-----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, F8Aum8MiI6P7sp5Wzdhl8IKNq28JmPXQ8T8oIFRu3wDnZneYDr0Z7w90uXvHJvSm Wx+wigF14/azPtqYFPDVSw== 0000820027-99-000019.txt : 19990125 0000820027-99-000019.hdr.sgml : 19990125 ACCESSION NUMBER: 0000820027-99-000019 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS FEDERAL INCOME FUND INC CENTRAL INDEX KEY: 0000764802 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04260 FILM NUMBER: 99509646 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 N-30D 1 IDS Federal Income Fund 1998 SEMIANNUAL REPORT (icon of) clock The goals of IDS Federal IncomeFund, Inc. are to provide shareholderswith a high level of current income andsafety of principal consistent withinvestment in U.S. government and government agency securities. Distributed by American Express Financial Advisors Inc. AMERICAN EXPRESS Financial Advisors A Comfortable Compromise Balancing risk and reward is something all investors must consider. In thefixed-income area, intermediate-term securities issued by the federal government andits agencies offer a good middle ground. These securities, which form the core of Federal Income Fund, normally provide greater investment stability than long-term bonds, while still offering a yield higher than that of insured investments such as bank CDs. For a conservative investor, that can be a rewarding combination. CONTENTS From the Chairman 3 From the Portfolio Manager 3 Fund Facts 5 Financial Statements (Fund) 6 Notes to Financial Statements (Fund) 9 Financial Statements (Portfolio) 15 Notes to Financial Statements (Portfolio) 18 Investments in Securities 22 IDS FEDERAL INCOME FUND From the Chairman (picture of) William R. Pearce William R. Pearce Chairman of the board If you're an experienced investor, you know that the past six months was a highly volatile period in many financial markets. But history tells us that substantial market moves are nothing new. Though they're often unpredictable, declines -- whether they're brief or long-lasting, moderate or substantial -- are always a possibility. The potential for such volatility reinforces the need for investors to periodically review their long-term goals and examine whether their investment program remains on track to achieving them. Your quarterly investment statements are one part of that monitoring process. The other is a meeting with your American Express financial advisor. That becomes even more important if there's a major change in your financial situation or in the financial markets. William R. Pearce From the Portfolio Manager (picture of) James W. Snyder James W. Snyder Portfolio manager Falling interest rates continued to provide support for the bond market and IDS Federal Income Fund during the first half of the fiscal year. For the period -- June through November 1998 -- the Fund's Class A shares generated a total return (net asset value change and interest income) of 3.36%. Continuing the trend of recent years, the inflation rate -- the key influence on interest rates and, thus, the bond market -- remained remarkably low over the six months. Adding to the positive environment was another outbreak of the so-called "Asian flu," the financial illness that first struck Southeast Asia in the fall of 1997. This time, the victims were Russia and Latin America, whose crumbling financial markets sent shock waves throughout the world, including the U.S. The upshot of the financial turmoil was a "flight to quality" on the part of many concerned investors, who took refuge in U.S. Treasury securities. Their heavy buying helped drive down interest rates, which in turn drove up prices for Treasuries. Other sectors, including mortgage-backed bonds issued by federal government agencies, were essentially ignored by investors and, therefore, barely participated in the rally. PORTFOLIO SHIFT For the Fund, this meant that about half the portfolio benefited fully from the upturn, as its asset mix of mortgage-backed bonds and short- and intermediate-term Treasuries was roughly 50/50 when the fiscal year began. As the period progressed, I shifted more money into mortgage bonds, concentrating on low-coupon issues, which are less vulnerable to mortgage refinancing and, consequently, a decline in value. By the end of the six months, mortgages made up close to 80% of the portfolio, with Treasuries accounting for most of the rest. Because I thought interest rates were likely to come down, I maintained a slightly long duration in the portfolio. (Duration, a function of the average maturity of the bonds held in the portfolio, determines how sensitive the Fund's value is to interest-rate changes. The longer the duration, the greater the sensitivity.) Therefore, when rates declined, the Fund's performance was enhanced somewhat. As is usually the case, I also maintained a small investment in interest-rate futures contracts -- a form of "derivatives" -- to shield the Fund from the possibility of a sharp rise in interest rates. With its increased emphasis on mortgage-backed bonds, the Fund is positioned for what I think will be a comparatively stable interest-rate environment in the second half of the fiscal year. If that proves true, interest income will become more important to performance, and mortgages hold an advantage over Treasuries in that regard. James W. Snyder IDS FEDERAL INCOME FUND Fund Facts Class A -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1998 $5.10 May 31, 1998 $5.08 Increase $0.02 Distributions -- June 1, 1998 - Nov. 30, 1998 From income $0.14 From capital gains $ -- Total distributions $0.14 Total return* +3.36%** Class B -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1998 $5.10 May 31, 1998 $5.08 Increase $0.02 Distributions -- June 1, 1998 - Nov. 30, 1998 From income $0.12 From capital gains $ -- Total distributions $0.12 Total return* +2.99%** Class Y -- 6-month performance (All figures per share) Net asset value (NAV) Nov. 30, 1998 $5.10 May 31, 1998 $5.08 Increase $0.02 Distributions -- June 1, 1998 - Nov. 30, 1998 From income $0.14 From capital gains $ -- Total distributions $0.14 Total return* +3.39%** *The prospectus discusses the effect of sales charges, if any, on the various classes. **The total return is a hypothetical investment in the Fund with all distributions reinvested. SEMIANNUAL REPORT -- 1998
Financial Statements Statement of assets and liabilities IDS Federal Income Fund, Inc. Nov. 30, 1998 (Unaudited) Assets Investment in Government Income Portfolio (Note 1) $2,991,384,782 -------------- Liabilities Dividends payable to shareholders 2,130,499 Accrued distribution fee 77,231 Accrued service fee 41,852 Accrued administrative services fee 11,014 Other accrued expenses 401,175 ------- Total liabilities 2,661,771 --------- Net assets applicable to outstanding capital stock $2,988,723,011 ============== Represented by Capital stock-- $.01 par value (Note 1) $ 5,855,887 Additional paid-in capital 2,957,534,909 Undistributed net investment income 1,146,200 Accumulated net realized gain (loss) (31,438,913) Unrealized appreciation (depreciation) on investments 55,624,928 ---------- Total-- representing net assets applicable to outstanding capital stock $2,988,723,011 ============== Net assets applicable to outstanding shares: Class A $1,577,287,150 Class B $1,260,825,184 Class Y $ 150,610,677 Net asset value per share of outstanding capital stock: Class A shares 309,038,894 $ 5.10 Class B shares 247,040,972 $ 5.10 Class Y shares 29,508,809 $ 5.10 See accompanying notes to financial statements. IDS FEDERAL INCOME FUND
Statement of operations IDS Federal Income Fund, Inc. Six months ended Nov. 30, 1998 (Unaudited) Investment income Income: Interest $89,265,314 ----------- Expenses (Note 2): Expenses allocated from Government Income Portfolio 7,128,077 Distribution fee -- Class B 4,315,383 Transfer agency fee 1,219,493 Incremental transfer agency fee-- Class B 29,323 Service fee Class A 1,298,474 Class B 1,000,723 Class Y 68,494 Administrative services fees and expenses 636,707 Compensation of board members 5,437 Postage 205,941 Registration fees 257,663 Reports to shareholders 30,493 Audit fees 5,313 Other 4,912 ----- Total expenses 16,206,433 Earnings credits on cash balances (Note 2) (82,110) ------- Total net expenses 16,124,323 ---------- Investment income (loss) -- net 73,140,991 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 60,060,287 Financial futures contracts (73,905,904) Options contracts written 34,536,813 ---------- Net realized gain (loss) on investments 20,691,196 Net change in unrealized appreciation (depreciation) on investments (8,064,606) ---------- Net gain (loss) on investments 12,626,590 ---------- Net increase (decrease) in net assets resulting from operations $85,767,581 ----------- See accompanying notes to financial statements. SEMIANNUAL REPORT -- 1998
Statements of changes in net assets IDS Federal Income Fund, Inc. Nov. 30, 1998 May 31, 1998 Six months ended Year ended (Unaudited) Operations and distributions Investment income (loss)-- net $ 73,140,991 $ 133,540,143 Net realized gain (loss) on investments 20,691,196 (1,501,226) Net change in unrealized appreciation (depreciation) on investments (8,064,606) 47,306,927 ---------- ---------- Net increase (decrease) in net assets resulting from operations 85,767,581 179,345,844 ---------- ----------- Distributions to shareholders from: Net investment income Class A (41,400,799) (78,592,006) Class B (27,468,283) (47,677,831) Class Y (3,837,034) (6,895,419) ---------- ---------- Total distributions (72,706,116) (133,165,256) ----------- ------------ Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 744,912,342 1,134,422,710 Class B shares 740,267,709 1,136,115,029 Class Y shares 53,386,063 51,390,904 Reinvestment of distributions at net asset value Class A shares 34,203,088 66,667,607 Class B shares 25,554,436 45,475,793 Class Y shares 3,759,016 6,889,995 Payments for redemptions Class A shares (611,775,207) (1,091,759,256) Class B shares (Note 2) (555,697,810) (973,988,889) Class Y shares (26,185,757) (56,274,053) ----------- ----------- Increase (decrease) in net assets from capital share transactions 408,423,880 318,939,840 ----------- ----------- Total increase (decrease) in net assets 421,485,345 365,120,428 Net assets at beginning of period 2,567,237,666 2,202,117,238 ------------- ------------- Net assets at end of period $2,988,723,011 $2,567,237,666 ============== ============== Undistributed net investment income $ 1,146,200 $ 711,325 -------------- -------------- See accompanying notes to financial statements. IDS FEDERAL INCOME FUND
Notes to Financial Statements IDS Federal Income Fund, Inc. (Unaudited as to Nov. 30, 1998) 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. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge and automatically convert to Class A shares during the ninth calendar year of ownership. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, 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 Portfolio's net assets. The percentage of the Portfolio owned by the Fund at Nov. 30, 1998 was 99.97%. Valuation of securities held by the Portfolio is discussed in Note 1 of the Portfolio's "Notes to financial statements" (included elsewhere in this report). Use of estimates Preparing financial statements that conform to generally accepted accounting principles requires management to make estimates (e.g., on assets and liabilities) that could differ from actual results. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders, no provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. 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) to provide 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 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 The Fund entered into agreements with American Express Financial Advisors Inc. for distribution and shareholder 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 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 $20,738,040 for Class A and $596,578 for Class B for the six months ended Nov. 30, 1998. During the six months ended Nov. 30, 1998, the Fund's transfer agency fees were reduced by $82,110 as a result of earnings credits from overnight cash balances.
3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the periods indicated are as follows: Six months ended Nov. 30, 1998 Class A Class B Class Y Sold 145,781,609 144,884,663 10,456,783 Issued for reinvested distributions 6,697,361 5,004,102 735,842 Redeemed (119,811,722) (108,841,691) (5,125,331) ------------ ------------ ---------- Net increase (decrease) 32,667,248 41,047,074 6,067,294 Year ended May 31, 1998 Class A Class B Class Y Sold 224,794,922 225,164,813 10,168,756 Issued for reinvested distributions 13,216,392 9,014,209 1,365,952 Redeemed (216,322,833) (192,999,127) (11,146,551) ------------ ------------ ----------- Net increase (decrease) 21,688,481 41,179,895 388,157 4. BANK BORROWINGS The Fund entered into a revolving credit agreement with U.S. Bank, N.A., whereby the Fund is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The Fund must have asset coverage for borrowings not to exceed the aggregate of 333% of advances equal to or less than 5 business days plus 367% of advances over 5 business days. The agreement, which enables the Fund to participate with other IDS Funds, permits borrowings up to $200 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to 90 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.05% per annum. The Fund had no borrowings outstanding during the six months ended Nov. 30, 1998.
IDS Federal Income Fund 5. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results. Fiscal period ended May 31, Per share income and capital changesa Class A 1998c 1998 1997 1996b 1995 Net asset value,beginning of period $5.08 $4.98 $4.92 $4.97 $4.85 Income from investment operations: Net investment income (loss) .14 .30 .32 .28 .32 Net gains (losses)(both realized and unrealized) .02 .10 .06 (.04) .11 Total from investment operations .16 .40 .38 .24 .43 Less distributions: Dividends fromnet investment income (.14) (.30) (.32) (.29) (.31) Net asset value, end of period $5.10 $5.08 $4.98 $4.92 $4.97 Ratios/supplemental data Class A 1998c 1998 1997 1996b 1995 Net assets, end of period(in millions) $1,577 $1,403 $1,267 $1,095 $977 Ratio of expenses toaverage daily net assetsd .85%e .86% .90% .91%e .79% Ratio of net investment income (loss) to average daily net assets 5.55%e 5.89% 6.37% 6.34%e 6.59% Portfolio turnover rate (excluding short-term securities) 129% 159% 146% 115% 213% Total returnf 3.36% 8.15% 7.73% 5.04% 9.25% 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 Six months ended Nov. 30, 1998 (Unaudited). 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. SEMIANNUAL REPORT -- 1998
Fiscal period ended May 31, Per share income and capital changesa Class B Class Y 1998d 1998 1997 1996c 1995b 1998d 1998 1997 1996c 1995b Net asset value, beginning of period $5.08 $4.98 $4.92 $4.96 $4.87 $5.08 $4.98 $4.92 $4.97 $4.87 Income from investment operations: Net investment income (loss) .12 .26 .28 .26 .06 .14 .30 .32 .29 .07 Net gains (losses) both realized and unrealized) .02 .10 .06 (.04) .14 .02 .10 .06 (.04) .15 Total from investment operations .14 .36 .34 .22 .20 .16 .40 .38 .25 .22 Less distributions: Dividends from net investment income (.12) (.26) (.28) (.26) (.11) (.14) (.30) (.32) (.30) (.12) Net asset value, end of period $5.10 $5.08 $4.98 $4.92 $4.96 $5.10 $5.08 $4.98 $4.92 $4.97 Ratios/supplemental data Class B Class Y 1998d 1998 1997 1996c 1995b 1998d 1998 1997 1996c 1995b Net assets, end of period (in millions) $1,261 $1,045 $820 $520 $292 $151 $119 $115 $99 $85 Ratio of expenses to average daily net assetse 1.61%f 1.61% 1.66% 1.67%f 1.74%f .78%f .78% .73% .74%f .75%f Ratio of net investment income (loss) to average daily net assets 4.81%f 5.13% 5.60% 5.59%f 6.21%f 5.64%f 5.97% 6.54% 6.53%f 7.20%f Portfolio turnover rate (excluding short-term securities) 129% 159% 146% 115% 213% 129% 159% 146% 115% 213% Total returng 2.99% 7.32% 6.95% 4.30% 4.22% 3.39% 8.23% 7.91% 5.22% 4.48% 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 Six months ended Nov. 30, 1998 (Unaudited). e Effective fiscal year 1996, expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. f Adjusted to an annual basis. g Total return does not reflect payment of a sales charge. IDS FEDERAL INCOME FUND
Financial Statements Statement of assets and liabilities Government Income Portfolio Nov. 30, 1998 (Unaudited) Assets Investments in securities, at value (Note 1) (identified cost $3,589,417,480) $3,668,483,822 Cash in bank on demand deposit 7,490,520 Accrued interest receivable 26,665,945 Receivable for investment securities sold 172,970,598 U.S. government securities held as collateral (Note 5) 79,721,822 ---------- Total assets 3,955,332,707 ------------- Liabilities Payable for investment securities purchased 844,955,391 Payable upon return of securities loaned (Note 5) 91,009,322 Accrued investment management services fee 121,210 Option contracts written, at value (premium received $26,805,756) (Note 6) 27,018,485 ---------- Total liabilities 963,104,408 ----------- Net assets $2,992,228,299 ============== See accompanying notes to financial statements. SEMIANNUAL REPORT -- 1998
Statement of operations Government Income Portfolio Six months ended Nov. 30, 1998 (Unaudited) Investment income Income: Interest $89,294,815 ----------- Expenses (Note 2): Investment management services fee 6,946,441 Compensation of board members 7,073 Custodian fees 133,245 Audit fees 15,938 Other 35,132 ------ Total expenses 7,137,829 Earnings credits on cash balances (Note 2) (7,658) ------ Total net expenses 7,130,171 --------- Investment income (loss) -- net 82,164,644 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 60,077,637 Financial futures contracts (73,927,375) Options contracts written (Note 6) 34,546,699 ---------- Net realized gain (loss) on investments 20,696,961 Net change in unrealized appreciation (depreciation) on investments (8,066,331) ---------- Net gain (loss) on investments 12,630,630 ---------- Net increase (decrease) in net assets resulting from operations $94,795,274 ----------- See accompanying notes to financial statements. IDS FEDERAL INCOME FUND
Statements of changes in net assets Government Income Portfolio Nov. 30, 1998 May 31, 1998 Six months ended Year ended (Unaudited) Operations Investment income (loss)-- net $ 82,164,644 $ 148,446,162 Net realized gain (loss) on investments 20,696,961 (1,501,667) Net change in unrealized appreciation (depreciation) on investments (8,066,331) 47,320,048 ---------- ---------- Net increase (decrease) in net assets resulting from operations 94,795,274 194,264,543 Net contributions (withdrawals) from partners 328,161,864 171,023,648 ----------- ----------- Total increase (decrease) in net assets 422,957,138 365,288,191 Net assets at beginning of period 2,569,271,161 2,203,982,970 ------------- ------------- Net assets at end of period $2,992,228,299 $2,569,271,161 ============== ============== See accompanying notes to financial statements. SEMIANNUAL REPORT -- 1998
Notes to Financial Statements Government Income Portfolio (Unaudited as to Nov. 30, 1998) 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. The Portfolio's accounting policies are summarized below: Use of estimates Preparing financial statements that conform to generally accepted accounting principles requires management to make estimates (e.g., on assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an 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 To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and sell put and call options and write 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 for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. The Portfolio also may write over-the-counter options where 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 when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. 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 Nov. 30, 1998, the Portfolio had entered into outstanding when-issued or forward-commitments of $749,626,199. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Interest income, including level-yield amortization of premium and discount, is accrued daily. 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 six months ended Nov. 30, 1998, the Portfolio's custodian fees were reduced by $7,658 as a result of earnings credits from overnight cash balances. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $4,723,451,339 and $4,119,162,895, respectively, for the six months ended Nov. 30, 1998. For the same period, the portfolio turnover rate was 129%. Realized gains and losses are determined on an identified cost basis. 4. INTEREST RATE FUTURES CONTRACTS As of Nov. 30, 1998, investments in securities included securities valued at $99,831,977 that were pledged as collateral to cover initial margin deposits on 5,939 open purchase contracts and 9,608 open sale contracts. The market value of the open purchase contracts at Nov. 30, 1998, was $861,878,509 with a net unrealized loss of $4,862,917. The market value of the open sale contracts at Nov. 30, 1998, was $1,199,243,173 with a net unrealized loss of $18,349,868. See "Summary of significant accounting policies." 5. LENDING OF PORTFOLIO SECURITIES As of Nov. 30, 1998, securities valued at $87,304,957 were on loan to brokers. For collateral, the Portfolio received $11,287,500 in cash and U.S. government securities valued at $79,721,822. Income from securities lending amounted to $547,868 for the year ended Nov. 30, 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 Contracts and premium amounts associated with options contracts written are as follows: Six months ended Nov. 30, 1998 Puts Calls MBS Puts and Calls Contracts Premium Contracts Premium Contracts Premium Balance May 31, 1998 2,146 $ 4,017,648 2,380 $ 3,811,781 12,000 $ 123,773,405 Opened 28,300 38,288,411 27,320 43,042,817 36,750 1,058,984 Closed (17,656) (23,121,024) (13,558) (22,531,561) (12,000) (123,773,404) Exercised (4,831) (7,585,873) (2,263) (3,418,658) (4,250) (19,922) Expired (2,349) (3,167,011) (3,997) (3,452,649) (20,000) (117,188) ------ ---------- ------ ---------- ------- -------- Balance Nov. 30, 1998 5,610 $ 8,432,151 9,882 $ 17,451,730 12,500$ 921,875 See "Summary of significant accounting policies." SEMIANNUAL REPORT -- 1998
Investments in Securities Government Income Portfolio Nov. 30, 1998 (Unaudited) (Percentages represent value of investments compared to net assets) Bonds (121.1%) Issuer Coupon Principal Value(a) rate amount Govt Natl Mtge Assn (--%) 08-20-19 11.00% $206,773 $231,585 Mortgage-backed securities (84.4%) Federal Home Loan Mtge Corp 08-01-00 7.50 8,995,438 9,078,800 07-01-03 6.50 66,254 66,658 07-15-03 5.75 30,750,000 31,714,923 01-15-08 5.50 42,640,000(j) 43,234,419 09-01-09 6.50 5,339,549 5,427,972 03-01-10 5.50 42,000,000 41,383,125 10-01-10 7.00 13,842,502 14,158,250 01-01-13 6.00 12,041,698 12,072,216 01-25-13 6.25 39,000,000 39,387,270 11-01-23 8.00 15,390,297 15,976,975 05-01-24 7.50 5,897,236 6,061,238 07-01-24 8.00 9,044,809 9,366,986 01-01-25 9.00 7,901,348 8,326,045 06-01-25 8.00 13,148,292 13,604,406 08-01-25 8.00 2,973,642 3,076,798 02-01-26 6.00 18,333,097 18,109,616 05-01-26 9.00 19,135,662 20,194,055 12-01-27 6.00 146,901,630 145,209,099 01-01-28 6.00 2,924,308 2,887,754 02-01-28 6.00 17,992,026 17,771,127 08-01-28 6.00 34,673,386 34,239,969 09-01-28 6.00 143,411,987 141,622,589 10-01-28 6.00 13,831,200 13,658,310 Zero Coupon 02-15-28 15.35 145,493,910(b) 1,636,807 Collateralized Mtge Obligation 08-15-03 6.50 14,652,880 14,969,037 04-15-22 8.50 9,150,000 10,008,087 11-15-22 4.00 44,310,000 41,424,958 11-15-23 4.00 8,940,984 8,691,084 11-18-25 6.50 12,750,000 12,910,321 02-15-28 .00 2,298,294 1,597,314 Interest Only 01-01-20 10.00 193,308(f) 37,379 Principal Only 09-15-03 6.46 9,272,987(e) 8,505,042 10-15-07 8.47 2,868,277(e) 2,728,000 05-15-08 8.13 7,523,918(e) 6,880,858 05-15-08 7.14 7,628,336(e) 6,721,279 03-15-09 7.38 5,669,869(e) 5,358,912 11-15-23 7.86 6,272,778(e) 6,086,008 Trust Series Z 04-25-24 8.25 29,818,998(d) 29,806,739 Federal Natl Mtge Assn 12-01-99 7.00 5,998,951 6,058,582 09-01-07 8.50 3,611,662 3,731,280 02-15-08 5.75 84,875,000 87,621,325 03-01-10 5.50 162,660,000(j) 160,220,099 03-01-10 6.00 135,750,000(j) 135,877,265 05-01-13 6.00 63,029,608 63,085,302 06-01-13 6.00 51,378,967 51,424,367 08-01-13 6.00 82,734,969 82,786,264 09-01-13 6.00 18,530,882 18,547,256 11-01-21 8.00 2,954,034 3,067,588 05-01-22 8.50 5,324,805 5,611,014 03-01-23 9.00 2,044,837 2,170,083 04-01-23 8.50 7,457,983 7,854,151 08-01-23 8.50 17,013,955 17,928,455 08-25-23 6.00 14,400,000 14,192,015 09-01-23 6.50 45,043,868(h,i) 45,367,733 09-01-23 8.50 27,190,783 28,669,418 11-01-23 6.00 10,885,218 10,769,617 12-01-23 7.00 15,666,869 15,999,790 01-01-24 6.50 16,663,442 16,783,252 06-01-24 9.00 6,321,739 6,712,928 03-01-25 6.00 208,500,000(j) 205,828,593 06-01-25 8.50 2,573,380 2,693,196 09-01-25 6.50 19,339,552 19,472,608 09-01-25 6.50 3,368,088(h,i) 3,391,260 11-01-25 6.50 22,967,924(h,i) 23,125,943 12-01-25 8.50 6,642,167 6,949,367 01-15-26 5.50 41,000,000(j) 39,629,063 02-01-26 6.00 580,119 572,688 02-01-26 8.00 2,827,617(h,i) 2,927,460 04-01-26 6.00 315,836 311,790 05-01-26 7.50 18,896,756 19,428,133 02-01-27 6.00 2,522,028 2,488,939 04-01-27 6.00 5,759,879 5,684,309 04-01-27 6.50 14,954,680 15,057,568 04-01-27 7.00 11,194,309 11,425,136 09-01-27 7.00 7,505,062 7,659,816 03-01-28 6.00 23,006,912 22,707,761 04-01-28 6.00 106,871,589 105,487,707 05-01-28 6.00 9,712,117 9,586,320 05-01-28 6.50 22,409,942 22,562,803 07-01-28 6.00 9,860,098 9,732,384 09-01-28 6.00 96,169,908 94,916,422 10-01-28 6.00 17,149,659 16,924,655 10-01-28 6.50 18,914,481 19,056,339 10-01-28 6.50 54,869,455 55,280,976 Collateralized Mtge Obligation 06-25-05 6.10 40,925,603 41,014,411 08-25-08 6.00 1,372,733 1,367,354 09-25-08 4.50 38,000,000 36,259,581 11-25-08 5.50 5,517,709 5,479,525 10-25-10 4.50 8,204,208 8,010,507 07-25-12 7.00 2,868,264 2,904,230 01-25-19 3.00 11,250,000 10,929,375 03-25-19 5.75 37,973,624 37,950,753 07-18-19 5.50 13,976,000 13,812,815 10-25-20 9.00 11,666,000 12,426,040 03-25-21 8.50 12,350,000 13,064,010 01-25-22 5.75 10,000,000 9,901,897 01-25-24 5.00 1,936,927 1,927,864 05-18-26 5.00 17,000,000 16,140,592 Interest Only 07-01-18 10.00 3,346,053(f) 638,553 08-01-18 9.50 71,077(f) 13,588 01-15-20 10.00 3,267,751(f) 940,524 09-25-20 9.50 1,025,408(f) 178,316 01-25-21 10.50 8,126,116(f) 1,650,557 11-25-21 9.50 2,678,435(f) 737,882 02-25-22 9.50 519,924(f) 112,531 02-25-22 10.00 19,299,644(f) 5,276,716 05-25-22 10.00 6,323,426(f) 1,157,701 07-25-22 8.50 11,016,845(f) 1,959,410 07-25-22 9.50 5,566,727(f) 1,128,425 Inverse Floater 08-25-23 8.08 4,979,808(g) 4,862,135 03-25-24 9.61 3,298,066(g) 3,307,186 Principal Only 06-25-21 12.57 426,430(e) 350,731 Total 2,525,816,315 Other (3.8%) California Infrastructure Pacific Gas & Electric 09-25-05 6.32 20,400,000 21,128,280 San Diego Gas & Electric 03-25-03 6.07 7,500,000 7,613,175 09-25-05 6.19 6,000,000 6,185,340 San Diego Gas & Electric 1st Series 1997 09-25-08 6.31 25,000,000 26,138,000 Southern California Edison 03-25-03 6.17 13,895,000 14,130,659 09-25-08 6.38 12,000,000 12,591,240 Citibank Credit Card Master Trust I Series 1998-2 Cl A 01-15-08 6.05 15,000,000 15,557,700 GMAC Commercial Mtge Securities Series 1997-C2 Cl A1 12-15-04 6.45 9,578,665 9,872,251 Total 113,216,645 U.S. government obligations (32.9%) Resolution Funding Corp 10-15-19 8.13 8,000,000 10,514,946 Zero Coupon 04-15-02 6.15 11,170,000(b) 9,489,438 10-15-03 6.36 16,000,000(b) 12,618,520 04-15-06 5.74 4,803,000(b) 3,317,693 04-15-08 5.88 21,250,000(b) 13,144,460 07-15-08 6.13 48,500,000(b) 29,618,455 01-15-09 5.76 24,173,000(b) 14,381,461 07-15-09 5.91 32,646,000(b) 18,687,586 10-15-12 8.04 8,400,000(b) 3,903,645 04-15-17 7.28 37,700,000(b) 13,473,565 07-15-17 7.28 6,650,000(b) 2,343,387 01-15-18 7.20 8,000,000(b) 2,736,232 10-15-18 7.87 7,500,000(b) 2,412,065 U.S. Treasury 07-31-01 6.63 17,000,000 17,848,679 08-31-01 6.50 8,500,000(h,i) 8,906,908 11-30-01 5.88 6,000,000(h,i) 6,210,212 04-30-02 6.63 10,000,000 10,613,158 02-15-03 10.75 15,000,000 18,399,467 08-15-03 5.75 18,500,000(c) 19,341,961 05-15-04 12.38 7,000,000 9,522,430 08-15-05 6.50 5,000,000 5,506,115 08-15-05 10.75 4,750,000(h,i) 6,353,620 07-15-06 7.00 35,750,000 40,669,743 10-15-06 6.50 36,100,000 40,006,045 11-15-08 4.75 42,000,000 42,029,531 08-15-19 8.13 104,000,000(h,i) 140,012,225 08-15-20 8.75 49,000,000(h,i) 70,315,377 05-15-21 8.13 74,000,000 100,771,823 08-15-21 8.13 124,700,000 169,981,687 08-15-23 6.25 76,500,000(c,h,i) 86,099,985 11-15-27 6.13 10,000,000(c) 11,294,676 Zero Coupon 11-15-04 5.65 33,000,000(b,h,i) 24,921,993 Collateralized Mtge Acceptance Corp 12-15-30 6.50 14,239,636 14,664,974 Collateralized Mtge Securities Corp 12-20-20 14.08 3,750,000 3,803,816 Total 983,915,878 Total bonds (Cost: $3,543,373,331) $3,623,180,423
Options purchased (--%) Issuer Shares Exercise Expiration Value(a) price date Put U.S. Treasury Bond March 99 59,500 $116 Dec. 1998 $18,594 U.S. Treasury Bond March 99 42,500 112 Feb. 1999 132,813 U.S. Treasury Bond March 99 289,000 125 Feb. 1999 225,767 Total options purchased (Cost: $1,117,924) $377,174
Short-term securities (1.5%) Issuer Annualized Amount Value(a) yield on date payable at of purchase maturity U.S. government agencies (0.4%) Federal Farm Credit Disc Nt 12-02-98 4.75% $4,300,000 $4,299,435 Federal Home Loan Bank Disc Nt 12-11-98 4.79 1,100,000 1,098,546 Federal Home Loan Mtge Corp Disc Nts 12-07-98 5.00 1,700,000 1,698,589 12-10-98 4.77 400,000 399,525 12-21-98 4.83 3,200,000 3,191,448 12-22-98 4.81 1,100,000 1,096,920 Federal Natl Mtge Assn Disc Nt 12-15-98 5.00 500,000 499,032 Total 12,283,495 Letter of credit (1.1%) Student Loan Marketing Assn- Nebraska Higher Education 12-14-98 4.86 32,700,000 32,642,730 Total short-term securities (Cost: $44,926,225) $44,926,225 Total investments in securities (Cost: $3,589,417,480)(k) $3,668,483,822 See accompanying notes to investments in securities. SEMIANNUAL REPORT -- 1998
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) Security is partially or fully on loan. See Note 4 to the financial statements. (d) 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. (e) 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. (f) 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. (g) 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 Nov. 30, 1998. Inverse floaters in the aggregate represent 0.27% of the Portfolio's net assets as of Nov. 30, 1998. (h) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 4 to the financial statements): Type of security Notional amount Purchase contracts Eurodollar Dec. 1999 $56,900,000 Eurodollar March 2000 56,900,000 Eurodollar June 2000 56,900,000 Eurodollar Sept. 2000 61,100,000 U.S. Treasury Note Dec. 1998, 5-year notes 275,400,000 U.S. Treasury Note Dec. 1998, 10-year notes 83,700,000 U.S. Treasury Note Feb. 1999, 10-year notes 3,000,000 Sale contracts U.S. Treasury Note Dec. 1998, 2-year notes $12,600,000 U.S. Treasury Note Dec. 1998, 10-year notes 108,300,000 U.S. Treasury Note Feb. 1999, 5-year notes 198,900,000 U.S. Treasury Bond March 1999 641,000,000 SEMIANNUAL REPORT -- 1998
(i) At Nov. 30, 1998, securities valued at $99,831,977 were held to cover open call options written as follows: Issuer Shares Exercise Expiration Value(a) price date U.S. Treasury Bond 500,000 $99 Dec. 1998 $359,375 U.S. Treasury Bond March 99 195,500 114 Feb. 1999 1,618,975 U.S. Treasury Bond March 99 42,500 119 Feb. 1999 670,701 U.S. Treasury Bond March 99 221,000 120 Feb. 1999 2,451,708 U.S. Treasury Bond March 99 17,000 128 Feb. 1999 345,312 U.S. Treasury Bond March 99 17,000 130 Feb. 1999 143,437 U.S. Treasury Bond March 99 187,000 126 Feb. 1999 8,544,372 U.S. Treasury Bond March 99 34,000 128 Feb. 1999 1,094,375 U.S. Treasury Bond March 99 204,000 130 Feb. 1999 4,398,750 U.S. Treasury Bond March 99 70,200 134 Feb. 1999 592,312 Total $20,219,317 At Nov. 30, 1998, cash or short-term securities were designated to cover open put options written as follows: Issuer Shares Exercise Expiration Value(a) price date Federal Natl Mtge Assn 750,000 $97 Dec. 1998 $58,594 U.S. Treasury Bond March 99 12,800 112 Feb. 1999 56,000 U.S. Treasury Bond March 99 38,200 127 Feb. 1999 147,311 U.S. Treasury Bond March 99 191,200 126 Feb. 1999 1,881,197 U.S. Treasury Bond March 99 127,500 128 Feb. 1999 1,979,174 U.S. Treasury Bond March 99 8,500 118 Feb. 1999 71,719 U.S. Treasury Bond March 99 42,500 119 Feb. 1999 524,607 U.S. Treasury Bond March 99 8,500 128 Feb. 1999 37,187 U.S. Treasury Bond March 99 8,500 127 Feb. 1999 19,921 U.S. Treasury Bond March 99 123,300 128 Feb. 1999 2,023,458 Total $6,799,168
(j) At Nov. 30, 1998, the cost of securities purchased, including interest purchased, on awhen-issued basis was $749,626,199. (k) At Nov. 30, 1998, the cost of securities for federal income tax purposes was approximately $3,589,417,000 and the approximate aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation...........................................$93,937,822 Unrealized depreciation...........................................(14,871,000) Net unrealized appreciation.......................................$79,066,822 SEMIANNUAL REPORT -- 1998 Bulk Rate U.S. POSTAGE PAID Permit No. 85 Spencer, IA S-6442 M (1/99) IDS Federal Income Fund IDS Tower 10 Minneapolis, MN 55440-0010 -----END PRIVACY-ENHANCED MESSAGE-----