AXP (SM)
Federal Income Fund
1999 SEMIANNUAL REPORT
American Express(R) Funds
(icon of) clock
AXP Federal Income Fund seeks to provide shareholders with a high level of
current income and safety of principal consistent with investment in U.S.
government and government agency securities.
<PAGE>
A Comfortable
Compromise
Balancing risk and reward is something all investorsmust 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 AXPFederal 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 23
<PAGE>
(picture of) Arne H. Carlson
Arne H. Carlson
Chairman of the board
From the Chairman
We are in an extraordinary period for investing in financial assets, with many
stocks at their all-time highs. Looking at year 2000, American Express Financial
Corporation, the Fund's investment manager, expects the economy to continue to
grow and long-term interest rates to rise only slightly. This is a great time to
take a close look at your goals and investments. We encourage you to:
o Consult a professional investment adviser who can help you cut
through mountains of data.
o Set financial goals that extend beyond those achievable through retirement
plans of your employer.
o Learn as much as you can about your current investments.
The portfolio manager's letter that follows provides a review of the Fund's
investment strategies and performance. The annual report contains other
valuable information as well. The Fund's prospectus describes its investment
objectives and how it intends to achieve those objectives. As experienced
investors know, information is vital to making good investment decisions.
So, take a moment and decide again whether the Fund's investment objectives and
management style fit with your other investments to help you reach your
financial goals. And make it a practice on a regular basis to assess your
investment options.
Sincerely,
Arne H. Carlson
(picture of) James W. Snyder
James W. Snyder
Portfolio manager
From the Portfolio Manager
Rising interest rates put a damper on the bond market during the past six
months. Still, AXP Federal Income Fund (Class A shares) fared relatively well,
as it generated a positive total return of 1.17% (excluding the sales charge)
for the first half of the fiscal year -- June through November 1999.
Although inflation had, to that point, shown little indication of getting out of
hand, fixed-income investors found enough to worry Arne H. Carlson Chairman of
the boardJames W. Snyder Portfolio managerSEMIANNUAL REPORT -- 1999about when
the period began. Leading the list were an economy that, except for the second
quarter of 1999, continued to show remarkably good growth; an extremely tight
labor market; a run-up in the price of oil; and an occasionally weak dollar.
That combination, many investors apparently concluded, probably would fan the
fire under inflation before long. That view was reinforced by the actions of the
Federal Reserve Board (the Fed), which raised short-term interest rates three
times during the six months (in June, August and November) in an effort to cool
off the economy and head off a potential spike in inflation.
SELLING PRESSURE INCREASES
The result of the hand-wringing and the Fed's actions was increased selling
pressure on bonds, which caused interest rates to rise and, ultimately, caused
prices to fall. Although the short- and intermediate-term securities the Fund
invests in were less affected by the downturn than longer-maturity bonds, the
negative environment did hurt the Fund's performance.
Also playing a role was a huge supply of new bonds, which tended to hold down
prices on all non-U.S. Treasury issues, including the mortgage-backed securities
that made up the bulk of the portfolio. Later in the period, the supply shrank
somewhat, lending some much-needed support to the mortgage sector. That helped
the Fund to turn things around during the fall, when it recorded three straight
months of gains to finish in positive territory for the period as a whole.
Looking at the portfolio's asset mix, I kept the majority invested in
mortgage-backed bonds issued by the Federal National Mortgage Association
(commonly known as "Fannie Mae") and the Federal Home Loan Mortgage Corporation
("Freddie Mac"). Most of the rest went into Treasury securities. At the outset
of the period, the portfolio held a higher-than-usual level of cash reserves,
which provided something of a cushion for the Fund's net asset value as interest
rates rose. I gradually reduced the cash over the ensuing months. As is normally
the case, I also maintained an investment in interest-rate futures contracts --
a form of derivatives -- to reduce volatility in the Fund's value.
As the second half of the fiscal year begins, fixed-income investors remain
concerned that the Fed may find it necessary to push short-term interest rates
still higher in upcoming months. Even if the Fed doesn't act, over the near term
I think the bond market could continue to struggle in the face of that
possibility. In light of that, I plan to maintain an emphasis on mortgage-backed
securities, which I believe offer good investment value as well as potential for
positive performance.
James W. Snyder
<PAGE>
Fund Facts
Class A -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1999 $4.86
May 31, 1999 $4.94
Decrease $0.08
Distributions -- June 1, 1999 - Nov. 30, 1999
From income $0.13
From capital gains $ --
Total distributions $0.13
Total return* +1.17%**
Class B -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1999 $4.86
May 31, 1999 $4.94
Decrease $0.08
Distributions -- June 1, 1999 - Nov. 30, 1999
From income $0.11
From capital gains $ --
Total distributions $0.11
Total return* +0.79%**
Class Y -- 6-month performance
(All figures per share)
Net asset value (NAV)
Nov. 30, 1999 $4.86
May 31, 1999 $4.94
Decrease $0.08
Distributions -- June 1, 1999 - Nov. 30, 1999
From income $0.13
From capital gains $ --
Total distributions $0.13
Total return* +1.25%**
*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.
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<CAPTION>
Financial Statements
Statement of assets and liabilities
AXP Federal Income Fund, Inc.
Nov. 30, 1999 (Unaudited)
Assets
<S> <C> <C>
Investments in Government Income Portfolio (Note 1) $3,198,438,797
--------------
Liabilities
Dividends payable to shareholders 3,586,353
Accrued distribution fee 49,873
Accrued service fee 516
Accrued transfer agency fee 13,303
Accrued administrative services fee 3,891
Other accrued expenses 842,851
Total liabilities 4,496,787
=========
Net assets applicable to outstanding capital stock $3,193,942,010
Represented by
Capital stock-- $.01 par value (Note 1) $ 6,571,144
Additional paid-in capital 3,321,801,296
Undistributed net investment income 2,745,703
Accumulated net realized gain (loss) (88,983,198)
Unrealized appreciation (depreciation) on investments (48,192,935)
Total -- representing net assets applicable to outstanding capital stock $3,193,942,010
==============
Net assets applicable to outstanding shares: Class A $1,584,661,551
Class B $1,421,827,603
Class Y $ 187,452,856
Net asset value per share of outstanding capital stock:
Class A shares 326,018,416 $ 4.86
Class B shares 292,525,562 $ 4.86
Class Y shares 38,570,464 $ 4.86
See accompanying notes to financial statements.
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<CAPTION>
Statement of operations
AXP Federal Income Fund, Inc.
Six months ended Nov. 30, 1999 (Unaudited)
Investment income
Income:
<S> <C>
Interest $109,921,081
Expenses (Note 2):
Expenses allocated from Government Income Portfolio 8,477,753
Distribution fee
Class A 1,731,518
Class B 7,147,139
Transfer agency fee 1,581,079
Incremental transfer agency fee
Class A 84,407
Class B 107,932
Service fee
Class A 262,277
Class B 231,519
Class Y 94,754
Administrative services fees and expenses 751,619
Compensation of board members 5,322
Printing and postage 311,187
Registration fees 257,567
Audit fees 5,625
Other 4,376
---------
Total expenses 21,054,074
Earnings credits on cash balances (Note 2) (87,014)
-------
Total net expenses 20,967,060
----------
Investment income (loss) -- net 88,954,021
----------
Realized and unrealized gain (loss) -- net
Net realized gain (loss) on:
Security transactions (102,624,069)
Financial futures contracts (14,543,926)
Options contracts written 43,094,665
----------
Net realized gain (loss) on investments (74,073,330)
Net change in unrealized appreciation (depreciation) on investments 17,557,863
----------
Net gain (loss) on investments (56,515,467)
-----------
Net increase (decrease) in net assets resulting from operations $ 32,438,554
=============
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Statements of changes in net assets
AXP Federal Income Fund, Inc.
Nov. 30, 1999 May 31, 1999
Six months ended Year ended
(Unaudited)
Operations and distributions
<S> <C> <C>
Investment income (loss) -- net $ 88,954,021 $ 150,349,144
Net realized gain (loss) on investments (74,073,330) 77,501,051
Net change in unrealized appreciation (depreciation) on investments 17,557,863 (129,440,332)
---------- ------------
Net increase (decrease) in net assets resulting from operations 32,438,554 98,409,863
---------- ----------
Distributions to shareholders from:
Net investment income
Class A (46,069,693) (84,487,155)
Class B (35,088,924) (58,371,770)
Class Y (5,310,448) (8,540,146)
Net realized gain
Class A -- (20,820,054)
Class B -- (16,864,445)
Class Y -- (1,996,962)
---------- ----------
Total distributions (86,469,065) (191,080,532)
----------- ------------
Capital share transactions (Note 3)
Proceeds from sales
Class A shares (Note 2) 574,950,637 1,562,041,397
Class B shares 686,744,405 1,583,549,222
Class Y shares 41,024,098 129,406,083
Reinvestment of distributions at net asset value
Class A shares 37,256,637 89,835,865
Class B shares 32,045,697 71,896,843
Class Y shares 5,109,528 10,549,694
Payments for redemptions
Class A shares (722,981,494) (1,284,658,374)
Class B shares (Note 2) (771,243,520) (1,162,611,233)
Class Y shares (46,999,042) (62,510,919)
----------- -----------
Increase (decrease) in net assets from capital share transactions (164,093,054) 937,498,578
------------ -----------
Total increase (decrease) in net assets (218,123,565) 844,827,909
Net assets at beginning of period 3,412,065,575 2,567,237,666
------------- -------------
Net assets at end of period $3,193,942,010 $3,412,065,575
============== ==============
Undistributed net investment income $ 2,745,703 $ 260,747
-------------- --------------
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
AXP Federal Income Fund, Inc.
(Unaudited as to Nov. 30, 1999)
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, incremental 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
The Fund invests all of its assets in Government Income Portfolio (the
Portfolio), a series of Income Trust (the Trust), an open-end investment company
that has the same objectives as the Fund. The Portfolio invests primarily in
U.S. government and government agency securities.
The Fund records daily its share of the Portfolio's income, expenses and
realized and unrealized gains and losses. The financial statements of the
Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
The Fund records its investment in the Portfolio at the value that is equal to
the Fund's proportionate ownership interest in the Portfolio's net assets. The
percentage of the Portfolio owned by the Fund as of Nov. 30, 1999 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
that apply to regulated investment companies and to distribute substantially all
of its taxable income to the shareholders. No provision for income or excise
taxes is thus required.
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:
The Fund has an agreement with American Express Financial Corporation (AEFC) to
provide administrative services. Under an Administrative Services Agreement, the
Fund pays AEFC a fee for administration and accounting services at a percentage
of the Fund's average daily net assets in reducing percentages from 0.05% to
0.025% annually. A minor portion of additional administrative service expenses
paid by the Fund are consultants' fees and fund office expenses. Under this
agreement, the Fund also pays taxes, audit and certain legal fees, registration
fees for shares, compensation of board members, corporate filing fees and any
other expenses properly payable by the Fund and approved by the board.
Under a separate Transfer Agency Agreement, American Express Client Service
Corporation (AECSC) maintains shareholder accounts and records. The Fund pays
AECSC an annual fee per shareholder account for this service as follows:
o Class A $19.50
o Class B $20.50
o Class Y $17.50
The Fund has agreements with American Express Financial Advisors Inc. (the
Distributor) for distribution and shareholder services. Under a Plan and
Agreement of Distribution (the Plan), the Fund pays a distribution fee at an
annual rate up to 0.25% of the Fund's average daily net assets attributable to
Class A shares and up to 1.00% for Class B shares. The Plan went into effect
July 1, 1999. Under terms of a prior Plan and Agreement of Distribution (the
Prior Plan) that ended June 30, 1999, the Fund paid a distribution fee for Class
B shares at an annual rate up to 0.75% of average daily net assets. The Prior
Plan was not effective with respect to Class A shares.
Under a Shareholder Service Agreement, the Fund's Class Y shares pay a fee for
service provided to shareholders by financial advisors and other servicing
agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net
assets attributable to Class Y shares. Under terms of a prior agreement that
ended June 30, 1999, the Fund paid a shareholder service fee for Class A and
Class B shares at a rate of 0.175% of average daily net assets. Effective July
1, 1999, the agreement for Class A and Class B shares was converted to the Plan
and Agreement of Distribution discussed above.
Sales charges received by the Distributor for
distributing Fund shares were $42,681,775 for Class A and $1,802,722 for Class B
for the six months ended Nov. 30, 1999.
During the six months ended Nov. 30, 1999, the Fund's transfer agency fees were
reduced by $87,014 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, 1999
Class A Class B Class Y
Sold 117,932,489 140,880,704 8,418,422
Issued for reinvested distributions 7,650,703 6,582,033 1,049,501
Redeemed (148,321,580) (158,229,051) (9,644,973)
------------ ------------ ----------
Net increase (decrease) (22,738,388) (10,766,314) (177,050)
Year ended May 31, 1999
Class A Class B Class Y
Sold 308,354,414 312,726,481 25,577,003
Issued for reinvested distributions 17,789,153 14,244,033 2,090,237
Redeemed (253,758,409) (229,672,536) (12,361,241)
------------ ------------ -----------
Net increase (decrease) 72,385,158 97,297,978 15,305,999
4. BANK BORROWINGS
The Fund has a revolving credit agreement with U.S. Bank, N.A., whereby the Fund
is permitted to have bank borrowings for temporary or emergency purposes to fund
shareholder redemptions. The Fund must have asset coverage for borrowings not to
exceed the aggregate of 333% of advances equal to or less than five business
days plus 367% of advances over five business days. The agreement, which enables
the Fund to participate with other American Express mutual funds, permits
borrowings up to $200 million, collectively. Interest is charged to each Fund
based on its borrowings at a rate equal to the Federal Funds Rate plus 0.30% or
the Eurodollar Rate (Reserve Adjusted) plus 0.20%. Borrowings are payable up to
90 days after such loan is executed. The Fund also pays a commitment fee equal
to its pro rata share of the amount of the credit facility at a rate of 0.05%
per annum. The Fund had no borrowings outstanding during the six months ended
Nov. 30, 1999.
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<CAPTION>
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
1999c 1999 1998 1997 1996b
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $4.94 $5.08 $4.98 $4.92 $4.97
Income from investment operations:
Net investment income (loss) .13 .27 .30 .32 .28
Net gains (losses) (both realized and unrealized) (.08) (.07) .10 .06 (.04)
Total from investment operations .05 .20 .40 .38 .24
Less distributions:
Dividends from net investment income (.13) (.27) (.30) (.32) (.29)
Distributions from realized gains -- (.07) -- -- --
Total distributions (.13) (.34) (.30) (.32) (.29)
Net asset value, end of period $4.86 $4.94 $5.08 $4.98 $4.92
Ratios/supplemental data
Net assets, end of period (in millions) $1,585 $1,723 $1,403 $1,267 $1,095
Ratio of expenses to average daily net assetsd .92%e .88% .86% .90% .91%e
Ratio of net investment income (loss) to average daily net assets 5.58%e 5.36% 5.89% 6.37% 6.34%e
Portfolio turnover rate (excluding short-term securities) 303% 278% 159% 146% 115%
Total returnf 1.17% 4.07% 8.15% 7.73% 5.04%
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, 1999 (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.
</TABLE>
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<CAPTION>
Fiscal period ended May 31,
Per share income and capital changesa
Class B Class Y
1999c 1999 1998 1997 1996b 1999c 1999 1998 1997 1996b
Net asset value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
beginning of period $4.94 $5.08 $4.98 $4.92 $4.96 $4.94 $5.08 $4.98 $4.92 $4.97
Income from investment operations:
Net investment income (loss) .11 .23 .26 .28 .26 .13 .28 .30 .32 .29
Net gains (losses)
(both realized and unrealized) (.08) (.07) .10 .06 (.04) (.08) (.07) .10 .06 (.04)
Total from investment operations .03 .16 .36 .34 .22 .05 .21 .40 .38 .25
Less distributions:
Dividends from net investment income (.11) (.23) (.26) (.28) (.26) (.13) (.28) (.30) (.32) (.30)
Distributions from realized gains -- (.07) -- -- -- -- (.07) -- -- --
Total distributions (.11) (.30) (.26) (.28) (.26) (.13) (.35) (.30) (.32) (.30)
Net asset value, end of period $4.86 $4.94 $5.08 $4.98 $4.92 $4.86 $4.94 $5.08 $4.98 $4.92
Ratios/supplemental data
Net assets, end of period
(in millions) $1,422 $1,498 $1,045 $820 $520 $187 $191 $119 $115 $99
Ratio of expenses to
average daily net assetsd 1.67%e 1.63% 1.61% 1.66% 1.67%e .78%e .80% .78% .73% .74%e
Ratio of net investment
income (loss) to average
daily net assets 4.83%e 4.61% 5.13% 5.60% 5.59%e 5.76%e 5.44% 5.97% 6.54% 6.53%e
Portfolio turnover rate
(excluding short-term
securities) 303% 278% 159% 146% 115% 303% 278% 159% 146% 115%
Total returnf .79% 3.31% 7.32% 6.90% 4.30% 1.25% 4.15% 8.23% 7.91% 5.22%
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, 1999 (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.
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<CAPTION>
Financial Statements
Statement of assets and liabilities
Government Income Portfolio
Nov. 30, 1999 (Unaudited)
Assets
Investments in securities, at value (Note 1)
<S> <C> <C>
(identified cost $4,583,093,649) $4,527,530,478
Cash in bank on demand deposit 770,720
Accrued interest receivable 26,978,644
Receivable for investment securities sold 726,259,440
U.S. government securities held as collateral (Note 5) 74,105,757
- ----------
Total assets 5,355,645,039
Liabilities
Payable for investment securities purchased 245,854,032
Payable for securities purchased on a when-issued basis (Note 1) 827,200,077
Payable upon return of securities loaned (Note 5) 858,622,632
Accrued investment management services fee 43,186
Other accrued expenses 15,586
Securities sold short (Notes 1 and 3) 224,001,250
Options contracts written, at value (premium received $1,863,381) (Note 6) 577,500
Total liabilities 2,156,314,263
-------------
Net assets $3,199,330,776
==============
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Statement of operations
Government Income Portfolio
Six months ended Nov. 30, 1999 (Unaudited)
Investment income
Income:
<S> <C>
Interest $110,029,262
------------
Expenses (Note 2):
Investment management services fee 8,307,540
Compensation of board members 7,210
Custodian fees 129,730
Audit fees 16,875
Other 24,695
------
Total expenses 8,486,050
Earnings credits on cash balances (Note 2) (6,026)
------
Total net expenses 8,480,024
---------
Investment income (loss) -- net 101,549,238
===========
Realized and unrealized gain (loss) -- net Net realized gain (loss) on:
Security transactions (Note 3) (102,651,069)
Financial futures contracts (14,547,989)
Options contracts written (Note 6) 43,106,240
----------
Net realized gain (loss) on investments (74,092,818)
Net change in unrealized appreciation (depreciation) on investments 17,562,382
----------
Net gain (loss) on investments (56,530,436)
-----------
Net increase (decrease) in net assets resulting from operations $ 45,018,802
=============
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
Statements of changes in net assets
Government Income Portfolio
Nov. 30, 1999 May 31, 1999
Six months ended Year ended
(Unaudited)
Operations
<S> <C> <C>
Investment income (loss) -- net $ 101,549,238 $ 170,696,388
Net realized gain (loss) on investments (74,092,818) 77,523,298
Net change in unrealized appreciation (depreciation) on investments 17,562,382 (129,475,710)
---------- ------------
Net increase (decrease) in net assets resulting from operations 45,018,802 118,743,976
Net contributions (withdrawals) from partners (260,136,460) 726,433,297
------------ -----------
Total increase (decrease) in net assets (215,117,658) 845,177,273
Net assets at beginning of period 3,414,448,434 2,569,271,161
------------- -------------
Net assets at end of period $3,199,330,776 $3,414,448,434
============== ==============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
Government Income Portfolio
(Unaudited as to Nov. 30, 1999)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Government Income Portfolio (the Portfolio) is a series of Income Trust (the
Trust) and is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. The Portfolio seeks to
provide a high level of current income and safety of principal consistent with
investment in U.S. government and government agency securities. The Declaration
of Trust permits the Trustees to issue non-transferable interests in the
Portfolio.
The Portfolio's significant accounting policies are summarized below:
Use of estimates
Preparing financial statements that conform to 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 independent pricing service.
Securities for which market quotations are not readily available are valued at
fair value according to methods selected in good faith by the board. Short-term
securities maturing in more than 60 days from the valuation date are valued at
the market price or approximate market value based on current interest rates;
those maturing in 60 days or less are valued at amortized cost.
Option transactions
To produce incremental earnings, protect gains and facilitate buying and selling
of securities for investments, the Portfolio may buy and sell put and call
options and write covered call options on portfolio securities as well as 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 completing the obligation depends upon the credit standing of the other
party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Portfolio
will realize a gain or loss when the option transaction expires or closes. When
options on debt securities or futures are exercised, the Portfolio will realize
a gain or loss. When other options are exercised, the proceeds on sales for a
written call option, the purchase cost for a written put option or the cost of a
security for a purchased put or call option is adjusted by the amount of premium
received or paid.
Futures transactions
To gain exposure to or protect itself from market changes, the Portfolio may buy
and sell financial futures contracts. Risks of entering into futures contracts
and related options include the possibility of an illiquid market and that a
change in the value of the contract or option may not correlate with changes in
the value of the underlying securities.
Upon entering into a futures contract, the Portfolio is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Portfolio each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Portfolio recognizes a realized gain or loss when the
contract is closed or expires.
Short sales
The Portfolio may engage in short sales. In these transactions, the Portfolio
sells a security that it does not own in anticipation of a decline in the market
value of the security. To complete the transaction, the Portfolio must borrow
the security to make delivery to the buyer. The Portfolio is obligated to
replace the security that was borrowed by purchasing it at the market price at
the time of replacement. The price at such time may be more or less than the
price at which the Portfolio sold the security. The Portfolio will designate
cash or liquid securities to cover its open short positions. The Portfolio also
may engage in "short sales against the box," a form of short-selling that
involves selling a security that the Portfolio owns (or has an unconditioned
right to purchase) for delivery at a specified date in the future. This
technique allows the Portfolio to hedge protectively against anticipated
declines in the market of its securities. If the value of the securities sold
short increased between the date of the short sale and the date on which the
borrowed security is replaced, the Portfolio loses the opportunity to
participate in the gain. A "short sale against the box" will result in a
constructive sale of appreciated securities thereby generating capital gains to
the Portfolio.
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 debt securities
at least equal to the amount of its commitment. As of Nov. 30, 1999, the
Portfolio had entered into outstanding when-issued or forward-commitments of
$827,200,077.
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 an Investment Management Services
Agreement with AEFC to manage its portfolio. Under this agreement, AEFC
determines which securities will be purchased, held or sold. The management fee
is a percentage of the Portfolio's average daily net assets in reducing
percentages from 0.52% to 0.395% annually.
Under the agreement, the Trust also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees, audit and certain legal
fees, fidelity bond premiums, registration fees for units, office expenses,
consultants' fees, compensation of trustees, corporate filing fees, expenses
incurred in connection with lending securities of the Portfolio and any other
expenses properly payable by the Trust or Portfolio and approved by the board.
During the six months ended Nov. 30, 1999, the Portfolio's custodian fees were
reduced by $6,026 as a result of earnings credits from overnight cash balances.
The Portfolio also pays custodian fees to American Express Trust Company, an
affiliate of AEFC.
According to a Placement Agency Agreement, American Express Financial Advisors
Inc. acts as placement agent of the Trust's units.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than short-term
obligations) aggregated $13,405,766,542 and $13,188,404,377, respectively, for
the six months ended Nov. 30, 1999. For the same period, the portfolio turnover
rate was 303%. Realized gains and losses are determined on an identified cost
basis.
As of Nov. 30, 1999, the following securities were sold short.
Issuer Shares Proceeds Value
FNMA 30 6.5% TBA 100,000,000 $ 96,027,500 $ 95,218,750
FNMA 30 7.0% TBA 132,000,000 129,758,750 128,782,500
----------- ----------- -----------
Total 232,000,000 $225,786,250 $224,001,250
4. INTEREST RATE FUTURES CONTRACTS
As of Nov. 30, 1999, investments in securities included securities valued at
$79,306,974 that were pledged as collateral to cover initial margin deposits on
4,187 open purchase contracts and 26,942 open sale contracts. The market value
of the open purchase contracts as of Nov. 30, 1999 was $453,558,223 with a net
unrealized loss of $3,424,278. The market value of the open sale contracts as of
Nov. 30, 1999 was $4,915,426,288 with a net unrealized gain of $7,442,411. See
"Summary of significant accounting policies."
5. LENDING OF PORTFOLIO SECURITIES As of Nov. 30, 1999, securities valued at
$831,697,825 were on loan to brokers. For collateral, the Portfolio received
$784,516,875 in cash and U.S. government securities valued at $74,105,757.
Income from securities lending amounted to $1,828,867 for the six months ended
Nov. 30, 1999. 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, 1999
Puts Calls
Contracts Premium Contracts Premium
Balance May 31, 1999 2,351 $3,162,193 33,129 $15,694,987
Opened 91,274 10,358,188 127,396 21,161,409
Closed (19,800) (3,579,800) (18,634) (6,090,420)
Exercised (26,926) (944,834) (24,225) (2,156,317)
Expired (46,899) (8,995,747) (85,898) (26,746,278)
------- ---------- ------- -----------
Balance Nov. 30, 1999 -- $ -- 31,768 $ 1,863,381
See "Summary of significant accounting policies."
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Government Income Portfolio
Nov. 30, 1999 (Unaudited)
(Percentages represent value of investments compared to net assets)
Bonds (137.9%)
Issuer Coupon Principal Value(a)
rate amount
Mortgage-backed securities (94.8%)
Federal Home Loan Mtge Corp
<S> <C> <C> <C> <C> <C>
08-01-00 7.50% $533,757 $534,459
07-01-03 6.50 14,695 14,543
09-01-09 6.50 3,770,817 3,728,296
10-01-10 7.00 9,619,092 9,600,983
01-01-13 6.00 10,554,713 10,152,634
04-01-14 6.00 40,772,405 39,089,199
11-01-23 8.00 10,459,739 10,688,598
05-01-24 7.50 4,173,151 4,175,738
07-01-24 8.00 5,634,971 5,726,539
01-01-25 9.00 4,844,869 5,065,892
06-01-25 8.00 7,472,755 7,589,480
08-01-25 8.00 1,936,790 1,967,043
02-01-26 6.00 16,392,090 15,321,522
05-01-26 9.00 10,511,805 11,004,598
12-01-27 6.00 131,521,687 122,603,797
01-01-28 6.00 2,700,713 2,504,912
02-01-28 6.00 17,126,421 15,888,108
09-01-28 6.00 18,063,603 16,772,530
10-01-28 6.00 13,158,386 12,200,324
06-01-29 6.50 22,397,890 21,361,988
06-01-29 7.00 24,992,229 24,429,904
07-01-29 6.50 46,205,287 44,068,293
07-01-29 7.00 26,232,898 25,642,658
Collateralized Mtge Obligation
08-15-03 6.50 11,926,107 11,863,563
11-15-22 4.00 44,310,000 38,703,686
11-15-23 4.00 5,752,952 5,569,030
Interest Only
01-01-20 10.00 148,557(c) 34,658
Principal Only
09-15-03 6.46 5,355,715(d) 4,554,977
05-15-08 7.14 5,689,699(d) 4,577,541
05-15-08 8.13 5,176,585(d) 4,538,409
03-15-09 7.38 3,122,966(d) 2,717,957
11-15-23 7.86 834,511(d) 699,373
Federal Natl Mtge Assn
12-01-99 7.00 665,796 665,803
09-01-07 8.50 2,370,176 2,454,996
05-01-13 6.00 55,758,434 53,399,458
06-01-13 6.00 45,747,139 43,811,712
08-01-13 6.00 73,401,709 70,296,297
09-01-13 6.00 16,961,409 16,243,822
11-01-13 6.00 18,059,744 17,295,689
12-01-13 5.50 12,670,878 11,879,502
12-01-13 6.00 3,894,139 3,729,389
01-01-14 5.50 2,420,206 2,269,049
01-01-14 6.00 2,822,031 2,702,639
02-01-14 5.50 9,449,676 8,852,761
03-01-14 5.50 986,656 923,331
03-01-14 6.00 4,502,543 4,312,054
04-01-14 5.50 204,730,118(b) 191,897,108
04-01-14 6.00 7,486,502 7,163,486
05-01-14 5.50 26,928,315 25,200,027
05-01-14 6.00 22,440,789 21,472,544
06-01-14 5.50 140,365,986 131,568,971
06-01-14 6.00 40,970,409 39,205,719
06-01-14 6.50 54,091,984 52,928,078
07-01-14 5.50 16,026,324 14,997,738
07-01-14 6.00 61,021,396 58,388,532
08-01-14 5.50 111,491,017 104,335,407
08-01-14 6.00 153,241,104 146,634,185
08-01-14 6.50 12,818,902 12,539,457
09-01-14 6.00 4,277,195 4,092,650
09-01-14 6.50 12,942,450 12,660,311
12-01-14 6.50 217,910,000(b) 212,938,927
12-01-14 7.00 66,000,000(b) 65,649,375
08-01-19 6.50 156,798,051 149,447,358
11-01-21 8.00 1,956,771 1,992,227
03-01-23 9.00 1,346,060 1,416,728
04-01-23 8.50 5,169,799 5,349,139
08-25-23 6.00 14,400,000 12,897,484
09-01-23 6.50 37,929,979 36,507,605
09-01-23 8.50 17,837,634 18,489,778
11-01-23 6.00 9,604,276 8,985,953
12-01-23 7.00 12,291,293 12,053,088
01-01-24 6.50 14,037,389 13,484,598
06-01-24 9.00 4,232,807 4,449,739
09-01-25 6.50 18,783,031 17,992,224
11-01-25 6.50 18,878,120 18,087,504
02-01-26 6.00 491,233 457,461
02-01-26 8.00 1,973,967 2,001,721
04-01-26 6.00 279,600 260,378
05-01-26 7.50 13,156,512 13,123,621
02-01-27 6.00 2,212,019 2,054,413
04-01-27 6.00 5,077,269 4,715,514
04-01-27 6.50 12,106,182 11,542,518
04-01-27 7.00 7,535,944 7,364,049
09-01-27 7.00 5,983,009 5,846,537
03-01-28 6.00 21,088,896 19,565,175
04-01-28 6.00 54,785,778(f,g) 50,812,971
05-01-28 6.00 9,147,403 8,484,875
05-01-28 6.50 19,714,399 18,807,309
07-01-28 6.00 9,517,515 8,828,180
09-01-28 6.00 91,710,631 85,037,536
10-01-28 6.00 16,471,458 15,267,065
10-01-28 6.50 47,177,378 45,010,167
06-01-29 6.50 41,463,694 39,536,168
07-01-29 6.50 142,278,766 135,609,281
09-01-29 6.50 534,214 509,171
09-01-29 7.00 70,227,246 68,637,299
10-01-29 7.00 109,722,540 107,233,502
11-01-29 6.50 13,768,107 13,122,659
11-01-29 7.00 17,732,885 17,325,767
11-01-29 7.50 22,000,000 21,931,559
12-01-29 5.50 132,000,000(b) 123,461,249
Collateralized Mtge Obligation
09-25-08 4.50 38,000,000 34,235,021
11-25-08 5.50 2,084,009 2,006,963
10-25-10 4.50 6,368,130 6,156,772
07-25-12 7.00 2,371,887 2,361,000
01-25-19 3.00 4,997,335 4,834,123
08-25-23 6.50 15,000,000 14,125,050
05-18-26 5.00 17,000,000 14,614,144
Interest Only
08-01-18 9.50% $45,980(c) $11,653
01-15-20 10.00 2,197,879(c) 600,878
02-25-22 9.50 347,971(c) 84,864
07-25-22 8.50 7,739,013(c) 1,977,326
Inverse Floater
08-25-23 6.78 687,961(h) 609,829
03-25-24 7.98 1,030,465(h) 886,507
Principal Only
06-25-21 12.57 281,048(d) 231,288
Govt Natl Mtge Assn
08-20-19 11.00 142,126 158,293
Total 3,034,493,530
U.S. government obligations (41.3%)
Collateralized Mtge Acceptance Corp
12-15-30 6.50 74,487 73,396
Resolution Funding Corp
Zero Coupon
04-15-06 5.74 4,803,000(i) 3,173,540
04-15-08 5.88 21,250,000(i) 12,218,960
07-15-08 6.13 48,500,000(i) 27,385,224
01-15-09 5.76 24,173,000(i) 13,237,836
07-15-09 5.91 32,646,000(i) 17,234,999
10-15-12 8.04 8,400,000(i) 3,521,049
04-15-17 7.28 37,700,000(i) 11,602,514
07-15-17 7.28 6,650,000(i) 2,012,084
01-15-18 7.20 8,000,000(i) 2,342,552
10-15-18 7.87 7,500,000(i) 2,092,433
U.S. Treasury
07-31-01 5.50 26,600,000(f,g) 26,402,628
08-19-01 5.50 44,000,000 43,638,320
09-30-01 5.63 374,000,000(e,f,g) 371,527,859
10-31-01 5.88 228,800,000(e) 228,289,775
04-30-02 6.63 10,000,000 10,137,890
02-15-03 10.75 15,000,000(f,g) 16,968,323
08-15-03 5.75 18,500,000(e) 18,271,525
11-15-03 4.25 1,950,000 1,825,688
02-15-04 4.75 154,000,000(e) 146,423,200
05-15-04 5.25 44,000,000(e) 42,515,000
05-15-04 12.38 7,000,000 8,641,774
08-15-05 6.50 5,000,000 5,068,184
08-15-05 10.75 4,750,00(f) 5,744,148
05-15-06 6.88 12,600,000(e) 13,012,603
07-15-06 7.00 98,500,000(e) 102,392,612
11-15-08 4.75 10,100,000(e) 9,077,375
05-15-09 5.50 160,600,000(e) 152,770,750
Zero Coupon
11-15-04 5.65 33,000,000(f,g,i) 24,254,762
Total 1,321,857,003
Other (1.8%)
California Infrastructure-
Pacific Gas & Electric Series 1997-1
09-25-05 6.32 20,400,000 20,186,820
San Diego Gas & Electric
03-25-03 6.07 7,500,000 7,487,625
09-25-05 6.19 6,000,000 5,906,700
Southern California Edison
03-25-03 6.17 13,895,000 13,884,579
GMAC Commercial Mtge Securities
Series 1997-C2 Cl A1
12-15-04 6.45 9,081,798 8,907,246
Total 56,372,970
Total bonds
(Cost: $4,467,777,598) $4,412,723,503
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Option purchased (0.04%)
Issuer Shares Exercise Expiration Value(a)
price date
Put
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 1,500,000 $97 Dec. 1999 $1,218,750
Total option purchased
(Cost: $1,617,188) $1,218,750
Short-term securities (3.6%)
Issuer Annualized Amount Value(a)
yield on date payable at
of purchase maturity
U.S. government agencies (3.4%)
Federal Home Loan Bank Disc Nts
12-22-99 5.21% $6,600,000 $6,578,139
02-02-00 5.59 6,300,000 6,232,576
02-18-00 5.60 8,000,000 7,892,978
02-23-00 5.65 2,200,000 2,168,729
Federal Home Loan Mtge Corp Disc Nts
12-10-99 5.20 1,800,000 1,797,405
01-10-00 5.60 5,000,000 4,966,118
01-12-00 5.52 1,600,000 1,589,527
02-01-00 5.59 700,000 692,626
02-18-00 5.63 10,500,000 10,359,533
Federal Natl Mtge Assn Disc Nts
12-02-99 5.24 1,300,000 1,299,602
12-08-99 5.26 4,800,000 4,794,229
12-17-99 5.25 500,000 498,676
01-21-00 5.61 5,900,000 5,847,454
01-25-00 5.57 9,400,000 9,311,274
01-28-00 5.59 300,000 296,969
02-02-00 5.61 1,000,000 989,298
02-17-00 5.60 37,500,000 37,004,603
02-24-00 5.65 6,400,000 6,307,961
Total 108,627,697
Commercial paper (0.2%)
Bell Atlantic
01-18-00 5.85 5,000,000 4,960,528
Total short-term securities
(Cost: $113,698,863) $113,588,225
Total investments in securities
(Cost: $4,583,093,649)(j) $4,527,530,478
<PAGE>
</TABLE>
Notes to investments in securities
(a) Securities are valued by procedures described in Note 1 to the financial
statements.
(b) At Nov. 30, 1999, the cost of securities purchased, including interest
purchased, on a when-issued basis was $827,200,077.
(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) Security is partially or fully on loan. See Note 5 to the financial
statements.
(f) Partially pledged as initial deposit on the following open interest rate
futures contracts (see Note 4 to the financial statements):
Type of security Notional amount
Purchase contracts
Eurodollar Sept. 2004, 90-day $25,500,000
U.S. Treasury Notes March 2000, 2-year 5,100,000
U.S. Treasury Notes March 2000, 5-year 388,100,000
Sale contracts
Eurodollar March 2000, 90-day 86,500,000
Eurodollar March 2001, 90-day 97,700,000
Eurodollar March 2003, 90-day 152,200,000
Eurodollar March 2004, 90-day 112,500,000
Eurodollar June 2000, 90-day 86,500,000
Eurodollar June 2001, 90-day 27,900,000
Eurodollar June 2002, 90-day 68,800,000
Eurodollar June 2003, 90-day 152,200,000
Eurodollar June 2004, 90-day 112,500,000
Eurodollar Sept. 2000, 90-day 86,500,000
Eurodollar Sept. 2001, 90-day 28,900,000
Eurodollar Sept. 2002, 90-day 68,800,000
Eurodollar Sept. 2003, 90-day 152,200,000
Eurodollar Dec. 2000, 90-day $97,700,000
Eurodollar Dec. 2002, 90-day 152,200,000
Eurodollar Dec. 2003, 90-day 114,700,000
Eurodollar Dec. 1999, 90-day 33,700,000
U.S. Treasury Bonds Dec. 1999 82,700,000
U.S. Treasury Bonds March 2000 30,800,000
U.S. Treasury Notes Dec. 1999, 5-year 68,200,000
U.S. Treasury Notes Dec. 1999, 10-year 503,100,000
U.S. Treasury Notes March 2000 376,900,000
(g) At Nov. 30, 1999, securities valued at $79,302,013 were held to cover open
call options written as follows:
Issuer Principal Exercise Expiration Value(a)
amount Price Date
Federal Natl Mtge Assn $880,000 $96 Dec. 1999 $68,750
Federal Natl Mtge Assn 880,000 98 Dec. 1999 110,000
Federal Natl Mtge Assn 880,000 98 Dec. 1999 55,000
Federal Natl Mtge Assn 440,000 97 Dec. 1999 41,250
U.S. Treasury Note Futures Dec. 1999 968,000 98 Dec. 1999 302,500
Total $577,500
(h) Inverse floaters represent securities that pay interest at a rate that
increases (decreases) in the same magnitude as, or in a multiple of, a decline
(increase) in the LIBOR (London InterBank Offering Rate) Index. Interest rate
disclosed is the rate in effect on Nov. 30, 1999. Inverse floaters in the
aggregate represent 0.05% of the Portfolio's net assets as of Nov. 30, 1999.
(i) For zero coupon bonds, the interest rate disclosed represents the annualized
effective yield on the date of acquisition.
(j) At Nov. 30, 1999, the cost of securities for federal income tax purposes was
approximately $4,581,476,000 and the approximate aggregate gross unrealized
appreciation and depreciation based on that cost was:
Unrealized appreciation $16,878,000
Unrealized depreciation (70,824,000)
-----------
Net unrealized depreciation $(53,946,000)
<PAGE>
American
Express
Funds
AXP Federal Income Fund
IDS Tower 10
Mpls, MN 55440-0010
Ticker Symbol
Class A: IFINX Class B ISHOX Class Y IDFYX
PRSRT STD AUTO
U.S POSTAGE
PAID
SPENCER, IA
PERMIT NO. 85
AMERICAN
EXPRESS
S-6442 N (1/00)
Distributed by American Express Financial Advisors Inc. Member NASD. American
Express Company is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
