minneapolis, MN 55440 John M. Baker Vice President-Plan Sponsor None IDS Tower 10 Services Minneapolis, MN 55440 Joseph M. Barsky III Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Timothy V. Bechtold Vice President-Risk Management None IDS Tower 10 Products Minneapolis, MN 55440 John D. Begley Group Vice None Suite 100 President-Ohio/Indiana 7760 Olentangy River Rd. Columbus, OH 43235 Brent L. Bisson Group Vice President-Los None Suite 900, E. Westside Twr Angeles Metro 11835 West Olympic Blvd. Los Angeles, CA 90064 John C. Boeder Vice President-Mature Market None IDS Tower 10 Group Minneapolis, MN 55440 Walter K. Booker Group Vice President-New Jersey None Suite 200, 3500 Market Street Camp Hill, NJ 17011 Bruce J. Bordelon Group Vice President-Gulf States None Galleria One Suite 1900 Galleria Blvd. Metairie, LA 70001 Charles R. Branch Group Vice President-Northwest None Suite 200 West 111 North River Dr. Spokane, WA 99201 Douglas W. Brewers Vice President-Sales Support None IDS Tower 10 Minneapolis, MN 55440 Karl J. Breyer Senior Vice President-Law and None IDS Tower 10 Corporate Minneapolis, MN 55440 Affairs Daniel J. Candura Vice President-Marketing Support None IDS Tower 10 Minneapolis, MN 55440 Cynthia M. Carlson Vice President-American Express None IDS Tower 10 Securities Services Minneapolis, MN 55440 Mark W. Carter Senior Vice President and Chief None IDS Tower 10 Marketing Officer Minneapolis, MN 55440 James E. Choat Senior Vice None IDS Tower 10 President-Institutional Minneapolis, MN 55440 Products Group Kenneth J. Ciak Vice President and General None IDS Property Casualty Manager-IDS Property Casualty 1400 Lombardi Avenue Green Bay, WI 54304 Paul A. Connolly Vice President - Advisor None IDS Tower 10 Staffing, Training and Support Minneapolis, MN 55440 Roger C. Corea Group Vice President-Upstate None 290 Woodcliff Drive New York Fairport, NY 14450 Henry J. Cormier Group Vice President-Connecticut None Commerce Center One 333 East River Drive East Hartford, CT 06108 John M. Crawford Group Vice President-Arkansas / None Suite 200 Springfield / Memphis 10800 Financial Ctr Pkwy Little Rock, AR 72211 Kevin F. Crowe Group Vice None Suite 312 President-Carolinas/Eastern 7300 Carmel Executive Pk Georgia Charlotte, NC 28226 Colleen Curran Vice President and assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Reginia David Vice President-Systems Services None IDS Tower 10 Minneapolis, MN 55440 Luz Maria Davis Vice President-Communications None IDS Tower 10 Minneapolis, MN 55440 Scott M. DiGiammarino Group Vice None Suite 500, 8045 Leesburg Pike President-Washington/Baltimore Vienna, VA 22182 Bradford L. Drew Group Vice President-Eastern None Two Datran Center Florida Penthouse One B 9130 S. Dadeland Blvd. Miami, FL 33156 James P. Egge Group Vice President - Western None 4305 South Louise, Suite 202 Iowa, Nebraska, Dakotas Sioux Falls, SD 57103 Gordon L. Eid Senior Vice President, General None IDS Tower 10 Counsel and Chief Compliance Minneapolis, MN 55440 Officer Robert M. Elconin Vice President-Government None IDS Tower 10 Relations Minneapolis, MN 55440 Louise P. Evenson Group Vice President-San None Suite 200 Francisco Bay Area 1333 N. California Blvd. Walnut Creek, CA 94596 Phillip W. Evans, Group Vice President - Rocky None Suite 600 Mountain 6985 Union Park Center Midvale, UT 84047-4177 Gordon M. Fines Vice President-Mutual Fund None IDS Tower 10 Equity Investments Minneapolis, MN 55440 Douglas L. Forsberg Vice President-Institutional None IDS Tower 10 Products Group Minneapolis, MN 55440 Jeffrey P. Fox Vice President and Corporate None IDS Tower 10 Controller Minneapolis, MN 55440 William P. Fritz Group Vice President-Gateway None Suite 160 12855 Flushing Meadows Dr St. Louis, MO 63131 Carl W. Gans Group Vice President-Twin City None 8500 Tower Suite 1770 Metro 8500 Normandale Lake Blvd. Bloomington, MN 55437 David A. Hammer Vice President and Marketing None IDS Tower 10 Controller Minneapolis, MN 55440 Teresa A. Hanratty Group Vice President-Northern None Suites 6&7 New England 169 South River Road Bedford, NH 03110 Robert L. Harden Group Vice President-Boston None Two Constitution Plaza Metro Boston, MA 02129 Lorraine R. Hart Vice President-Insurance None IDS Tower 10 Investments Minneapolis, MN 55440 Scott A. Hawkinson Vice President-Assured Assets None IDS Tower 10 Product Development and Minneapolis, MN 55440 Management Brian M. Heath Group Vice President-North Texas None Suite 150 801 E. Campbell Road Richardson, TX 75081 Janis K. Heaney Vice President - Incentive None IDS Tower 10 Management Minneapolis, MN 55440 James G. Hirsh Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Jon E. Hjelm Group Vice President-Rhode None 319 Southbridge Street Island/Central-Western Auburn, MA 01501 Massachusetts David J. Hockenberry Group Vice President-Eastern None 30 Burton Hills Blvd. Tennessee Suite 175 Nashville, TN 37215 Jeffrey S. Horton Vice President and Treasurer None IDS Tower 10 Minneapolis, MN 55440 David R. Hubers Chairman, President and Chief Board member IDS Tower 10 Executive Officer Minneapolis, MN 55440 Martin G. Hurwitz Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 James M. Jensen Vice President-Insurance None IDS Tower 10 Product Development and Minneapolis, MN 55440 Management Marietta L. Johns Senior Vice President-Field None IDS Tower 10 Management Minneapolis, MN 55440 Nancy E. Jones Vice President - Business None IDS Tower 10 Development Minneapolis, MN 55440 James E. Kaarre Vice President-Marketing None IDS Tower 10 Promotions Minneapolis, MN 55440 Matthew N. Karstetter Vice President-Investment None IDS Tower 10 Accounting Minneapolis, MN 55440 Linda B. Keene Vice President-Market None IDS Tower 10 Development Minneapolis, MN 55440 G. Michael Kennedy Vice President-Investment None IDS Tower 10 Services and Investment Research Minneapolis, MN 55440 Susan D. Kinder Senior Vice None IDS Tower 10 President-Distribution Services Minneapolis, MN 55440 Brian Kleinberg Executive Vice None IDS Tower 10 President-Financial Direct Minneapolis, MN 55440 Richard W. Kling Senior Vice President-Products None IDS Tower 10 Minneapolis, MN 55440 Paul F. Kolkman Vice President-Actuarial Finance None IDS Tower 10 Minneapolis, MN 55440 Claire Kolmodin Vice President-Service Quality None IDS Tower 10 Minneapolis, MN 55440 David S. Kreager Group Vice President-Greater None Suite 108 Michigan Trestle Bridge V 5136 Lovers Lane Kalamazoo, MI 49002 Steven C. Kumagai Director and Senior Vice None IDS Tower 10 President-Field Management and Minneapolis, MN 55440 Business Systems Mitre Kutanovski Group Vice President-Chicago None Suite 680 Metro 8585 Broadway Merrillville, IN 48410 Edward Labenski Jr. Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Kurt A. Larson Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Lori J. Larson Vice President - Brokerage and None IDS Tower 10 Direct Services Minneapolis, MN 55440 Daniel E. Laufenberg Vice President and Chief U.S. None IDS Tower 10 Economist Minneapolis, MN 55440 Peter A. Lefferts Senior Vice President-Corporate None IDS Tower 10 Strategy and Development Minneapolis, MN 55440 Douglas A. Lennick Director and Executive Vice None IDS Tower 10 President-Private Client Group Minneapolis, MN 55440 Mary J. Malevich Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Fred A. Mandell Vice President-Field Marketing None IDS Tower 10 Readiness Minneapolis, MN 55440 Daniel E. Martin Group Vice President-Pittsburgh None Suite 650 Metro 5700 Corporate Drive Pittsburgh, PA 15237 Thomas W. Medcalf Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Paula R. Meyer Vice President - Assured Assets None IDS Tower 10 Minneapolis, MN 55440 William P. Miller Vice President and Senior None IDS Tower 10 Portfolio Manager Minneapolis, MN 55440 James A. Mitchell Executive Vice None IDS Tower 10 President-Marketing and Products Minneapolis, MN 55440 Pamela J. Moret Vice President-Variable Assets None IDS Tower 10 Minneapolis, MN 55440 Alan D. Morgenstern Group Vice President-Central None Suite 200 California/Western Nevada 3500 Market Street Camp Hill, NJ 17011 Barry J. Murphy Senior Vice President-Client None IDS Tower 10 Service Minneapolis, MN 55440 Mary Owens Neal Vice President-Mature Market None IDS Tower 10 Segment Minneapolis, MN 55440 Thomas V. Nicolosi Group Vice President-New York None Suite 220 Metro Area 500 Mamaroneck Avenue Harrison, NY 10528 Michael J. O'Keefe Vice President - Advisory None IDS Tower 10 Business Systems Minneapolis, MN 55440 James R. Palmer Vice President-Taxes None IDS Tower 10 Minneapolis, MN 55440 Marc A. Parker Group Vice President - None 10200 SW Greenburg Road Portland/Eugene Suite 110 Portland OR 97223 Carla P. Pavone Vice President-Compensation and None IDS Tower 10 Field Administration Minneapolis, MN 55440 Thomas P. Perrine Senior Vice President - Group IDS Tower 10 Relationship Leader/AXP Minneapolis, MN 55440 Technologies Financial Services Susan B. Plimpton Vice President-Marketing None IDS Tower 10 Services Minneapolis, MN 55440 Larry M. Post Group Vice None One Tower Bridge President-Philadelphia Metro 100 Front Street 8th Fl West Conshohocken, PA 19428 Ronald W. Powell Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Diana R. Prost Group Vice President - None 3030 N.W. Expressway Kansas/Oklahoma Suite 900 Oklahoma City, OK 73112 James M. Punch Vice President-Special Projects None IDS Tower 10 Minneapolis, MN 55440 Frederick C. Quirsfeld Senior Vice President - Fixed None IDS Tower 10 Income Minneapolis, MN 55440 R. Daniel Richardson Group Vice President-Southern None Suite 800 Texas Arboretum Plaza One 9442 Capital of Texas Hwy N. Austin, TX 78759 ReBecca K. Roloff Senior Vice President-Field None IDS Tower 10 Management and Financial Minneapolis, MN 55440 Advisory Service Stephen W. Roszell Senior Vice None IDS Tower 10 President-Institutional Minneapolis, MN 55440 Max G. Roth Group Vice None Suite 201 S IDS Ctr President-Wisconsin/Upper 1400 Lombardi Avenue Michigan Green Bay, WI 54304 John P. Ryan Vice President and General None IDS Tower 10 Auditor Minneapolis, MN 55440 Erven A. Samsel Senior Vice President-Field None 45 Braintree Hill Park Management Suite 402 Braintree, MA 02184 Russell L. Scalfano Group Vice None Suite 201 President-Illinois/Indiana/Kentucky 101 Plaza East Blvd. Evansville, IN 47715 William G. Scholz Group Vice None Suite 205 President-Arizona/Las Vegas 7333 E Doubletree Ranch Rd Scottsdale, AZ 85258 Stuart A. Sedlacek Senior Vice President and Chief None IDS Tower 10 Financial Officer Minneapolis, MN 55440 Donald K. Shanks Vice President-Property Casualty None IDS Tower 10 Minneapolis, MN 55440 F. Dale Simmons Vice President-Senior Portfolio None IDS Tower 10 Manager, Insurance Investments Minneapolis, MN 55440 Judy P. Skoglund Vice President -Quality and None IDS Tower 10 Service Support Minneapolis, MN 55440 William A. Smith Vice President and None IDS Tower 10 Controller-Private Client Group Minneapolis, MN 55440 James B. Solberg Group Vice President-Eastern None 466 Westdale Mall Iowa Area Cedar Rapids, IA 52404 Bridget Sperl Vice President-Geographic None IDS Tower 10 Service Teams Minneapolis, MN 55440 Paul J. Stanislaw Group Vice President-Southern None Suite 1100 California Two Park Plaza Irvine, CA 92714 Lisa A. Steffes Vice President - Cardmember None IDS Tower 10 Initiatives Minneapolis, MN 55440 Lois A. Stilwell Group Vice President-Outstate None Suite 433 Minnesota Area/ North 9900 East Bren Road Dakota/Western Wisconsin Minnetonka, MN 55343 William A. Stoltzmann Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 James J. Strauss Vice President and General None IDS Tower 10 Auditor Minneapolis, MN 55440 Jeffrey J. Stremcha Vice President-Information None IDS Tower 10 Resource Management/ISD Minneapolis, MN 55440 Barbara Stroup Stewart Vice President - Channel None IDS Tower 10 Development Minneapolis, MN 55440 Craig P. Taucher Group Vice None Suite 150 President-Orlando/Jacksonville 4190 Belfort Road Jacksonville, FL 32216 Neil G. Taylor Group Vice None Suite 425 President-Seattle/Tacoma 101 Elliott Avenue West Seattle, WA 98119 Peter S. Velardi Group Vice None Suite 180 President-Atlanta/Birmingham 1200 Ashwood Parkway Atlanta, GA 30338 Charles F. Wachendorfer Group Vice President - Detroit None 8115 East Jefferson Avenue Metro Detroit, MI 48214 Wesley W. Wadman Vice President-Senior Portfolio None IDS Tower 10 Manager Minneapolis, MN 55440 Donald F. Weaver Group Vice President - Greater None 3500 Market Street, Suite 200 Pennsylvania Camp Hill, PA 17011 Norman Weaver Jr. Senior Vice President-Field None 1010 Main St. Suite 2B Management Huntington Beach, CA 92648 Michael L. Weiner Vice President-Tax Research and None IDS Tower 10 Audit Minneapolis, MN 55440 Lawrence J. Welte Vice President-Investment None IDS Tower 10 Administration Minneapolis, MN 55440 Jeffry M. Welter Vice President-Equity and Fixed None IDS Tower 10 Income Trading Minneapolis, MN 55440 Thomas L. White Group Vice President-Cleveland None Suite 200 Metro 28601 Chagrin Blvd. Woodmere, OH 44122 Eric S. Williams Group Vice President-Virginia None Suite 250 3951 Westerre Parkway Richmond, VA 23233 William J. Williams Group Vice President-Western None Two North Tamiami Trail Florida Suite 702 Sarasota, FL 34236 Edwin M. Wistrand Vice President and Assistant None IDS Tower 10 General Counsel Minneapolis, MN 55440 Michael D. Wolf Vice President- Senior None IDS Tower 10 Portfolio Manager Minneapolis, MN 55440 Michael R. Woodward Senior Vice President-Field None 32 Ellicott St Management Suite 100 Batavia, NY 14020
Item 29(c). Not applicable. Item 30. Location of Accounts and Records American Express Financial Corporation IDS Tower 10 Minneapolis, MN 55440 Item 31. Management Services Not Applicable. Item 32. Undertakings (a) Not Applicable. (b) Not Applicable. (c) The Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, IDS Federal Income Fund, Inc., certifies that it meets all of the requirements for effectiveness of this Amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and the State of Minnesota on the 28th day of July, 1998. IDS FEDERAL INCOME FUND, INC. By /s/ William R. Pearce** William R. Pearce, Chief Executive Officer By /s/ Matthew N. Karstetter Matthew N. Karstetter, Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of July, 1998. Signature Capacity /s/ William R. Pearce* Chairman of the Board William R. Pearce /s/ H. Brewster Atwater, Jr.* Director H. Brewster Atwater, Jr. /s/ Lynne V. Cheney* Director Lynne V. Cheney /s/ William H. Dudley* Director William H. Dudley /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/ Alan K. Simpson* Director Alan K. Simpson Signature Capacity /s/ Edson W. Spencer* Director Edson W. Spencer /s/ John R. Thomas* Director John R. Thomas /s/ Wheelock Whitney* Director Wheelock Whitney /s/ C. Angus Wurtele* Director C. Angus Wurtele *Signed pursuant to Directors' Power of Attorney dated January 7, 1998, filed electronically herewith, by: /s/ Leslie L. Ogg Leslie L. Ogg **Signed pursuant to Officers' Power of Attorney dated November 1, 1995, filed electronically as Exhibit 19(b) to Registrant's Post-Effective Amendment No. 22, by: /s/ Leslie L. Ogg Leslie L. Ogg SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, INCOME TRUST consents to the filing of this Amendment to the Registration Statement signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis and the State of Minnesota on the 28th day of July, 1998. INCOME TRUST By /s/ William R. Pearce** William R. Pearce, Chief Executive Officer By /s/ Matthew N. Karstetter Matthew N. Karstetter, Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 28th day of July, 1998. Signature Capacity /s/ William R. Pearce* Chairman of the Board William R. Pearce /s/ H. Brewster Atwater, Jr.* Trustee H. Brewster Atwater, Jr. /s/ Lynne V. Cheney* Trustee Lynne V. Cheney /s/ William H. Dudley* Trustee William H. Dudley /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/ Alan K. Simpson* Trustee Alan K. Simpson Signature Capacity /s/ Edson W. Spencer* Trustee Edson W. Spencer /s/ John R. Thomas* Trustee John R. Thomas /s/ Wheelock Whitney* Trustee Wheelock Whitney /s/ C. Angus Wurtele* Trustee C. Angus Wurtele *Signed pursuant to Trustees' Power of Attorney dated January 7, 1998, filed electronically herewith, by: /s/ Leslie L. Ogg Leslie L. Ogg *Signed pursuant to Officers' Power of Attorney dated April 11, 1996, filed electronically as Exhibit 19(d) to Registrant's Post-Effective Amendment No. 24, by: /s/ Leslie L. Ogg Leslie L. Ogg CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 26 TO REGISTRATION STATEMENT NO. 2-96512 This Post-Effective Amendment comprises the following papers and documents: The facing sheet. The cross reference sheet. Part A. The prospectus. Part B. Statement of Additional Information. Financial statements. Part C. Other information. The signatures. EX-99 2 EXHIBIT INDEX IDS Federal Income Fund, Inc. File No. 2-96512/811-4260 Exhibit Index Exhibit 6 Distribution Agreement dated March 20, 1995 Exhibit 8a Custodian Agreement dated March 20, 1995 Exhibit 9a Transfer Agency Agreement dated January 1, 1998 Exhibit 9c Shareholder Service Agreement dated March 20, 1995 Exhibit 9e Administrative Services Agreement dated March 20, 1995 Exhibit 10 Opinion and consent of counsel Exhibit 11 Independent Auditors' Consent Exhibit 15 Plan and Agreement of Distribution dated March 20, 1995 Exhibit 17 Financial Data Schedules Exhibit 19a Directors' Power of Attorney dated January 7, 1998 Exhibit 19c Trustees' Power of Attorney dated January 7, 1998 EX-99.6-DISTAGR 3 DISTRIBUTION AGREEMENT DISTRIBUTION AGREEMENT Agreement made as of the 20th day of March, 1995, by and between IDS Federal Income Fund, Inc. (the "Fund"), a Minnesota corporation, for and on behalf of each class of the Fund and American Express Financial Advisors Inc., a Delaware corporation. Part One: DISTRIBUTION OF SECURITIES (1) The Fund covenants and agrees that, during the term of this agreement and any renewal or extension, American Express Financial Advisors shall have the exclusive right to act as principal underwriter for the Fund and to offer for sale and to distribute either directly or through any affiliate any and all shares of each class of capital stock issued or to be issued by the Fund. (2) American Express Financial Advisors hereby covenants and agrees to act as the principal underwriter of each class of capital shares issued and to be issued by the Fund during the period of this agreement and agrees during such period to offer for sale such shares as long as such shares remain available for sale, unless American Express Financial Advisors is unable or unwilling to make such offer for sale or sales or solicitations therefor legally because of any federal, state, provincial or governmental law, rule or agency or for any financial reason. (3) With respect to the offering for sale and sale of shares of each class to be issued by the Fund, it is mutually understood and agreed that such shares are to be sold on the following terms: (a) All sales shall be made by means of an application, and every application shall be subject to acceptance or rejection by the Fund at its principal place of business. Shares are to be sold for cash, payable at the time the application and payment for such shares are received at the principal place of business of the Fund. (b) No shares shall be sold at less than the asset value (computed in the manner provided by the currently effective prospectus or Statement of Additional Information and the Investment Company Act of 1940, and rules thereunder). The number of shares or fractional shares to be acquired by each applicant shall be determined by dividing the amount of each accepted application by the public offering price of one share of the capital stock of the appropriate class as of the close of business on the day when the application, together with payment, is received by the Fund at its principal place of business. The computation as to the number of shares and fractional shares shall be carried to three decimal points of one share with the computation being carried to the nearest 1/lOOOth of a share. If the day of receipt of the application and payment is not a full business day, then the asset value of the share for use in such computation shall be determined as of the close of business on the next succeeding full business day. In the event of a period of emergency, the computation of the asset value for the purpose of determining the number of shares or fractional shares to be acquired by the applicant may be deferred until the close of business on the first full business day following the termination of the period of emergency. A period of emergency shall have the definition given thereto in the Investment Company Act of 1940, and rules thereunder. (4) The Fund agrees to make prompt and reasonable effort to do any and all things necessary, in the opinion of American Express Financial Advisors, to have and to keep the Fund and the shares properly registered or qualified in all appropriate jurisdictions and, as to shares, in such amounts as American Express Financial Advisors may from time to time designate in order that the Fund's shares may be offered or sold in such jurisdictions. (5) The Fund agrees that it will furnish American Express Financial Advisors with information with respect to the affairs and accounts of the Fund, and in such form, as American Express Financial Advisors may from time to time reasonably require and further agrees that American Express Financial Advisors, at all reasonable times, shall be permitted to inspect the books and records of the Fund. (6) American Express Financial Advisors or its agents may prepare or cause to be prepared from time to time circulars, sales literature, broadcast material, publicity data and other advertising material to be used in the sales of shares issued by the Fund, including material which may be deemed to be a prospectus under rules promulgated by the Securities and Exchange Commission (each separate promotional piece is referred to as an "Item of Soliciting Material"). At its option, American Express Financial Advisors may submit any Item of Soliciting Material to the Fund for its prior approval. Unless a particular Item of Soliciting Material is approved in writing by the Fund prior to its use, American Express Financial Advisors agrees to indemnify the Fund and its directors and officers against any and all claims, demands, liabilities and expenses which the Fund or such persons may incur arising out of or based upon the use of any Item of Soliciting Material. The term "expenses" includes amounts paid in satisfaction of judgments or in settlements. The foregoing right of indemnification shall be in addition to any other rights to which the Fund or any director or officer may be entitled as a matter of law. Notwithstanding the foregoing, such indemnification shall not be deemed to abrogate or diminish in any way any right or claim American Express Financial Advisors may have against the Fund or its officers or directors in connection with the Fund's registration statement, prospectus, Statement of Additional Information or other information furnished by or caused to be furnished by the Fund. (7) American Express Financial Advisors agrees to submit to the Fun each application for shares immediately after the receipt of such application and payment therefor by American Express Financial Advisors at its principal place or business. (8) American Express Financial Advisors agrees to cause to be delvered to each person submitting an application a prospectus or circular to be furnished by the Fund in the form required by the applicable federal laws or by the acts or statutes of any applicable state, province or country. (9) The Fund shall have the right to extend to shareholders of each class the right to use the proceeds of any cash dividend paid by the Fund to that shareholder to purchase shares of the same class at the net asset value at the close of business upon the day of purchase, to the extent set forth in the currently effective prospectus or Statement of Additional Information. (10) Shares of each class issued by the Fund may be offered and sold at their asset value to the shareholders of the same class of other funds in the IDS MUTUAL FUND GROUP who wish to exchange their investments in shares of the other funds in the IDS MUTUAL FUND GROUP to investments in shares of the Fund, to the extent set forth in the currently effective prospectus or Statement of Additional Information, such asset value to be computed as of the close of business on the day of sale of such shares of the Fund. (11) American Express Financial Advisors and the Fund agree to use their best efforts to conform with all applicable state and federal laws and regulations relating to any rights or obligations under the term of this agreement. Part Two: ALLOCATION OF EXPENSES Except as provided by any other agreements between the parties, American Express Financial Advisors covenants and agrees that during the period of this agreement it will pay or cause or be paid all expenses incurred by American Express Financial Advisors, or any of its affiliates, in the offering for sale or sale of each class of the Fund's shares. Part Three: COMPENSATION (1) It is covenanted and agreed that American Express Financial Advisors shall be paid: (i) for a class of shares imposing a front-end sales charge, by the purchasers of Fund shares in an amount equal to the difference between the total amount received upon each sale of shares issued by the Fund and the asset value of such shares at the time of such sale; and (ii) for a class of shares imposing a deferred sales charge, by owners of Fund shares at the time the sales charge is imposed in an amount equal to any deferred sales charge, as described in the Fund's prospectus. Such sums as are received by the Fund shall be received as Agent for American Express Financial Advisors and shall be remitted to American Express Financial Advisors daily as soon as practicable after receipt. (2) The asset value of any share of each class of the Fund shall be determined in the manner provided by the classes currently effective prospectus and Statement of Additional Information and the Investment Company Act of 1940, and rules thereunder. Part Four: MISCELLANEOUS (1) American Express Financial Advisors shall be deemed to be an independent contractor and, except as expressly provided or authorized in this agreement, shall have no authority to act for or represent the Fund. (2) American Express Financial Advisors shall be free to render to others services similar to those rendered under this agreement. (3) Neither this agreement nor any transaction had pursuant hereto shall be invalidated or in any way affected by the fact that directors, officers, agents and/or shareholders of the Fund are or may be interested in American Express Financial Advisors as directors, officers, shareholders or otherwise; that directors, officers, shareholders or agents of American Express Financial Advisors are or may be interested in the Fund as directors, officers, shareholders or otherwise; or that American Express Financial Advisors is or may be interested in the Fund as shareholder or otherwise, provided, however, that neither American Express Financial Advisors nor any officer or director of American Express Financial Advisors or any officers or directors of the Fund shall sell to or buy from the Fund any property or security other than a security issued by the Fund, except in accordance with a rule, regulation or order of the federal Securities and Exchange Commission. (4) For the purposes of this agreement, a "business day" shall have the same meaning as is given to the term in the By-laws of the Fund. (5) Any notice under this agreement shall be given in writing, addressed and delivered, or mailed postpaid, to the parties to this agreement at each company's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) American Express Financial Advisors agrees that no officer, director or employee of American Express Financial Advisors will deal for or on behalf of the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit: (a) Officers, directors and employees of American Express Financial Advisors from having a financial interest in the Fund or in American Express Financial Advisors. (b) The purchase of securities for the Fund, or the sale of securities owned by the Fund, through a security broker or dealer, one or more of whose partners, officers, directors or employees is an officer, director or employee of American Express Financial Advisors, provided such transactions are handled in the capacity of broker only and provided commissions charged do not exceed customary brokerage charges for such services. (c) Transactions with the Fund by a broker-dealer affiliate of American Express Financial Advisors if allowed by rule or order of the Securities and Exchange Commission and if made pursuant to procedures adopted by the Fund's Board of Directors. (7) American Express Financial Advisors agrees that, except as otherwise provided in this agreement, or as may be permitted consistent with the use of a broker-dealer affiliate of American Express Financial Advisors under applicable provisions of the federal securities laws, neither it nor any of its officers, directors or employees shall at any time during the period of this agreement make, accept or receive, directly or indirectly, any fees, profits or emoluments of any character in connection with the purchase or sale of securities (except securities issued by the Fund) or other assets by or for the Fund. Part Five: TERMINATION (1) This agreement shall continue from year to year unless and until terminated by American Express Financial Advisors or the Fund, except that such continuance shall be specifically approved at least annually by a vote of a majority of the Board of Directors who are not parties to this agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval, and by a majority of the Board of Directors or by vote of a majority of the outstanding voting securities of the Fund. As used in this paragraph, the term "interested person" shall have the meaning as set forth in the Investment Company Act of 1940, as amended. (2) This agreement may be terminated by American Express Financial Advisors or the Fund at any time by giving the other party sixty (60) days written notice of such intention to terminate. (3) This agreement shall terminate in the event of its assignment, the term "assignment" for this purpose having the same meaning as set forth in the Investment Company Act of 1940, as amended. IN WITNESS WHEREOF, The parties hereto have executed the foregoing agreement on the date and year first above written. IDS FEDERAL INCOME FUND, INC. By /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL ADVISORS INC. By /s/ Janis E. Miller Vice President EX-99.8A-CUSTAGR 4 CUSTODIAN AGREEMENT CUSTODIAN AGREEMENT THIS CUSTODIAN AGREEMENT dated March 20, 1995, between IDS Federal Income Fund, Inc., a Minnesota Corporation (the "Corporation") and American Express Trust Company, a corporation organized under the laws of the State of Minnesota with its principal place of business at Minneapolis, Minnesota (the "Custodian"). WHEREAS, the Corporation desires that its securities and cash be hereafter held and administered by Custodian pursuant to the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein made, the Corporation and the Custodian agree as follows: Section 1. Definitions The word "securities" as used herein shall be construed to include, without being limited to, shares, stocks, treasury stocks, including any stocks of this Corporation, notes, bonds, debentures, evidences of indebtedness, options to buy or sell stocks or stock indexes, certificates of interest or participation in any profit-sharing agreements, collateral trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, fractional or undivided interests in oil, gas or other mineral rights, or any certificates of interest or participation in, temporary or interim certificates for, receipts for, guarantees of, or warrants or rights to subscribe to or purchase any of the foregoing, acceptances and other obligations and any evidence of any right or interest in or to any cash, property or assets and any interest or instrument commonly known as a security. In addition, for the purpose of this Custodian Agreement, the word "securities" also shall include other instruments in which the Corporation may invest including currency forward contracts and commodities such as interest rate or index futures contracts, margin deposits on such contracts or options on such contracts. The words "custodian order" shall mean a request or direction, including a computer printout, directed to the Custodian and signed in the name of the Corporation by any two individuals designated in the current certified list referred to in Section 2. The word "facsimile" shall mean an exact copy or likeness which is electronically transmitted for instant reproduction. Section 2. Names, Titles and Signatures of Authorized Persons The Corporation will certify to the Custodian the names and signatures of its present officers and other designated persons authorized on behalf of the Corporation to direct the Custodian by custodian order as herein before defined. The Corporation agrees that whenever any change occurs in this list it will file with the Custodian a copy of a resolution certified by the Secretary or an Assistant Secretary of the Corporation as having been duly adopted by the Board of Directors or the Executive Committee of the Board of Directors of the Corporation designating those persons currently authorized on behalf of the Corporation to direct the Custodian by custodian order, as herein before defined, and upon such filing (to be accompanied by the filing of specimen signatures of the designated persons) the persons so designated in said resolution shall constitute the current certified list. The Custodian is authorized to rely and act upon the names and signatures of the individuals as they appear in the most recent certified list from the Corporation which has been delivered to the Custodian as herein above provided. Section 3. Use of Subcustodians The Custodian may make arrangements, where appropriate, with other banks having not less than two million dollars aggregate capital, surplus and undivided profits for the custody of securities. Any such bank selected by the Custodian to act as subcustodian shall be deemed to be the agent of the Custodian. The Custodian also may enter into arrangements for the custody of securities entrusted to its care through foreign branches of United States banks; through foreign banks, banking institutions or trust companies; through foreign subsidiaries of United States banks or bank holding companies, or through foreign securities depositories or clearing agencies (hereinafter also called, collectively, the "Foreign Subcustodian" or indirectly through an agent, established under the first paragraph of this section, if and to the extent permitted by Section 17(f) of the Investment Company Act of 1940 and the rules promulgated by the Securities and Exchange Commission thereunder, any order issued by the Securities and Exchange Commission, or any "no-action" letter received from the staff of the Securities and Exchange Commission. To the extent the existing provisions of the Custodian Agreement are consistent with the requirements of such Section, rules, order or no-action letter, they shall apply to all such foreign custodianships. To the extent such provisions are inconsistent with or additional requirements are established by such Section, rules, order or no-action letter, the requirements of such Section, rules, order or no-action letter will prevail and the parties will adhere to such requirements; provided, however, in the absence of notification from the Corporation of any changes or additions to such requirements, the Custodian shall have no duty or responsibility to inquire as to any such changes or additions. Section 4. Receipt and Disbursement of Money (1) The Custodian shall open and maintain a separate account or accounts in the name of the Corporation or cause its agent to open and maintain such account or accounts subject only to checks, drafts or directives by the Custodian pursuant to the terms of this Agreement. The Custodian or its agent shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Corporation. The Custodian or its agent shall make payments of cash to or for the account of the Corporation from such cash only: (a) for the purchase of securities for the portfolio of the Corporation upon the receipt of such securities by the Custodian or its agent unless otherwise instructed on behalf of the Corporation; (b) for the purchase or redemption of shares of capital stock of the Corporation; (c) for the payment of interest, dividends, taxes, management fees, or operating expenses (including, without limitation thereto, fees for legal, accounting and auditing services); (d) for payment of distribution fees, commissions, or redemption fees, if any; (e) for payments in connection with the conversion, exchange or surrender of securities owned or subscribed to by the Corporation held by or to be delivered to the Custodian; (f) for payments in connection with the return of securities loaned by the Corporation upon receipt of such securities or the reduction of collateral upon receipt of proper notice; (g) for payments for other proper corporate purposes; (h) or upon the termination of this Agreement. Before making any such payment for the purposes permitted under the terms of items (a), (b), (c), (d), (e), (f) or (g) of paragraph (1) of this section, the Custodian shall receive and may rely upon a custodian order directing such payment and stating that the payment is for such a purpose permitted under these items (a), (b), (c), (d), (e), (f) or (g) and that in respect to item (g), a copy of a resolution of the Board of Directors or of the Executive Committee of the Board of Directors of the Corporation signed by an officer of the Corporation and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose to be a proper corporate purpose, and naming the person or persons to whom such payment is made. Notwithstanding the above, for the purposes permitted under items (a) or (f) of paragraph (1) of this section, the Custodian may rely upon a facsimile order. (2) The Custodian is hereby appointed the attorney-in-fact of the Corporation to endorse and collect all checks, drafts or other orders for the payment of money received by the Custodian for the account of the Corporation and drawn on or to the order of the Corporation and to deposit same to the account of the Corporation pursuant to this Agreement. Section 5. Receipt of Securities Except as permitted by the second paragraph of this section, the Custodian or its agent shall hold in a separate account or accounts, and physically segregated at all times from those of any other persons, firms or corporations, pursuant to the provisions hereof, all securities received by it for the account of the Corporation. The Custodian shall record and maintain a record of all certificate numbers. Securities so received shall be held in the name of the Corporation, in the name of an exclusive nominee duly appointed by the Custodian or in bearer form, as appropriate. Subject to such rules, regulations or guidelines as the Securities and Exchange Commission may adopt, the Custodian may deposit all or any part of the securities owned by the Corporation in a securities depository which includes any system for the central handling of securities established by a national securities exchange or a national securities association registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, or such other person as may be permitted by the Commission, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities. All securities are to be held or disposed of by the Custodian for, and subject at all times to the instructions of, the Corporation pursuant to the terms of this Agreement. The Custodian shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities, except pursuant to the directive of the Corporation and only for the account of the Corporation as set forth in Section 6 of this Agreement. Section 6. Transfer Exchange, Delivery, etc. of Securities The Custodian shall have sole power to release or deliver any securities of the Corporation held by it pursuant to this Agreement. The Custodian agrees to transfer, exchange or deliver securities held by it or its agent hereunder only: (a) for sales of such securities for the account of the Corporation, upon receipt of payment therefor; (b) when such securities are called, redeemed, retired or otherwise become payable; (c) for examination upon the sale of any such securities in accordance with "street delivery" custom which would include delivery against interim receipts or other proper delivery receipts; (d) in exchange for or upon conversion into other securities alone or other securities and cash whether pursuant to any plan of (e) merger, consolidation, reorganization, recapitalization or readjustment, or otherwise; (f) for the purpose of exchanging interim receipts or temporary certificates for permanent certificates; (g) upon conversion of such securities pursuant to their terms into other securities; (h) upon exercise of subscription, purchase or other similar rights represented by such securities; for loans of such securities by the Corporation upon receipt of collateral; or (i) for other proper corporate purposes. As to any deliveries made by the Custodian pursuant to items (a), (b), (c), (d), (e), (f), (g) and (h), securities or cash received in exchange therefore shall be delivered to the Custodian, its agent, or to a securities depository. Before making any such transfer, exchange or delivery, the Custodian shall receive a custodian order or a facsimile from the Corporation requesting such transfer, exchange or delivery and stating that it is for a purpose permitted under Section 6 (whenever a facsimile is utilized, the Corporation will also deliver an original signed custodian order) and, in respect to item (i), a copy of a resolution of the Board of Directors or of the Executive Committee of the Board of Directors of the Corporation signed by an officer of the Corporation and certified by its Secretary or an Assistant Secretary, specifying the securities, setting forth the purpose for which such payment, transfer, exchange or delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom such transfer, exchange or delivery of such securities shall be made. Section 7. Custodian's Acts Without Instructions Unless and until the Custodian receives a contrary custodian order from the Corporation, the Custodian shall or shall cause its agent to: (a) present for payment all coupons and other income items held by the Custodian or its agent for the account of the Corporation which call for payment upon presentation and hold all cash received by it upon such payment for the account of the Corporation; (b) present for payment all securities held by it or its agent which mature or when called, redeemed, retired or otherwise become payable; (c) ascertain all stock dividends, rights and similar securities to be issued with respect to any securities held by the Custodian or its agent hereunder, and to collect and hold for the account of the Corporation all such securities; and (d) ascertain all interest and cash dividends to be paid to security holders with respect to any securities held by the Custodian or its agent, and to collect and hold such interest and cash dividends for the account of the Corporation. Section 8. Voting and Other Action Neither the Custodian nor any nominee of the Custodian shall vote any of the securities held hereunder by or for the account of the Corporation. The Custodian shall promptly deliver to the Corporation all notices, proxies and proxy soliciting materials with relation to such securities, such proxies to be executed by the registered holder of such securities (if registered otherwise than in the name of the Corporation), but without indicating the manner in which such proxies are to be voted. Custodian shall transmit promptly to the Corporation all written information (including, without limitation, pendency of calls and maturities of securities and expirations of rights in connection therewith) received by the Custodian from issuers of the securities being held for the Corporation. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Corporation all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. Section 9. Transfer Taxes The Corporation shall pay or reimburse the Custodian for any transfer taxes payable upon transfers of securities made hereunder, including transfers resulting from the termination of this Agreement. The Custodian shall execute such certificates in connection with securities delivered to it under this Agreement as may be required, under any applicable law or regulation, to exempt from taxation any transfers and/or deliveries of any such securities which may be entitled to such exemption. Section 10. Custodian's Reports The Custodian shall furnish the Corporation as of the close of business each day a statement showing all transactions and entries for the account of the Corporation. The books and records of the Custodian pertaining to its actions as Custodian under this Agreement and securities held hereunder by the Custodian shall be open to inspection and audit by officers of the Corporation, internal auditors employed by the Corporation's investment adviser, and independent auditors employed by the Corporation. The Custodian shall furnish the Corporation in such form as may reasonably be requested by the Corporation a report, including a list of the securities held by it in custody for the account of the Corporation, identification of any subcustodian, and identification of such securities held by such subcustodian, as of the close of business of the last business day of each month, which shall be certified by a duly authorized officer of the Custodian. It is further understood that additional reports may from time to time be requested by the Corporation. Should any report ever be filed with any governmental authority pertaining to lost or stolen securities, the Custodian will concurrently provide the Corporation with a copy of that report. The Custodian also shall furnish such reports on its systems of internal accounting control as the Corporation may reasonably request from time to time. Section 11. Concerning Custodian For its services hereunder the Custodian shall be paid such compensation at such times as may from time to time be agreed on in writing by the parties hereto in a Custodian Fee Agreement. The Custodian shall not be liable for any action taken in good faith upon any custodian order or facsimile herein described or certified copy of any resolution of the Board of Directors or of the Executive Committee of the Board of Directors of the Corporation, and may rely on the genuineness of any such document which it may in good faith believe to have been validly executed. The Corporation agrees to indemnify and hold harmless Custodian and its nominee from all taxes, charges, expenses, assessments, claims and liabilities (including counsel fees) incurred or assessed against it or its nominee in connection with the performance of this Agreement, except such as may arise from the Custodian's or its nominee's own negligent action, negligent failure to act or willful misconduct. Custodian is authorized to charge any account of the Corporation for such items. In the event of any advance of cash for any purpose made by Custodian resulting from orders or instructions of the Corporation, or in the event that Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Corporation shall be security therefor. The Custodian shall maintain a standard of care equivalent to that which would be required of a bailee for hire and shall not be liable for any loss or damage to the Corporation resulting from participation in a securities depository unless such loss or damage arises by reason of any negligence, misfeasance, or willful misconduct of officers or employees of the Custodian, or from its failure to enforce effectively such rights as it may have against any securities depository or from use of an agent, unless such loss or damage arises by reason of any negligence, misfeasance, or willful misconduct of officers or employees of the Custodian, or from its failure to enforce effectively such rights as it may have against any agent. Section 12. Termination and Amendment of Agreement The Corporation and the Custodian mutually may agree from time to time in writing to amend, to add to, or to delete from any provision of this Agreement. The Custodian may terminate this Agreement by giving the Corporation ninety days' written notice of such termination by registered mail addressed to the Corporation at its principal place of business. The Corporation may terminate this Agreement at any time by written notice thereof delivered, together with a copy of the resolution of the Board of Directors authorizing such termination and certified by the Secretary of the Corporation, by registered mail to the Custodian. Upon such termination of this Agreement, assets of the Corporation held by the Custodian shall be delivered by the Custodian to a successor custodian, if one has been appointed by the Corporation, upon receipt by the Custodian of a copy of the resolution of the Board of Directors of the Corporation certified by the Secretary, showing appointment of the successor custodian, and provided that such successor custodian is a bank or trust company, organized under the laws of the United States or of any State of the United States, having not less than two million dollars aggregate capital, surplus and undivided profits. Upon the termination of this Agreement as a part of the transfer of assets, either to a successor custodian or otherwise, the Custodian will deliver securities held by it hereunder, when so authorized and directed by resolution of the Board of Directors of the Corporation, to a duly appointed agent of the successor custodian or to the appropriate transfer agents for transfer of registration and delivery as directed. Delivery of assets on termination of this Agreement shall be effected in a reasonable, expeditious and orderly manner; and in order to accomplish an orderly transition from the Custodian to the successor custodian, the Custodian shall continue to act as such under this Agreement as to assets in its possession or control. Termination as to each security shall become effective upon delivery to the successor custodian, its agent, or to a transfer agent for a specific security for the account of the successor custodian, and such delivery shall constitute effective delivery by the Custodian to the successor under this Agreement. In addition to the means of termination herein before authorized, this Agreement may be terminated at any time by the vote of a majority of the outstanding shares of the Corporation and after written notice of such action to the Custodian. Section 13. General Nothing expressed or mentioned in or to be implied from any provision of this Agreement is intended to, or shall be construed to give any person or corporation other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement, or any covenant, condition or provision herein contained, this Agreement and all of the covenants, conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective successors and assigns. This Agreement shall be governed by the laws of the State of Minnesota. This Agreement supersedes all prior agreements between the parties. IDS FEDERAL INCOME FUND, INC. By: /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS TRUST COMPANY By: /s/ Chandrakant A. Patel Vice President EX-99.9A-TRANAGR 5 TRANSFER AGENCY AGREEMENT TRANSFER AGENCY AGREEMENT AGREEMENT dated as of January 1, 1998, between IDS 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 fund in the IDS MUTUAL FUND GROUP 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. 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. 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. IDS FEDERAL INCOME FUND, INC. By: /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS CLIENT SERVICE CORPORATION By: /s/ Barry J. Murphy Barry J. Murphy President Schedule A IDS 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 Y $15.50 $16.50 $15.50 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-99.9C-SHAREAGR 6 SHAREHOLDER SERVICE AGREEMENT Shareholder Service Agreement This agreement is between IDS Federal Income Fund, Inc. (the "Fund") and American Express Financial Advisors Inc., the principal underwriter of the Fund, for services to be provided to shareholders by personal financial advisors and other servicing agents. It is effective on the first day the Fund offers multiple classes of shares. American Express Financial Advisors represents that shareholders consider their financial advisor or servicing agent a significant factor in their satisfaction with their investment and, to help retain financial advisors or servicing agents, it is necessary for the Fund to pay annual servicing fees to financial advisors and other servicing agents. American Express Financial Advisors represents that fees paid to financial advisors will be used by financial advisors to help shareholders thoughtfully consider their investment goals and objectively monitor how well the goals are being achieved. As principal underwriter, American Express Financial Advisors will use its best efforts to assure that other distributors provide comparable services to shareholders for the servicing fees received. American Express Financial Advisors agrees to monitor the services provided by financial advisors and servicing agents, to measure the level and quality of services provided, to provide training and support to financial advisors and servicing agents and to devise methods for rewarding financial advisors and servicing agents who achieve an exemplary level and quality of services. The Fund agrees to pay American Express financial advisors and other servicing agents 0.15 percent of the net asset value for each shareholder account assigned to a financial advisor or servicing agent that holds either Class A or Class B shares. In addition, the Fund agrees to pay American Express Financial Advisors' costs to monitor, measure, train and support services provided by financial advisors or servicing agents up to 0.025 percent of the net asset value for each shareholder account assigned to a financial advisor or servicing agent that holds either Class A or Class B shares. The Fund agrees to pay American Express Financial Advisors in cash within five (5) business days after the last day of each month. American Express Financial Advisors agrees to provide the Fund, prior to the beginning of the calendar year, a budget covering its expected costs to monitor, measure, train and support services and a quarterly report of its actual expenditures. American Express Financial Advisors agrees to meet with representatives of the Fund at their request to provide information as may be reasonably necessary to evaluate its performance under the terms of this agreement. American Express Financial Advisors agrees that if, at the end of any month, the expenses of the Fund, including fees under this agreement and any other agreement between the Fund and American Express Financial Advisors or American Express Financial Corporation, but excluding taxes, brokerage commissions and charges in connection with the purchase and sale of assets exceed the most restrictive applicable state expense limitation for the Fund's current fiscal year, the Fund shall not pay fees and expenses under this agreement to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Advisors will assume all unpaid expenses and bill the Fund for them in subsequent months but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. This agreement shall continue in effect for a period of more than one year so long as it is reapproved at least annually at a meeting called for the purpose of voting on the agreement by a vote, in person, of the members of the Board who are not interested persons of the Fund and have no financial interest in the operation of the agreement, and of all the members of the Board. This agreement may be terminated at any time without payment of any penalty by a vote of a majority of the members of the Board who are not interested persons of the Fund and have no financial interest in the operation of the agreement or by American Express Financial Advisors. The agreement will terminate automatically in the event of its assignment as that term is defined in the Investment Company Act of 1940. This agreement may be amended at any time provided the amendment is approved in the same manner the agreement was initially approved and the amendment is agreed to by American Express Financial Advisors. Approved this 20th day of March, 1995. IDS FEDERAL INCOME FUND, INC. /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL ADVISORS INC. /s/ Janis E. Miller Vice President EX-99.9E-ADMINAGR 7 ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT AGREEMENT made the 20th day of March, 1995, by and between IDS Federal Income Fund, Inc. (the "Fund"), a Minnesota corporation, and American Express Financial Corporation, a Delaware corporation. Part One: SERVICES (1) The Fund hereby retains American Express Financial Corporation, and American Express Financial Corporation hereby agrees, for the period of this Agreement and under the terms and conditions hereinafter set forth, to furnish the Fund continuously with all administrative, accounting, clerical, statistical, correspondence, corporate and all other services of whatever nature required in connection with the administration of the Fund as provided under this Agreement; and to pay such expenses as may be provided for in Part Three hereof; subject always to the direction and control of the Board of Directors, the Executive Committee and the authorized officers of the Fund. American Express Financial Corporation agrees to maintain an adequate organization of competent persons to provide the services and to perform the functions herein mentioned. American Express Financial Corporation agrees to meet with any persons at such times as the Board of Directors deems appropriate for the purpose of reviewing American Express Financial Corporation's performance under this Agreement. (2) The Fund agrees that it will furnish to American Express Financial Corporation any information that the latter may reasonably request with respect to the services performed or to be performed by American Express Financial Corporation under this Agreement. (3) It is understood and agreed that in furnishing the Fund with the services as herein provided, neither American Express Financial Corporation, nor any officer, director or agent thereof shall be held liable to the Fund or its creditors or shareholders for errors of judgment or for anything except willful misfeasance, bad faith, or gross negligence in the performance of its duties, or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that American Express Financial Corporation may rely upon information furnished to it reasonably believed to be accurate and reliable. Part Two: COMPENSATION FOR SERVICES (1) The Fund agrees to pay to American Express Financial Corporation, and American Express Financial Corporation covenants and agrees to accept from the Fund in full payment for the services furnished, based on the net assets of the Fund as set forth in the following table: Assets Annual Rate At (Billions) Each Asset Level First $1 0.050% Next 1 0.045 Next 1 0.040 Next 3 0.035 Next 3 0.030 Over 9 0.025 The administrative fee for each calendar day of each year shall be equal to 1/365th (1/366th in each leap year) of the total amount computed. The computation shall be made for each such day on the basis of net assets as of the close of business of the full business day two (2) business days prior to the day for which the computation is being made. In the case of the suspension of the computation of net asset value, the administrative fee for each day during such suspension shall be computed as of the close of business on the last full business day on which the net assets were computed. As used herein, "net assets" as of the close of a full business day shall include all transactions in shares of the Fund recorded on the books of the Fund for that day. (2) The administrative fee shall be paid on a monthly basis and, in the event of the termination of this Agreement, the administrative fee accrued shall be prorated on the basis of the number of days that this Agreement is in effect during the month with respect to which such payment is made. (3) The administrative fee provided for hereunder shall be paid in cash by the Fund to American Express Financial Corporation within five (5) business days after the last day of each month. Part Three: ALLOCATION OF EXPENSES (1) The Fund agrees to pay: (a) Administrative fees payable to American Express Financial Corporation for its services under the terms of this Agreement. (b) Taxes. (c) Fees and charges of its independent certified public accountants for services the Fund requests. (d) Fees and expenses of attorneys (i) it employs in matters not involving the assertion of a claim by a third party against the Fund, its directors and officers, (ii) it employs in conjunction with a claim asserted by the Board of Directors against American Express Financial Corporation, except that American Express Financial Corporation shall reimburse the Fund for such fees and expenses if it is ultimately determined by a court of competent jurisdiction, or American Express Financial Corporation agrees, that it is liable in whole or in part to the Fund, and (iii) it employs to assert a claim against a third party. (e) Fees paid for the qualification and registration for public sale of the securities of the Fund under the laws of the United States and of the several states in which such securities shall be offered for sale. (f) Office expenses which shall include a charge for occupancy, insurance on the premises, furniture and equipment, telephone, telegraph, electronic information services, books, periodicals, published services, and office supplies used by the Fund, equal to the cost of such incurred by American Express Financial Corporation. (g) Fees of consultants employed by the Fund. (h) Directors, officers and employees expenses which shall include fees, salaries, memberships, dues, travel, seminars, pension, profit sharing, and all other benefits paid to or provided for directors, officers and employees, directors and officers liability insurance, errors and omissions liability insurance, worker's compensation insurance and other expenses applicable to the directors, officers and employees, except the Fund will not pay any fees or expenses of any person who is an officer or employee of American Express Financial Corporation or its affiliates. (i) Filing fees and charges incurred by the Fund in connection with filing any amendment to its articles of incorporation, or incurred in filing any other document with the State of Minnesota or its political subdivisions. (j) Organizational expenses of the Fund. (k) One-half of the Investment Company Institute membership dues charged jointly to the IDS MUTUAL FUND GROUP and American Express Financial Corporation. (l) Expenses properly payable by the Fund, approved by the Board of Directors. (2) American Express Financial Corporation agrees to pay all expenses associated with the services it provides under the terms of this Agreement. Further, American Express Financial Corporation agrees that if, at the end of any month, the expenses of the Fund under this Agreement and any other agreement between the Fund and American Express Financial Corporation, but excluding those expenses set forth in (1)(b) of this Part Three, exceed the most restrictive applicable state expenses limitation, the Fund shall not pay those expenses set forth in (1)(a) and (c) through (m) of this Part Three to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Corporation will assume all unpaid expenses and bill the Fund for them in subsequent months but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. Part Four: MISCELLANEOUS (1) American Express Financial Corporation shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act for or represent the Fund. (2) A "full business day" shall be as defined in the By-laws. (3) The Fund recognizes that American Express Financial Corporation now renders and may continue to render investment advice and other services to other investment companies and persons which may or may not have investment policies and investments similar to those of the Fund and that American Express Financial Corporation manages its own investments and/or those of its subsidiaries. American Express Financial Corporation shall be free to render such investment advice and other services and the Fund hereby consents thereto. (4) Neither this Agreement nor any transaction had pursuant hereto shall be invalidated or in anyway affected by the fact that directors, officers, agents and/or shareholders of the Fund are or may be interested in American Express Financial Corporation or any successor or assignee thereof, as directors, officers, stockholders or otherwise; that directors, officers, stockholders or agents of American Express Financial Corporation are or may be interested in the Fund as directors, officers, shareholders, or otherwise; or that American Express Financial Corporation or any successor or assignee, is or may be interested in the Fund as shareholder or otherwise, provided, however, that neither American Express Financial Corporation, nor any officer, director or employee thereof or of the Fund, shall sell to or buy from the Fund any property or security other than shares issued by the Fund, except in accordance with applicable regulations or orders of the United States Securities and Exchange Commission. (5) Any notice under this Agreement shall be given in writing, addressed, and delivered, or mailed postpaid, to the party to this Agreement entitled to receive such, at such party's principal place of business in Minneapolis, Minnesota, or to such other address as either party may designate in writing mailed to the other. (6) American Express Financial Corporation agrees that no officer, director or employee of American Express Financial Corporation will deal for or on behalf of the Fund with himself as principal or agent, or with any corporation or partnership in which he may have a financial interest, except that this shall not prohibit officers, directors or employees of American Express Financial Corporation from having a financial interest in the Fund or in American Express Financial Corporation. (7) The Fund agrees that American Express Financial Corporation 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 American Express Financial Corporation remains fully responsible for the services. (8) 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. This Agreement shall be governed by the laws of the State of Minnesota. Part Five: RENEWAL AND TERMINATION (1) 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. (2) This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement as of the day and year first above written. IDS FEDERAL INCOME FUND, INC. By: /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL CORPORATION By: /s/ Janis E. Miller Vice President EX-99.10-OPINCOUN 8 OPINION AND CONSENT OF COUNSEL July 28, 1998 IDS Federal Income Fund, Inc. IDS Tower 10 Minneapolis, Minnesota 55440-0010 Gentlemen: I have examined the Articles of Incorporation and the By-Laws of 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: (a) That the Company is a corporation duly organized and existing under the laws of the State of Minnesota with an authorized capital stock of 10,000,000,000 shares, all of $.01 par value, and that such shares may be issued as full or fractional shares; (b) That all such authorized shares are, under the laws of the State of Minnesota, redeemable as provided in the Articles of Incorporation of the Company and upon redemption shall have the status of authorized and unissued shares; (c) That the Company registered on July 22, 1985 an indefinite number of shares pursuant to Rule 24f-2; and (d) That shares which were sold at not less than their par value and in accordance with applicable federal and state securities laws were legally issued, fully paid and nonassessable. I hereby consent that the foregoing opinion may be used in connection with this Post-Effective Amendment. Very truly yours, /s/ Leslie L. Ogg Leslie L. Ogg Attorney at Law 901 S. Marquette Ave., Suite 2810 Minneapolis, Minnesota 55402-3268 EX-99.11-AUDCONS 9 INDEPENDENT AUDITORS' CONSENT Independent auditors' consent The Board and Shareholders IDS 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. KPMG Peat Marwick LLP Minneapolis, Minnesota July 28, 1998 EX-99.15-PLANAGR 10 PLAN AND AGREEMENT OF DISTRIBUTION Plan and Agreement of Distribution This plan and agreement is between IDS Federal Income Fund, Inc. (the "Fund") and American Express Financial Advisors Inc., the principal underwriter of the Fund, for distribution services to the Fund. It is effective on the first day the Fund offers multiple classes of shares. The plan and agreement has been approved by members of the Board of Directors (the "Board") of the Fund who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the plan or any related agreement, and all of the members of the Board, in person, at a meeting called for the purpose of voting on the plan and agreement. The plan and agreement provides that: 1. The Fund will reimburse American Express Financial Advisors for all sales and promotional expenses attributable to the sale of Class B shares, including sales commissions, business and employee expenses charged to distribution of Class B shares, and corporate overhead appropriately allocated to the sale of Class B shares. 2. The amount of the reimbursement shall be equal on an annual basis to 0.75% of the average daily net assets of the Fund attributable to Class B shares. The amount so determined shall be paid to American Express Financial Advisors in cash within five (5) business days after the last day of each month. American Express Financial Advisors agrees that if, at the end of any month, the expenses of the Fund, including fees under this agreement and any other agreement between the Fund and American Express Financial Advisors or American Express Financial Corporation, but excluding taxes, brokerage commissions and charges in connection with the purchase and sale of assets exceed the most restrictive applicable state expense limitation for the Fund's current fiscal year, the Fund shall not pay fees and expenses under this agreement to the extent necessary to keep the Fund's expenses from exceeding the limitation, it being understood that American Express Financial Advisors will assume all unpaid expenses and bill the Fund for them in subsequent months, but in no event can the accumulation of unpaid expenses or billing be carried past the end of the Fund's fiscal year. 3. For each purchase of Class B shares, after eight years the Class B shares will be converted to Class A shares and those assets will no longer be included in determining the reimbursement amount. 4. The Fund understands that if a shareholder redeems Class B shares before they are converted to Class A shares, American Express Financial Advisors will impose a sales charge directly on the redemption proceeds to cover those expenses it has previously incurred on the sale of those shares. 5. American Express Financial Advisors agrees to provide at least quarterly an analysis of distribution expenses and to meet with representatives of the Fund as reasonably requested to provide additional information. 6. The plan and agreement shall continue in effect for a period of more than one year provided it is reapproved at least annually in the same manner in which it was initially approved. 7. The plan and agreement may not be amended to increase materially the amount that may be paid by the Fund without the approval of a least a majority of the outstanding shares of Class B. Any other amendment must be approved in the manner in which the plan and agreement was initially approved. 8. This agreement may be terminated at any time without payment of any penalty by a vote of a majority of the members of the Board who are not interested persons of the Fund and have no financial interest in the operation of the plan and agreement, or by vote of a majority of the outstanding Class B shares, or by American Express Financial Advisors. The plan and agreement will terminate automatically in the event of its assignment as that term is defined in the Investment Company Act of 1940. Approved this 20th day of March, 1995. IDS FEDERAL INCOME FUND, INC. /s/ Leslie L. Ogg Leslie L. Ogg Vice President AMERICAN EXPRESS FINANCIAL ADVISORS INC. /s/ Janis E. Miller Vice President EX-27 11 FINANCIAL DATA SCHEDULES
6 1 IDS FEDERAL INCOME FUND CLASS A YEAR MAY-31-1998 MAY-31-1998 0 0 0 2568551837 0 2568551837 0 0 1314171 1314171 0 2554966916 276371646 254683165 1404377 0 0 52823161 63689534 1402754837 0 160572188 0 27032045 133540143 (1501226) 47306927 179345844 0 78592006 0 0 224794922 216322833 13216392 365120428 1029490 0 0 51321935 6714630 0 27372560 1341974544 4.98 .30 .10 .30 0 0 5.08 .86 0 0
EX-27 12 FINANCIAL DATA SCHEDULES
6 2 IDS FEDERAL INCOME FUND CLASS B YEAR MAY-31-1998 MAY-31-1998 0 0 0 2568551837 0 2568551837 0 0 1314171 1314171 0 2554966916 205993898 164814003 1404377 0 0 52823161 63689534 1045496588 0 160572188 0 27032045 133540143 (1501226) 47306927 179345844 0 47677831 0 0 225164813 192999127 9014209 365120428 1029490 0 0 51321935 5004526 0 27372560 934208343 4.98 .26 .10 .26 0 0 5.08 1.61 0 0
EX-27 13 FINANCIAL DATA SCHEDULES
6 3 IDS FEDERAL INCOME FUND CLASS Y YEAR MAY-31-1998 MAY-31-1998 0 0 0 2568551837 0 2568551837 0 0 1314171 1314171 0 2554966916 23441515 23053358 1404377 0 0 52823161 63689534 118986241 0 160572188 0 27032045 133540143 (1501226) 47306927 179345844 0 6895419 0 0 10168756 11146551 1365952 365120428 1029490 0 0 51321935 569556 0 27372560 116130931 4.98 .30 .10 .30 0 0 5.08 .78 0 0
EX-27 14 FINANCIAL DATA SCHEDULES
6 4 GOVERNMENT INCOME PORTFOLIO YEAR MAY-31-1998 MAY-31-1998 2905160601 2971345554 296923862 92038331 0 3360307747 323766128 0 467270458 791036586 0 0 0 0 0 0 0 0 0 2569271161 0 160738262 0 12292100 148446162 (1501667) 47320048 194264543 0 0 0 0 0 0 0 365288191 0 0 0 0 11996865 0 12296283 2399962399 0 0 0 0 0 0 0 0 0 0
EX-99.19A-DIRTRPOA 15 DIRECTORS/TRUSTEES POWER OF ATTORNEY 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 IDS Bond Fund, Inc. 2-51586 811-2503 IDS California Tax-Exempt Trust 33-5103 811-4646 IDS Discovery Fund, Inc. 2-72174 811-3178 IDS Equity Select Fund, Inc. 2-13188 811-772 IDS Extra Income Fund, Inc. 2-86637 811-3848 IDS Federal Income Fund, Inc. 2-96512 811-4260 IDS Global Series, Inc. 33-25824 811-5696 IDS Growth Fund, Inc. 2-38355 811-2111 IDS High Yield Tax-Exempt Fund, Inc. 2-63552 811-2901 IDS International Fund, Inc. 2-92309 811-4075 IDS Investment Series, Inc. 2-11328 811-54 IDS Managed Retirement Fund, Inc. 2-93801 811-4133 IDS Market Advantage Series, Inc. 33-30770 811-5897 IDS Money Market Series, Inc. 2-54516 811-2591 IDS New Dimensions Fund, Inc. 2-28529 811-1629 IDS Precious Metals Fund, Inc. 2-93745 811-4132 IDS Progressive Fund, Inc. 2-30059 811-1714 IDS Selective Fund, Inc. 2-10700 811-499 IDS Special Tax-Exempt Series Trust 33-5102 811-4647 IDS Stock Fund, Inc. 2-11358 811-498 IDS Strategy Fund, Inc. 2-89288 811-3956 IDS Tax-Exempt Bond Fund, Inc. 2-57328 811-2686 IDS Tax-Free Money Fund, Inc. 2-66868 811-3003 IDS Utilities Income Fund, Inc. 33-20872 811-5522 hereby constitutes and appoints William R. Pearce 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 7th day of January, 1998. /s/ H. Brewster Atwater, Jr. /s/ William R. Pearce H. Brewster Atwater, Jr. William R. Pearce /s/ Lynne V. Cheney /s/ Alan K. Simpson Lynne V. Cheney Alan K. Simpson /s/ William H. Dudley /s/ Edson W. Spencer William H. Dudley Edson W. Spencer /s/ David R. Hubers /s/ John R. Thomas David R. Hubers John R. Thomas /s/ Heinz F. Hutter /s/ Wheelock Whitney Heinz F. Hutter Wheelock Whitney /s/ Anne P. Jones /s/ C. Angus Wurtele Anne P. Jones C. Angus Wurtele EX-99.19C-TRUSTPOA 16 TRUSTEES POWER OF ATTORNEY 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 William R. Pearce 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 7th day of January, 1998. /s/ H. Brewster Atwater, Jr. /s/ William R. Pearce H. Brewster Atwater, Jr. William R. Pearce /s/ Lynne V. Cheney /s/ Alan K. Simpson Lynne V. Cheney Alan K. Simpson /s/ William H. Dudley /s/ Edson W. Spencer William H. Dudley Edson W. Spencer /s/ David R. Hubers /s/ John R. Thomas David R. Hubers John R. Thomas /s/ Heinz F. Hutter /s/ Wheelock Whitney Heinz F. Hutter Wheelock Whitney /s/ Anne P. Jones /s/ C. Angus Wurtele Anne P. Jones C. Angus Wurtele -----END PRIVACY-ENHANCED MESSAGE-----