<PAGE>
1998 ANNUAL REPORT
IDS
Federal Income Fund
(prospectus enclosed)
(icon of) shield with eagle head
The goals of IDS Federal Income Fund, Inc. are to provide shareholders with a
high level of current income and safety of principal consistent with investment
in U.S. government and government agency securities.
(This annual report includes a prospectus that describes in detail the Fund's
objective, investment policies, risks, sales charges, fees and other matters of
interest. Please read the prospectus carefully before you invest or send money.)
AMERICAN EXPRESS Financial Advisors
Distributed by American Express Financial Advisors Inc.
<PAGE>
(icon of) shield with eagle head
A comfortable compromise
Balancing risk and reward is something all investors must consider. In the
fixed-income area, intermediate-term securities issued by the federal government
and its agencies offer a good middle ground. These securities, which form the
core of Federal Income Fund, normally provide greater investment stability than
long-term bonds, while still offering a yield higher than that of insured
investments such as bank CDs. For a conservative investor, that can be a
rewarding combination.
<PAGE>
Contents
The purpose of this annual report is to tell investors how the Fund performed.
(icon of) one open book inside of another
The prospectus, which is bound into the middle of this annual report, describes
the Fund in detail.
1998 annual report
From the chairman 4
From the portfolio manager 4
Making the most of the Fund 6
The Fund's long-term performance 7
Independent auditors' report (Fund) 8
Financial statements (Fund) 9
Notes to financial statements (Fund) 12
Independent auditors' report (Portfolio) 16
Financial statements (Portfolio) 17
Notes to financial statements (Portfolio) 20
Investments in securities 25
IDS mutual funds 32
Federal income tax information 36
1998 prospectus
The Fund in brief 3p
Goal 3p
Investment policies and risks 3p
Structure of the Fund 4p
Manager and distributor 4p
Portfolio manager 4p
Alternative purchase arrangements 4p
Sales charge and Fund expenses 5p
Performance 7p
Financial highlights 7p
Total returns 9p
Yield 11p
Investment policies and risks 12p
Facts about investments and their risks 12p
Valuing Fund shares 16p
How to purchase, exchange or redeem shares 17p
Alternative purchase arrangements 17p
How to purchase shares 19p
How to exchange shares 22p
How to redeem shares 22p
Reductions and waivers of the sales charge 27p
Special shareholder services 32p
Services 32p
Quick telephone reference 32p
<PAGE>
Distributions and taxes 33p
Dividend and capital gain distributions 33p
Reinvestments 34p
Taxes 34p
How to determine the correct TIN 36p
How the Fund and Portfolio are organized 37p
Shares 37p
Voting rights 37p
Shareholder meetings 37p
Special considerations regarding master/feeder structure 38p
Board members and officers 39p
Investment manager 41p
Administrator and transfer agent 41p
Distributor 42p
About American Express Financial Corporation 44p
General information 44p
Year 2000 45p
Appendix 46p
Descriptions of derivative instruments 46p
(This annual report is not part of the prospectus.)
<PAGE>
To our shareholders
(picture of) William R. Pearce
William R. Pearce
Chairman of the board
(picture of) James W. Snyder
James W. Snyder
Portfolio manager
From the chairman
If you're an experienced investor, you know that the past few years have
been unusually strong in many financial markets. Perhaps just as
important, history shows that bull markets don't last forever. Though
they're often unpredictable, declines -- whether they're brief or
long-lasting, moderate or substantial -- are always a possibility. We saw
evidence of that in late October, when declines in certain Asian markets
spawned a sharp drop in several financial markets worldwide, including the
U.S.
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.
(signature of) W. R. Pearce
William R. Pearce
<PAGE>
From the portfolio manager
Continued low inflation led to an overall decline in interest rates and,
in turn, higher bond prices during the past 12 months. Taking advantage of
the positive trend, IDS Federal Income Fund's Class A shares generated a
total return (net asset value change and dividends) of 8.2% for the fiscal
year -- June 1997 through May 1998.
Despite periodic concern on the part of some investors that ongoing
economic growth would soon send consumer prices higher, inflation remained
remarkably subdued throughout the period. The result was that, aside from
a temporary run-up last summer, interest rates worked their way lower
through early January. True to their nature, bond prices responded by
moving higher. The rally stalled over the final months of the period,
though, as investors worried that it wouldn't be long before continued
wage increases and a still-strong economy might push inflation higher.
Treasury bonds benefit
I kept the Portfolio's assets largely divided between short- and
intermediate-term U.S. Treasury bonds and mortgage-backed bonds issued by
agencies of the federal government. Although both sectors provided the
Fund with positive performance, the prices of the Treasury investments
benefited most from the decline in interest rates. (Conversely, when rates
are stable or rising slightly, mortgage-backed bonds perform better
because homeowners are less likely to refinance their mortgages.)
As for changes to the Portfolio, I reduced holdings among mortgage-backed
securities and shifted more money into Treasury securities, some of it in
the form of options. In addition, I gradually lowered the level of cash
reserves in the Portfolio, putting that money to work in longer-term
securities that earned a better return.
`Futures' used as hedge
The only notable negative for the Fund was its investments in
interest-rate futures contracts -- a form of derivative investments --
which produced a loss early in the period. I employ these "futures" to
help insulate the Fund from the effect of sharp moves in interest rates,
rather than as a speculative investment strategy.
As we begin a new fiscal year, the bond market continues to benefit from a
low rate of inflation, a federal budget surplus, a strong dollar and the
possibility of slower economic growth because of the weakness in many
Asian markets. All in all, it's an environment that should keep downward
pressure on interest rates, which is positive for bond values.
(signature of) James W. Snyder
James W. Snyder
<PAGE>
Class A
12-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1998 $5.08
May 31, 1997 $4.98
Increase $0.10
Distributions
June 1, 1997 - May 31, 1998
From income $0.30
From capital gains $ --
Total distributions $0.30
Total return* +8.2%**
Class B
12-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1998 $5.08
May 31, 1997 $4.98
Increase $0.10
Distributions
June 1, 1997 - May 31, 1998
From income $0.26
From capital gains $ --
Total distributions $0.26
Total return* +7.3%**
<PAGE>
Class Y
12-month performance
(All figures per share)
Net asset value (NAV)
May 31, 1998 $5.08
May 31, 1997 $4.98
Increase $0.10
Distributions
June 1, 1997 - May 31, 1998
From income $0.30
From capital gains $ --
Total distributions $0.30
Total return* +8.2%**
* 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.
(This annual report is not part of the prospectus.)
<PAGE>
Making the most of the Fund
Build your assets systematically
One of the best ways to invest in the Fund is by dollar-cost averaging --
a time-tested strategy that can make market fluctuations work for you. To
dollar-cost average, simply invest a fixed amount of money regularly.
You'll automatically buy more shares when the Fund's share price is low,
fewer shares when it is high.
Using this strategy does not ensure a profit or avoid a loss if the market
declines, and requires that you be able to keep on investing on a regular
basis, even when the price of your shares falls or the market declines.
Investing in this manner can be an effective way to accumulate shares to
meet your long-term goals.
How dollar-cost averaging works
Month Amount Per-share Number of shares purchased
invested market price
Jan $100 $20 5.00 XXXXX
Feb 100 18 5.56 XXXXXx
March 100 17 5.88 XXXXXx
April 100 15 6.67 XXXXXXx
May 100 16 6.25 XXXXXXx
June 100 18 5.56 XXXXXx
July 100 17 5.88 XXXXXx
Aug 100 19 5.26 XXXXXx
Sept 100 21 4.76 XXXXx
Oct 100 20 5.00 XXXXX
[3-part caption in margin:]
By investing an equal number of dollars each month...
you automatically buy more shares when the per share market price
is low... [arrow pointing to "April" line in table above]
and fewer shares when the per share market price is high. [arrow
pointing to "Sept" line in table above]
You have paid an average price of only $17.91 per share over the 10
months, while the average market price actually was $18.10.
Three ways to benefit from a mutual fund:
o your shares increase in value when the Fund's investments do well
o you receive capital gains when the gains on investments sold by the
Fund exceed losses
o you receive income when the Fund's stock dividends, interest and
short-term gains exceed its expenses.
All three make up your total return. And you potentially can increase your
investment if, like most investors, you reinvest your dividends and
capital gain distributions to buy additional shares of the Fund or another
fund.
(This annual report is not part of the prospectus.)
<PAGE>
The Fund's long-term performance
Assumes: oHolding period from 6/1/88 to 5/31/98. oReturns do not reflect
taxes payable on distributions. oReinvestment of all income and capital
gain distributions for the Fund, with a value of $10,101. Also see
"Performance" in the Fund's current prospectus.
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.
How your $10,000 has grown in IDS Federal Income Fund
$20,000
Lehman Aggregate
Bond Index
$19,746
Merrill Lynch Federal Income Fund
1-5 Yr. Class A
Government Index
$9,500
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
Average annual total return
(as of May 31, 1998)
1 year Since 5 years 10 years
inception*
Class A +2.75% --% +5.07% +7.04%
Class B +3.32% +6.35% --% --%
Class Y +8.23% +8.12% --% --%
*Inception date was March 20, 1995.
On the graph above you can see how the Fund's total return compared to two
widely cited performance indexes, the Lehman Aggregate Bond Index and the
Merrill Lynch 1-5 Year Government Index. In comparing IDS Federal Income
Fund (Class A) to the two indexes, you should take into account the fact
that the Fund's performance reflects the maximum sales charge of 5%, while
such charges are not reflected in the performance of the indexes.
Your investment and return values fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. Average annual
total return figures reflect the impact of the applicable sales charge up
to a maximum of 5%. This was a period of widely fluctuating security
prices. Past performance is no guarantee of future results.
(This annual report is not part of the prospectus.)
<PAGE>
The financial statements contained in Post-Effective Amendment #26
to Registration Statement No. 2-96512 filed on or about July 29,
1998, are incorporated herein by reference.
<PAGE>
IDS mutual funds
Global/International funds
Funds in this group seek capital growth and/or income by investing primarily in
foreign securities. Foreign investments may be subject to currency fluctuations
and political and economic risks of the countries in which the investments are
made. They are high risk mutual funds with a potential for high reward.
IDS Emerging Markets Fund
Invests in a Portfolio comprised primarily of stocks of companies in developing
countries throughout the world that are believed to offer growth potential.
Seeks to provide long-term growth of capital.
(icon of) world with countries
IDS Global Growth Fund
Invests in a Portfolio comprised primarily of stocks of companies throughout the
world that are positioned to meet market needs in a changing world economy.
These companies offer above-average potential for long-term growth.
(icon of) world
IDS International Fund
Invests primarily in common stocks of foreign companies that offer potential for
superior growth. The Fund may invest up to 20% of its assets in the U.S. market.
(icon of) three flags
IDS Global Balanced Fund
Invests in stocks and bonds in, for the most part, major markets throughout the
world, including the U.S. Seeks to provide a balance of growth of capital and
current income.
(icon of) scale of globes
IDS Global Bond Fund
Invests in a Portfolio comprised primarily of debt securities of U.S. and
foreign issuers to seek high total return through income and growth of capital.
(icon of) globe
Growth funds
Funds in this group seek capital growth, primarily from common stocks. They are
high risk mutual funds with a potential for high reward.
IDS Precious Metals Fund
Invests primarily in the securities of foreign or domestic companies that
explore for, mine and process or distribute gold and other precious metals. A
highly aggressive and speculative fund that seeks long-term growth of capital.
(icon of) cart of precious gems
<PAGE>
IDS Discovery Fund
Invests in small- and medium-size, growth-oriented companies emphasizing
technological innovation and productivity enhancement. Buys and holds larger
growth-oriented stocks.
(icon of) ship
IDS Small Company Index Fund
Invests in all or a representative group of the equity securities comprising the
S&P SmallCap 600 Index, as it strives to provide long-term capital appreciation.
(icon of) building
IDS Strategy Aggressive Fund
Invests primarily in common stocks of companies that are selected for their
potential for above-average growth. Above-average means that their growth
potential is better, in the opinion of the portfolio's investment manager, than
the Standard & Poor's Corporation (S&P) 500 Stock Index.
(icon of) chess piece
IDS Research Opportunities Fund
Invests in a Portfolio comprised primarily of equity securities of companies
included in the S&P 500 Index that are believed to have strong growth potential.
The Portfolio is managed using a research methodology by the Research Department
of AEFC. Goal is long-term appreciation.
(icon of) magnifying glass
(This annual report is not part of the prospectus.)
<PAGE>
IDS Growth Fund
Invests in a Portfolio comprised primarily of companies that have above-average
potential for long-term growth as a result of new management, marketing
opportunities or technological superiority.
(icon of) trees
IDS New Dimensions Fund
Invests in a Portfolio comprised primarily of companies with
significant growth potential due to superiority in
technology, marketing or management. The Fund frequently
changes its industry mix.
(icon of) dimension
IDS Progressive Fund
Invests primarily in undervalued common stocks. The Fund holds stocks for the
long term with the goal of capital growth.
(icon of) shooting star
Growth & income funds
These funds focus on securities of medium to large, well-established companies
that offer long-term growth of capital and reasonable income from dividends and
interest. Foreign investments may be subject to currency fluctuations and
political and economic risks of the countries in which the investments are made.
IDS Equity Select Fund
Invests primarily in a combination of moderate growth stocks that generally
pay dividends and bonds. Seeks growth of capital and income.
(icon of) three pine trees
IDS Blue Chip Advantage Fund
Invests in selected stocks from a major market index. Securities purchased are
those recommended by our research analysts as the best from each industry
represented on the index. Offers potential for long-term growth as well as
dividend income.
(icon of) ribbon
IDS Managed Allocation Fund
Invests in a Portfolio comprised primarily of U.S. equity securities, U.S. and
foreign debt securities, foreign equity securities and money market instruments.
The Fund provides diversification among these major investment categories and
has a target mix that represents the way the Fund's investments will be
allocated over the long term. Seeks maximum total return.
(icon of) gyroscope
<PAGE>
IDS Stock Fund
Invests in a Portfolio comprised primarily of common stock of companies
representing many sectors of the economy. Seeks current income and growth of
capital.
(icon of) building with columns
IDS Equity Value Fund
Invests primarily in undervalued common stocks that offer potential for growth
of capital and income.
(icon of) three growing flowers
IDS Utilities Income Fund
Invests primarily in the stocks of public utility companies to seek high current
income and growth of income and capital with reduced volatility.
(icon of) light bulb
IDS Diversified Equity Income Fund
Invests in a Portfolio comprised primarily in high-yielding common stocks to
seek high current income and, secondarily, to benefit from the growth potential
offered by stock investments.
(icon of) two puzzle pieces
IDS Mutual
Invests in a Portfolio that seeks to balance between common stocks and senior
securities (preferred stocks and bonds). Seeks a balance of growth of capital
and current income.
(icon of) scale of justice
(This annual report is not part of the prospectus.)
<PAGE>
Income funds
The funds in this group invest their assets primarily in corporate bonds or
government securities to seek interest income. Secondary objective is capital
growth. Risk varies by bond quality.
IDS Extra Income Fund
Invests in a Portfolio comprised mainly of long-term, high-yielding corporate
fixed-income securities in the lower rated, higher risk bond categories to seek
high current income. Secondary objective is capital growth.
(icon of) two coins
IDS Bond Fund
Invests mainly in corporate bonds, at least 50% in the higher rated, lower risk
bond categories, or the equivalent, and in government bonds.
(icon of) Greek column
IDS Selective Fund
Invests in a Portfolio comprised primarily of high-quality corporate bonds and
other highly rated debt instruments including government securities and
short-term investments. Seeks current income and preservation of capital.
(icon of) skyline
IDS Federal Income Fund
Invests in a Portfolio comprised primarily of securities issued or guaranteed as
to the timely payment of principal and interest by the U.S. government, its
agencies and instrumentalities. Seeks a high level of current income and safety
of principal consistent with its type of investments.
(icon of) shield with eagle head
Tax-exempt income funds
These funds provide tax-free income by investing in municipal bonds. The income
is generally free from federal income tax, but a portion of the income may be
subject to state and local taxes. Risk varies by bond quality.
IDS Tax-Exempt Bond Fund
Invests mainly in bonds and notes of state or local government units, with at
least 75% in the four highest rated, lowest risk bond categories.
(icon of) shield with Greek column
IDS Insured Tax-Exempt Fund
Invests primarily in municipal securities that are insured as to the timely
payment of principal and interest. The insurance feature minimizes credit risk
of the Fund but does not guarantee the market value of the Fund's shares.
(icon of) shield with star
<PAGE>
IDS State Tax-Exempt Funds
(CA, MA, MI, MN, NY, OH)
Invests primarily in high- and medium-grade municipal securities to provide
income to residents of each respective state that is exempt from federal, state
and local income taxes. (New York is the only state that is exempt at the local
level.)
(icon of) shield with U.S. enclosed
IDS High Yield Tax-Exempt Fund
Invests in a Portfolio comprised primarily of medium- and lower-quality
municipal bonds and notes. Lower-quality securities generally involve greater
risk of principal and income.
(icon of) shield with basket of apples enclosed
IDS Intermediate Tax-Exempt Fund
Invests in mainly investment-grade bonds and other debt securities with
intermediate-term maturities issued by state and local government units. Goal is
to seek a high level of current income exempt from federal taxes.
(icon of) shield with tree enclosed
(This annual report is not part of the prospectus.)
<PAGE>
Money market funds
These money market funds have three main goals: conservation of capital,
constant liquidity and the highest possible current income consistent with these
objectives. An investment in these funds is neither insured nor guaranteed by
the U.S. government, and there can be no assurance that these funds will be able
to maintain a stable net asset value of $1.00 per share. Very limited risk.
IDS Cash Management Fund
Invests in such money market securities as high quality commercial paper,
bankers' acceptances, certificates of deposit (CDs) and other bank securities.
(icon of) piggy bank
IDS Tax-Free Money Fund
Invests primarily in short-term bonds and notes issued by state and local
governments to seek high current income exempt from federal income taxes.
(icon of) shield with piggy bank enclosed
For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus by contacting your financial advisor or
writing to American Express Shareholder Service, P.O. Box 534, Minneapolis, MN
55440-0534. Read it carefully before you invest or send money.
(This annual report is not part of the prospectus.)
<PAGE>
Federal income tax information
IDS Federal Income Fund, Inc.
The Fund is required by the Internal Revenue Code of 1986 to tell its
shareholders about the tax treatment of the dividends it pays during its
fiscal year. Some of the dividends listed below were reported to you on a
Form 1099-DIV, Dividends and Distributions, last January. Dividends paid
to you since the end of last year will be reported to you on a tax
statement sent next January. Shareholders should consult a tax advisor on
how to report distributions for state and local purposes.
IDS Federal Income Fund, Inc.
Fiscal year ended May 31, 1998
Class A
Income distributions
taxable as dividend income, none qualifying for deduction by corporations.
Payable date Per share
June 27, 1997 $0.02274
July 28, 1997 0.02356
Aug. 28, 1997 0.02668
Sept. 26, 1997 0.02318
Oct. 29, 1997 0.02745
Nov. 26, 1997 0.02433
Dec. 26, 1997 0.02348
Jan. 29, 1998 0.02761
Feb. 27, 1998 0.02340
March 27, 1998 0.02216
April 29, 1998 0.02817
May 28, 1998 0.02294
Total distributions $0.29570
(This annual report is not part of the prospectus.)
<PAGE>
Class B
Income distributions
taxable as dividend income, none qualifying for deduction by corporations.
Payable date Per share
June 27, 1997 $0.01974
July 28, 1997 0.02054
Aug. 28, 1997 0.02325
Sept. 26, 1997 0.02017
Oct. 29, 1997 0.02401
Nov. 26, 1997 0.02140
Dec. 26, 1997 0.02044
Jan. 29, 1998 0.02392
Feb. 27, 1998 0.02034
March 27, 1998 0.01921
April 29, 1998 0.02471
May 28, 1998 0.01990
Total distributions $0.25763
(This annual report is not part of the prospectus.)
<PAGE>
Federal income tax information
Class Y
Income distributions
taxable as dividend income, none qualifying for deduction by corporations.
Payable date Per share
June 27, 1997 $0.02303
July 28, 1997 0.02385
Aug. 28, 1997 0.02701
Sept. 26, 1997 0.02347
Oct. 29, 1997 0.02779
Nov. 26, 1997 0.02461
Dec. 26, 1997 0.02377
Jan. 29, 1998 0.02797
Feb. 27, 1998 0.02369
March 27, 1998 0.02244
April 29, 1998 0.02851
May 28, 1998 0.02324
Total distributions $0.29938
(This annual report is not part of the prospectus.)
<PAGE>
Quick telephone reference
American Express Redemptions and exchanges, National/Minnesota
Financial Advisors dividend payments or 800-437-3133
Telephone Transaction reinvestments and automatic
Service payment arrangements Mpls./St. Paul area:
671-3800
TTY Service For the hearing impaired 800-846-4852
American Express Automated account information 800-862-7919
Financial Advisors (TouchTone(R) phones only),
Easy Access Line including current fund prices
and performance, account values
and recent account transactions
AMERICAN EXPRESS
Financial Advisors
IDS Federal Income Fund
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
STATEMENT OF DIFFERENCES
Difference Description
1) The layout is different 1) Some of the layout in the
throughout the annual report. annual report to
shareholders is in two
columns.
2) Headings. 2) The headings in the
annual report are
placed in a blue strip
at the top of the page.
3) There are pictures, icons 3) Each picture, icon and
and graphs throughout the graph is described in
annual report. parentheses.
4) Footnotes for charts and 4) The footnotes for each
graphs are described at chart or graph are typed
the left margin. below the description of
the chart or graph.
