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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
IDS Extra Income Fund, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:*
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
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IDS EXTRA INCOME FUND
901 MARQUETTE AVENUE SOUTH
SUITE 2810
MINNEAPOLIS, MINNESOTA 55402-3268
NOTICE OF REGULAR MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 9, 1994
September 17, 1994
Dear Shareholder:
We will hold a regular meeting of the shareholders of IDS Extra Income Fund,
Inc. (the "Fund") at 2:00 p.m. on November 9, 1994, at the Marquette Hotel, 7th
and Marquette, Minneapolis, Minnesota in the Lake Superior Room on the fourth
floor. The purposes of the meeting include the election of Board members,
consideration of a new agreement between the Fund and IDS Financial Corporation
("IDS") with changes in the fee structure, and changes to the Fund's investment
policies. The agenda for the meeting is on the next page.
Please take the time to read the proxy statement which discusses each agenda
item. The Board of Directors has approved the proposals and recommends that you
vote in favor of each item. If you were a shareholder on September 11, 1994, you
may vote at the meeting or any adjournment of the meeting. We hope you can
attend. For those of you who cannot attend, the enclosed card is for your vote.
Please be sure to sign the card and return it to us as soon as possible in the
enclosed postage-paid envelope. The latest annual report was previously mailed
to you.
LESLIE L. OGG
Secretary
IT IS IMPORTANT THAT YOU VOTE PROMPTLY. PLEASE FILL IN AND SIGN THE ENCLOSED
CARD. PROMPT RESPONSE WILL SAVE YOUR FUND THE COST OF ADDITIONAL MAILINGS.
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AGENDA
(1) To elect 14 Board members;
(2) To ratify or reject the selection of KPMG Peat Marwick as the independent
auditors for the Fund;
(3) To approve or reject a new Investment Management and Services Agreement with
IDS with an increase in the fee;
(4) To approve or reject a change in the investment policies of the Fund to
permit the Fund to invest all of its assets in another investment company
with substantially the same investment objectives, policies and restrictions
as the Fund;
(5) To approve or reject changes to certain of the Fund's fundamental investment
policies;
(6) To transact any other business that comes before the meeting.
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PROXY STATEMENT
As a shareholder of IDS Extra Income Fund (the "Fund"), you are invited to
attend a regular meeting of the Fund. At the meeting, the shareholders will vote
on the matters described below. Each share is entitled to one vote. For those of
you who cannot come to the meeting, the Board of Directors (the "Board") is
asking permission to vote for you. The shares will be voted the way you mark the
boxes on the enclosed card. Proxies not voted, including broker non-votes, will
not be counted toward establishing a quorum. Abstentions will be counted toward
a quorum, but will have the same effect as a no vote in determining whether a
proposal is approved.
To avoid the cost of further solicitation, it is important for you to vote
promptly. If you think you might not attend, please complete the card. If your
plans change and you can attend, simply see the Secretary at the meeting and
tell him you will be voting your shares in person. Also, if you change your mind
after you send in the card, you may change your vote or revoke it by writing us
or by sending another card. Make sure you sign and date the card and return it
to us.
On September 11, 1994, the Fund had shares outstanding. As far as the
Board has been able to determine, as of September 1, 1994, no shareholder owned
5% or more of the outstanding shares of the Fund. It is estimated that this
proxy statement will be mailed to shareholders on September 17, 1994.
(1) ELECTION OF BOARD MEMBERS
The Board has set the number of persons who serve on the Board at 14. Each
Board member will serve until the next regular shareholders' meeting or until he
or she reaches the mandatory retirement age established by resolution of the
Board. Under the current resolution of the Board, members who were serving on
the Board of any fund in the IDS MUTUAL FUND GROUP (the "GROUP") on January 1,
1988, serve until the end of the meeting of the Board following their 75th
birthday and all other members serve through the meeting following their 70th
birthday.
In voting for Board members, you may vote all of your shares cumulatively.
This means that you have the right to give each nominee an equal number of votes
or divide the votes among the nominees as you wish. You have as many votes as
the number of shares you own, including fractional shares, multiplied by the
number of members to be elected. By completing the card, you give the proxies
the right to vote for the persons named below. If you elect to withhold
authority for any individual nominee or nominees, you may do so by marking the
box labeled "Exception," and by striking the name of any excepted nominee, as is
further explained on the card itself. If
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you do withhold authority, the proxies will not vote shares equivalent to the
proportionate number applicable to the names for which authority is withheld.
The persons nominated to serve on the Board are set forth below. Each of the
nominees is a nominee for trustee or director of each of the other funds within
the GROUP except William Dudley who is director of all the publicly offered
funds. The GROUP currently consists of 42 funds with assets of approximately $44
billion. Each nominee was elected a member of the Board at the last
shareholders' meeting except for Lynne Cheney, David Hubers, Heinz Hutter and
Angus Wurtele.
All of the nominees have agreed to serve. If an unforeseen event prevents a
nominee from serving, your votes will be cast for the election of a substitute
selected by the Board. Information about each nominee is provided below. It
includes the period of service as a Board member of funds in the GROUP, the
number of shares each owns in the Fund and in all the funds in the GROUP on
September 1, 1994 and the current committee assignments. Election requires a
vote by a majority of the shares present or represented at the meeting.
LYNNE V. CHENEY Board member since 1994 Age 53
Distinguished Fellow, American Enterprise Institute for Public Policy Research.
Former Chair of National Endowment of the Humanities. Director, The Reader's
Digest Association Inc., Lockhead Corporation, and the Interpublic Group of
Companies, Inc. (advertising).
Shares owned: Fund GROUP
Committee assignment: Audit
WILLIAM H. DUDLEY** Board member since 1991 Age 62
Executive vice president and director of IDS Financial Corporation ("IDS").
Shares owned: Fund GROUP
Committee assignment: Executive
ROBERT F. FROEHLKE Board member since 1987 Age 71
Former president of all funds in the GROUP. Director, the ICI Mutual Insurance
Co., Institute for Defense Analyses, Marshall Erdman and Associates, Inc.
(architectural engineering) and Public Oversight Board of the American Institute
of Certified Public Accountants.
Shares owned: Fund GROUP
Committee assignments: Contracts, Executive, Personnel
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DAVID R. HUBERS** Board member since 1993 Age 51
President, chief executive officer and director of IDS. Previously, senior vice
president, finance and chief financial officer of IDS.
Shares owned: Fund GROUP
HEINZ F. HUTTER Board member since 1994 Age 65
President and chief operating officer, Cargill, Incorporated (commodity
merchants and processors) since February 1991. Executive vice president from
1981 to February 1991.
Shares owned: Fund GROUP
ANNE P. JONES Board member since 1985 Age 59
Partner, law firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
Shares owned: Fund GROUP
Committee assignment: Contracts
DONALD M. KENDALL Board member since 1968 Age 73
Former chairman and chief executive officer, PepsiCo, Inc.
Shares owned: Fund GROUP
Committee assignment: Audit
MELVIN R. LAIRD Board member since 1974 Age 72
Senior counsellor for national and international affairs, The Reader's Digest
Association, Inc. Chairman of the board, COMSAT Corporation, former nine-term
congressman, secretary of defense and presidential counsellor. Director, Martin
Marietta Corp., Metropolitan Life Insurance Co., The Reader's Digest
Association, Inc., Science Applications International Corp., Wallace Reader's
Digest Funds and Public Oversight Board (SEC Practice Section, American
Institute of Certified Public Accountants).
Shares owned: Fund GROUP
Committee assignment: Personnel
LEWIS W. LEHR Board member since 1986 Age 73
Former chairman of the board and chief executive officer, Minnesota Mining and
Manufacturing Company (3M). Director, Jack Eckerd Corporation (drugstores).
Advisory Director, Peregrine Inc. (microelectronics).
Shares owned: Fund GROUP
Committee assignments: Audit, Personnel
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WILLIAM R. PEARCE* Board member since 1980 Age 66
President of all funds in the GROUP since June 1993. Former vice chairman of the
board, Cargill, Incorporated (commodity merchants and processors).
Shares owned: Fund GROUP
Committee assignments: Contracts, Executive
EDSON W. SPENCER Board member since 1991 Age 68
President, Spencer Associates Inc. (consulting). Chairman of the board, Mayo
Foundation (healthcare). Former chairman of the board and chief executive
officer, Honeywell Inc. Director, Boise Cascade Corporation (forest products)
and CBS Inc. Member of International Advisory Councils, Robert Bosch (Germany)
and NEC (Japan).
Shares owned: Fund GROUP
Committee assignments: Audit, Executive
JOHN R. THOMAS** Board member since 1987 Age 57
Senior vice president and director of IDS.
Shares owned: Fund GROUP
WHEELOCK WHITNEY Board member since 1977 Age 68
Chairman, Whitney Management Company (manages family assets).
Shares owned: Fund GROUP
Committee assignment: Audit, Contracts, Executive, Personnel
C. ANGUS WURTELE Board member since 1994 Age 60
Chairman of the board and chief executive officer, The Valspar Corporation
(paints). Director, Bemis Corporation (packaging), Donaldson Company (air
cleaners & mufflers) and General Mills, Inc. (consumer foods).
Shares owned: Fund GROUP
*Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, director, securityholder
and/or employee of IDS or American Express Company ("American Express").
+Shares owned by family members in which nominee disclaims any beneficial
ownership.
As of September 1, 1994, all executive officers and Board members as a group
beneficially owned directly or indirectly less than 1% of the shares of the
Fund.
The committees have been appointed to facilitate the work of the Board. The
Executive Committee has authority to act for the full Board
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between meetings. It focuses on investment activities, routine compliance issues
and oversight of various operational functions. The Joint Audit Committee meets
with representatives of the independent auditors to consider the scope of annual
audits and reviews the results of those audits. It receives reports from IDS
Internal Audit that pertain to the Fund's operations and addresses special areas
of concern. The Contracts Committee, under the full Board's direction,
negotiates contracts and monitors, evaluates and reports to the Board the
performance under the terms of those contracts. The Joint Personnel Committee
makes recommendations with respect to the composition of the Board and the
compensation of the members, officers and staff of the Fund. Candidates for
vacancies on the Board must have a background that gives promise of making a
significant contribution to furthering the interests of all shareholders.
Shareholders wishing to suggest candidates should write in care of Joint
Personnel Committee, IDS MUTUAL FUND GROUP, 901 Marquette Avenue South, Suite
2810, Minneapolis, MN 55402-3268.
Over the last fiscal year, the Board held 10 meetings, the Executive
Committee met twice a month, and the Audit, Contracts and Personnel Committees
met 5, 4 and 6 times respectively. Average attendance at the Board was 95% and
no nominee attended less than 75% of the meetings of the Board and the
committees on which she or he serves.
Members who are not officers of the Fund or directors of IDS receive an
annual fee and retirement benefits from the Fund. They also receive attendance
and other fees, the cost of which the Fund shares with the other funds in the
GROUP. Members of this Fund's Board receive an annual fee of $2,250 and upon
retirement at age 70, or earlier if for health reasons, such members receive
monthly payments equal to 1/2 of the annual fee divided by 12 for as many months
as the member served on the Board up to 120 months or until the date of death.
There are no death benefits and the plan is not funded. The fees shared with
other funds are those for attendance for meetings of the Contracts Committee or
Board, $500, meetings of the Audit, Executive, and Personnel Committees, $300,
out-of state, $500, and Chair of Contracts Committee, $5,000. Expenses also are
reimbursed.
During the last fiscal year, the members of the Board, for attending up to
49 meetings, received the following compensation, in total, from all the funds
in the GROUP.
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NOMINEE COMPENSATION FROM GROUP
<TABLE>
<CAPTION>
Retirement Estimated
Aggregate Benefits Annual Total Cash
Compensation Accrued as Fund Benefit on Compensation
Nominee from Fund Expenses Retirement from GROUP
- ---------------------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert F. Froehlke
(part of year) $ 782 $ 1,350 $ 1,125 $ 14,787
Anne P. Jones 3,810 1,376 1,125 42,125
Donald M. Kendall 3,544 6,152 1,125 37,370
Melvin R. Laird 3,695 4,448 1,125 39,511
Lewis W. Lehr 3,725 6,118 1,097 40,182
William R. Pearce
(part of year) 3,169 2,354 1,125 29,978
Edson W. Spencer 3,717 2,916 600 40,858
Wheelock Whitney 3,770 2,622 1,125 40,645
</TABLE>
Besides Mr. Pearce, who is president, the Fund's other officer is:
Leslie L. Ogg, 56, Vice president and general counsel of all publicly
offered funds in the GROUP since 1978. Vice president and secretary of the Life
Funds and treasurer and secretary of all publicly offered funds in the GROUP
since July 1989.
Officers serve at the pleasure of the Board.
During the last fiscal year, no officer earned more than $60,000 from the
Fund. All officers as a group (two persons) earned cash compensation, including
salaries and thrift plan, of $24,290 for the last fiscal year.
(2) RATIFY OR REJECT THE SELECTION OF
KPMG PEAT MARWICK AS INDEPENDENT AUDITORS
For the fiscal year ending August 31, 1995, KPMG Peat Marwick has been
selected to serve as the independent auditors for the Fund. This selection was
made by the members of the Board who are not officers of the Fund or associated
with the investment manager pursuant to a recommendation by the Joint Audit
Committee. When a meeting of shareholders is held, the selection also is
considered by the shareholders.
The audit services provided to the funds in the GROUP by KPMG Peat Marwick
include the examination of the annual financial statements, assistance in
connection with filings with the Securities and Exchange Commission (the "SEC")
and meeting with the Joint Audit Committee. A representative of KPMG Peat
Marwick is expected to be at the meeting and will have the opportunity to make a
statement and answer questions.
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that you vote to
ratify the selection of the independent auditors. Ratification of
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the selection requires a vote by a majority of the shares present or represented
at the meeting. If the selection of the independent auditors is not ratified,
the Board will consider what further action must be taken.
(3) APPROVE OR REJECT A NEW INVESTMENT
MANAGEMENT AND SERVICES AGREEMENT
WITH AN INCREASE IN THE FEE
IDS has provided the Fund investment advice, administrative services,
transfer agent services and distribution since the Fund began operation. These
services are now provided under four separate contracts.
The Fund is considering two changes in its current structure. First, it is
considering issuing multiple classes of shares. This would permit investors to
choose when and how to pay a sales charge. Second, at some future time, the Fund
may separate the asset management function from the investor services function,
creating what are known as master/feeder funds. The master fund will offer its
shares only to other investment companies and investment groups including
pension plans and trust accounts. The master/feeder structure facilitates the
use of a number of different distribution channels. The master/feeder structure
will not necessarily be used by all funds in the GROUP and will be implemented
for this Fund only if the Board determines that it is in the best interests of
the Fund and its shareholders.
In order to proceed with the changes, new contracts with IDS are necessary.
Under the proposed contracts, based on the net asset values and the number of
shareholder accounts in the Fund in 1993, shareholders would have paid an
additional $1.50 for each $1,000 invested. In return for that increase, IDS
believes it can provide more and better services to shareholders.
The proposed contracts will become effective only if and when the Fund
issues multiple classes of shares. If the proposed contracts are approved, the
Fund plans to offer multiple classes of shares before the end of March 1995.
BOARD DELIBERATIONS. In considering the desirability of issuing multiple
classes of shares, the members of the Board took several steps. First, they
asked the Board's Contracts Committee, composed of members who are not
affiliated with IDS ("independent members"), to test and evaluate a plan to
offer multiple classes of shares. The Committee determined that many investment
companies are now offering multiple classes of shares because they give
investors the choice among several sales charge options. Also, they determined
that issuing multiple classes of shares enables an investment company to offer
shares more effectively to institutional and retirement accounts. Second, the
Board asked the Committee to consider terms of the new contracts. By the end of
1993, proposed contract terms were deemed sufficiently complete to be considered
and evaluated by all independent members of the Board. Third, the members of the
Board approved the filing of an application with the SEC for the necessary
authority to offer multiple
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classes of shares. An order approving the application was granted on March 16,
1994. Fourth, the Board authorized the Fund to seek a private letter ruling from
the Internal Revenue Service to assure the plan to offer multiple classes of
shares would not create any tax problems for the Fund or its shareholders.
Multiple classes of shares will be issued only if that assurance is provided. If
the private letter ruling has not yet been issued at the time the Fund intends
to implement multiple classes of shares, the Fund may rely on an opinion of tax
counsel.
In February, the independent members of the Board began an evaluation of the
plan and the proposed contracts against two standards: first, they had to offer
important benefits both to the Fund and its shareholders and, second, they had
to be fair to the Fund and its shareholders. In the course of this evaluation,
independent members met with representatives of American Express, the parent
company of IDS, and IDS to discuss the business plans of both companies. Also,
they reviewed the changes taking place in the money management industry with
noted research analysts and industry executives. And, they considered the
benefits existing shareholders derive from continued growth of the Fund and
tested the fairness of contract terms by employing the services of consultants
considered experts in their fields.
Independent members of the Board also reviewed five performance reports
prepared by IDS and an extensive review of those reports by Price Waterhouse, a
service it has provided the Fund in each of the past 13 years. The five reports,
prepared for the Fund each year by IDS, cover investment performance,
shareholder services, compliance, sales and marketing, and IDS' profitability
from its relationships with all funds in the GROUP. In addition, they considered
information provided by IDS in response to questions asked by the independent
members and the Fund's staff and from various periodic reports given to the
Board or to committees of the Board.
CURRENT INVESTMENT MANAGEMENT AND SERVICES AGREEMENT. Currently, IDS
provides investment advice and administrative services to the Fund under an
Investment Management and Services Agreement (the "IMS Agreement") which was
last approved by shareholders on November 13, 1991. At that time, shareholders
approved a change in the rate of the fee payable to IDS, a change in the
language pertaining to payment of expenses, and the elimination of the
contractual provisions applicable to services provided as transfer agent and
dividend-disbursing agent. The Fund and IDS then entered into a separate
Transfer Agent Agreement (the "TA Agreement").
The fee paid to IDS for its services under the IMS Agreement is based on two
components. The first component of the fee, a group asset charge, is based on a
graduated scale applied to the net assets of all the funds, except the
money-market funds, in the GROUP. The scale begins at 0.46% of net assets for
the first $5 billion and declines for each additional $5 billion until a
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fee of 0.32% is paid for net assets exceeding $50 billion. The second component,
an individual asset charge, is a fixed fee of 0.21% of the net assets of the
Fund itself. The complete group asset charge schedule and net assets for all
funds in the GROUP appear under the caption "Certain Information Concerning IDS"
which follows later in this proxy statement.
The Fund pays its taxes, brokerage commissions and nonadvisory expenses,
which include custodian fees; audit and certain legal fees; fidelity bond
premiums; registration fees for shares; office expenses of the Fund; consultant
fees; compensation of Board members, officers and employees (except anyone who
is also an officer, director or employee of IDS or its affiliates); corporate
filing fees; a portion of the Investment Company Institute dues; organizational
expenses; expenses incurred in connection with lending portfolio securities; and
other expenses properly payable by the Fund, approved by the Board.
If, at the end of any month, the fees payable by the Fund under the IMS
Agreement and its nonadvisory expenses exceed the most restrictive applicable
state expense limitation -- which at the current time is 2.5% of the first $30
million of the average daily net assets, 2% of the next $70 million and 1.5% of
average daily net assets over $100 million on an annual basis -- IDS will assume
all expenses in excess of the limit. IDS then may bill the Fund for those
expenses in subsequent months up to the end of that fiscal year, but not after
that date.
PROPOSED INVESTMENT MANAGEMENT AND SERVICES AGREEMENT. The proposed
agreement is the same as the current IMS Agreement except that: (a) the fee is
based solely on the assets of the Fund, not on assets of the GROUP and on the
unique characteristics of the Fund, including the Fund's use of the services
provided by IDS in the areas of investment research, portfolio management and
investment services and (b) in order to facilitate the implementation of a
master/feeder structure in the future, certain provisions relating to
administration and accounting services have been eliminated. IDS will continue
to provide those administration and accounting services under a separate
Administrative Services Agreement (the "Admin
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Agreement"). A copy of the proposed IMS Agreement reflecting these changes is
set forth as Exhibit A. The proposed fees under the IMS Agreement and the Admin
Agreement are shown below:
PROPOSED FEES
<TABLE>
<CAPTION>
PROPOSED IMS AGREEMENT PROPOSED ADMIN AGREEMENT
Assets Annual Rate At Annual Rate At
(Billions) Each Asset Level Each Asset Level
- ---------- ---------------------- -------------------------
<S> <C> <C>
First $1 0.590% 0.050%
Next $1 0.565 0.045
Next $1 0.540 0.040
Next $3 0.515 0.035
Next $3 0.490 0.030
Over $9 0.465 0.025
</TABLE>
Based on the current net assets in the GROUP, the effective rate paid by the
Fund under the current IMS Agreement is 0. % and under the proposed IMS
Agreement is 0. %. In subsequent years, the Board could consider changing the
fees under the Admin Agreement without shareholder approval.
On July 31, 1994, the Fund's net assets were approximately $1.7 billion; for
1993, approximately $1.5 billion; and for 1992, approximately $1.3 billion.
The Board's independent members based their evaluation of the proposed IMS
Agreement on a number of factors. The IDS annual report on investment
performance describes the total return of each of the funds in the GROUP;
reviews IDS' organizational structure and the performance of the portfolio
managers; and provides other information about IDS' qualifications to serve as
investment adviser. Periodic reports to committees of the Board reflect the
ability of IDS to actually carry out the duties of administrator which include,
among other things, pricing portfolios, maintaining accurate accounting records,
issuing timely financial and tax reports, and complying with federal and state
requirements. Terms of the proposed contract, especially the graduated fee scale
and the types of expenses paid by the Fund, were compared to those of other
investment companies deemed by a respected, independent industry authority most
comparable to the Fund. The independent members concluded that IDS has the
qualifications needed to serve the Fund as investment adviser under the IMS
Agreement. Overall the funds in the GROUP have benefited from IDS' accurate and
timely recordkeeping and, as a GROUP, a majority of funds are consistently in
the second quartile of their competitive groupings.
NEW CONTRACTS TO BE APPROVED BY THE BOARD. If shareholders approve the
proposed IMS Agreement, the Board will approve a 12b-1 plan and new contracts
necessary for issuing multiple classes of shares. The Fund intends to offer
shares with a front-end sales charge and a service fee (Class A), a
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rear-end sales charge, service fee and 12b-1 fee (Class B) and, for certain
institutional retirement and fixed fee accounts, no sales charge or service fee
(Class Y). At the time multiple classes are implemented, IDS, as sole
shareholder of Class B and Class Y shares, will approve the 12b-1 plan for Class
B and the IMS Agreement for Class B and Class Y. The 12b-1 plan and the
contracts are discussed below. The shares you currently own will become Class A
shares.
- SHAREHOLDER SERVICES. IDS now provides shareholder services under a plan
and supplemental agreement of distribution. Because distribution services are
included, it is considered a 12b-1 plan (so called because it is authorized
under Rule 12b-1, a regulation issued under the Investment Company Act of 1940,
the "1940 Act"). The Fund currently pays a fee determined by multiplying all the
active shareholder accounts by $6. The fee is intended to help IDS defray that
portion of its distribution costs not covered by the sales charges, further
costs incurred in maintaining and improving shareholder services and in
financing the sale of shares. The fee paid to IDS in 1993 under this plan was
equal to 0.04% of net assets.
The proposed contract for shareholder services does not cover any
distribution costs and is not a 12b-1 plan. The Fund will pay 0.15% of net
assets of accounts holding Class A or Class B shares directly for the benefit of
planners and servicing agents for the services they provide shareholders. The
Fund also will pay IDS 0.025% for use in monitoring those services and providing
additional training and support to planners and servicing agents to assure the
Fund shareholders receive good service. The services provided are designed to
help shareholders consider thoughtfully their investment goals and monitor the
progress they are making in achieving those goals. The Fund will pay the service
fee only with respect to net assets of accounts actually serviced by an IDS
planner or other servicing agents. The fee will not be used to finance the sale
of shares.
In evaluating the proposed contract, the independent members of the Board
considered both the general use of such fees in the industry and the proposed
level in relation to the services provided and similar fees charged by others.
They concluded the services contemplated will provide important benefits to
shareholders and that the terms of the proposed contract are fair both to the
Fund and its shareholders. Accordingly, the Board will approve the contract for
shareholder services if shareholders approve the proposed IMS Agreement.
12B-1 PLAN. IDS Financial Services, Inc. ("IDSFS"), as exclusive
underwriter for the Fund, has agreed to offer multiple classes of shares for the
Fund. IDSFS will incur substantial costs on the date Class B shares (those
shares that do not pay a sales charge at the time of purchase) are sold. IDSFS
is repaid those costs by the Fund over several years out of the assets of Class
B shares.
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The 12b-1 plan applies only to Class B shares. Under the plan, the Fund will
pay IDSFS 0.75% of the assets of that class each year to cover the sales costs
IDSFS incurs. After eight years, Class B shares will be converted to Class A
shares. Class B shares redeemed before being converted to Class A shares will be
assessed a contingent deferred sales charge designed to approximate the sales
charge that would have been paid had the shares been held for eight years. The
sales charges for Class A and Class B shares are structured so that investors
will have approximately the same total returns at the end of eight years
regardless of which class is chosen.
The independent members concluded that the proposed contract should
contribute to positive cash flows, growing asset size, and services of enhanced
scope and quality that can be provided by a growing and profitable investment
manager and distributor. The ability to offer multiple classes of shares should
help IDS develop new markets for the Fund in light of current trends in the
investment market. The members of the Board have approved the adoption of the
multiple class structure believing that it serves the best interest of the Fund
and its shareholders. Accordingly, if the shareholders approve the proposed IMS
Agreement a new 12b-1 plan will be approved. Any changes in the 12b-1 plan will
require the approval of the Class B shareholders, if and when shares of that
class are sold.
- TRANSFER AGENT SERVICES. The Board reviewed the annual report provided by
IDS with respect to the scope and quality of the services it provides
shareholders as transfer agent. The report describes the standards by which IDS
measures the quality of transfer agent services and assesses how well it has met
those standards. The report describes the types of services IDS offers
(including providing shareholders with an average cost basis of their
investments in the Fund made over time) and compares them to the services
offered by others.
Under the proposed TA Agreement, the fee for the current class of
shareholders will not change. IDS will be paid a fee by the Fund for these
services out of the assets of Class A shares determined by multiplying the
number of Class A shareholder accounts by $15.50 and, from the assets of Class B
shares, by multiplying the number of Class B accounts by $16.50 and, from the
assets of Class Y shares, by multiplying the number of Class Y accounts by
$15.50. The members of the Board will approve the proposed TA Agreement if
shareholders approve the proposed IMS Agreement. The TA Agreement is reviewed
annually. It may be changed at any time by agreement between IDS and the Fund.
- DISTRIBUTION. The distribution contract between IDSFS and the Fund
provides that IDSFS has the exclusive right to act as principal underwriter for
the Fund. The contract will be modified to reflect the changes that result from
implementation of the multiple class structure.
- BROKERAGE. The Fund executes some portfolio transactions through American
Enterprise Investment Services Inc., a wholly owned subsidiary of
14
<PAGE>
IDS, at advantageous rates. Executions of the Fund's remaining portfolio
transactions are through other brokerage firms at competitive rates which enable
IDS to receive services, such as market research, that benefit the Fund.
- CUSTODIAN. IDS Trust Company serves as custodian for the assets of the
Fund. The contract is reviewed annually to determine that IDS Trust Company
provides required custodial services at least equal in scope and quality to
those provided by others at rates that are fair and reasonable in light of the
usual and customary charges made by others.
CURRENT AND PRO FORMA DATA. For the last fiscal year, fees and expenses the
Fund actually paid as well as fees and expenses the Fund would have paid if the
proposed IMS Agreement, proposed Admin Agreement, proposed shareholder service
agreement and proposed TA Agreement had been in effect are shown below:
FUND EXPENSES
(AS A PERCENT OF AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
Pro Forma
Actual Class A*
----------- -------------
<S> <C> <C>
Annual Operating Expenses
IMS Agreement 0.62%
12b-1 Plan 0.04
Other Expenses 0.04
Total Fund Operating Expenses 0.81
<FN>
*The figures for Class A include a small percentage of shares that will be moved
into Class Y.
</TABLE>
EXAMPLE: Suppose for each year for the next 10 years, fund expenses are as
above and annual return is 5%. If you sold your shares at the end of the
following years, for each $1,000 invested, you would pay total expenses of:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 59 $ 79 $ 101 $ 162
</TABLE>
If the proposed IMS Agreement had been in effect, in the last fiscal year
the Fund would have paid to IDS under that agreement, an increase of
%.
For the last fiscal year IDS received $8,481,616 from the Fund under the IMS
Agreement, $569,529 under the 12b-1 Plan and $1,447,257 under the TA Agreement.
In addition, IDSFS, a wholly owned subsidiary of IDS, received $10,927,944 in
sales charges from sales of shares of the Fund.
BASIS OF RECOMMENDATION BY THE BOARD ON THE PROPOSED IMS AGREEMENT. In
reaching its recommendation to shareholders, the members of the Board considered
the scope and quality of all services IDS has provided and expects to provide
under the proposed contracts. They considered IDS' present distribution
strategies, its past success and its willingness to invest additional resources
in developing new markets for the Fund. They noted
15
<PAGE>
IDS' commitment to compliance with all applicable laws and regulations and the
benefits IDS receives from its relationships with the Fund. The members
considered IDS' investment performance; the Fund's expense ratio; the
profitability IDS realizes from its investment company operations; and the trend
of IDS profitability from fund operations as well as that of other investment
managers. The members of the Board concluded the services provided, measured in
both scope and quality, have been above average in the industry; investment
performance for funds in the GROUP in most years has been consistent and
generally a majority of the funds perform above the median of a group of their
competitive funds; expense ratios remain in line with other funds; and IDS'
profitability is not unreasonable. Based on its conclusions, the members of the
Board have approved the proposed IMS Agreement and recommend unanimously that
the shareholders approve it.
On May 12, 1994, at a meeting called for the purpose of considering the
proposed IMS Agreement, the independent members first and then the Board as a
whole, by vote, cast in person, approved the terms of the proposed IMS
Agreement. After the second year, the proposed IMS Agreement will continue from
year to year provided continuance is approved at least annually by the Board.
The proposed IMS Agreement may be terminated without penalty either by the
Board, by IDS or by a vote of a majority of the outstanding shares of the Fund.
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that shareholders
approve the proposed IMS Agreement. Approval requires the affirmative vote of
the majority of the outstanding shares of the Fund which the 1940 Act defines as
67% or more of the shares represented at the meeting held to consider the issue
if more than 50% are represented or more than 50% of the shares entitled to
vote, whichever is less.
(4) APPROVE OR DISAPPROVE A NEW INVESTMENT POLICY
TO PERMIT THE FUND TO INVEST ALL OF
ITS ASSETS IN AN INVESTMENT COMPANY WITH
SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVES,
POLICIES AND RESTRICTIONS AS THE FUND
As discussed in Proposal 3 above, at some future time the Board may
determine that it is in the best interests of the Fund and its shareholders to
create what is known as a master/feeder fund structure. Such a structure allows
several investment companies and other investment groups, including pensions
plans and trust accounts, to have their investment portfolios managed as a
combined pool called the master fund. The purpose of the structure is to achieve
operational efficiencies.
Currently, the Fund's investment policies, including those pertaining to
investing all of its assets in one company, would prohibit the master/feeder
structure. The Board recommends that shareholders adopt the following investment
policy: "NOTWITHSTANDING ANY OF THE FUND'S OTHER INVESTMENT POLICIES, THE FUND
MAY INVEST ITS ASSETS IN AN OPEN-END MANAGEMENT INVESTMENT
16
<PAGE>
COMPANY HAVING SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS AS THE FUND FOR THE PURPOSE OF HAVING THOSE ASSETS MANAGED AS PART
OF A COMBINED POOL."
Adoption of this policy will permit the Fund to invest its assets in a
master fund, without any additional vote of shareholders. The Fund's operations
and shareholder services will not be affected. Even though the assets are
invested in securities of the master fund, you will continue to receive
information about the underlying investments the same as you now receive in your
annual and semi-annual reports. Fees and expenses are not expected to increase
as a result of that change.
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that shareholders
approve the new investment policy. Approval requires the affirmative vote of 67%
or more of the shares represented at the meeting if more than 50% are
represented or more than 50% of the shares entitled to vote, whichever is less.
If the change is not approved, the Fund will continue to operate in the same
fashion as it is now operating.
(5) APPROVE OR REJECT CHANGES TO FUNDAMENTAL POLICIES
The Fund has a number of investment policies that can be changed only with
approval of shareholders. These policies are referred to as "fundamental"
policies. Policies that can be changed by the Board are called "non-
fundamental". The Board recommends changing the fundamental policies described
below. These policies were established a number of years ago. New investment
strategies and new investment instruments continue to be created and developed.
If the policies are changed to non-fundamental or revised, the Fund will have
the flexibility to use those strategies and instruments promptly without
incurring the cost of shareholder meetings. Some policies were established to
conform to the requirements of federal or state law that existed at the time.
These policies do not need to be fundamental under those laws and, if changed to
non-fundamental, the Board could react to changes in the laws.
A. PERMIT THE FUND TO PLEDGE ASSETS AS COLLATERAL TO THE EXTENT PERMITTED
BY THE BOARD. The Fund is prohibited from pledging more than 15% of its total
assets as collateral for loans or other purposes. If the policy is changed to
non-fundamental, when appropriate, the Board would be able to raise or lower the
maximum percentage in order to implement investment strategies or to meet other
possible needs.
B. PERMIT THE BOARD TO ESTABLISH POLICIES FOR INVESTING IN OTHER INVESTMENT
COMPANIES. The Fund is prohibited from investing in other investment companies
except by purchases in the open market where the dealer's or sponsor's profit is
the regular commission. This policy was adopted to conform to a state law. It
may be appropriate to make such investments in ways other than open market
purchases in the future if the state changes its position. If the policy is
changed to non-fundamental, the Board could react to changes by the state.
17
<PAGE>
C. CHANGE A FUNDAMENTAL POLICY TO ELIMINATE THE RIGHT TO CONCENTRATE
INVESTMENTS. The Fund has a fundamental policy that provides: "THE FUND WILL
NOT INVEST MORE THAN 25 PERCENT OF ITS TOTAL ASSETS IN SECURITIES OF ANY ONE
INDUSTRY, EXCEPT THAT THE FUND WILL CONCENTRATE IN THE ELECTRIC UTILITY INDUSTRY
WHEN IT DEEMS ELECTRIC UTILITY SECURITIES TO BE GOOD RELATIVE VALUES BY
INVESTING FROM 25 PERCENT TO 40 PERCENT OF THE VALUE OF ITS TOTAL ASSETS IN SUCH
SECURITIES." The Fund has not concentrated in the electric utilities industry in
the past and has no current intention of concentrating in that industry. Because
of changing conditions in the utilities markets, the Fund no longer believes it
is consistent with its investment objective to reserve the right to concentrate
in that industry.
The Board recommends shareholders replace this policy with the following
fundamental policy governing concentration: "THE FUND WILL NOT CONCENTRATE IN
ANY ONE INDUSTRY." According to the current interpretation by the SEC, this
means no more than 25% of the Fund's total assets, based on market value at time
of purchase, can be invested in any one industry.
D. REVISE THE FUNDAMENTAL POLICY ON MAKING LOANS. Currently, the Fund has
a fundamental policy prohibiting it from making cash loans. It is proposed to
revise the policy to state that "THE FUND WILL NOT MAKE CASH LOANS, IF THE TOTAL
COMMITMENT AMOUNT EXCEEDS 5% OF THE FUND'S TOTAL ASSETS." In certain
circumstances the Fund may make investments, such as purchasing short-term debt
instruments from banks, that may be considered cash loans. The Fund will not
make loans to affiliated companies or to any individual.
E. REVISE THE FUNDAMENTAL POLICY ON INVESTING IN REAL ESTATE. Currently,
the Fund has a fundamental policy that states that the Fund will not buy or sell
real estate, commodities or commodity contracts, except the Fund may enter into
futures contracts. It is proposed to separate the policy into two parts. The
commodities policy will remain unchanged. The real estate policy will be revised
as follows: "THE FUND WILL NOT BUY OR SELL REAL ESTATE, UNLESS ACQUIRED AS A
RESULT OF OWNERSHIP OF SECURITIES OR OTHER INSTRUMENTS, EXCEPT THIS SHALL NOT
PREVENT THE FUND FROM INVESTING IN SECURITIES OR OTHER INSTRUMENTS BACKED BY
REAL ESTATE OR SECURITIES OF COMPANIES ENGAGED IN THE REAL ESTATE BUSINESS." The
Fund does not expect to hold real estate directly. However, it may invest in
securities issued or guaranteed by companies engaged in acquiring, constructing,
financing, developing or operating real estate projects, including real estate
investment trusts (REITs).
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that shareholders
approve the proposed changes in the Fund's fundamental policies. Approval
requires the affirmative vote of 67% or more of the shares represented at the
meeting if more than 50% are represented or more than 50% of the shares entitled
to vote, whichever is less. If the changes are not approved, the Fund will
continue to operate in accordance with its current investment policies.
18
<PAGE>
CERTAIN INFORMATION CONCERNING IDS
IDS is the adviser or subadviser for the 42 funds in the GROUP. The size of
each fund, as of July 31, 1994, and the fee schedule for each fund under its
management agreement are shown below:
<TABLE>
<CAPTION>
Name Net Assets
- ---------------------------------------- ---------------
<S> <C>
Publicly Offered Funds
(Non-Money Market):
- --------------------
Blue Chip Advantage..................... $ 142,209,588
Bond.................................... 2,259,063,867
California
Tax-Exempt............................ 258,866,435
Discovery............................... 522,606,718
Diversified Equity
Income................................ 864,567,489
Equity Plus............................. 607,697,337
Extra Income............................ 1,671,295,135
Federal Income.......................... 1,029,328,886
Global Bond............................. 452,984,951
Global Growth........................... 568,444,460
Growth.................................. 951,623,593
High Yield.............................. 6,356,086,929
Insured
Tax-Exempt............................ 533,030,027
International........................... 721,297,012
Managed
Retirement............................ 2,127,121,745
Massachusetts
Tax-Exempt............................ 72,980,822
Michigan
Tax-Exempt............................ 77,856,447
<CAPTION>
Name Net Assets
- ---------------------------------------- ---------------
<S> <C>
Minnesota
Tax-Exempt............................ $ 415,296,413
Mutual.................................. 3,036,337,955
New Dimensions.......................... 4,110,064,854
New York
Tax-Exempt............................ 121,406,333
Ohio
Tax-Exempt............................ 72,861,916
Precious Metals......................... 68,615,909
Progressive............................. 268,085,661
Selective............................... 1,510,417,028
Stock................................... 2,288,148,561
Strategy --
Aggressive Equity . 642,558,227
Equity................................ 1,145,543,613
Income................................ 706,837,475
Short-Term Income..................... 217,227,269
Worldwide Growth...................... 276,483,905
Tax-Exempt Bond......................... 1,190,034,011
Utilities Income........................ 658,813,634
</TABLE>
Life Funds Offered Only Through Annuities
(Non-Money Market):
- --------------------
<TABLE>
<S> <C>
Aggressive Growth....................... $ 669,816,381
Capital Resource........................ 2,714,729,872
International Equity.................... $ 1,029,638,190
Managed................................. 2,414,506,241
Special Income.......................... 1,577,327,715
</TABLE>
19
<PAGE>
Group Asset Charge
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Group Assets Annual Rate at Effective
(in billions) Each Asset Level Annual Rate
- --------------- ---------------- -----------
<S> <C> <C>
First $5 0.46% 0.46%
Next $5 0.44 0.45
Next $5 0.42 0.44
Next $5 0.40 0.43
Next $5 0.39 0.422
Next $5 0.38 0.415
Next $5 0.36 0.407
Next $5 0.35 0.40
Next $5 0.34 0.393
Next $5 0.33 0.387
Over $50 0.32
- ---------------------------------------------------
</TABLE>
Individual Asset Charge
- ----------------------------------------------------------------
(% of average daily net assets)
<TABLE>
<S> <C>
Blue Chip Advantage..................... 0.10%
Bond.................................... 0.13
California
Tax-Exempt............................. 0.13
Discovery............................... 0.23
Diversified
Equity Income.......................... 0.14
Equity Plus............................. 0.14
Extra Income............................ 0.21
Federal Income.......................... 0.13
Global Bond............................. 0.46
Global Growth........................... 0.46
Growth.................................. 0.23
High Yield.............................. 0.11
Insured Tax-Exempt...................... 0.13
International........................... 0.46
Managed Retirement...................... 0.14
Massachusetts
Tax-Exempt............................. 0.13
Michigan
Tax-Exempt............................. 0.13
Minnesota
Tax-Exempt............................. 0.13
Mutual.................................. 0.14%
New Dimensions.......................... 0.23
New York
Tax-Exempt............................. 0.13
Ohio Tax-Exempt......................... 0.13
Precious Metals......................... 0.46
Progressive............................. 0.23
Selective............................... 0.13
Stock................................... 0.14
Strategy --
Aggressive Equity..................... 0.23
Equity................................ 0.14
Income................................ 0.13
Short-Term Income..................... 0.13
Worldwide Growth...................... 0.46
Tax-Exempt Bond......................... 0.13
Utilities Income........................ 0.14
Life Aggressive Growth.................. 0.25
Life Capital Resource................... 0.25
Life International Equity............... 0.50
Life Managed............................ 0.25
Life Special Income..................... 0.25
</TABLE>
- ----------------------------------------------------------------
20
<PAGE>
Money Market Funds:
- -------------------
<TABLE>
<CAPTION>
Name Net Assets
- ---------------------------------------- ---------------
<S> <C>
Cash $ 1,153,600,779
Planned Investment 25,859,200
<CAPTION>
Name Net Assets
- ---------------------------------------- ---------------
<S> <C>
Tax-Free $ 120,773,901
Life Moneyshare 184,907,484
</TABLE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Asset Charge Cash Planned
Money Market Funds (in billions) Tax-Free Investment Moneyshare
- ------------------------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Cash First $1 0.34% 0.20% 0.54%
Planned Investment Next 0.5 0.32 0.18 0.52
Tax-Free Next 0.5 0.30 0.16 0.50
Life Moneyshare Next 0.5 0.28 0.14 0.48
Over 2.5 0.26 0.12 0.46
</TABLE>
IDS manages investments for its own account and has an investment advisory
agreement with a subsidiary, IDS Certificate Company ("IDSC"), a face amount
certificate company having total assets, as of July 31, 1994, of approximately
$2.8 billion. The current advisory agreement between IDS and IDSC provides for a
graduated scale of fees equal on an annual basis to 0.75% of the first $250
million total book value (carrying cost) of assets of IDSC, 0.65% on the next
$250 million, 0.55% on the next $250 million, 0.50% on the next $250 million and
0.45% on the value in excess of $1 billion. Not included in this computation are
mortgages, real estate and other assets on which IDSC pays a service fee leaving
a balance of approximately $2.5 billion.
IDS has advisory agreements to furnish investment advice to IDS Life
relative to investment of the six Life Funds in the GROUP described above as
well as the three additional funds listed below. The fee under each advisory
agreement is 0.25% of the Fund's average daily net assets. The size of the three
additional funds, as of July 31, 1994 is:
<TABLE>
<CAPTION>
Net Assets
--------------
<S> <C>
IDS Life Variable Annuity A $ 228,562,074
IDS Life Variable Annuity B 505,695,830
IDS Life Series Fund, Inc. --
Equity Portfolio 160,257,659
Government Securities Portfolio 11,431,837
Income Portfolio 34,594,515
Managed Portfolio 174,232,786
Money Market Portfolio 10,130,671
</TABLE>
In addition to the charges under the advisory agreement, IDS Life Insurance
Company ("IDS Life") charges Variable Annuity Funds A and B a fee equal on an
annual basis to 1% of the average net assets for mortality and expense
assurance.
21
<PAGE>
IDS is paid at a rate of 1% of the net assets for providing investment
advice to Sunrise Fund which had net assets of $63,696,199 as of July 31, 1994.
PRESIDENT AND BOARD OF DIRECTORS OF IDS. David R. Hubers is President and
Chief Executive Officer of IDS. Listed below are the names and principal
occupations of the directors of IDS as of July 31, 1994. Except as otherwise
noted below, the address of each director is IDS Tower, Minneapolis, MN
55440-0010.
<TABLE>
<CAPTION>
Name and Address Principal Occupation
- --------------------------------------- ---------------------------------------
<S> <C>
Peter J. Anderson Sr. Vice President
Karl J. Breyer Sr. Vice President and General Counsel
James E. Choat Sr. Vice President
William H. Dudley Executive Vice President
Roger S. Edgar Sr. Vice President
Gordon L. Eid Sr. Vice President and Deputy General
Counsel
Louis C. Fornetti Sr. Vice President and Chief Financial
Officer
Harvey Golub Chairman, American Express
American Express
New York, New York
David R. Hubers President and Chief Executive Officer
Marietta L. Johns Sr. Vice President
Susan D. Kinder Sr. Vice President
Steven C. Kumagai Sr. Vice President
Peter A. Lefferts Sr. Vice President
Douglas A. Lennick Exec. Vice President
Jonathan S. Linen Vice Chairman, American Express
American Express
New York, New York
James A. Mitchell Exec. Vice President
Barry Murphy Sr. Vice President
Erven A. Samsel Sr. Vice President
R. Reed Saunders Sr. Vice President
Jeffrey E. Stiefler President, American Express
American Express
New York, New York
Fenton R. Talbot Sr. Vice President, American Express
American Express
New York, New York
John R. Thomas Sr. Vice President
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Name and Address Principal Occupation
- --------------------------------------- ---------------------------------------
<S> <C>
Norman Weaver, Jr. Sr. Vice President
William N. Westhoff Sr. Vice President
Michael R. Woodward Sr. Vice President
</TABLE>
IDS is a wholly owned subsidiary of American Express. American Express is a
financial services company located at American Express Tower, World Financial
Center, New York, New York.
MISCELLANEOUS
INVESTMENT DECISIONS, PORTFOLIO TRANSACTIONS AND BROKERAGE. Each investment
decision made for the Fund is made independently from any decision made for
another fund in the GROUP or other account advised by IDS or any of its
subsidiaries. On occasion the Fund and one of the other funds in the GROUP or
another client of the investment manager may simultaneously purchase or sell the
same security. In that case, IDS executes the transaction in a manner which the
Fund agrees in advance is fair. Ordinarily, the transactions of the Fund and
another fund or client of IDS will be averaged as to price and allocated as to
amount between the Fund and the other fund or client pursuant to a formula
considered equitable by the parties to the transactions. Although sharing in
large transactions may at times adversely affect the price or volume of
securities purchased or sold by the Fund, the Fund hopes to gain an overall
advantage in execution.
In selecting broker-dealers to execute transactions, IDS may consider the
price of the security, including commission or mark-up, the size and difficulty
of the order, the reliability, integrity, financial soundness and general
operation and execution capabilities of the broker, the broker's expertise in
particular markets, and research services provided by the broker.
IDS is directed to use its best efforts to obtain the best available price
and most favorable execution except where otherwise authorized by the Board. In
so doing, if, in the professional opinion of the person responsible for
selecting the broker or dealer, several firms can execute the transaction on
that basis, consideration will be given to those firms that offer research
services. Research services may be used by IDS in providing advice to all the
funds in the GROUP or to other accounts advised by IDS and, according to IDS, it
is not possible to relate the benefits to any particular fund or account.
Research provided by brokers supplements the research activities of IDS.
Such services include economic data on, and analysis of, the U.S. and foreign
economies; information on specific industries; information about specific
companies, including earnings estimates; purchase recommendations for stocks and
bonds; portfolio strategy services; political, economic, business and industry
trend assessments; historical statistical information; market data services
providing information on specific issues and prices; and technical analysis of
various aspects of the securities markets, including
23
<PAGE>
technical charts. Research services may take the form of written reports,
computer software or personal contact by telephone or at seminars or other
meetings. IDS has obtained, and in the future may obtain, computer hardware from
brokers, including but not limited to personal computers, that will be used
exclusively for investment decision-making purposes, which include the research,
portfolio management and trading functions and such other services to the extent
permitted under an interpretation by the SEC.
The Board also has adopted a policy authorizing IDS to compensate a broker
for research services, or for brokerage services, by paying a commission which
might not otherwise be charged or a commission in excess of that another broker
might charge to the extent authorized by law, if IDS determines, in good faith,
that the amount of commission is reasonable in relation to the value of the
brokerage or research services provided by a broker or dealer, viewed either in
the light of that transaction or overall responsibilities of IDS to the funds in
the GROUP.
When paying a commission that might not otherwise be charged or a commission
in excess of the amount another broker might charge, IDS must follow procedures
authorized by the Board. To date, three procedures have been authorized. One
procedure permits IDS to direct an order to buy or sell a security traded on a
national securities exchange to a specific broker for research services it has
provided. The second procedure permits IDS, in order to obtain research, to
direct an order on an agency basis to buy or sell a security traded in the
over-the-counter market to a firm that does not make a market in that security.
The commission paid generally includes compensation for research services. The
third procedure permits IDS, in order to obtain research and brokerage services,
to cause the Fund to pay a commission in excess of the amount another broker
might have charged. IDS has assured the Fund that under all three procedures the
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
During the last fiscal year, the Fund paid brokerage commissions aggregating
$101,951. Substantially all firms through whom transactions were executed
provide research services. No transactions were directed to brokers because of
research services they provide to the Fund.
24
<PAGE>
Certain brokerage transactions were executed through broker-dealer
affiliates of IDS as shown in the table below:
<TABLE>
<CAPTION>
Aggregate Percent of
Dollar Aggregate Dollar
Amount of Percent of Amount of
Commissions Aggregate Transactions
Nature of Paid to Brokerage Involving Payment
Broker Affiliation* Broker Commissions of Commissions
- --------------------- --------------- ------------ ------------- -------------------
<S> <C> <C> <C> <C>
American Enterprise (3) $ 1,527 1.50% 1.37%
<FN>
(1) Under common control with IDS as a subsidiary of American Express.
(2) Under common control with IDS as an indirect subsidiary of American Express.
(3) Wholly owned subsidiary of IDS.
</TABLE>
These transactions were executed at rates determined to be reasonable and
fair as compared to the rates another broker would charge, pursuant to
procedures adopted by the Board.
OTHER BUSINESS. At this time the Board does not know of any other business
to come before the meetings. If something does come up, the proxies will use
their best judgment to vote for you on the matter.
SIMULTANEOUS MEETINGS. The regular meeting of shareholders of the Fund is
called to be held at the same time as the regular meetings of shareholders of
the other funds in the GROUP. It is anticipated that all meetings will be held
simultaneously. If any shareholder at the Fund's meeting objects to the holding
of a simultaneous meeting, the shareholder may move for an adjournment of the
Fund's meeting to a time immediately after the simultaneous meetings so that a
meeting of the Fund may be held separately. Should such a motion be made, the
persons named as proxies will take into consideration the reasons for the
objection in deciding whether to vote in favor of the adjournment.
SOLICITATION OF PROXIES. The Board is asking for your vote and for you to
return the proxy card by mail as promptly as possible. The Fund will pay the
expenses for the proxy material and the postage. Supplementary solicitations may
be made by mail, telephone, telegraph or personal contact by financial planners.
The expenses of supplementary solicitation will be paid by the Fund.
SHAREHOLDER PROPOSALS. The Fund does not hold regular meetings of
shareholders on an annual basis. Therefore, no anticipated date of the next
regular meeting can be provided. If a shareholder has a proposal which she or he
feels should be presented to all shareholders, the shareholder should send the
proposal to the President of the Fund. The proposal will be considered at a
meeting of the Board as soon as practicable. Should it be a matter which would
have to be submitted to shareholders, it will be presented at the
25
<PAGE>
next special or regular meeting of shareholders. In addition, should it be a
matter which the Board deems of such significance as to require a special
meeting, such a meeting will be called.
ADJOURNMENT. In the event that sufficient votes in favor of any of the
proposals set forth in the Notice of the Meeting and Proxy Statement are not
received by the time scheduled for the meeting, the persons named as proxies may
move for one or more adjournments of the meeting for a period or periods of not
more than 60 days in the aggregate to permit further solicitation of proxies
with respect to any of the proposals. Any adjournment will require the
affirmative vote of a majority of the shares present at the meeting. The persons
named as proxies will vote in favor of adjournment those shares which they are
entitled to vote which have voted in favor of the proposals. They will vote
against any adjournment those proxies which have voted against any of the
proposals. The costs of any additional solicitation and of any adjourned session
will be borne by the Fund.
By Order of the Board LESLIE L. OGG
September 17, 1994 Secretary
IMPORTANT! IF YOU DO NOT INTEND TO BE AT THE MEETING IN PERSON, PLEASE FILL IN
AND SIGN THE ENCLOSED PROXY AND MAIL IT AT ONCE. A RETURN ENVELOPE IS ENCLOSED
FOR YOUR CONVENIENCE.
26
<PAGE>
IDS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
($ THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Investments:
Investment securities at amortized cost -- fair value
$23,253,854........................................... $22,156,263
Other securities generally at cost -- fair value
$214,108.............................................. 191,718
Mortgage loans -- fair value $2,301,866................. 2,231,302
Cash and cash equivalents................................. 90,715
Life insurance policy and investment certificate loans.... 417,931
Accounts and notes receivable............................. 563,450
Deferred acquisition costs................................ 1,746,291
Consumer loans............................................ 296,161
Land, buildings and equipment -- less accumulated
depreciation, $103,460.................................. 213,984
Goodwill -- less accumulated amortization, $83,970........ 251,897
Other assets.............................................. 199,805
Assets held in segregated asset accounts -- primarily
common stocks at fair value............................. 8,991,694
-------------
$37,351,211
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Fixed annuity reserves.................................. $18,492,135
Life and disability insurance reserves.................. 3,169,569
Investment certificate reserves......................... 2,751,825
Career Distributors' Retirement Plan.................... 234,112
Open securities transactions............................ 299,710
Short-term borrowings................................... 302,894
Accounts payable, accrued expenses and other
liabilities........................................... 961,428
Liabilities related to segregated asset accounts........ 8,991,694
-------------
Total liabilities................................. 35,203,367
-------------
Stockholder's Equity:
Common stock -- $.01 par -- 100 shares authorized,
issued and outstanding................................ --
Additional paid-in capital.............................. 1,150,119
Net unrealized appreciation on equity securities........ 114
Retained earnings....................................... 997,611
-------------
Total stockholder's equity........................ 2,147,844
-------------
$37,351,211
-------------
-------------
Commitments and contingencies
</TABLE>
See accompanying notes to condensed consolidated balance sheet.
F-1
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IDS Financial Corporation (hereinafter referred to as IDS) is a wholly owned
subsidiary of American Express Company (parent).
PRINCIPLES OF CONSOLIDATION. The accompanying condensed consolidated
balance sheet is prepared in accordance with generally accepted accounting
principles. It includes the accounts of IDS and all of its subsidiaries. All
material intercompany accounts have been eliminated in consolidation.
ANNUITY ACCOUNTING. Liabilities for single premium deferred annuities and
installment annuities are accumulation values. Liabilities for fixed annuities
in benefit status are the present value of future benefits using established
industry mortality tables.
INSURANCE ACCOUNTING. Liabilities for future benefits on traditional life
and disability income and health insurance policies are generally calculated
using anticipated rates of mortality, morbidity, policy persistency and
investment yields. Liabilities for universal life-type life insurance are
accumulation values.
DEFERRED ACQUISITION COSTS. The costs of acquiring new business,
principally sales compensation, policy issue costs and underwriting, have been
deferred on annuity, life insurance and other long-term products.
For annuities, the costs are amortized in relation to surrender charge
revenue and a portion of the excess of investment income earned from investment
of contract considerations over the interest credited to contract owners. For
traditional life insurance, and disability income and health insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue. For universal life-type insurance, the costs are amortized over the
lives of the policies as a percentage of the estimated gross profits expected to
be realized on the policies.
SEGREGATED ASSET ACCOUNTS. Assets and liabilities related to segregated
asset accounts represent funds held for the exclusive benefit of the variable
annuity and variable life insurance contract owners.
IDS makes contractual mortality assurances to the variable annuity contract
owners that the net assets of the segregated asset accounts will not be affected
by future variations in the actual life expectancy experience of the annuitants
and beneficiaries from the mortality assumptions implicit in the annuity
contracts. IDS makes periodic fund transfers to, or withdrawals from, the
segregated asset accounts for such actuarial adjustments for variable annuities
that are in the benefit payment period. IDS guarantees, for the
F-2
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
variable life insurance funds, the cost of the contractual insurance rates and
that the death benefit will never be less than the death benefit at the date of
issuance.
INVESTMENT CERTIFICATES. Investment certificates entitle certificate
holders, who have either made lump-sum or installment payments, to receive a
definite sum of money at maturity. Payments from certificate holders are
credited to investment certificate reserves. Investment certificate reserves
accumulate at specified percentage rates of accumulation. For certificates that
allow for the deduction of a surrender charge, cash surrender values may be less
than accumulated investment certificate reserves prior to maturity dates.
Investment certificate reserves are maintained for advance payments by
certificate holders, additional credits granted and interest accrued on each.
The payment distribution, reserve accumulation rates, cash surrender values and
reserve values, among other matters, are governed by the Investment Company Act
of 1940.
GOODWILL. Goodwill represents the unamortized excess of cost over the
underlying fair value of the net tangible assets of IDS as of the date of
acquisition by its parent. Goodwill is being amortized on a straight-line basis
over the next 30 years.
INCOME TAXES. IDS taxable income is included in the consolidated Federal
tax return of IDS' parent. Each eligible subsidiary of IDS' parent provides for
income taxes on a separate return basis.
INVESTMENTS. Bonds and notes, mortgage-backed securities, and preferred
stocks that either must be redeemed by the issuer or may be redeemed by the
issuer at the holder's request are carried at amortized cost. The expected
maturities of these investments are, for the most part, matched with the
expected payments of fixed annuity, life and disability insurance, and
investment certificate future benefits. IDS has the ability to hold these
investments to their maturities and has the intent to hold them for the
foreseeable future. When there is a decline in value, which is other than
temporary, the investments are carried at estimated realizable value.
Marketable equity securities of IDS and its subsidiaries, other than the
life insurance subsidiary, are carried at the lower of aggregate cost or market
value. Common and nonredeemable preferred stocks of the life insurance
subsidiary are carried at market value. The net unrealized appreciation/
depreciation on such securities is included in stockholder's equity. When there
is a decline in value, which is other than temporary, the securities are carried
at estimated realizable value.
F-3
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received from
brokerage firms which deal in mortgage-backed securities.
INTEREST RATE CAPS. IDS purchases interest rate caps as protection against
exposed interest rate positions. Cost is amortized to the expiration dates on a
straight-line basis. Benefits are recognized when realized.
MORTGAGE LOANS. Mortgage loans on real estate are carried at amortized cost
less reserve for losses. When credit and economic evaluations of the underlying
real estate indicate a loss on the loan is likely to occur, an allowance for
such loss is recorded. IDS generally stops accruing interest on loans for which
interest payments are delinquent more than three months.
The estimated fair value of the mortgage loans is determined by a discounted
cash flow analysis using mortgage interest rates currently offered for mortgages
of similar maturities.
LAND, BUILDINGS AND EQUIPMENT. Land, buildings and equipment are carried at
cost less accumulated depreciation. IDS generally utilizes the straight-line
method of computing depreciation.
2. QUALIFIED ASSETS AND ASSETS ON DEPOSIT
IDS' subsidiary, IDS Certificate Company, has issued investment certificates
to clients. The terms of the investment certificates and the provisions of the
Investment Company Act of 1940 require the maintenance of qualified assets. The
carrying value of qualified assets at December 31, 1993 aggregated $2,931,737
and exceeded legal requirements.
Under the terms of the investment certificates, the Investment Company Act
of 1940, depository agreements and the statutes of various states relating to
investment certificates, assets are required to be on deposit with the states or
authorized depositories. Investments, mortgage loans and other assets on deposit
at December 31, 1993, aggregated $2,814,974 and exceeded legal requirements.
IDS' banking subsidiaries are generally required to maintain reserve
balances with the Federal Reserve Bank, the Depository Trust Company and other
institutions. Based upon the dollar volumes and types of deposit liabilities,
the subsidiaries maintained $1,373 in reserves at December 31, 1993.
3. INVESTMENTS
Fair values of bonds and notes, mortgage-backed securities, and common and
preferred stocks represent quoted market prices where available. In
F-4
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
3. INVESTMENTS -- CONTINUED
the absence of quoted market prices, estimated fair values are determined by
established procedures involving, among other things, review of market indices,
price levels of current offerings and comparable issues, price estimates and
market data from independent brokers.
Fair values, and gross unrealized gains and losses of investment securities
at amortized cost at December 31, 1993 were:
<TABLE>
<CAPTION>
Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed Securities $ 10,697,725 $ 10,995,052 $ 358,609 $ 61,284
Corporate Bonds and Obligations 10,373,609 11,112,009 792,684 54,282
Preferred Stocks 801,747 839,941 40,851 2,657
State and Municipal Obligations 258,447 283,010 24,602 39
U.S. Government Agency
Obligations 24,735 23,842 484 1,377
------------- ------------- ------------ -----------
Total Investment Securities $ 22,156,263 $ 23,253,854 $ 1,217,230 $ 119,639
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
</TABLE>
Contractual maturities of debt securities carried at amortized cost as of
December 31, 1993 were:
<TABLE>
<CAPTION>
Fair
Cost Value
------------- -------------
<S> <C> <C>
Due within 1 year $ 553,129 $ 558,107
Due after 1 year through 5 years 2,062,332 2,174,664
Due after 5 years through 10 years 6,107,705 6,581,514
Due after 10 years 2,735,372 2,944,517
------------- -------------
11,458,538 12,258,802
Mortgage-backed Securities 10,697,725 10,995,052
------------- -------------
Total Investment Securities $ 22,156,263 $ 23,253,854
------------- -------------
------------- -------------
</TABLE>
(The timing of actual receipts will differ from contractual maturities
because issuers may call or prepay obligations.)
At December 31, 1993, IDS had a valuation allowance of $114 reflecting the
net unrealized appreciation of equity securities carried at fair value at that
date. The amount is net of $160 of gross unrealized appreciation and deferred
taxes of $46.
IDS will implement, effective January 1, 1994, Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
F-5
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
3. INVESTMENTS -- CONTINUED
and Equity Securities". Under the new rules, debt securities that IDS has both
the positive intent and ability to hold to maturity will be carried at amortized
cost. Debt securities that IDS does not have the positive intent and ability to
hold to maturity, as well as all marketable equity securities, will be
classified as available for sale or trading and carried at fair value.
Unrealized gains and losses on securities classified as available for sale will
be carried as a separate component of Stockholder's Equity. Unrealized holding
gains and losses on securities classified as trading will be reported in
earnings. The effect of the new rules will be to increase Stockholder's Equity
by approximately $200 million, net of taxes, as of January 1, 1994. The
measurement of unrealized securities gains (losses) in Stockholder's Equity is
affected by market conditions, and therefore, subject to volatility.
Other securities, at cost, include shares in affiliated mutual funds at
December 31, 1993 of $106,131. The fair value was $115,465.
Included in bonds and notes at December 31, 1993 are interest rate caps at
amortized cost of $51,733 with an estimated fair value of $21,117. These
interest rate caps carry a notional amount of $5,570,000 and expire on various
dates from 1994 to 1998.
4. SHORT-TERM BORROWINGS
IDS has lines of credit with various banks totaling $495,000, of which
$302,894 was outstanding at December 31, 1993. $75,000 of the amount outstanding
was borrowed from a related party. The weighted average interest rate on the
borrowings was 3.71 percent at December 31, 1993.
IDS has entered into an interest rate swap agreement expiring in 1999
enabling it to convert $21,000 of its variable-rate borrowings to a fixed
interest rate of 8.88 percent. IDS has estimated the cost to terminate the
agreement in the current interest rate environment at $2.0 million at December
31, 1993.
5. RETIREMENT PLANS
IDS and its subsidiaries have qualified and non-qualified pension plans
which cover all permanent employees age 21 and over and certain other employees.
Pension benefits generally depend upon length of service, compensation and other
factors. Funding of retirement costs for the qualified plan complies with the
applicable minimum funding requirements specified by the Employee Retirement
Income Security Act of 1974, as amended.
F-6
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
5. RETIREMENT PLANS -- CONTINUED
The funded status of the plans at December 31, 1993 is set forth in the
table below:
<TABLE>
<CAPTION>
Funded Unfunded
Plan Plan
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation........................ $ (67,260) $ (2,283)
----------- -----------
----------- -----------
Projected benefit obligation for service rendered to
date................................................ (107,261) (7,003)
Fair value of plan assets, primarily invested in bonds
and equities........................................... 131,637 --
----------- -----------
Plan assets in excess of projected benefit obligation... 24,376 (7,003)
Unrecognized prior service cost being recognized over
14.2 years............................................. (1,395) 2,978
Unrecognized net (gain) loss from past experience
different from assumptions and effects of changes in
assumptions............................................ (10,266) 801
Unrecognized net transition asset being recognized over
13.7 years............................................. (10,812) --
----------- -----------
Prepaid (accrued) pension cost included in other
assets................................................. $ 1,903 $ (3,224)
----------- -----------
----------- -----------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation of all plans was 7.25 percent. The
rate of increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation of all plans was 6.0 percent.
The weighted average expected long-term rates of return on plan assets was 9.5
percent.
The Career Distributors' Retirement Plan is an unfunded, noncontributory,
non-qualified deferred compensation plan for IDS financial planners, district
managers and division vice presidents, based on their independent contractor
earnings.
IDS sponsors defined benefit health care plans that provide health care and
life insurance benefits to employees and financial planners who retire after
having worked five years and attained age 55 while in service with IDS or its
subsidiaries. Upon retirement, annual health care premiums will be paid through
participant contributions and fixed amounts contributed by IDS
F-7
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
5. RETIREMENT PLANS -- CONTINUED
based on years of service. For employees and financial planners who retired
prior to April, 1990, IDS contributes a percentage of their annual health care
premiums. The cost of retiree life insurance will be paid entirely by IDS. IDS
funds the cost of these benefits as they are incurred.
The accrued postretirement benefit cost included in other liabilities at
December 31, 1993 was $31,883.
The weighted average discount rates used in determining the 1993
postretirement benefit obligation was 7.25. The rate of increase in the per
capita cost of covered benefits was assumed to be 13 percent for 1994; the rate
was assumed to decrease one percent per year to seven percent in 2000 and remain
at the level thereafter. An increase in the assumed health care cost trend rates
by one percentage point, in each year, would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $1,653.
6. STOCKHOLDER'S EQUITY
Various state laws, the Investment Company Act of 1940 and terms of
investment certificates restrict the amount of dividends that the subsidiaries
may pay to IDS. The amount of net assets of subsidiaries which may be
transferred to IDS was approximately $699.
7. COMMITMENTS AND CONTINGENCIES
IDS is committed to pay aggregate minimum rentals under noncancelable leases
for office facilities and equipment in future years as follows: 1994, $57,313;
1995, $50,341; 1996, $40,737; 1997, $30,572; 1998, $24,337 and an aggregate of
$70,334 thereafter.
Life insurance in force aggregated $46.1 billion at December 31, 1993, of
which $3.0 billion was reinsured. Reinsured risks could become a liability in
the event the reinsurers become unable to meet the obligations they have
assumed.
Approved but unused consumer lines of credit aggregated $457,038 at December
31, 1993. Of the amount approved, 95 percent is in lines of $25 or less, and
less than 1 percent is in lines exceeding $100.
IDS and certain of its subsidiaries are defendants in various lawsuits. In
the opinion of management, the ultimate resolution of these lawsuits, taken in
the aggregate, will not materially affect IDS' consolidated financial position.
F-8
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
8. CREDIT RISK CONCENTRATIONS
Concentrations of credit risk of investment securities at cost at December
31, 1993 were:
<TABLE>
<CAPTION>
On Balance
Sheet
-------------
<S> <C>
By Investment Grade:
Mortgage-backed Securities $ 10,697,725
Aaa/AAA 493,228
Aa/AA 288,727
Aa/A 144,222
A/A 2,619,628
A/BBB 671,159
Baa/BBB 5,182,582
Below Investment Grade 2,058,992
-------------
$ 22,156,263
-------------
-------------
</TABLE>
Mortgage-backed securities are FHLMC, FNMA and GNMA pools which are
guaranteed as to principal and interest by agencies of the U.S. Government.
Other debt securities are rated by Moody's and Standard & Poors (S&P) except for
approximately $2.4 billion which is rated by IDS' analysts using criteria
similar to Moody's and S&P. Commitments to purchase investments were $nil at
December 31, 1993.
Concentrations of credit risk of mortgage loans at December 31, 1993 were:
<TABLE>
<CAPTION>
On Balance Commitments
Sheet to Purchase
------------ -------------
<S> <C> <C>
Mortgage Loans By Region:
North Central $ 896,174 $ 36,325
Atlantic 819,082 94,345
New England 162,227 18,130
South Central 137,707 900
Pacific 128,311 15,140
Mountain 87,801 14,600
------------ -------------
$ 2,231,302 $ 179,440
------------ -------------
------------ -------------
</TABLE>
F-9
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
8. CREDIT RISK CONCENTRATIONS -- CONTINUED
<TABLE>
<CAPTION>
On Balance Commitments
Sheet to Purchase
------------ -------------
<S> <C> <C>
Mortgage Loans By Property Type:
Apartments $ 821,645 $ 78,560
Shopping Ctrs/Retail 705,319 67,355
Office Buildings 261,673 15,675
Industrial Buildings 253,557 9,250
Retirement Homes 85,338 1,000
Hotels/Motels 36,743 --
Medical Buildings 30,430 6,100
Residential 142 --
Other 36,455 1,500
------------ -------------
$ 2,231,302 $ 179,440
------------ -------------
------------ -------------
</TABLE>
Mortgage loans are first mortgages on real estate. IDS' underwriting policy
is that at the time of loan origination, the loan amount cannot exceed 75
percent of appraised value. If a mortgage is in default, IDS can begin
foreclosure proceedings. Commitments to purchase mortgages are made in the
ordinary course of business. The estimated fair value of the mortgage
commitments is $nil.
Concentrations of credit risk of unsecured consumer loans at December 31,
1993 were:
<TABLE>
<CAPTION>
On Balance Approved
Sheet But Unused
----------- -------------
<S> <C> <C>
Consumer Loans By Region:
North Central $ 88,790 $ 165,829
Atlantic 76,827 120,307
Pacific 51,707 80,205
South Central 34,696 38,637
New England 25,805 27,541
Mountain 18,336 24,519
----------- -------------
$ 296,161 $ 457,038
----------- -------------
----------- -------------
</TABLE>
Consumer loans have a variable rate of interest. As a result, the estimated
fair value of the consumer loans is approximated to be the carrying value. The
estimated fair value of the approved but unused lines of credit is $nil.
F-10
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
8. CREDIT RISK CONCENTRATIONS -- CONTINUED
Included in accounts receivable at December 31, 1993 are interest and
dividends receivable on investments of $350,098 and fees receivable from
affiliated mutual funds of $25,507.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following are fair values of financial instruments not presented
elsewhere in the condensed consolidated balance sheet, and methods and
assumptions that were used to estimate these fair values.
The estimated fair values for short-term financial instruments, such as cash
and cash equivalents, short-term borrowings and customers' deposits are
approximated to be the carrying amounts disclosed in the condensed consolidated
balance sheet.
The estimated fair value of fixed annuities future policy benefits is based
on the status of the annuities at December 31, 1993. The estimated fair value
for deferred annuities approximates the carrying amount less any surrender
charges and related loans. The estimated fair value for annuities in non-life
contingent payout status approximates the present value of projected benefit
payments at the rate appropriate for contracts issued in 1993. At December 31,
1993, the carrying amount and fair value of fixed annuities future policy
benefits, after excluding life insurance-related contracts carried at $913,127
was $17,579,008 and $16,881,747, respectively. The fair value is net of policy
loans of $59,132 at December 31, 1993.
The estimated fair value of investment certificate reserves is based upon a
method appropriate for each class of certificate. The estimated fair value for
investment certificates that reprice within a year approximates the carrying
value. The estimated fair value for other investment certificates is determined
by a discounted cash flow analysis using investment rates currently offered for
investment certificates of similar remaining maturities. These amounts are
reduced by applicable surrender charges and related loans. At December 31, 1993,
the estimated fair value of the investment certificate reserves was $2,694,720,
net of certificate loans of $67,429.
The estimated fair value of liabilities related to segregated asset accounts
is the carrying amount less variable insurance contracts carried at $346,276 and
surrender charges, if applicable. At December 31, 1993, the estimated fair value
of these liabilities was $8,305,209.
10. RELATED PARTY TRANSACTIONS
IDS has entered into various related party transactions with its parent and
the parent's other affiliates.
F-11
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
10. RELATED PARTY TRANSACTIONS -- CONTINUED
IDS has a reinsurance agreement to assume a single premium life line of
business from an affiliated company. The accompanying condensed consolidated
balance sheet at December 31, 1993 includes $759,714 of liabilities for future
policy benefits related to this agreement.
IDS has a reinsurance agreement to cede 50 percent of its long-term care
insurance business to an affiliated company. The accompanying condensed
consolidated balance sheet at December 31, 1993 includes $44,086 of reinsurance
receivables related to this agreement.
IDS purchased a $35,000 five year secured note from an affiliated company.
The note bears a market interest rate, revised semi-annually, which was 8.42
percent at December 31, 1993.
Included in other liabilities is $30,420 at December 31, 1993 for federal
income taxes payable to the parent.
11. INCOME TAXES
At December 31, 1993, the life insurance subsidiary had a policyholders'
surplus account balance of $19,032. The policyholders' surplus is only taxable
if dividends to shareholders exceed the shareholders' surplus account and/or the
company is liquidated. Deferred taxes of $6,661 have not been established
because no distributions of such amounts are contemplated.
F-12
<PAGE>
DRAFT CONSENT
The Board of Directors and Shareholders
IDS Financial Corporation
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of IDS Financial Corporation at December
31, 1993, not presented separately herein, and in our report dated February 3,
1994, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet is fairly stated in all material respects
in relation to the consolidated financial statements from which it has been
derived.
Ernst & Young
Minneapolis, Minnesota
February 3, 1994
F-13
<PAGE>
EXHIBIT A
FORM OF
INVESTMENT MANAGEMENT AND SERVICES AGREEMENT
AGREEMENT made the th day of , 199 , by and between IDS Extra Income
Fund, Inc. (the "Fund"), a Minnesota corporation, and IDS Financial Corporation
("IDS"), a Delaware corporation.
PART ONE: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Fund hereby retains IDS, and IDS hereby agrees, for the period of
this Agreement and under the terms and conditions hereinafter set forth, to
furnish the Fund continuously with suggested investment planning; to determine,
consistent with the Fund's investment objectives and policies, which securities
in IDS' discretion shall be purchased, held or sold and to execute or cause the
execution of purchase or sell orders; to prepare and make available to the Fund
all necessary research and statistical data in connection therewith; to furnish
all administrative, accounting, clerical, statistical, correspondence, corporate
and all other services of whatever nature required in connection with the
management and administration of the Fund as provided under this Agreement; and
to pay such expenses as may be provided for in Part Three; subject always to the
direction and control of the Board of Directors (the "Board"), the Executive
Committee and the authorized officers of the Fund. IDS agrees to maintain an
adequate organization of competent persons to provide the services and to
perform the functions herein mentioned. IDS agrees to meet with any persons at
such times as the Board deems appropriate for the purpose of reviewing IDS'
performance under this Agreement.
(2) IDS agrees that the investment planning and investment decisions will be
in accordance with general investment policies of the Fund as disclosed to IDS
from time to time by the Fund and as set forth in its prospectuses and
registration statements filed with the United States Securities and Exchange
Commission (the "SEC").
(3) IDS agrees that it will maintain all required records, memoranda,
instructions or authorizations relating to the acquisition or disposition of
securities for the Fund.
(4) The Fund agrees that it will furnish to IDS any information that the
latter may reasonably request with respect to the services performed or to be
performed by IDS under this Agreement.
(5) IDS is authorized to select the brokers or dealers that will execute the
purchases and sales of portfolio securities for the Fund and is directed to use
its best efforts to obtain the best available price and most favorable
execution, except as prescribed herein. Subject to prior authorization by the
A-1
<PAGE>
Fund's Board of appropriate policies and procedures, and subject to termination
at any time by the Board, IDS may also be authorized to effect individual
securities transactions at commission rates in excess of the minimum commission
rates available, to the extent authorized by law, if IDS determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or IDS' overall responsibilities
with respect to the Fund and other funds for which it acts as investment
adviser.
(6) It is understood and agreed that in furnishing the Fund with the
services as herein provided, neither IDS, nor any officer, director or agent
thereof shall be held liable to the Fund or its creditors or shareholders for
errors of judgment or for anything except willful misfeasance, bad faith, or
gross negligence in the performance of its duties, or reckless disregard of its
obligations and duties under the terms of this Agreement. It is further
understood and agreed that IDS may rely upon information furnished to it
reasonably believed to be accurate and reliable.
PART TWO: COMPENSATION TO INVESTMENT MANAGER
(1) The Fund agrees to pay to IDS, and IDS covenants and agrees to accept
from the Fund in full payment for the services furnished, a fee for each
calendar day of each year equal to the total of 1/365th (1/366th in each leap
year) of the amount computed as shown below. The computation shall be made for
each day on the basis of net assets as of the close of business of the full
business day two (2) business days prior to the day for which the computation is
being made. In the case of the suspension of the computation of net asset value,
the asset charge for each day during such suspension shall be computed as of the
close of business on the last full business day on which the net assets were
computed. Net assets as of the close of a full business day shall include all
transactions in shares of the Fund recorded on the books of the Fund for that
day.
The asset charge shall be based on the net assets of the Fund as set forth
in the following table.
ASSET CHARGE
<TABLE>
<CAPTION>
Assets Annual Rate at
(Billions) Each Asset Level
- --------------- ----------------
<S> <C>
First $1 0.590%
Next $1 0.565
Next $1 0.540
Next $3 0.515
Next $3 0.490
Over $9 0.465
</TABLE>
A-2
<PAGE>
(2) The fee shall be paid on a monthly basis and, in the event of the
termination of this Agreement, the fee accrued shall be prorated on the basis of
the number of days that this Agreement is in effect during the month with
respect to which such payment is made.
(3) The fee provided for hereunder shall be paid in cash by the Fund to IDS
within five business days after the last day of each month.
PART THREE: ALLOCATION OF EXPENSES
(1) The Fund agrees to pay:
(a) Fees payable to IDS for its services under the terms of this
Agreement.
(b) Taxes.
(c) Brokerage commissions and charges in connection with the purchase
and sale of assets.
(d) Custodian fees and charges.
(e) Fees and charges of its independent certified public accountants for
services the Fund requests.
(f) Premium on the bond required by Rule 17g-1 under the Investment
Company Act of 1940.
(g) Fees and expenses of attorneys (i) it employs in matters not
involving the assertion of a claim by a third party against the Fund, its
directors and officers, (ii) it employs in conjunction with a claim asserted
by the Board against IDS, except that IDS shall reimburse the Fund for such
fees and expenses if it is ultimately determined by a court of competent
jurisdiction, or IDS agrees, that it is liable in whole or in part to the
Fund, and (iii) it employs to assert a claim against a third party.
(h) Fees paid for the qualification and registration for public sale of
the securities of the Fund under the laws of the United States and of the
several states in which such securities shall be offered for sale.
(i) Fees of consultants employed by the Fund.
(j) Directors, officers and employees expenses which shall include fees,
salaries, memberships, dues, travel, seminars, pension, profit sharing, and
all other benefits paid to or provided for directors, officers and
employees, directors and officers liability insurance, errors and omissions
liability insurance, worker's compensation insurance and other expenses
applicable to the directors, officers and employees, except the Fund will
not pay any fees or expenses of any person who is an officer or employee of
IDS or its affiliates.
(k) Filing fees and charges incurred by the Fund in connection with
filing any amendment to its articles of incorporation, or incurred in filing
any other document with the State of Minnesota or its political
subdivisions.
(l) Organizational expenses of the Fund.
A-3
<PAGE>
(m) Expenses incurred in connection with lending portfolio securities of
the Fund.
(n) Expenses properly payable by the Fund, approved by the Board.
(2) IDS agrees to pay all expenses associated with the services it provides
under the terms of this Agreement. Further, IDS agrees that if, at the end of
any month, the expenses of the Fund under this Agreement and any other agreement
between the Fund and IDS, but excluding those expenses set forth in (1)(b) and
(1)(c) of this Part Three, exceed the most restrictive applicable state expenses
limitation, the Fund shall not pay those expenses set forth in (1)(a) and (d)
through (n) of this Part Three to the extent necessary to keep the Fund's
expenses from exceeding the limitation, it being understood that IDS will assume
all unpaid expenses and bill the Fund for them in subsequent months but in no
event can the accumulation of unpaid expenses or billing be carried past the end
of the Fund's fiscal year.
PART FOUR: MISCELLANEOUS
(1) IDS shall be deemed to be an independent contractor and, except as
expressly provided or authorized in this Agreement, shall have no authority to
act for or represent the Fund.
(2) A "full business day" shall be as defined in the By-laws.
(3) The Fund recognizes that IDS now renders and may continue to render
investment advice and other services to other investment companies and persons
which may or may not have investment policies and investments similar to those
of the Fund and that IDS manages its own investments and/ or those of its
subsidiaries. IDS shall be free to render such investment advice and other
services and the Fund hereby consents thereto.
(4) Neither this Agreement nor any transaction had pursuant hereto shall be
invalidated or in any way affected by the fact that directors, officers, agents
and/or shareholders of the Fund are or may be interested in IDS or any successor
or assignee thereof, as directors, officers, stockholders or otherwise; that
directors, officers, stockholders or agents of IDS are or may be interested in
the Fund as directors, officers, shareholders, or otherwise; or that IDS or any
successor or assignee, is or may be interested in the Fund as shareholder or
otherwise, provided, however, that neither IDS, nor any officer, director or
employee thereof or of the Fund, shall sell to or buy from the Fund any property
or security other than shares issued by the Fund, except in accordance with
applicable regulations or orders of the SEC.
(5) Any notice under this Agreement shall be given in writing, addressed,
and delivered, or mailed postpaid, to the party to this Agreement entitled to
receive such, at such party's principal place of business in Minneapolis,
Minnesota, or to such other address as either party may designate in writing
mailed to the other.
A-4
<PAGE>
(6) IDS agrees that no officer, director or employee of IDS will deal for or
on behalf of the Fund with himself as principal or agent, or with any
corporation or partnership in which he may have a financial interest, except
that this shall not prohibit:
(a) Officers, directors or employees of IDS from having a financial
interest in the Fund or in IDS.
(b) The purchase of securities for the Fund, or the sale of securities
owned by the Fund, through a security broker or dealer, one or more of whose
partners, officers, directors or employees is an officer, director or
employee of IDS, provided such transactions are handled in the capacity of
broker only and provided commissions charged do not exceed customary
brokerage charges for such services.
(c) Transactions with the Fund by a broker-dealer affiliate of IDS as
may be allowed by rule or order of the SEC, and if made pursuant to
procedures adopted by the Fund's Board.
(7) IDS agrees that, except as herein otherwise expressly provided or as may
be permitted consistent with the use of a broker-dealer affiliate of IDS under
applicable provisions of the federal securities laws, neither it nor any of its
officers, directors or employees shall at any time during the period of this
Agreement, make, accept or receive, directly or indirectly, any fees, profits or
emoluments of any character in connection with the purchase or sale of
securities (except shares issued by the Fund) or other assets by or for the
Fund.
PART FIVE: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect until 199 , or until
a new agreement is approved by a vote of the majority of the outstanding shares
of the Fund and by vote of the Fund's Board, including the vote required by (b)
of this paragraph, and if no new agreement is so approved, this Agreement shall
continue from year to year thereafter unless and until terminated by either
party as hereinafter provided, except that such continuance shall be
specifically approved at least annually (a) by the Board of the Fund or by a
vote of the majority of the outstanding shares of the Fund and (b) by the vote
of a majority of the directors who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. As used in this paragraph, the term
"interested person" shall have the same meaning as set forth in the Investment
Company Act of 1940, as amended (the "1940 Act").
(2) This Agreement may be terminated by either the Fund or IDS at any time
by giving the other party 60 days' written notice of such intention to
terminate, provided that any termination shall be made without the payment of
any penalty, and provided further that termination may be effected either by the
Board of the Fund or by a vote of the majority of the outstanding voting shares
of the Fund. The vote of the majority of the outstanding voting
A-5
<PAGE>
shares of the Fund for the purpose of this Part Five shall be the vote at a
shareholders' regular meeting, or a special meeting duly called for the purpose,
of 67% or more of the Fund's shares present at such meeting if the holders of
more than 50% of the outstanding voting shares are present or represented by
proxy, or more than 50% of the outstanding voting shares of the Fund, whichever
is less.
(3) This Agreement shall terminate in the event of its assignment, the term
"assignment" for this purpose having the same meaning as set forth in the 1940
Act.
IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement
as of the day and year first above written.
IDS EXTRA INCOME FUND, INC.
By: -----------------------------
IDS FINANCIAL CORPORATION
By: -----------------------------
A-6
<PAGE>
FORM OF PROXY CARD
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
IDS EXTRA INCOME FUND, INC.
PROXY/VOTING
INSTRUCTION CARD
___________________________________________________________________
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints William R. Pearce, Leslie L. Ogg and Robert F.
Froehlke, or any one of them, as proxies, with full power of substitution, to
represent and to vote all of the shares of the undersigned at the regular
meeting to be held on November 9, 1994, and any adjournment thereof.
TO HAVE YOUR VOTE COUNTED, YOU MUST SIGN, DATE AND RETURN THIS PROXY. IT WILL
BE VOTED AS MARKED, OR IF NOT MARKED, WILL BE VOTED "FOR" EACH PROPOSAL.
THE BOARD RECOMMENDS A VOTE "FOR" ALL PROPOSALS.
(client name and address)
X______________________
X______________________
Date_____________, 1994
Owners please sign as names appear at left. Executors, administrators,
trustees, etc., should indicate position when signing.
<PAGE>
For With- Excep-
held tion
1. Election of Board Members ( ) ( ) ( )
TO VOTE FOR ALL NOMINEES, MARK THE "FOR" BOX IN ITEM 1. TO WITHHOLD AUTHORITY
TO VOTE FOR ALL NOMINEES, MARK THE "WITHHOLD" BOX. TO WITHHOLD AUTHORITY TO
VOTE FOR ANY NOMINEE, MARK THE "EXCEPTION" BOX AND STRIKE A LINE THROUGH THE
NOMINEE'S NAME.
Fourteen board members are to be elected at the meeting. The nominees are LYNNE
V. CHENEY, WILLIAM H. DUDLEY, ROBERT F. FROEHLKE, DAVID R. HUBERS, HEINZ F.
HUTTER, ANNE P. JONES, DONALD M. KENDALL, MELVIN R. LAIRD, LEWIS W. LEHR,
WILLIAM R. PEARCE, EDSON W. SPENCER, JOHN R. THOMAS, WHEELOCK WHITNEY, C. ANGUS
WURTELE.
For Against Abstain
2. Ratification of
Independent Auditors ( ) ( ) ( )
3. Approval of New Investment
Management and
Services Agreement ( ) ( ) ( )
4. Approval of a Change in
Investment Policies to Permit
the Fund to Invest All its
Assets in Another Investment
Company ( ) ( ) ( )
5. Approval of Changes in FOR each policy
Fundamental Investment listed below (except AGAINST ABSTAIN
Policies as marked to the ALL ALL
contrary)
( ) ( )
If you do NOT wish to approve a policy change, please check the appropriate
box below:
( ) A. Pledge Assets ( ) D. Cash Loans
( ) B. Investment Companies ( ) E. Real Estate
( ) C. Concentration
<PAGE>
Dear Shareholder,
The Board of Directors is recommending significant changes in the structure of
the fund. It is important for you to study the proposals in the proxy statement
carefully. By voting and mailing your proxy card promptly, you will save the
fund the cost of additional proxy solicitation. For a quick overview of the
proposals, here is a summary.
The first two proposals, election of directors and ratification of auditors, are
matters requiring shareholder action at every regular meeting of shareholders.
Proposal (3) is a new Investment and Services Agreement. The new agreement will
enable the Fund to be structured to offer multiple classes of shares. The
Board, like the Boards of other funds in the IDS MUTUAL FUND GROUP, believes
that the fund should offer more than one class of shares. This would permit
investors to choose the method of paying the costs of distribution that suits
them best. For example, investors could choose a front-end sales charge or a
deferred contingent sales charge. It also would permit institutional investors,
retirement plans and fixed fee accounts to pay distribution costs in other ways.
If shareholders
-1-
<PAGE>
approve the new agreement, the Board will approve other new agreements with IDS
and implement the multiple class structure.
Proposals (4) is a new investment policy that will permit the fund to invest all
of its assets in another investment company. If this proposal is approved, the
Board could adopt another new structure establishing a master investment fund
and related feeder shareholder funds. This is explained in detail in the proxy
statement. The Board would approve such structure only if it believes the
structure is in the interest of shareholders.
Proposal (5) makes a number of investment policies "non-fundamental." That is,
the Board, instead of shareholders as is now the case, could make changes to the
policies. The purpose is flexibility. By giving the power to change the
policies to the Board, changes can be made as regulations change or as new
investment strategies and products are developed.
Let me urge you to study and vote the enclosed proxy card. The Board strongly
supports these proposals because they serve shareholders' interests.
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