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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
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IDS FEDERAL INCOME FUND, INC.
IDS TOWER 10,
MINNEAPOLIS, MINNESOTA 55440-0010
(612) 330-9283
LESLIE L. OGG
901 S. MARQUETTE AVENUE, SUITE 2810
MINNEAPOLIS, MINNESOTA 55402-3268
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Rule 24f-2 (a) (1) Declaration:
No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The registrant is filing as an exhibit to this Registration Statement a copy of
its earlier declaration under Rule 24f-2. Registrant will file its Rule 24f-2
Notice on or about August 29, 1994 for its most recent fiscal year ended
June 30, 1994.
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVENESS OF THIS
REGISTRATION STATEMENT.
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Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
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CROSS-REFERENCE SHEET
(AS REQUIRED BY RULE 481(A))
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Part A of Form N-14 Prospectus/Proxy Caption
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1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus........................... Cross Reference Sheet and Cover Page
2. Beginning and Outside Back Cover Page of
Prospectus......................................... Table of Contents
3. Synopsis Information and Risk Factors................ Summary; Risk Factors
4. Information about the Transaction.................... Reasons for the Reorganization; Information about the
Reorganization; Voting Information
5. Information about the Registrant..................... Inside Front Cover; Additional Materials; Information
about Federal Income Fund and Short-Term Income
Fund; Comparison of Goals and Investment Policies;
Reclassification of Federal Income Fund Investment
Policies from Fundamental to Non-Fundamental
6. Information about the Company Being Acquired......... Additional Materials; Information about Federal
Income Fund and Short-Term Income Fund; Comparison
of Goals and Investment Policies
7. Voting Information................................... Summary; Information about the Reorganization; Voting
Information
8. Interest of Certain Persons and Experts.............. Voting Information
9. Additional Information............................... Not Applicable
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Statement of
Part B of Form N-14 Additional Information Caption
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10. Cover Page........................................... Cover Page
11. Table of Contents.................................... Not Applicable
12. Additional Information about the Registrant.......... Cover Page (Incorporation of Documents by Reference)
13. Additional Information about the Company Being
Acquired........................................... Cover Page (Incorporation of Documents by Reference)
14. Financial Statements................................. Cover Page (Incorporation of Documents by Reference);
Pro Forma Financial Statements
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Part C of Form N-14
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Information required to be included in Part C is set forth under the appropriate item in Part C of this Registration
Statement.
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IDS STRATEGY FUND, INC. - SHORT-TERM INCOME FUND
IDS TOWER 10
MINNEAPOLIS, MINNESOTA 55440-0010
September , 1994
Dear Shareholder:
The packet of material you are receiving is lengthy and in some places
complex. Let me guide you through it. First, what is your Board doing? We and
the other Boards of the funds in the IDS MUTUAL FUND GROUP are proposing each of
the funds offer multiple classes of shares so an investor can select the way he
or she pays the sales charge. In addition, one or more classes of shares will be
offered to institutional and individual investors and retirement plans that pay
the costs of distribution in ways other than through a sales charge. Second, why
does it take so many pages to explain? To offer multiple classes of shares, the
funds must approve new agreements with IDS. At the same time they are electing
members of the Boards, changing some investment policies, and explaining the
possibility of sometime in the future developing a master investment fund and
feeder shareholder funds structure. For your fund, we are asking you to take an
additional step and consider merging it into another fund. All of this takes a
lot of pages to cover the information we feel you should have together with that
required by the Securities and Exchange Commission.
IDS Strategy - Short-Term Income Fund is a series of capital shares issued
by IDS Strategy Fund, Inc. and is a separate mutual fund. Its investment
objectives and policies are substantially the same as IDS Federal Income Fund,
Inc. and, except for the differences in cash flow, its investment portfolio
closely ties to Federal Income Fund. Both funds are managed by IDS Financial
Corporation. Short-Term Income Fund was created to give investors the same
opportunity to select the method of paying the sales charge that will now be
available with multiple classes of shares since the multiple class structure was
not an option at the time Short-Term Income Fund was created. By consolidating
the two funds, the Board believes investors will be better served in that they
will not have to choose between two separate funds in order to select the sales
charge best suited for them and shareholders may benefit by the larger asset
base.
To consolidate the two funds, under a plan of reorganization, Federal Income
Fund will acquire all the assets and liabilities of Short-Term Income Fund and
your shares will become shares of Federal Income Fund. Your new
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Federal Income Fund shares will have the same total value as your Short-Term
Income Fund shares on the date of the consolidation. The consolidation will be
tax-free.
As you read through the material, you will find the nominees for the Board
are the same for Short-Term Income Fund and Federal Income Fund, so both groups
of shareholders are voting on the same persons. The same is true for auditors.
There is a lengthy description about the current agreements and new agreements
with IDS. If you were not being asked to consolidate Short-Term Income Fund with
Federal Income Fund, you would have been asked to approve the new agreements.
Under these new agreements, your cost as a shareholder of Federal Income Fund is
expected to be very similar to your cost as a shareholder of Short-Term Income
Fund. Proposed changes in investment policies will allow Federal Income Fund's
Board to change those policies without shareholder approval in the future and
will permit the fund to engage in certain investment strategies in the cash
market that it can now do in the derivatives market. While you are not being
asked to vote on these matters directly, by approving the consolidation, you are
agreeing to the new agreements and changes in investment strategy.
If you have any questions regarding the proposed transaction or other
matters with respect to which your vote is requested, please feel free to call
your IDS financial planner.
Sincerely,
WILLIAM R. PEARCE
President
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IDS STRATEGY FUND, INC. - SHORT-TERM INCOME FUND
901 S. MARQUETTE AVE.
SUITE 2810
MINNEAPOLIS, MINNESOTA 55402-3268
NOTICE OF REGULAR MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 9, 1994
We will hold a regular meeting of shareholders of Short-Term Income Fund
("Short-Term Income Fund"), a separate series of capital stock forming part of
IDS Strategy Fund, Inc. (the "Corporation") on November 9, 1994, at [ ] .m.
at [ ]
Minneapolis, Minnesota. The agenda for the meeting is:
1. To approve or reject the Agreement and Plan of Reorganization (the
"Plan") dated as of [ , 1994]providing for (i) the acquisition of all of
the assets of Short-Term Income Fund by IDS Federal Income Fund, Inc.
("Federal Income Fund"), in exchange for shares of Federal Income Fund
and the assumption by Federal Income Fund of the liabilities of
Short-Term Income Fund, (ii) the distribution of shares of Federal Income
Fund to shareholders of Short-Term Income Fund in liquidation of
Short-Term Income Fund and (iii) the subsequent dissolution of Short-Term
Income Fund. It is expected that the Reorganization, if approved, will
occur shortly before March 31, 1995.
2. To elect Board members.
3. To ratify or reject the selection of KPMG Peat Marwick as the independent
auditors for the fiscal year ending March 31, 1995.
4. To transact any other business that may come before the meeting.
Please take the time to read the prospectus/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.
By order of the Board of Directors
LESLIE L. OGG
Secretary
September , 1994
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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PROSPECTUS/PROXY STATEMENT DATED SEPTEMBER , 1994
ACQUISITION OF THE ASSETS OF
SHORT-TERM INCOME FUND OF IDS STRATEGY FUND, INC.
901 S. MARQUETTE AVE.
SUITE 2810
MINNEAPOLIS, MINNESOTA 55402-3268
BY AND IN EXCHANGE FOR SHARES OF
IDS FEDERAL INCOME FUND, INC.
IDS TOWER 10
MINNEAPOLIS, MINNESOTA 55440-0010
This Prospectus/Proxy Statement is being furnished to shareholders of
Short-Term Income Fund ("Short-Term Income Fund"), a separate series of capital
stock forming part of IDS Strategy Fund, Inc. (the "Corporation"), in connection
with a regular meeting of shareholders to be held on November 9, 1994, at [ ]
p.m., Minneapolis time, at [ ], and any adjournments
thereof. The meeting is being held for the following purposes:
1. To approve or reject an Agreement and Plan of Reorganization (the "Plan")
which provides for the acquisition of Short-Term Income Fund assets by
IDS Federal Income Fund, Inc. ("Federal Income Fund") in exchange for
shares of Federal Income Fund,
2. To elect members to the Board of the Corporation, and
3. To ratify or reject the selection of KPMG Peat Marwick as the independent
auditors for the fiscal year ending March 31, 1995.
The Plan provides that Federal Income Fund will acquire all of the assets of
Short-Term Income Fund in exchange for shares of Federal Income Fund and will
assume the liabilities of Short-Term Income Fund (the "Reorganization")
(Short-Term Income Fund and Federal Income Fund are referred to individually as
a "Fund" and collectively as the "Funds"). Following the Reorganization, shares
of Federal Income Fund will be distributed to shareholders of Short-Term Income
Fund and Short-Term Income Fund will be dissolved. As a result of the proposed
Reorganization, each shareholder of Short-Term Income Fund will receive that
number of shares of Federal Income Fund equal in value to the value of that
shareholder's shares of Short-Term Income Fund on the effective date of the
Reorganization. Any contingent deferred sales charge ("CDSC") applicable to a
Short-Term Income Fund shareholder's investment will continue to apply, and, in
calculating the applicable CDSC payable upon a subsequent redemption of Class B
shares of Federal Income Fund, the period during which a Short-Term Income Fund
shareholder held shares of Short-Term Income Fund will be counted. The
Reorganization is being structured as a tax-free reorganization.
Federal Income Fund is an open-end, diversified management investment
company. The Corporation, of which Short-Term Income Fund forms a part, is also
an open-end management investment company. The goals of
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each of Federal Income Fund and Short-Term Income Fund are substantially
similar. The goal of Federal Income Fund is to provide a high level of current
income and safety of principal consistent with investment in U.S. government and
government agency securities. The goal of Short-Term Income Fund is to provide
high current income consistent with conservation of capital. The investment
policies of each Fund are also substantially similar. The differences in the
Funds' investment policies are described under "Comparison of Goals and
Investment Policies."
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth the information about Federal Income Fund that a
prospective investor should know before investing. Certain relevant documents
listed below, which have been filed with the Securities and Exchange Commission
("SEC"), are incorporated herein by reference. A Statement of Additional
Information dated September , 1994 relating to this Prospectus/ Proxy Statement
and the Reorganization, has been filed with the SEC and is incorporated by
reference into this Prospectus/Proxy Statement. A copy of the Statement of
Additional Information and the Short-Term Income Fund Prospectus referred to
below are available upon request and without charge by writing to IDS
Shareholder Service, P.O. Box 534, Minneapolis, Minnesota 55440-0534 or by
calling (612) 671-3733.
1. The Prospectus dated [August , 1994] of IDS Federal Income Fund, Inc. is
incorporated in its entirety by reference and a copy is included herein.
2. The Prospectus dated May 27, 1994 of IDS Strategy Fund, Inc. - Short-Term
Income Fund is incorporated in its entirety by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a copy of
Plan for the proposed transaction.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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(1) Proposed Reorganization
Summary............................................................. 7
Risk Factors........................................................ 12
Reasons for the Reorganization...................................... 13
Information about the Reorganization................................ 13
Information about Federal Income Fund and Short-Term Income Fund.... 17
Comparison of Goals and Investment Policies......................... 18
Recommendation and Vote Required.................................... 20
(2) Election of Board Members............................................ 20
(3) Ratify or Reject the Selection of KPMG Peat Marwick as
Independent Auditors................................................. 25
Voting Information........................................................ 25
Financial Statements and Experts.......................................... 29
Exhibit A: Agreement and Plan of Reorganization........................... A-1
Exhibit B: Matters subject to Approval at Regular Meeting of Federal
Income Fund Shareholders................................................. B-1
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(1) APPROVE OR REJECT THE PROPOSED REORGANIZATION
SUMMARY
PROPOSED REORGANIZATION. The Plan provides for the transfer of all of the
assets of Short-Term Income Fund in exchange for shares of Federal Income Fund
and the assumption by Federal Income Fund of [all/certain] of the liabilities of
Short-Term Income Fund. The Plan also calls for the distribution of shares of
Federal Income Fund to Short-Term Income Fund shareholders in liquidation of
Short-Term Income Fund. (The proposed transaction is referred to in this
Prospectus/Proxy Statement as the "Reorganization"). As a result of the
Reorganization, each shareholder of Short-Term Income Fund will become the owner
of full and fractional shares of Federal Income Fund having value equal to the
value of the shareholder's shares of Short-Term Income Fund as of the close of
business on the date that Short-Term Income Fund's assets are exchanged for
shares of Federal Income Fund.
For the reasons set forth below under "Reasons for the Reorganization," the
Board of Directors of the Corporation, including all of the "non-interested"
Directors, as that term is defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), has concluded that the Reorganization would be in the
best interests of the shareholders of Short-Term Income Fund and that the
interests of Short-Term Income Fund's existing shareholders would not be diluted
as a result of the transaction contemplated by the Reorganization. Therefore,
the Board of Directors has approved the Reorganization and has submitted the
Plan for approval by Short-Term Income Fund's shareholders. Approval of the
Reorganization will require the affirmative vote of a majority of the
outstanding shares of Short-Term Income Fund.
The Board of Directors of Federal Income Fund has also concluded that the
Reorganization would be in the best interests of Federal Income Fund's existing
shareholders and has therefore approved the Reorganization.
TAX CONSEQUENCES. Prior to completion of the Reorganization, Short-Term
Income Fund will have received from counsel an opinion that, upon the
Reorganization and the transfer of the assets of Short-Term Income Fund, no gain
or loss will be recognized by Short-Term Income Fund or its shareholders for
federal income tax purposes. The holding period and aggregate tax basis of
shares of Federal Income Fund that are received by each Short-Term Income Fund
shareholder will be the same as the holding period and aggregate tax basis of
the shares of Short-Term Income Fund previously held by that shareholder. In
addition, the holding period and tax basis of the assets of Short-Term Income
Fund in the hands of Federal Income Fund as a result of the Reorganization will
be the same as in the hands of Short-Term Income Fund immediately prior to the
Reorganization.
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GOALS, INVESTMENT POLICIES AND RESTRICTIONS. Federal Income Fund and
Short-Term Income Fund have substantially similar goals. The goal of Federal
Income Fund is to provide a high level of current income and safety of principal
consistent with investment in U.S. government and government agency securities.
The goal of Short-Term Income Fund is also to provide high current income
consistent with conservation of capital. The investment policies and
restrictions of each Fund are also substantially similar and described herein
under the heading "Comparison of Goals and Investment Policies."
Contemporaneously with the meeting of Short-Term Income Fund shareholders
held to approve the Reorganization, a regular meeting of Federal Income Fund
shareholders will be held to approve, among other things, reclassifying certain
of Federal Income Fund's investment policies and restrictions from fundamental
to non-fundamental to the extent permitted by the 1940 Act. Federal Income Fund
has proposed reclassifying the status of such policies and restrictions in order
to provide the Fund with greater flexibility in managing its portfolio of
investments. There can be no assurance that shareholders of Federal Income Fund
will vote to approve such reclassification.
IMPLEMENTATION OF REORGANIZATION. The Reorganization is expected to occur
shortly before March 31, 1995. The Class B shares will be created by Federal
Income Fund pursuant to an exemptive order (the "Exemptive Order") of the SEC
obtained on behalf of Federal Income Fund and other funds managed by IDS. The
multiple class structure will involve creating three separate classes of shares,
Class A shares, Class B shares and Class Y shares. Class A shares, Class B
shares and Class Y shares will represent identical interests in Federal Income
Fund's portfolio of investments; however, Class A shares will be subject to a
front-end sales load, Class B shares will be subject to a contingent deferred
sales charge ("CDSC") and Class Y shares will not be subject to a sales charge.
In addition, as discussed below, the Class B shares will be subject to a Rule
12b-1 distribution fee while Class A and Class Y shares will not be subject to
distribution fees. The higher 12b-1 fees for Class B shares are necessary to
help defray costs not covered by contingent deferred sales charges. Class B
shares will convert to Class A shares after a holding period of approximately
eight years, and the number of years an Short-Term Income Fund shareholder held
his shares prior to the Reorganization will be included for purposes of
calculating this holding period. Existing shareholders of Federal Income Fund,
whose shares are subject to a front-end sales load, will receive either Class A
shares or, upon meeting certain requirements, Class Y shares of Federal Income
Fund at the time the multiple class structure is implemented. Most shareholders
of Short-Term Income Fund at the time of the Reorganization will receive
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Class B shares of Federal Income Fund in exchange for their shares of Short-Term
Income Fund. Shareholders of Short-Term Income Fund who entitled to a waiver of
the CDSC will receive Class A shares of Federal Income Fund.
As discussed under "Fees and Expenses" below, it is anticipated that IDS
Financial Corporation ("IDS"), as the sole Class B shareholder immediately prior
to the Reorganization, will approve the Rule 12b-1 and management and service
fees applicable to Class B shares. If approved, the Rule 12b-1 fee applicable to
Class B shares of Federal Income Fund will be calculated in a way different from
the current Rule 12b-1 fee applicable to Short-Term Income Fund shares.
FEES AND EXPENSES. Federal Income Fund and Short-Term Income Fund each have
agreements with IDS pursuant to which they pay IDS for managing their respective
portfolios, providing administrative services and serving as transfer agent.
Each Fund pays IDS a fee based on two components for providing investment
management and services that is calculated in the same manner for each Fund. The
first component is based on the combined average daily net assets of all mutual
funds (other than money market funds) publicly offered by IDS and is calculated
at a rate of 0.46 percent of the first $5 billion in net assets and decreasing
thereafter at reduced percentage rates for each additional $5 billion in net
assets to a minimum rate of 0.32 percent on all net assets of more than $50
billion. The second component of the investment management and services fee is
based on each Fund's average daily net assets during the fiscal year and is
calculated at a rate of 0.13 percent of such assets for both Federal Income Fund
and Short-Term Income Fund. For the fiscal year ended June 30, 1994, Federal
Income Fund paid IDS a total investment management fee of [ ] percent of its
average daily net assets. For the fiscal year ended March 31, 1994, Short-Term
Income Fund paid IDS a total investment management fee of [ ] percent of its
average daily net assets. Each Fund also pays taxes, brokerage commissions and
non-advisory expenses.
Each of Federal Income Fund and Short-Term Income Fund has a transfer agency
agreement with IDS pursuant to which IDS maintains shareholder accounts and
records for each Fund. Federal Income Fund pays IDS an annual fee of $15.50 per
shareholder account and Short-Term Income Fund pays IDS an annual fee of $16.50
per shareholder account for the transfer agency services rendered by IDS.
Currently the shares of Federal Income Fund and the shares of Short-Term
Income Fund are both sold subject to distribution plans adopted pursuant to Rule
12b-1 under the 1940 Act. Under the Rule 12b-1 plan for Federal Income Fund, IDS
is paid a distribution fee at the annual rate of $6 per shareholder account.
Total Rule 12b-1 fees paid by Federal Income Fund were [ ] percent of its
average daily net assets for the fiscal year ended June 30, 1994.
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Under the Rule 12b-1 plan for Short-Term Income Fund, IDS is paid a
distribution fee at an annual rate equal to 1 percent of the lesser of (i)
aggregate purchase payments of shares sold since inception, including purchase
payments of shares exchanged from another fund in the IDS MUTUAL FUND GROUP
("GROUP") and the value of all shares exchanged from another fund in the GROUP
(excluding appreciation, dividend reinvestments and capital gain distributions),
less the aggregate amount of any redemptions of purchase payments, or (ii) the
fund's average daily net assets. Of the Rule 12b-1 fee for Short-Term Income
Fund the first 0.75 percent is for distribution of Fund shares and the balance
of the fee, up to .25 percent, represents service fees for personal services
rendered to shareholders of the Fund. Total 12b-1 fees paid by Short-Term Income
Fund were [ ] percent of its average daily net assets for the fiscal year
ended March 31, 1994.
Total fees and expenses for Federal Income Fund stated as a percentage of
average net assets for the fiscal year ended June 30, 1994 were [ ] percent.
Total fees and expenses for Short-Term Income Fund stated as a percentage of
average net assets for the fiscal year ended March 31, 1994 were [0. ] percent.
Short-Term Income Fund shares are and, subsequent to the Reorganization, Federal
Income Fund Class B shares will be sold subject to a CDSC and an ongoing
distribution fee.
It is anticipated that the investment management and services fees, the
transfer agency fees and the Rule 12b-1 distribution fees of Federal Income Fund
will change at the time of the Reorganization. Contemporaneously with the
meeting of Short-Term Income Fund shareholders to vote on the Reorganization, a
meeting of Federal Income Fund shareholders will be held to vote on, among other
matters, a new investment management and services agreement with IDS. If
approved, the new investment management and services agreement will eliminate
the portion of the management fee based on total GROUP assets and will provide
for a graduated fee to be paid to IDS calculated at a rate of percent on the
first million in net assets and decreasing thereafter at reduced percentage
rates for each additional
million in net assets to a minimum rate of percent on all net assets of
Federal Income Fund in excess of billion.
The new transfer agency agreement with IDS will provide that Federal Income
Fund will pay IDS an annual fee of $[ ] per shareholder account for Class A
shares and $[ ] per shareholder account for Class B shares. The fees assessed
on each class of shares reflect the different costs and expenses allocated to
the respective class. Class Y shares are not subject to transfer agency fees;
the other fees assessed on Class Y shares include the cost of providing transfer
agent services.
Immediately prior to the Reorganization, IDS, as the sole Class B
shareholder of Federal Income Fund, will vote to approve a new Rule 12b-1
distribution plan applicable to Class B shares, including Class B shares
received by Short-Term Income Fund shareholders in the Reorganization.
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This Rule 12b-1 distribution plan will provide for an annual distribution fee to
be paid to IDS. The distribution fee will be calculated at the rate of 0.75
percent of Federal Income Fund's average daily net assets. In addition, Class B
shares will be subject to a service fee calculated at a rate of 0.175 percent of
Federal Income Fund's average daily net assets. Class A shares will not be
subject to a Rule 12b-1 distribution fee, but will be subject to a service fee
calculated in the same manner calculated at the rate of 0.175 percent of Federal
Income Fund's average daily net assets. Class Y shares will not be subject to a
distribution fee or a service fee. The expense ratio of Class B of Federal
Income Fund is expected to be substantially similar to the expense ratio of
Short-Term Income Fund. If the changes in management and Rule 12b-1 distribution
fees and transfer agency expenses are approved as discussed below, it is
expected that total Federal Income Fund fees and expenses stated as a percentage
of average net assets subsequent to the Reorganization will be percent for
Class A, percent for Class B and percent for Class Y.
PURCHASE AND SALE PROCEDURES. Purchase of shares of Federal Income Fund and
Short-Term Income Fund must be made through IDS Financial Services Inc. at their
respective public offering prices (net asset value next determined).
Federal Income Fund shares and Short-Term Income Fund shares may be redeemed
at their net asset value next determined per share. Redemptions of Short-Term
Income Fund shares are and Federal Income Fund Class B shares will be subject to
a CDSC. Redemptions of Federal Income Fund and Short-Term Income Fund shares may
be made in writing or by telephone.
EXCHANGE PRIVILEGES. Shareholders of Federal Income Fund may exchange at
net asset value all or a portion of their shares for shares in any publicly
offered fund in the GROUP, except IDS Planned Investment Account. Shareholders
of Short-Term Income Fund may exchange at net asset value all or a portion of
their shares for shares of any of the other four mutual funds forming part of
the Corporation. The CDSC does not apply to exchanges between these funds. No
exchanges are permitted into other funds in the GROUP. Shareholders of
Short-Term Income Fund may, however, sell their shares and purchase shares of
another fund in the GROUP.
Subsequent to the Reorganization, Class A, Class B and Class Y shareholders
of Federal Income Fund may exchange at net asset value all or a portion of their
shares for shares of the same class in any fund in the GROUP. No initial sales
charge will be imposed on the shares being acquired and no CDSC will be imposed
on the shares being exchanged. The holding period of Class B shares received in
an exchange will include the holding period of the Class B shares disposed of in
an exchange for purposes of calculating the CDSC.
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Any exchange will be a taxable event for which a shareholder may have to
recognize a gain or loss under federal income tax provisions. Exchanges are
subject to minimum investment and other requirements of the Fund into which
exchanges are made.
DIVIDENDS. The dividend and distribution policies of Federal Income Fund
and Short-Term Income Fund are substantially the same. Distributions of net
investment income (dividends and interest earned on securities held by the Fund,
less operating expenses) are made to shareholders of record each month with
respect to Federal Income Fund distributions and each quarter with respect to
Short-Term Income Fund distributions. Distributions of short-term capital gains
are included in the net investment income [for Short-Term Income Fund].
Distributions of any net realized capital gains are made before the end of the
calendar year. For each Fund, dividend and capital gain distributions are
automatically reinvested in additional shares of the Fund, unless the
shareholder has requested distributions be made in cash or directed to the
purchase of shares of another fund in the GROUP.
SHAREHOLDER VOTING RIGHTS. Subsequent to the Reorganization, Class A
shares, Class B shares and Class Y shares will be treated as separate classes of
shares issued by Federal Income Fund. Class A shares, Class B shares and Class Y
shares will vote together as a single class on most issues, such as election of
directors, and as separate classes on issues that affect only a particular
class, such as Rule 12b-1 distribution plans.
The Funds do not hold regular meetings of shareholders on an annual basis.
Meetings of shareholders may be called by the directors at their discretion or
on demand by the holders of 10 percent or more of the outstanding shares for the
purpose of electing or removing directors.
RISK FACTORS
Because the goals and investment policies of Federal Income Fund and
Short-Term Income Fund are substantially the same, the investment risks
associated with each Fund are substantially the same. The Funds invest portions
of their assets in debt securities that are not backed by the full faith and
credit of the United States, in securities whose interest and principal payments
are more sensitive to interest rate changes and mortgage prepayment rates, and
may react opposite to such changes, in options including options based on
changing market values between different types of securities, and in futures.
The success of the Funds' investment techniques depends on the liquidity of the
market and the portfolio managers' ability to predict market changes. For a more
complete discussion of the risks associated with goals and investment policies
associated with investing in the Funds, see ["Facts about Investments and their
Risks"] in the accompanying Prospectus of Federal Income Fund and the Prospectus
of Short-Term Income Fund.
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REASONS FOR THE REORGANIZATION
The Board of Directors of the Corporation, including all of the non-
interested directors, has determined that it is advantageous to combine
Short-Term Income Fund with Federal Income Fund. The Funds have substantially
similar goals and investment policies and the Funds have the same investment
manager, the same portfolio manager, and the same custodian, auditors and
shareholder servicing agent.
The Short-Term Income Fund was created to provide investors wanting to
invest in a portfolio of debt securities like Federal Income Fund with the
option to pay the sales charge on such an investment over time by way of a CDSC.
With the ability to offer multiple classes of shares in one fund pursuant to the
Order, it is no longer necessary to offer shares in two separate mutual funds
with substantially similar investment portfolios. Accordingly, the Board of
Directors has determined that the Reorganization should eliminate the
duplication inherent in marketing two funds with similar investment goals. The
Board of Directors also determined that a combination of the Funds would not
dilute the interests of Short-Term Income Fund shareholders and has received
advice from counsel that the Reorganization will be effected as a tax-free
organization.
In light of the foregoing, the Board of Directors, has decided that it is in
the best interests of Short-Term Income Fund and its shareholders to combine
with Federal Income Fund.
The Board of Directors of Federal Income Fund also determined that a
combination of the Funds would not dilute the interests of Federal Income Fund
shareholders and has received advice from counsel that the Reorganization will
be effected as a tax-free reorganization. Accordingly, the Board of Directors
has decided that it is in the best interests of Federal Income Fund and its
shareholders to acquire the assets of Short-Term Income Fund and has approved
the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
PLAN OF REORGANIZATION. The Plan, a copy of which is attached as Exhibit A,
provides that Federal Income Fund will acquire all of the assets of Short-Term
Income Fund in exchange for shares of Federal Income Fund and the assumption by
Federal Income Fund of the liabilities of Short-Term Income Fund on or about
March 31, 1995, or a later date agreed upon by the parties (the "Closing Date").
Federal Income Fund will not assume any liabilities of Short-Term Income Fund
other than those reflected in an unaudited statement of assets and liabilities
of Short-Term Income Fund prepared as of the close of regular trading on the New
York Stock Exchange on the Closing Date. The number of full and fractional
shares of Federal Income Fund to be issued to Short-Term Income Fund
shareholders will be determined on the basis of the relative net asset values of
Federal Income
13
<PAGE>
Fund and Short-Term Income Fund as of the close of business on the New York
Stock Exchange on the Closing Date. Net asset value is determined by dividing
total assets, less liabilities, by the total number of shares outstanding. Both
of the Funds will utilize IDS as agent to determine the value of their
respective portfolios of securities. The method of valuation employed will be
consistent with Rule 22c-1 of the 1940 Act.
At or prior to the Closing Date, Short-Term Income Fund will declare a
dividend which, together with all previous such dividends, shall have the effect
of distributing to Short-Term Income Fund's shareholders all taxable income for
the taxable year ending on or prior to the Closing Date (computed without regard
to any deduction for dividends paid) and all of its net capital gains realized
in the taxable year ending on or prior to the Closing Date (after reductions for
any capital loss carryforward).
As soon as practicable after the Closing Date, the Corporation will
distribute pro rata to the shareholders of record of Short-Term Income Fund as
of the close of business on the Closing Date the shares of Federal Income Fund
to be issued to Short-Term Income Fund shareholders, and the Corporation will
take all necessary steps to effect the liquidation and termination of Short-Term
Income Fund. The distribution of shares of Federal Income Fund will be
accomplished by the establishment of open accounts on the share records of
Federal Income Fund in the name of each shareholder of Short-Term Income Fund
representing the respective number of shares, including fractional shares, of
Federal Income Fund due each shareholder. Shareholders of Short-Term Income Fund
whose shares are represented by certificates will be required to surrender such
certificates to Federal Income Fund in order to redeem Federal Income Fund
shares held in their accounts. In the event of lost certificates, adequate bond
must be posted.
The Reorganization is subject to a number of conditions set forth in the
Plan, some of which may be waived by the Board of Directors or an authorized
officer of the Corporation. The Plan may be terminated and the proposed
transaction abandoned at any time, before or after approval by the shareholders
of Short-Term Income Fund, prior to the Closing Date by either the Board of
Directors of the Corporation or a designated officer of the Corporation.
Federal Income Fund and Short-Term Income Fund each will pay its own
expenses, if any, incurred in connection with the Reorganization; provided,
however, that certain expenses of Short-Term Income Fund that are solely and
directly related to the Reorganization (such as legal and accounting expenses,
appraisal fees, registration fees and expenses, and administrative costs
including costs incurred for printing, clerical work and telephone) may be
assumed by Federal Income Fund in the same manner as the other liabilities of
Short-Term Income Fund.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding shares of Short-Term Income Fund. If the Reorganization is not
14
<PAGE>
approved, the Board of Directors will consider other possible courses of action.
Shareholders of Short-Term Income Fund may assert dissenters' rights with
respect to the Reorganization and their shares; however, the staff of the
Commission has taken the position that the 1940 Act requires that an investment
company only redeem shares at net asset value and that this requirement
supersedes appraisal provisions in state statutes.
DESCRIPTION OF FEDERAL INCOME FUND SHARES. Assuming the multiple class
share structure discussed in the summary is implemented, full and fractional
shares of the common stock of Federal Income Fund will be issued in accordance
with the procedures detailed in the Plan and as described in Federal Income
Fund's Prospectus. Most shareholders will receive Class B shares of Federal
Income Fund in exchange for their shares of Short-Term Income Fund. Shareholders
of Short-Term Income Fund who are not subject to the CDSC will receive Class A
shares of Federal Income Fund. The shares of Federal Income Fund will represent
shares of common stock, with $.01 par value, in Federal Income Fund, which is an
open-end, management investment company incorporated under the laws of the State
of Minnesota. Class A, Class B and Class Y shares will represent identical and
equal proportionate interests in Federal Income Fund's portfolio of investments.
The only differences among the three classes will be (i) that Class B shares
will be subject to a CDSC while Class A shares will be subject to a front-end
sales charge and Class Y shares will not be subject to a sales charge and (ii)
that Class B shares will be subject to a Rule 12b-1 distribution fee and a
service fee while Class A shares will be subject to a service fee but not a Rule
12b-1 distribution fee and Class Y shares will not be subject to a distribution
fee or a service fee. Class A, Class B and Class Y shares will have one vote for
each share held on matters on which they are entitled to vote. Class A, Class B
and Class Y shares will vote together as one class on most matters subject to
shareholder approval, such as election of directors and changes in fundamental
investment objectives or policies, and as separate classes on issues that affect
only a particular class, such as changes in Rule 12b-1 distribution policies.
Class A, Class B and Class Y shares of Federal Income Fund will have no
pre-emptive or conversion rights, except to the extent that Class B shares will
convert to Class A shares after they have been held for approximately eight
years and Class A shares will convert to Class Y shares upon meeting the
shareholder eligibility requirements for Class Y shares. Each class of shares
may be exchanged for shares of the same class of other funds in the GROUP as
described in Federal Income Fund Prospectus and Statement of Additional
Information. Federal Income Fund does not issue certificates to shareholders.
FEDERAL INCOME TAX CONSEQUENCES. The completion of the Reorganization is
contingent upon the receipt by the Corporation of an opinion from Ropes & Gray
to the effect that the Reorganization will constitute a tax-free reorganization.
As such, no gain or loss will be recognized by Short-Term
15
<PAGE>
Income Fund, Federal Income Fund or their respective shareholders as a result of
the proposed transaction, the tax basis of the shares of Federal Income Fund
received by Short-Term Income Fund shareholders will be the same as the tax
basis of their Short-Term Income Fund shares, and the tax basis of the assets of
Short-Term Income Fund in the hands of Federal Income Fund will be the same as
the tax basis of such assets in the hands of Short-Term Income Fund prior to the
Reorganization.
RELATED PROPOSALS OF INTEREST TO SHORT-TERM INCOME FUND SHAREHOLDERS.
Contemporaneously with the meeting of Short-Term Income Fund shareholders to
approve the Reorganization, a regular meeting of Federal Income Fund
shareholders will be held to vote on the following matters: (1) election of
directors; (2) ratification of KPMG Peat Marwick as the independent auditors for
the fiscal year ending June 30, 1995; (3) approval of an investment management
and services agreement between Federal Income Fund and IDS; (4) approval of
changes in the investment policies of Federal Income Fund to permit investment
of all of its assets in another investment company with substantially the same
investment objectives, policies and restrictions of Federal Income Fund; and (5)
approval of changes to certain Federal Income Fund's fundamental policies. Each
of the above matters to be voted on by Federal Income Fund shareholders is
discussed in detail in Exhibit B. In addition, the investment management and
Rule 12b-1 distribution fees and expenses and the reclassification of the
fundamental policies that would result from such vote are discussed below. There
can be no assurance that shareholders of Federal Income Fund will vote to
approve any or all of the matters set forth above.
The new investment management and services agreement will provide for a
graduated management fee to be paid to IDS calculated at a rate of 0.57 percent
on the first $250 million in net assets and decreasing thereafter at reduced
percentage rates for each additional $250 million in net assets to a minimum
rate of 0.42 percent on all net assets of Federal Income Fund in excess of $1
billion.
A service fee will apply to Federal Income Fund Class A shares. The service
fee will be calculated at a rate of 0.175 percent of Federal Income Fund's
average daily net assets. Class B shares will be subject to a Rule 12b-1
distribution plan. This Rule 12b-1 distribution plan will provide for an annual
distribution fee to be paid to IDS calculated at the rate of 0.75 percent of
Federal Income Fund's average daily net assets. In addition, a service fee
calculated at a rate of 0.175 percent of Federal Income Fund's average daily net
assets will apply to Class B shares. Class B shareholders of Short-Term Income
Fund will have the right to vote on any changes in the Rule 12b-1 plan
applicable to Class B Shares of Federal Income Fund after the Reorganization.
Class Y shares will not be subject to distribution fees or to service fees.
16
<PAGE>
At the meeting of Federal Income Fund shareholders, shareholders will also
vote on whether to approve reclassifying certain of Federal Income Fund's
investment policies and restrictions from fundamental to non-fundamental to the
extent permitted by the 1940 Act.
CAPITALIZATION. The following table shows the capitalization of Short-Term
Income Fund and Federal Income Fund as of [ , 1994] and on a pro forma
basis as of that date, giving effect to the proposed acquisition of assets at
net asset value:
<TABLE>
<CAPTION>
Strategy
Federal Income Short-Term Pro forma for
Fund* Income Fund** Reorganization
-------------- -------------- --------------
(In thousands, except per share values)
<S> <C> <C> <C>
Class A Shares
- -------------------------------
Net assets..................... $ 938,413,635 $ 0 $ 938,413,635
Net asset value per share...... $ 4.85 $ 0.00 $ 4.85
Shares outstanding............. 193,487,347 0 193,487,347
Class B Shares
- -------------------------------
Net assets..................... $ 0 $ 214,179,941 $ 214,179,941
Net asset value per share...... $ 0.00 $ 0.98 $ 4.85
Shares outstanding............. 0 218,550,960 44,160,813
Class Y Shares
- -------------------------------
Net assets..................... $ 86,908,170 $ 0 $ 86,908,170
Net asset value per share...... $ 4.85 $ 0.00 $ 4.85
Shares outstanding............. 17,919,210 0 17,919,210
<FN>
*Current shares of Federal Income Fund are shown as either Class A shares or
Class Y shares, into which such shares will be converted immediately prior to
the Reorganization upon implementation of the multiple class structure.
**Current shares of Short-Term Income Fund are shown as Class B shares, for
which such shares will be exchanged upon the Reorganization.
</TABLE>
INFORMATION ABOUT FEDERAL INCOME FUND AND
SHORT-TERM INCOME FUND
Information concerning Federal Income Fund is incorporated by reference from
the current Federal Income Fund Prospectus, dated August [ ], 1994,
accompanying this Prospectus/Proxy Statement. Information concerning Short-Term
Income Fund is incorporated by reference from the Corporation's Prospectus,
dated May 27, 1994.
Both Federal Income Fund and the Corporation are subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and in accordance therewith file reports and other information including
proxy material, reports and charter documents with the SEC. These reports can be
inspected and copies obtained at the Public Reference Facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C.
17
<PAGE>
20549 and at the New York Regional Office of the SEC, Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates. A copy of the Prospectus of the Corporation is available
upon request and without charge by writing IDS Shareholder Service, P.O. Box
534, Minneapolis, Minnesota 55440-0010 or by calling (612) 671-3733.
COMPARISON OF GOALS AND INVESTMENT POLICIES
The goals and investment policies and restrictions of Federal Income Fund
and Short-Term Income Fund are substantially similar. As discussed below under
"Reclassification of Federal Income Fund Investment Policies and Restrictions
from Fundamental to Non-Fundamental," certain of Federal Income Fund's
investment policies and restrictions will, subject to approval by Federal Income
Fund shareholders, be reclassified from fundamental to non-fundamental.
GOALS
The goals of Federal Income Fund and Short-Term Income Fund are
substantially the same. The goal of Federal Income Fund is to provide a high
level of current income and safety of principal consistent with investment in
U.S. government and government agency securities. The goal of Short-Term Income
Fund is also to provide high current income consistent with conservation of
capital. Because any investment involves risk, there can be no guarantee that
either Fund will achieve its goal. The goal of each Fund can be changed only if
holders of a majority of the outstanding shares of the applicable Fund agree to
make the change.
INVESTMENT POLICIES
Under normal market conditions, at least 65% of Federal Income Fund's total
assets are invested in such securities. Short-Term Income Fund has no similar
policy requiring a specific percentage of its assets be invested in government
securities; however, it invests principally in such securities. The dollar
weighted average life of Short-Term Income Fund's investments is limited to
three years. Federal Income Fund is not limited as to the maturities of its
portfolio investments.
Each Fund's investments are primarily in government related mortgage-backed
securities. The Funds may also invest in non-government debt securities, such as
corporate bonds and commercial paper, as long as corporate bond investments are
rated in the three highest rating categories of Moody's Investors Service, Inc.
, Standard & Poor's Corporation or other nationally recognized statistical
rating organizations and commercial paper investments are rated in the two
highest rating categories of such rating agencies. In
18
<PAGE>
addition, Federal Income Fund may invest in unrated non-government debt
securities if its investment manager determines that such securities are of
equivalent investment quality to the rated securities.
Certain of the Fund's investment policies are similar but have different
percentage limitations. Each Fund is limited as to investments in securities of
investment companies. Both Short-Term Income Fund and Federal Income Fund may
make such investments but only on the open market where the dealer's or
sponsor's profit is the regular commission; however, Short-Term Income Fund's
investments in other investment companies are limited to 10% of its total
assets. Each Fund may pledge or mortgage its assets but subject to different
percentage limitations. Short-Term Income may not pledge or mortgage its assets
beyond 30% of its total assets taken at market while Federal Income Fund may not
pledge or mortgage its assets beyond 15% of its total assets at cost. Short-Term
Income Fund may invest in foreign securities subject to a limit of 15% of its
total assets while Federal Income Fund may not invest its assets in foreign
securities.
Short-Term Income Fund is subject to certain investment policies to which
Federal Income Fund is not subject. Short-Term Income Fund may invest no more
than 25% of its assets in any particular industry, except that there are no
limits with respect to investments in government or agency securities or bank
obligations. Short-Term Income Fund may invest more than 25% of its total assets
in obligations of domestic banks when such obligations offer the most
advantageous combination of yield, maturity and creditworthiness of the issuer.
Federal Income Fund has no similar policy with respect to concentration of
investment in obligations of domestic banks. Short-Term Income Fund may not
invest more than 5% of its total assets in negotiable certificates of deposit
issued by small savings and loans (up to $100,000 per institution).
Federal Income Fund is subject to an investment policy to which Short-Term
Income Fund is not subject. Federal Income Fund may not invest in a company if
its investment would result in the total holdings of all the funds in the IDS
MUTUAL FUND GROUP exceeding 15 percent of the company's issued shares.
Short-Term Income Fund is not subject to this limitation. [Note: Federal Income
Fund has three investment policies that Short-Term Income Fund does not have
(loans to directors, purchases from directors and issuance of senior
securities). Short-Term Income Fund should have at least the senior securities
policy as it is required by Section 8(a).]
In connection with a meeting of Federal Income Fund shareholders to be held
contemporaneously with the meeting of Short-Term Income Fund shareholders,
Federal Income Fund shareholders will vote on whether to approve the
reclassification of certain of Federal Income Fund's investment policies and
restrictions from fundamental to non-fundamental to the extent permitted by the
1940 Act. The goal of Federal Income Fund will remain
19
<PAGE>
unchanged. The Board of Directors of Federal Income Fund has proposed the
reclassification in order to provide the Fund with greater flexibility in
managing its portfolio of investments.
RECOMMENDATION AND VOTE REQUIRED
The Board of Directors of Short-Term Income Fund, including the "non-
interested" directors, recommends that shareholders approve the Plan. Approval
of the Plan requires the affirmative vote of a majority of the outstanding
shares of Short-Term Income Fund entitled to vote.
(2) ELECTION OF BOARD MEMBERS
The Board has set the number of persons who serve on the Board at . 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 Short-Term Income Fund
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 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 of Directors are set forth
below. Each of the nominees is a nominee for trustee or director of each of the
other funds within the GROUP. 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 Ms. Cheney and Mr. Hubers.
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 in the table
below. It includes the period of service as a Board member of funds in the
GROUP, the number of shares each owns in Short-Term Income Fund and in all the
funds in the GROUP on September 1, 1994 and
20
<PAGE>
the current committee assignments. The shareholders of Short-Term Income Fund
and the other funds forming part of the Corporation vote as a group in electing
directors. 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., Lockheed Corporation, and the Interpublic Group of
Companies, Inc.
Shares owned: Short-Term Income 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: Short-Term Income 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: Short-Term Income Fund GROUP
Committee assignments: Contracts, Executive, Personnel
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: Short-Term Income 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: Short-Term Income Fund GROUP
Committee assignment: Contracts
21
<PAGE>
DONALD M. KENDALL Board member since 1968 Age 73
Former chairman and chief executive officer, PepsiCo, Inc.
Shares owned: Short-Term Income 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: Short-Term Income 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: Short-Term Income Fund GROUP
Committee assignments: Audit, Personnel
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: Short-Term Income 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: Short-Term Income Fund GROUP
Committee assignments: Audit, Executive
22
<PAGE>
JOHN R. THOMAS** Board member since 1987 Age 57
Senior vice president and director of IDS.
Shares owned: Short-Term Income Fund GROUP
WHEELOCK WHITNEY Board member since 1977 Age 68
Chairman, Whitney Management Company (manages family assets).
Shares owned: Short-Term Income Fund GROUP
Committee assignment: Audit, Contracts, Executive, Personnel
*Interested person by reason of being an officer and employee of Short-Term
Income Fund.
**Interested person by reason of being an officer, director, securityholder
and/or employee of IDS of American Express Company ("American Express").
+Shares owned by family members in which nominee disclaims any beneficial
ownership.
As of September 1, 1994, all executive members and Board members as a group
beneficially owned directly or indirectly less than 1% of the shares of the
Short-Term Income Fund.
The committees have been appointed to facilitate the work of the Board. The
Executive Committee has authority to act for the full Board 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 operations of the Corporation and the funds
forming part of the Corporation, including Short-Term Income Fund, 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 Corporation and the
funds forming part of the Corporation, including Short-Term Income Fund.
Candidates for vacancies 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, 5 and 4 times, respectively. Average attendance at the Board was % and
no nominee attended less than 75% of the meetings of the Board and the
committees on which she or he serves.
23
<PAGE>
Members who are not officers of Short-Term Income Fund or directors of IDS
receive an annual fee and retirement benefits from Short-Term Income Fund. They
also receive attendance and other fees, the cost of which Short-Term Income Fund
shares with the other funds in the GROUP. Members of Short-Term Income Fund's
Board receive an annual fee of $1,000 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 are also reimbursed.
During the fiscal year ended March 31, 1994 the members of the Board, for
attending up to 48 meetings, received the following compensation, in total, from
all the funds in the GROUP.
<TABLE>
<CAPTION>
Aggregate Retirement Benefits
Compensation from Accrued as Estimated Annual Total Cash
Short-Term Income Short-Term Income Benefit on Compensation from
Nominee Fund Fund Expenses Retirement GROUP
- ----------------------- --------------------- ------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
Lynne V. Cheney
Robert F. Froehlke
(part of year)
Anne P. Jones
Donald M. Kendall
Melvin R. Laird
Lewis W. Lehr
William R. Pearce
(part of year)
Edson W. Spencer
Wheelock Whitney
</TABLE>
Besides Mr. Pearce, who is president, Short-Term Income 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 of the Life Funds and
treasurer of all publicly offered funds in the GROUP since July 1989.
Officers of Short-Term Income Fund serve at the pleasure of the Board.
During the last fiscal year, no officer earned more than $60,000 from
Short-Term Income Fund. All officers as a group (two persons) earned cash
compensation, including salaries and thrift plan, of $ for the last fiscal
year.
24
<PAGE>
(3) RATIFY OR REJECT THE SELECTION OF KPMG PEAT MARWICK AS INDEPENDENT AUDITORS
For the fiscal year ending March 31, 1995, KPMG Peat Marwick has been
selected to serve as the independent auditors for the Corporation and the funds
forming part of the Corporation, including Short-Term Income Fund. This
selection was made by the members of the Board who are not officers of the
Corporation 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 Commission and meeting with the Joint Audit
Committee. A representative of KPMG Peat Marwick is expected to be at the
meetings 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 the selection requires a vote by a
majority of the shares present or represented at the meeting. The shareholders
of Short-Term Income Fund and the other funds forming part of the Corporation
vote as a group in ratifying or rejecting the selection of independent auditors.
If the selection of the independent auditors is not ratified, the Board will
consider what further action must be taken.
VOTING INFORMATION
GENERAL. This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Directors of the Corporation to be used
at the meeting of Short-Term Income Fund shareholders to be held at [ ] p.m.
on November 9, 1994, at [ ], Minneapolis, Minnesota and at any
adjournments thereof. This Prospectus/Proxy Statement, is first being mailed to
shareholders of Short-Term Income Fund on or about September , 1994. Only
shareholders of record as of the close of business on September 11, 1994 (the
"Record Date") will be entitled to notice of, and to vote at, the meeting or any
adjournment thereof. If the enclosed form of proxy is properly executed and
returned in time to be voted at the meeting, the proxies named therein will vote
the shares represented by the proxy in accordance with the instructions marked
thereon. Unmarked proxies will be voted FOR the proposed Reorganization and FOR
election of the persons nominated to the Board and ratification of the Board's
selection of independent auditors and FOR any other matters deemed appropriate.
A proxy may be revoked at any time on or before the meeting by written notice
25
<PAGE>
to IDS Strategy Fund, Inc. - Short-Term Income Fund, IDS Tower 10, Minneapolis,
Minnesota 55440-0010, c/o the Corporate Secretary. Approval of the Plan will
require the affirmative vote of a majority of the outstanding shares of
Short-Term Income Fund. Shareholders of Short-Term Income Fund are entitled to
one vote for each share.
Election of members to the Board and ratification or rejection of the
selection of independent auditors will require the affirmative vote of a
majority of the shares of the funds forming part of the Corporation.
Shareholders of the funds forming part of the Corporation vote together as a
group on such matters. Simultaneously with the meeting of Short-Term Income Fund
shareholders, shareholders of the other funds forming part of the Corporation
will vote at shareholder meetings for the purpose of electing directors and
ratifying or rejecting the selection of independent auditors.
The funds forming part of the Corporation in addition to Short-Term Income
Fund include Aggressive Equity Fund, Equity Fund, Worldwide Growth Fund and
Income Fund. As of the Record Date, the funds forming part of the Corporation
had [ ] shares outstanding, and each of the funds had shares outstanding as
follows: Aggressive Equity -- [ ] shares; Equity Fund -- [ ] shares;
Income Fund -- [ ] shares; Short-Term Income Fund -- [ ] shares; and
Worldwide Growth -- [ ] shares.
Proxies are solicited by mail. Additional solicitations may be made by
telephone, telegraph or personal contact by officers or employees of IDS and its
affiliates. The cost of solicitation will be borne by Short-Term Income Fund.
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.
Shareholders of Federal Income Fund are not entitled to vote on the
Reorganization and their votes are not being solicited by this Prospectus/ Proxy
Statement.
DISSENTERS' RIGHTS. Pursuant to Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act (the "MBCA Sections"), record holders of
shares of Short-Term Income Fund on September 11, 1994 are entitled to assert
dissenters' rights in connection with the Reorganization and
26
<PAGE>
obtain payment of the "fair value" of their shares, provided that such
shareholders comply with the requirements of the MBCA Sections. The following is
a summary of the statutory procedures to be followed by Short-Term Income Fund
shareholders electing to exercise their dissenters' rights. Shareholders who
wish to assert their dissenters' rights or who wish to preserve the right to do
so should review carefully the MBCA sections, since failure to comply with the
procedures set forth in the MBCA Sections will result in the loss of such
dissenters' rights.
Notwithstanding the provisions of the MBCA Sections discussed below, the
Division of Investment Management of the SEC has taken the position that
adherence to state appraisal procedures by a registered investment company
issuing redeemable securities would constitute a violation of Rule 22c-1 under
the 1940 Act.This rule provides that no open-end investment company may redeem
its shares other than at net asset value next computed after receipt of a tender
of such security for redemption. It is the view of the Division of Investment
Management that Rule 22c-1 supersedes appraisal provisions in state statutes.
In the interests of ensuring equal valuation of all interests in Short-Term
Income Fund, the Corporation will determine dissenters' rights in accordance
with the Division's interpretation. Accordingly, in the event that any
shareholder elects to exercise dissenters' rights under Minnesota law the
Corporation intends to submit this question to a court of competent
jurisdiction. In such event a dissenting shareholder would not receive any
payment until disposition of any such court proceeding.
Shareholders who elect to exercise dissenters' rights must satisfy each of
the following conditions: Dissenting holders must file with the Corporation
before the vote on the Reorganization is taken, written notice of their
intention to demand payment of the fair value of their shares (this written
notice must be in addition to and separate from any proxy or vote against the
Reorganization -- voting against or failing to vote for the Reorganization will
not constitute such a notice); and (ii) dissenting holders must not vote in
favor of the Reorganization (a failure to vote will satisfy this requirement,
but a vote in favor of the Reorganization, by proxy or in person, will
constitute a waiver of dissenters' rights and will nullify any previously filed
written notice of intent to demand payment). Shareholders who fail to comply
with either of these conditions will have no dissenters' rights with respect to
their shares.
All written notices should be addressed to: IDS Strategy Fund, Inc. -
Short-Term Income Fund, IDS Tower 10, Minneapolis, Minnesota 55440-0010,
Attention: Corporate Secretary, and should be executed by, or with the consent
of, the holder of record. The notice must identify the shareholder and indicate
the intention of such shareholder to demand payment of fair value of his or her
shares. In the notice the shareholder's name should be stated as it appears on
his or her stock certificates, if any, or in the manner in which his or her
shares are registered. A beneficial owner of shares
27
<PAGE>
who is not the registered owner may assert dissenters' rights as to shares held
on such person's behalf, provided that such beneficial owner submits a written
consent of the registered owner to the Corporation at or before the time such
rights are asserted. A Short-Term Income Fund shareholder may not assert
dissenters' rights as to less than all of the shares registered in such
shareholder's name except in the situation in which certain shares are
beneficially owned by another person but registered in such shareholder's name.
If a shareholder wishes to dissent with respect to shares beneficially owned by
another person, such shareholder must dissent with respect to all of such shares
and disclose the name and address of the beneficial owner on whose behalf the
holder is dissenting.
After a vote approving the Reorganization, and assuming the Reorganization
is consummated, the Corporation must give written notice that the Reorganization
has been approved to each shareholder who filed a written notice of intent to
demand payment for such shareholder's shares and who did not vote in favor of
the Reorganization. This notice sent by the Corporation shall specify the
address to which a demand for payment and stock certificates, if any, must be
sent by such shareholder in order to obtain payment and shall include a form for
demanding payment to be completed by the shareholder. In order to receive the
fair value of his or her shares, a dissenting shareholder must, within 30 days
after the date of such notice, send such holder's share certificates, if any,
together with certain information concerning such shareholder's shares, on the
form supplied by the Corporation. After a valid demand for payment and the
related certificates, if any, are received, the Corporation must remit to each
dissenting shareholder who has complied with the above-referenced requirements
the amount it deems to be the fair value of that shareholder's shares, plus
interest from the fifth day after the effective date of the Reorganization to
the date of such payment, together with a brief description of the method used
to reach such estimate and certain updated interim financial data of the
Corporation, if available.
If a dissenting shareholder believes that the amount remitted by the
Corporation is less than the fair value of such shareholder's shares, plus
interest, the shareholder may give written notice to the Corporation of their
own estimate of fair value of their Short-Term Income Fund shares within 30 days
after the mailing date of the remittance and demand payment of the difference.
If the shareholder fails to give written notice of such estimate and demand for
the difference within the 30-day time period, the shareholder will be entitled
only to the amount remitted.
If the Corporation and the dissenting shareholder are unable to settle the
shareholder's demand within 60 days, the Corporation shall file in court a
petition requesting that the court determine the fair value of the shares, plus
interest. All shareholders whose demands are not settled within the applicable
60-day settlement periods shall be made parties to this proceeding. The court,
after determining that the shareholder has complied with all statutory
28
<PAGE>
requirements, may use any valuation method or combination of methods it deems
appropriate, whether or not used by the Corporation or the dissenting
shareholder, or may appoint appraisers to determine the fair value of the
shares. The court's determination is binding on all shareholders of Short-Term
Income Fund and the court must enter judgment for any amount by which the court
determines fair value exceeds the amount remitted to the shareholders by the
Corporation.
The costs and expenses of such a proceeding, including the expenses and
compensation of any appraisers, will be assessed against the Corporation, unless
the court, in its discretion, determines that the dissenting shareholder's
action in demanding supplemental payment was arbitrary, vexatious or not in good
faith, in which event the court may assess all or a part of such costs against
the shareholder. Fees and expenses of counsel for the dissenting shareholder may
be awarded by the court out of the amount, if any, awarded to such shareholder.
The Board of the Directors of the Corporation recommends that each
Short-Term Income Fund shareholder address any questions such shareholder may
have with respect to his or her rights under the MBCA Sections to his or her
legal counsel.
INTEREST OF CERTAIN PERSONS. The following receive payments from Federal
Income Fund for services rendered pursuant to contractual arrangements with
Federal Income Fund: IDS Financial Corporation, as investment adviser, receives
payments for its investment advisory and management services and, as transfer
agent, receives payments for transfer agent and dividend disbursing services.
IDS Financial Services Inc. is compensated for its services in connection with
the distribution of the Funds' shares. IDS Trust Company receives payments for
its services as custodian for the Funds.
FINANCIAL STATEMENTS AND EXPERTS
The audited financial statements of Federal Income Fund and Short-Term
Income Fund as of June 30, 1994 and March 31, 1994, respectively, and the
respective statement of operations for the year then ended and changes in net
assets for the two years then ended and condensed financial information, all as
included in the respective Statements of Additional Information of Federal
Income Fund, dated August [ ], 1994, and of the Corporation, dated May 27, 1994,
have been incorporated by reference into this Prospectus/Proxy Statement in
reliance on the reports of KPMG Peat Marwick, independent auditors for each of
the Funds, given on the authority of such firms as experts in accounting and
auditing.
29
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER , 1994
ACQUISITION OF THE ASSETS OF
SHORT-TERM INCOME FUND OF IDS STRATEGY FUND, INC.
IDS TOWER 10
MINNEAPOLIS, MINNESOTA 55440-0010
BY AND IN EXCHANGE FOR SHARES OF
IDS FEDERAL INCOME FUND, INC.
IDS TOWER 10
MINNEAPOLIS, MINNESOTA 55440-0010
This Statement of Additional Information, relating specifically to the
proposed transfer of all of the assets of Short-Term Income Fund ("Short-Term
Income Fund"), a separate series of IDS Strategy Fund, Inc. (the "Corporation"),
to IDS Federal Income Fund, Inc. ("Federal Income Fund"), in exchange for shares
of Federal Income Fund and the assumption by Federal Income Fund of the
liabilities of Short-Term Income Fund, consists of this cover page and the
following documents, each of which is incorporated herein by reference.
1. Statement of Additional Information of IDS Federal Income Fund, Inc.,
dated August [ ], 1994.
2. Annual Report of IDS Federal Income Fund, Inc. for the fiscal year ended
June 30, 1994.
3. Statement of Additional Information of IDS Strategy Fund, Inc. -
Short-Term Income Fund, dated May 27, 1994.
4. Annual Report of IDS Strategy Fund, Inc. - Short-Term Income Fund for the
fiscal year ended March 31, 1994.
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus/Proxy Statement, dated September ,
1994, relating to the above-referenced matter, which may be obtained without
charge by writing either Federal Income Fund or the Corporation at the addresses
set forth above, or by contacting any IDS personal financial planner, or by
calling IDS Shareholder Service at (612) 671-3733.
The date of this Statement of Additional Information is September, 1994.
[Include Pro Forma Financial Statements here.]
30
<PAGE>
PRO FORMA COMBINING
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
Strategy-
Short-Term Federal Income
Fund Fund Combined
------------ -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (Note 1) (Identified
cost. $226,917,921: $1,079,138,683 and $1,306,056,604
respectively)............................................. $222,489,959 $1,048,406,463 $1,270,896,422
Cash in bank on demand deposit.............................. 372,619 (1,494,635) (1,122,016)
Receivable for investment securities sold................... 0 59,499,085 59,499,085
Dividends and accrued interest receivable................... 2,105,611 8,731,655 10,837,266
------------ -------------- --------------
Total assets............................................ $224,968,189 $1,115,142,568 $1,340,110,757
------------ -------------- --------------
------------ -------------- --------------
LIABILITIES
Dividends payable to shareholders........................... 64,411 74,923 139,335
Payable for investment securities purchased................. 10,340,139 88,743,799 99,083,938
Accrued investment management and
services fee.............................................. 91,428 442,762 534,190
Accrued 12b-1 and distribution fee.......................... 148,079 38,414 186,494
Accrued transfer agency fee................................. 32,361 98,726 131,087
Other accrued expenses...................................... 111,829 246,669 358,499
Open option contracts written, at value (premium received
$234,539)................................................. 175,469 175,469
------------ -------------- --------------
Total liabilities....................................... 10,788,248 89,820,762 100,433,541
------------ -------------- --------------
Net assets applicable to outstanding capital stock...... 214,179,942 1,025,321,805 1,239,677,216
------------ -------------- --------------
------------ -------------- --------------
REPRESENTED BY
Capital stock -- authorized 10,000,000,000 shares of $.01
par value: outstanding, 218,212,053: 211,575,822 and
255,567,371 shares, respectively.......................... $ 2,182,121 $ 2,115,758 $ 4,297,879
Additional paid-in capital.................................. 216,602,071 1,084,020,017 1,300,622,088
Undistributed net investment income......................... 41,782 (1,147,956) (1,106,174)
Accumulated net realized gain (Note 1)...................... (218,070) (31,560,644) (31,778,714)
Unrealized appreciation of investments...................... (4,427,962) (28,105,369) (32,533,331)
------------ -------------- --------------
Total -- representing net assets applicable to
outstanding capital stock............................. 214,179,941 1,025,321,805 1,239,501,747
------------ -------------- --------------
Net asset value per share of outstanding capital stock...... $ 0.98 $ 4.85 $ 4.85
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
See accompanying notes to pro forma
combining financial statements.
31
<PAGE>
PRO FORMA COMBINING
STATEMENT OF OPERATIONS
JUNE 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
Strategy- Federal
Short-Term Income
Fund Fund Combined
----------- ------------ ------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest.................................................. $10,543,228 $ 65,083,018 $ 75,626,246
Dividends................................................. 0 0 0
----------- ------------ ------------
Total income............................................ 10,543,228 65,083,018 75,626,246
----------- ------------ ------------
Expenses (Note 2):
Investment management and service fee..................... 977,774 5,369,312 6,347,087
12b-1 and distribution fee................................ 1,590,400 458,958 2,049,358
Transfer agency fee....................................... 377,149 1,172,477 1,549,626
Compensation of directors................................. 6,038 33,418 39,456
Compensation of officers.................................. 3,112 8,702 11,814
Custodian fees............................................ 31,570 100,341 131,911
Postage................................................... 76,100 265,731 341,831
Registration fees......................................... 86,562 145,630 232,191
Reports to shareholders................................... 19,564 53,088 72,652
Audit fees................................................ 8,359 52,541 60,900
Administrative............................................ 4,274 14,048 18,322
Other..................................................... 3,170 13,793 16,963
----------- ------------ ------------
Total net expenses...................................... 3,184,073 7,688,039 10,872,112
----------- ------------ ------------
Investment income -- net.............................. 7,359,155 57,394,979 64,754,134
----------- ------------ ------------
----------- ------------ ------------
REALIZED AND UNREALIZED GAIN -- NET
Net realized gain (loss) on security transactions (Note
3)......................................................... 186,706 (33,210,654) (33,023,949)
Net realized gain (loss) on closed interest rate futures
contracts.................................................. 0 8,449,197 8,449,197
----------- ------------ ------------
Net realized gain on investments............................ 186,706 (24,761,457) (24,574,751)
Net change in unrealized appreciation or depreciation....... 8,328,665 (38,009,969) (29,681,304)
----------- ------------ ------------
Net gain on investments..................................... 8,515,371 (62,771,426) (54,256,055)
----------- ------------ ------------
Net increase in assets resulting from operations............ $15,874,526 $ (5,376,448) $ 10,498,078
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes to pro forma
combining financial statements.
32
<PAGE>
IDS FEDERAL INCOME FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940 (as amended)
as a diversified, open-end management investment company. Significant accounting
policies followed by the Fund are summarized below:
VALUATION OF SECURITIES. All securities are valued at the close of each
business day. Securities for which market quotations are not readily available
are valued at fair value according to methods selected in good faith by the
Board of Directors. Determination of fair value involves, among other things,
reference to market indexes, matrixes and data from independent brokers.
Short-term securities maturing in more than 60 days from the valuation date are
valued at the market price or approximate market value based on current interest
rates; those maturing in 60 days or less are valued at amortized cost.
OPTIONS TRANSACTIONS. In order to produce incremental earnings, protect
gains, and facilitate buying and selling of securities for investment purposes,
the Fund may buy and sell put and call options and write covered call options on
portfolio securities and may write cash-secured put options on U.S. government
securities. The risk in writing a call option is that the Fund gives up the
opportunity of profit if the market price of the security increases. The risk in
writing a put option is that the Fund may incur a loss if the market price of
the security decreases and the option is exercised. The risk in buying an option
is that the Fund pays a premium whether or not the option is exercised. The Fund
also has the additional risk of not being able to enter into a closing
transaction if a liquid secondary market does not exist. The Fund also may write
over-the-counter options where the completion of the obligation is dependent
upon the credit standing of the other party.
Option contracts are valued daily at the closing prices on their primary
exchanges and unrealized appreciation or depreciation is recorded. The Fund will
realize a gain or loss upon expiration, exercise or closing of the option
transaction. When options on debt securities or futures are exercised, the Fund
will realize a gain or loss. When other options are exercised, the proceeds on
sales for a written call option, the purchase cost for a written put option or
the cost of a security for a purchased put or call option is adjusted by the
amount of premium received or paid.
FUTURES TRANSACTIONS. In order to gain exposure to or protect itself from
changes in the market, the Fund may buy and sell interest rate futures
contracts. Risks of entering into futures contracts and related options include
the possibility that there may be an illiquid market and that a change in the
value of the contract or option may not correlate with changes in the value of
the underlying securities.
33
<PAGE>
IDS FEDERAL INCOME FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Upon entering into a futures contract, the Fund is required to deposit
either cash or securities in an amount (initial margin) equal to a certain
percentage of the contract value. Subsequent payments (variation margin) are
made or received by the Fund each day. The variation margin payments are equal
to the daily changes in the contract value and are recorded as unrealized gains
and losses. The Fund recognizes a realized gain or loss when the contract is
closed or expires.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS. Delivery and payment for
securities that have been purchased by the Fund on a forward-commitment or
when-issued basis can take place one month or more after the transaction date.
During this period, such securities are subject to market fluctuations, and they
may affect the Fund's gross assets the same as owned securities.
FEDERAL TAXES. Since the Fund's policy is to comply with all sections of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to shareholders, no provision for income or
excise taxes is required.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of the deferral of losses
on certain futures contracts, the recognition of certain foreign currency gains
(losses) as ordinary income (loss) for tax purposes, and losses deferred due to
"wash sale" transactions. The character of distributions made during the year
from net investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains (losses) were recorded by
the Fund.
DIVIDENDS TO SHAREHOLDERS. Dividends from net investment income, declared
daily and payable monthly, are reinvested in additional shares of the Fund at
net asset value or payable in cash. Capital gains, when available, are
distributed along with the last income dividend of the calendar year.
OTHER. Security transactions are accounted for on the date securities are
purchased or sold. Interest income, including level-yield amortization of
premium and discount, is accrued daily.
2. EXPENSES AND SALES CHARGES
Under terms of an agreement dated Nov. 14, 1991, the Fund pays IDS Financial
Corporation (IDS) a fee for managing its investments, record-keeping and other
specified services. The fee is a percentage of the Fund's
34
<PAGE>
IDS FEDERAL INCOME FUND, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- CONTINUED
2. EXPENSES AND SALES CHARGES -- CONTINUED
average daily net assets consisting of a group asset charge in reducing
percentages from 0.46 percent to 0.32 percent annually on the combined net
assets of all non-money market funds in the IDS MUTUAL FUND GROUP and an
individual annual asset charge of 0.13 percent of average daily net assets.
The Fund also pays IDS a distribution fee at an annual rate of $6 per
shareholder account and a transfer agency fee at an annual rate of $15.50 per
shareholder account. The transfer agency fee is reduced by earnings on monies
pending shareholder redemptions.
IDS will assume and pay any expenses (except taxes and brokerage
commissions) that exceed the most restrictive applicable state expense
limitation.
Sales charges by IDS Financial Services Inc. for distributing Fund shares
were for the year ended June 30, 1994. The Fund also pays custodian fees
to IDS Bank & Trust, an affiliate of IDS.
The Fund has a retirement plan for its independent directors. Upon
retirement directors receive monthly payments equal to one-half of the retainer
fee for as many months as they served as directors up to 120 months. There are
no death benefits. The plan is not funded but the Fund recognizes the cost of
payments during the time the directors serve on the Board. The retirement plan
expense amounted to $7,649 for the year ended June 30, 1994.
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities (other than
short-term obligations) aggregated $ and $ , respectively, for
the year ended June 30, 1994. Realized gains and losses are determined on an
identified cost basis.
35
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of [ ], 1994, between
IDS Strategy Fund, Inc., a Minnesota corporation ("the Corporation"), on behalf
of its Short-Term Income Fund ("Short-Term Income Fund") and IDS Federal Income
Fund, Inc., a Minnesota corporation ("Federal Income Fund").
In consideration of the mutual promises herein contained, the Parties hereto
agree as follows:
1. SHAREHOLDER APPROVAL
APPROVAL BY THE SHAREHOLDERS. A meeting of the shareholders of Short-Term
Income Fund shall be called and held for the purpose of acting upon this
Agreement and the transactions contemplated herein. Federal Income Fund shall
furnish to the Corporation such data and information as shall be reasonably
requested by the Corporation for inclusion in the information to be furnished to
its Short-Term Income Fund shareholders in connection with the meeting for the
purpose of acting upon this Agreement and the transactions contemplated herein.
2. REORGANIZATION
(a) PLAN OF REORGANIZATION. The Corporation will convey, transfer and
deliver to Federal Income Fund all of the then existing assets of Short-Term
Income Fund at the closing provided for in Section 2(b) (hereinafter called the
"Closing"). Federal Income Fund shall assume all liabilities, expenses, costs,
charges and reserves reflected on an unaudited statement of assets and
liabilities of Short-Term Income Fund as of the Valuation Date (as defined in
paragraph 3(a)), in accordance with generally accepted accounting principles
consistently applied from the prior audited period. Federal Income Fund shall
assume only those liabilities of Short-Term Income Fund reflected in such
unaudited statement of assets and liabilities and shall not assume any other
liabilities, whether absolute or contingent, known or unknown, accrued or
unaccrued. Federal Income Fund agrees to deliver at the Closing to the
Corporation the number of shares of common stock of Federal Income Fund (the
"Shares") including fractional Shares, determined by dividing the value of the
net assets of Short-Term Income Fund, computed in the manner and as of the time
and date set forth in paragraph 3(a), by the net asset value of one Share
computed in the manner and as of the time and date set forth in paragraph 3(b).
It is expressly agreed that there will be no sales charge on the sale of Federal
Income Fund's Shares to Short-Term Income Fund in exchange for the assets of
Short-Term Income Fund, or to any of the shareholders of Short-Term Income Fund
upon distribution of the Shares to them. Shareholders of Short-Term Income Fund
subject to CDSC will receive
A-1
<PAGE>
Class B Shares of Federal Income Fund in exchange for their shares of Short-Term
Income Fund. Shareholder of Short-Term Income Fund will receive Class A Shares.
(b) CLOSING AND EFFECTIVE TIME OF THE REORGANIZATION. The Closing shall
occur on (a) the later of (i) receipt of all necessary regulatory approvals,
(ii) the final adjournment of the meeting of shareholders of Short-Term Income
Fund at which this Agreement will be considered and (iii) implementation of a
multiple class share structure by Federal Income Fund pursuant to an Exemptive
Order (the "Exemptive Order") obtained on behalf of Federal Income Fund and
other funds managed by IDS Financial Corporation and, in connection therewith,
creation of the Class B Shares to be delivered to Short-Term Income Fund
shareholders in accordance with the terms thereof, or (b) such later date as the
Parties may mutually agree (the "Effective Time of the Reorganization").
3. VALUATION OF NET ASSETS
(a) The value of the net assets of Short-Term Income Fund to be transferred
to Federal Income Fund hereunder shall be computed as of the close of regular
trading on the New York Stock Exchange, Inc. (the "NYSE"), currently 4:00 p.m.
New York time, on the day of the Closing (hereinafter the "Valuation Date")
using the valuation procedures as set forth in the Federal Income Fund
Prospectus.
(b) The net asset value per share of Federal Income Fund's Shares for
purposes of Section 2(a) hereof shall be determined as of the close of regular
trading on the NYSE, currently 4:00 p.m. New York time, on the Valuation Date by
Federal Income Fund using the same valuation procedures as set forth in the
Federal Income Fund Prospectus.
(c) A copy of the computations showing in reasonably detail the valuation of
Short-Term Income Fund's net assets on the Valuation Date pursuant to Section
3(a) above, certified by an officer of the Corporation, shall be furnished by
the Corporation to Federal Income Fund at the Closing. A copy of the
computations showing in reasonable detail the determination of the net asset
value per share of Federal Income Fund's Shares on the Valuation Date pursuant
to Section 3(b) above, certified by an officer of Federal Income Fund, shall be
furnished by Federal Income Fund to the Corporation at the Closing.
4. LIQUIDATION AND DISSOLUTION OF SHORT-TERM INCOME FUND
(a) As soon as practicable after the Valuation Date, the Corporation will
liquidate and distribute pro rata to its Short-Term Income Fund shareholders of
record as of the close of regular trading on the NYSE, currently 4:00 p.m. New
York time, the Federal Income Fund Shares received by the Corporation pursuant
to this Section. Such liquidation and distribution will be accomplished by the
establishment of shareholder accounts on the share
A-2
<PAGE>
records of Federal Income Fund in the names of each such shareholder of
Short-Term Income Fund, representing the respective pro rata number of full and
fractional Shares of Federal Income Fund due to each. All issued and outstanding
shares of Short-Term Income Fund will simultaneously be cancelled on the books
of the Corporation, although stick certificates representing interests in
Short-Term Income Fund will represent a number of Shares of Federal Income Fund
after the Valuation Date determined in accordance with Section 2(a). No such
shareholder accounts shall be established by Federal Income Fund or its transfer
agent except pursuant to written instructions from the Corporation, and the
corporation agrees to provide on the Valuation Date instructions to transfer to
a shareholder account for each such former shareholder of Short-Term Income Fund
a pro rata share of the number of Shares of Federal Income Fund received
pursuant to Section 2(a) hereof.
(b) Promptly after the distribution described in Section 4(a) above,
appropriate notification will be mailed by Federal Income Fund or its transfer
agent to each shareholder of Short-Term Income Fund receiving such distribution
of the Shares informing such shareholder of the number of such shares
distributed to such shareholder and confirming the registration thereof in such
shareholder's name.
(c) As promptly as practicable after the liquidation of Short-Term Income
Fund, and in no event later than twelve months from the date hereof, Short-Term
Income Fund shall be dissolved.
(d) Immediately after the Valuation Date, the share transfer books of the
Corporation relating to Short-Term Income Fund shall be closed and no transfer
of shares shall thereafter be made on such books.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF FEDERAL INCOME FUND
Federal Income Fund represents and warrants to the Corporation as follows:
(a) ORGANIZATION, EXISTENCE, ETC. Federal Income Fund is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota and has the power to carry on its business as it is now being
conducted. Federal Income Fund has all necessary federal, state and local
authorization to own all of its properties and assets and to carry on its
business as now being conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. Federal Income Fund is a
corporation registered under the Investment Company Act of 1940 (the "1940 Act")
as an open-end, management investment company; such registration has not been
revoked or rescinded and is in full force and effect.
(c) CAPITALIZATION. Federal Income Fund has an authorized capital of
10,000,000,000 shares of common stock, par value $0.01 per share, of which as of
, 1994, shares of common stock of Federal Income Fund were
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outstanding and no shares were held in the treasury of Federal Income Fund. All
of the outstanding shares have been duly authorized and are validly issued,
fully paid and non-assessable. Since Federal Income Fund is engaged in the
continuous offering and redemption of its shares, the number of outstanding
shares may change prior to the Effective Time of the Reorganization. Federal
Income Fund has the authority, pursuant to the Exemptive Order, to implement a
multiple class share structure and to create multiple classes of Common Stock,
including the Class B Shares. Federal Income Fund hereby agrees that, prior to
the Closing, it shall implement a multiple class structure in accordance with
the Exemptive Order and create the Class B Shares to be issued to Short-Term
Income Fund shareholders in accordance with the terms hereof.
(d) FINANCIAL STATEMENTS. The audited financial statements as of June 30,
1994 of Federal Income Fund (the "Federal Income Fund Financial Statements"),
previously delivered to the Corporation, fairly present the financial position
of Federal Income Fund as of such respective dates, and the results of its
operations and changes in its net assets for the periods then ended.
(e) SHARES TO BE ISSUED UPON REORGANIZATION. The Shares to be issued in
connection with the Reorganization will have been duly authorized and upon
consummation of the Reorganization will be validly issued, fully paid and
non-assessable.
(f) AUTHORITY RELATIVE TO THIS AGREEMENT. Federal Income Fund has the
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and no other proceedings by Federal Income Fund are necessary to
authorize its officers to effectuate this Agreement and the transactions
contemplated hereby.
(g) NO VIOLATION. Federal Income Fund is not in violation of its Articles
of Incorporation or By-Laws (the "Charter") or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which it is a party or by which it or its
properties may be bound; and the execution and delivery of this Agreement and
the consummation of the transactions contemplated herein will not conflict with
or constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
Federal Income Fund pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which Federal Income Fund is
subject, nor will such action result in any violation of the provisions of the
Charter or any law, administrative regulation or administrative or court decree
applicable to Federal Income Fund;
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and no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by Federal Income Fund of
the transactions contemplated by this Agreement other than the effectiveness of
the Registration Statement described below in Section 5(1).
(h) LIABILITIES. There are no liabilities of Federal Income Fund, whether
or not determined or determinable, other than liabilities disclosed or provided
for in Federal Income Fund's Financial Statements and liabilities incurred in
the ordinary course of business subsequent to August 31, 1993, or otherwise
previously disclosed to the Corporation, none of which has been materially
adverse to the business, assets or results of operations of Federal Income Fund.
(i) LITIGATION. There are no claims, actions, suits or proceedings pending
or, to the knowledge of Federal Income Fund, threatened which would adversely
affect Federal Income Fund or its assets or business or which would prevent or
hinder consummation of the transactions contemplated hereby.
(j) CONTRACTS. Except for contracts and agreements previously disclosed to
the Corporation under which no default exists, Federal Income Fund is not a
party to or subject to any material contract, debt instrument, plan, lease,
franchise, license or permit of any kind or nature whatsoever.
(k) TAXES. The federal income tax returns of Federal Income Fund have been
filed for all taxable years to and including the taxable year ended December 31,
1993. Federal Income Fund has qualified and will qualify as a regulated
investment company under the Internal Revenue Code with respect to each taxable
year of Federal Income Fund since commencement of its operations.
(l) REGISTRATION STATEMENT. Federal Income Fund shall cause to be filed
with the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form N-14 (the "Registration Statement") under the Securities Act
of 1933 ("Securities Act") relating to the Shares issuable hereunder. At the
time the Registration Statement becomes effective, the Registration Statement
(i) will comply in all material respects with the provisions of the Securities
Act and the rules and regulations of the Commission thereunder (the
"Regulations") and (ii) will not contain an untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; and at the time the Registration
Statement becomes effective, at the time of the shareholders' meeting referred
to in Section 1, and at the Effective Time of the Reorganization, the prospectus
and statement of additional information included therein, as amended or
supplemented by any amendments or supplements filed by Federal Income Fund, will
not contain an untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that none of the
representations and
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warranties in this subsection shall apply to statements in or omissions from the
Registration Statement or Prospectus and Statement of Additional Information
made in reliance upon and in conformity with information furnished by the
Corporation for use in the Registration Statement or Prospectus and Statement of
Additional Information as provided in Section 6(1).
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION
The Corporation represents and warrants to Federal Income Fund as follows:
(a) ORGANIZATION, EXISTENCE, ETC. The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota and has power to carry on its business as it is now being conducted.
The Corporation has all necessary federal, state and local authorization to own
all of its properties and assets and to carry on its business as now being
conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. The Corporation is a corporation
registered under the 1940 Act as a open-end diversified management investment
company; such registration has not been revoked or rescinded and is in full
force and effect.
(c) CAPITALIZATION. The Corporation has an authorized capital of [ ]
shares of common stock, par value $0.01 per share, of which as of
[ ], 1994, shares of Short-Term Income Fund were outstanding
and no shares were held in the treasury of the Corporation. All of the
outstanding shares of the Short-Term Income Fund have been duly authorized and
are validly issued, fully paid and non-assessable. Since the Corporation is
engaged in the continuous offering and redemption if its shares, the number of
outstanding shares of Short-Term Income Fund may change prior to the Effective
Time of the Reorganization.
(d) FINANCIAL STATEMENTS. The audited financial statements as of March 31,
1994 of Short-Term Income Fund (the "Short-Term Income Fund Financial
Statements"), previously delivered to Federal Income Fund, fairly present the
financial position of Short-Term Income Fund as of such respective dates, and
the results of its operations and changes in its net assets for the periods then
ended.
(e) AUTHORITY RELATIVE TO THIS AGREEMENT. The Corporation has the power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated have been duly authorized by its Board of Directors,
and except for obtaining approval by the holders of shares of Short-Term Income
Fund common stock, no other proceedings by the Corporation are necessary to
authorize its officers to effectuate this Agreement and the transactions
contemplated hereby.
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(f) NO VIOLATION. The Corporation is not in violation of its Articles of
Incorporation or By-Laws (the "Charter") or in default in the performance or
observance of any material obligation, agreement, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein will not conflict with or constitute a breach
of, or default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of Short-Term Income Fund
pursuant to any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which the law, administrative regulation or
administrative or court decree applicable to the Corporation; and no consent,
approval, authorization or order of any court or governmental authority or
agency is required for the consummation by the Corporation of the transactions
contemplated by this Agreement.
(g) LIABILITIES. There are no liabilities of Short-Term Income Fund,
whether or not determined or determinable, other than liabilities disclosed or
provided for in the Short-Term Income Fund Financial Statements and liabilities
incurred in the ordinary course of business subsequent to March 31, 1994, or
otherwise previously disclosed to Federal Income Fund, none of which has been
materially adverse to the business, assets or results of operations of
Short-Term Income Fund.
(h) LITIGATION. There are no claims, actions, suits or proceedings pending
or, to the knowledge of the Corporation, threatened which would adversely affect
Short-Term Income Fund or its assets or business or which would prevent or
hinder consummation of the transactions contemplated hereby.
(i) CONTRACTS. Except for contracts and agreements previously disclosed to
Federal Income Fund under which no default exists, the Corporation is not a
party to or subject to any material contract, debt instrument, plan, lease,
franchise, license or permit of any kind or nature whatsoever.
(j) TAXES. The federal income tax returns of the Corporation have been
filed for all taxable years to and including the taxable year ended December 31,
1993, and all taxes payable pursuant to such returns have been paid. Short-Term
Income Fund has qualified, and will qualify, as a regulated investment company
under the Internal Revenue Code with respect to each taxable year of the
Corporation since commencement of its operations.
(k) FUND SECURITIES. All securities to be listed in the schedule of
investments of Short-Term Income Fund as of the Effective Time of the
Reorganization will be owned by the Corporation on behalf of Short-Term Income
Fund free and clear of any liens, claims, charges, options and encumbrances,
except as indicated in said schedule, and, except as so indicated, none of such
securities is or, after the Reorganization as contemplated
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hereby, will be subject to any restrictions, legal or contractual, on the
disposition thereof (including restrictions as to the public offering or sale
thereof under the Securities Act), and all such securities are or will be
readily marketable.
(l) REGISTRATION STATEMENT. In connection with the Registration Statement,
the Corporation will cooperate with Federal Income Fund and will furnish to
Federal Income Fund the information relating to the Corporation or Short-Term
Income Fund required by the Securities Act and the Regulations to be set forth
in the Registration Statement (including the Prospectus and Statement of
Additional Information). At the time the Registration Statement becomes
effective, the Registration Statement, insofar as it related to the Corporation
and Short-Term Income Fund, (i) will comply in all material respects with the
provisions of the Securities Act and the Regulations and (ii) will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and at the time the Registration Statement becomes effective, at the time of the
shareholders' meeting referred to in Section 1 and at the Effective Time of the
Reorganization, the Prospectus and Statement of Additional Information, as
amended or supplemented by any amendments or supplements filed by Federal Income
Fund, insofar as it related to the Corporation or Short-Term Income Fund, will
not contain an untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to statements
in or omissions from the Registration Statement or Prospectus and Statement of
Additional Information made in reliance upon and in conformity with information
furnished by the Corporation for use in the Registration Statement or Prospectus
and Statement of Additional Information as provided in this Section 6(1).
7. CONDITIONS TO OBLIGATIONS OF THE CORPORATION
The obligations of the Corporation hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions:
(a) SHAREHOLDER APPROVAL. This Agreement shall have been approved by the
affirmative vote of the holders of the majority, as such term is defined in the
1940 Act, of the outstanding shares of common stock of Short-Term Income Fund.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Federal Income Fund shall
have complied with each of its agreements contained herein, each of the
representations and warranties contained herein shall be true in all material
respects as of the Effective Time of the Reorganization, and except as otherwise
indicated in any financial statements of Federal Income Fund
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audited or certified by the Treasurer of Federal Income Fund, which may be
delivered to the Corporation on or prior to the last business day preceding the
Effective Time of the Reorganization, as of the Effective Time of the
Reorganization there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of Federal
Income Fund since August 31, 1993, and the Corporation shall have received a
certificate of the Chairman or President of Federal Income Fund satisfactory in
form and substance to the Corporation so stating.
(c) CREATION OF CLASS B SHARES. Federal Income Fund shall have implemented
the multiple class share structure contemplated by the Exemptive Order and shall
have created and authorized the issuance of the Class B Shares to be issued to
Short-Term Income Fund shareholders in accordance with the terms hereof.
(d) REGULATORY APPROVAL. The Registration Statement referred to in Section
5(1) shall have become effective and no stop orders under the Securities Act
pertaining thereto shall have been issued; and all approvals, registrations, and
exemptions under federal and state securities laws considered to be necessary
shall have been obtained.
(e) TAX OPINION. The Corporation shall have received the opinion of Ropes
& Gray, dated the Effective Time of the Reorganization, addressed to and in form
and substance satisfactory to the Corporation, as to certain of the federal
income tax consequences of the Reorganization under the Internal Revenue Code of
1986 to Short-Term Income Fund and the shareholders of Short-Term Income Fund
and Federal Income Fund. For purposes of rendering their opinion Ropes & Gray
may rely exclusively and without independent verification, as to factual
matters, upon the statements made in this Agreement, the proxy statement which
will be distributed to the shareholders of Short-Term Income Fund in connection
with the Reorganization, and upon such other written representations as the
Chairman or President of the Corporation and Federal Income Fund, respectively,
will have verified as of the Effective Time of the Reorganization. The opinion
of Ropes & Gray will be to the effect that, based on the facts and assumptions
stated therein, for Federal income tax purposes: (i) neither Short-Term Income
Fund nor Federal Income Fund will recognize any gain or loss upon the transfer
of the assets of Short-Term Income Fund to, and the assumption of its
liabilities by, Federal Income Fund in exchange for the Shares and upon the
distribution (whether actual or constructive) of the Shares to its shareholders
in exchange for their shares of common stock of Short-Term Income Fund; (ii) the
shareholders of Short-Term Income Fund who receive the Shares pursuant to the
Reorganization will not recognize any gain or loss upon the exchange (whether
actual or constructive) of their shares of common stock of Short-Term Income
Fund for the Shares (including any fractional share interests they are deemed to
have received) pursuant to the Reorganization; (iii) the
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holding period and the basis of the Shares received by the Short-Term Income
Fund shareholders will be the same as the holding period and the basis of the
shares of common stock of Short-Term Income Fund surrendered in the exchange;
and (iv) the holding period and the basis of the assets acquired by Federal
Income Fund will be the same as the holding period and the basis of such assets
to Short-Term Income Fund immediately prior to the Reorganization.
(f) OPINION OF COUNSEL. The Corporation shall have received the opinion of
Leslie L. Ogg, counsel for Federal Income Fund, dated the Effective Time of the
Reorganization, addressed to and in form and substance satisfactory to the
Corporation, to the effect that: (i) Federal Income Fund is a corporation duly
organized and validly existing under the laws of the State of Minnesota; (ii)
Federal Income Fund is an open-end investment company of the management type
registered under the 1940 Act; (iii) this Agreement and the Reorganization
provided for herein and the execution of this Agreement have been duly
authorized and approved by all requisite action of Federal Income Fund and this
Agreement has been duly executed and delivered by Federal Income Fund and is a
valid and binding obligation of Federal Income Fund; and (iv) the Shares to be
issued in the Reorganization are, to the extent of the number of shares of
common stock authorized to be issued by Federal Income Fund in its Charter less
the number of the then outstanding shares of common stock, duly authorized and
upon issuance thereof in accordance with this Agreement will be validly issued,
fully paid and non-assessable shares of common stock of Federal Income Fund.
8. CONDITIONS TO OBLIGATIONS OF FEDERAL INCOME FUND
The obligations of Federal Income Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions:
(a) SHAREHOLDER APPROVAL. This Agreement shall have been approved by the
affirmative vote of the holders of a majority of the outstanding shares of
common stock of Short-Term Income Fund.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Corporation shall have
complied with each of its agreements contained herein, each of the
representations and warranties contained herein shall be true in all material
respects as of the Effective Time of the Reorganization, and except as otherwise
indicated in any financial statements of the Corporation or Short-Term Income
Fund, audited or certified by an officer of the Corporation, which may be
delivered to Federal Income Fund on or prior to the last business day preceding
the Effective Time of the Reorganization, as of the Effective Time of the
Reorganization there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of
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Short-Term Income Fund since May 31, 1994 and Federal Income Fund shall have
received a certificate of the President of the Corporation satisfactory in form
and substance to Federal Income Fund so stating.
(c) REGULATORY APPROVAL. All approvals, registrations, and exemptions
under federal and state securities laws considered to be necessary shall have
been obtained.
(d) OPINION OF COUNSEL. Federal Income Fund shall have received the
opinion of Ropes & Gray, counsel for the Corporation, dated the Effective Time
of the Reorganization, addressed to and in form and substance satisfactory to
Federal Income Fund, to the effect that (a) the Corporation is a corporation
duly organized and validly existing under the laws of the State of Minnesota;
(b) the Corporation is an open-end investment company of the management type
registered under the 1940 Act; (c) this Agreement and the Reorganization
provided for herein and the execution and filing of this Agreement have been
duly authorized and approved by all requisite action of the Corporation and this
Agreement has been duly executed and delivered by the Corporation and is a valid
and binding obligation of the Corporation with respect to Short-Term Income
Fund.
(e) DECLARATION OF DIVIDEND. The Corporation shall have declared a
dividend with respect to Short-Term Income Fund which, together with all
previous such dividends, shall have the effect of distributing to Short-Term
Income Fund's shareholders all of Short-Term Income Fund's investment company
taxable income for all taxable years ending on or prior to the Closing (computed
without regard to deduction for dividends paid) and all of its net capital gain
realized in taxable years ending on or prior to the Closing (after reduction for
capital loss carryforward).
9. AMENDMENT; TERMINATIONS; NON-SURVIVAL OF
COVENANTS, WARRANTIES AND REPRESENTATIONS.
(a) The Parties hereto may, by agreement in writing authorized by their
respective Boards of Directors, amend this agreement at any time before or after
approval by the shareholders of Short-Term Income Fund but after such approval,
no amendment shall be made which substantially changes the terms of Paragraphs 2
and 3.
(b) At any time prior to the Effective Time of the Reorganization, any of
the Parties may by written instrument signed by it (i) waive any inaccuracies in
the representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein.
(c) The Corporation may terminate this Agreement at any time prior to the
Effective Time of the Reorganization by notice to Federal Income Fund if (i) a
material condition to its performance or a material covenant of
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Federal Income Fund shall not be fulfilled on or before the date specified for
the fulfillment thereof or (ii) a material default or material breach of this
Agreement shall be made by Federal Income Fund that is not cured.
(d) Federal Income Fund may terminate this Agreement at any time prior to
the Effective Time of the Reorganization by notice to the Corporation if (i) a
material condition to its performance or a material covenant of the Corporation
shall not be fulfilled on or before the date specified for the fulfillment
thereof or (ii) a material default or material breach of this Agreement shall be
made by the Corporation that is not cured.
(e) This Agreement may be terminated at any time prior to the Effective Time
of the Reorganization, whether before or after approval by the shareholders of
Short-Term Income Fund, without any liability on the part of either Party hereto
or its respective directors, officers or shareholders, by any Party on written
notice to the other Party, and shall be terminated without liability as of the
close of business on [ , 1995], or such later date as agreed upon by the
Parties, if the Effective Time of the Reorganization is not on or prior to such
date.
(f) No representation, warranty or covenant in or pursuant to this Agreement
(including certificates of officers) shall survive the Reorganization.
10. EXPENSES
Each Party shall bear its respective expenses of entering into and carrying
out the provisions of this Agreement as has been separately incurred by each
whether or not the Reorganization is consummated although such expenses may be
subject to expense limitation undertakings by the respective investment advisers
to the Parties hereto.
11. GENERAL
This Agreement supersedes all prior agreements between the Parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the Parties and may not be changed or terminated orally. This
Agreement may be executed in one or more counterparts, all of which shall be
considered one and the same agreement, and shall become effective when one or
more counterparts have been executed by the Corporation and Federal Income Fund
and delivered to each of the Parties hereto. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement.
12. INDEMNIFICATION
Each Party shall indemnify and hold the other and their officers, directors,
agents and persons controlled or controlling any of them (each an
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"indemnitee") harmless from and against any liability, damage, deficiency, tax,
assessment, charge or other cost and expense, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees (all as provided in accordance with applicable corporate law) reasonably
incurred by such indemnitee in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, with respect to actions taken hereunder or thereafter by reason of
his having so acted in any such capacity, provided, however, that no indemnitee
shall be indemnified hereunder against any liability or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties involved in the
conduct of his position.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement and Plan
of Reorganization to be executed on its behalf by its Chairman, President or a
Vice President and its seal to be affixed hereto and attested by its Secretary
or Assistant Secretary, all of the day and year first above written.
(SEAL)
Attest: IDS Federal Income Fund, Inc.
By -------------------------- By --------------------------
Secretary Name:
Title:
(SEAL)
IDS Strategy Fund, Inc.
on behalf of the
Short-Term Growth Fund
By -------------------------- By --------------------------
Secretary Name:
Title:
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EXHIBIT B
MATTERS TO BE VOTED ON BY
FEDERAL INCOME SHAREHOLDERS
In addition to voting on Directors and Auditors, IDS Federal Income Fund
(the "Fund") Shareholders will consider the following issues
(3) APPROVE OR REJECT A
NEW INVESTMENT MANAGEMENT AGREEMENT
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 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 $ 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 load options. Also, they determined
that issuing multiple classes of shares enables an investment company to offer
shares more effectively to institutional and retirement accounts.
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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 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.
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 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
B-2
<PAGE>
assets for the first $5 billion and declines for each additional $5 billion
until a fee of 0.32% is paid for net assets exceeding $50 billion. The second
component, an individual asset charge, is a fixed fee of . % of the net assets
of the Fund itself.
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 covering investment advice and administration retains features of the
current IMS Agreement. The proposed contract has the same performance incentive
adjustment, the Fund pays the same expenses it now pays, and the services to be
provided by IDS are the same. But, there are also two important differences. 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. Moreover, the contract is designed to become two separate
contracts if the Board ultimately approves a master/feeder structure. The
proposed fee is shown below:
PROPOSED FEE
<TABLE>
<CAPTION>
Assets Annual Rate At
(Billions) Each Asset Level
- --------- ---------------------
<S> <C>
First $1 0.%
Next $1 0.
Next $1 0.
Next $3 0.
Over $6 0.
</TABLE>
B-3
<PAGE>
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. %. Should the IMS Agreement become two separate contracts, the
fee for accounting and administration would be 0. % for the first billion in
net assets, 0. % for the second billion, 0. % for the next billion and 0. %
for assets above $4 billion. The fee for investment advice would be the same as
the IMS Agreement less those amounts. In subsequent years, the Board could
consider changing the fees for administration without shareholder approval.
On , 1994, the Fund's daily net assets were approximately $
billion. For 1993, the average daily net assets were approximately $
billion. For 1992, they were $ .
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 advisor. 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 and administrator
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 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). The
12b-1 plan and the contracts the Board will approve are discussed below. The
class of shares you currently own will be Class A shares.
- A NEW CONTRACT WITH IDS FOR SHAREHOLDER SERVICES. IDS now provides
shareholder services under a plan and supplemental agreement of distribution.
Because distribution services are included, it is a 12b-1 plan (so called
because it is authorized under Rule 12b-1, a regulation issued under the
Investment Company Act). The Fund currently pays a fee determined by multiplying
all the active shareholder accounts by $6. The fee is intended to
B-4
<PAGE>
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. % 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 directly for the
benefit of planners and servicing agents 0.15% of net assets of accounts holding
Class A or Class B shares 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, 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.
- A 12B-1 PLAN TO PAY IDS FOR DISTRIBUTION SERVICES. IDS, as exclusive
underwriter for the Fund, has agreed to offer multiple classes of shares for the
Fund. IDS 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. IDS is repaid
those costs by the Fund over several years out of the assets of Class B shares.
The 12b-1 plan applies only to Class B shares. Under the plan, the Fund will
pay IDS 0.75% of the assets of that class each year to cover the sales costs IDS
incurs. After eight years, Class B shares will be automatically 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 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
B-5
<PAGE>
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, the Board will approve the 12b-1 plan if
the shareholders approve the proposed IMS Agreement. 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.
- A CONTRACT WITH IDS FOR 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) compares them to the services
offered by others. Under the proposed TA Agreement, 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 $_ and, from the
assets of Class B shares, by multiplying the number of Class B accounts by $_
and, from the assets of Class Y shares, by multiplying the number of Class Y
accounts by $ . The fees assessed each class of shares for these services
reflect the different costs and expenses allocated to each. 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 the IDS and the Fund.
- OTHER CONTRACTS WITH AND BENEFITS TO IDS. The distribution contract
between IDS and the Fund provides that IDS shall have 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.
The Fund executes portfolio transactions through American Enterprise
Investment Services, Inc., a wholly owned subsidiary of IDS. Execution of the
Fund's portfolio transactions through other brokerage firms enables IDS to
receive services, such as market research, that benefit the Fund.
B-6
<PAGE>
- CURRENT AND PRO FORMA DATA. For the last calendar 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 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>
Federal Pro Forma for
Income Fund Federal Income
1993 1993
--------------- ---------------
<S> <C> <C>
IMS Agreement
Group Fee $ 4,091,718.71 $ 0.00
Investment Fee 1,318,723.01 5,777,772.24
TA Agreement 1,153,510.76 1,153,510.76
12b-1 Plan 453,116.24 0.00
Service Fee 0.00 1,626,558.52
Nonadvisory Expenses 904,146.69 904,146.69
Expense Ratio 0.78 0.93
</TABLE>
*The figures for Class A include a small percentage of shares that will
eventually be moved into Class Y.
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> <C>
Federal Income $ 989.45 $ 1,073.34 $ 1,164.34 $ 1,427.03
</TABLE>
For the calendar year ended Dec. 31, 1993, IDS received $ from the Fund
under the IMS Agreement, $ under the 12b-1 Plan and $ under the TA
Agreement. In addition, IDS Financial Services Inc., a wholly owned subsidiary
of IDS, received $ in sales charges from sales of shares of the Fund. 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/decrease of %.
BASIS OF RECOMMENDATION BY THE BOARD ON THE PROPOSED 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 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
B-7
<PAGE>
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 in
most years has been consistent and generally above the median of a group of
competitive funds; the expense ratio remains 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.
At a meeting held on May 12, 1994, called for the purpose of considering the
proposed IMS Agreement for the Fund, the independent members first and then the
Board as a whole, by vote, cast in person, approved the terms of the proposed
IMS Agreement for the Fund. The shareholders of the Fund must accept or reject
the Fund's Agreement. The proposed IMS Agreement will continue from year to year
after the second year, provided continuance is approved at least annually. 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 Investment Company
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
OF THE FUND 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.
B-8
<PAGE>
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 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. Proposal 3 discusses that the Investment
Management and Services Agreement will become two agreements, the Investment
Advisory Agreement and the Administration Agreement, if the Board determines to
create the master/feeder structure. Fees and expenses will not increase as a
result of that split.
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 to non-fundamental. Some 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, the Fund will
have flexibility to use those strategies and instruments promptly without
incurring the cost of shareholder meetings. Other policies were established to
conform to the requirements of federal or state law that existed at the time.
The 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 BUY ON MARGIN OR SELL SHORT TO THE EXTENT PERMITTED
BY THE BOARD. Currently, the Fund is prohibited from buying on margin or
selling short. Buying on margin is borrowing money to buy securities and selling
short is selling securities the Fund does not own. Both
B-9
<PAGE>
strategies are cash market transactions that create leverage but are appropriate
if properly used. Leveraging occurs when the market value of an investment
changes significantly more than the amount of cash invested. Under existing
investment policies, the Fund can implement the same type of strategies using
derivative instruments. Depending on market conditions, however, it may be
preferable to pursue a strategy in the cash market instead of the derivatives
market. To assure the proper use of leverage transactions, the Fund imposes
limitations. One limitation is that its investment portfolio must have
investment performance characteristics similar to those it would have if all of
its assets were invested in the cash market. Accordingly, its investment
portfolio overall will not be leveraged. If the policies pertaining to use of
margin and short-selling are non-fundamental, as market conditions change, the
Board can consider requests of the portfolio manager to employ investment
strategies using these techniques.
B. PERMIT THE FUND TO PLEDGE ASSETS AS COLLATERAL TO THE EXTENT PERMITTED
BY THE BOARD. The Fund is prohibited from pledging more than % of its 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 some of the strategies described above
and to meet other possible needs.
C. PERMIT THE BOARD TO CHANGE THE LIMIT ON INVESTMENTS IN ISSUERS WITH LESS
THAN 3 YEARS OF OPERATING HISTORY. The Fund may not invest more than 5% of its
assets in companies that have less than 3 years of operating history. This
percentage currently is set by a state law which may change in the future. If
the policy is made non-fundamental and the state changes its law, the Board
could take such action as appropriate.
D. 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.
E. PERMIT THE BOARD TO ESTABLISH POLICIES WHEN THE FUND COULD MAKE AN
INVESTMENT FOR THE PURPOSE OF EXERCISING CONTROL OR MANAGING THE COMPANY. The
Fund is prohibited from making investments to control or manage a company. While
it is not the intent of the Fund to control or manage a company and it generally
is precluded from doing so by various laws, from time to time one of its
investments may experience financial difficulties. It may be in the interest of
the Fund to make an additional investment while at the same time asserting some
influence regarding management.
F. PERMIT THE BOARD TO ESTABLISH POLICIES FOR INVESTING IN OIL, GAS OR
OTHER MINERAL EXPLORATION OR DEVELOPMENT PROGRAMS. Currently, a state
B-10
<PAGE>
law limits investments by the Fund in oil, gas or other mineral exploration or
development programs. Should the law change, the Board could establish
appropriate guidelines.
G. PERMIT THE BOARD TO ESTABLISH RESTRICTIONS ON OWNERSHIP OF SECURITIES OF
COMPANIES WHOSE SECURITIES ARE OWNED OR MAY BE PURCHASED BY THE FUND. Under a
state law, the Fund may not purchase the securities of a company if officers,
members of the Board and IDS together own more than 5% of the securities of that
company. If the law should change, the Board could establish appropriate new
limits.
H. PERMIT THE BOARD TO ESTABLISH POLICIES WITH RESPECT TO INVESTING IN
WARRANTS. Several states now limit the percentage of the assets of the Fund
that can be invested in warrants. These limits are changing and to adjust to
those changes, the Board would establish appropriate policies.
I. 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 MAY MAKE CASH LOANS, PROVIDED THAT THE
TOTAL COMMITMENT AMOUNT DOES NOT EXCEED 5% OF THE FUND'S TOTAL ASSETS." In
certain circumstances the Fund may choose to make cash loans as an alternative
to investing in low rated corporate debt securities. The Fund will not make
loans to affiliated companies or to any individuals.
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.
B-11
<PAGE>
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The Articles of Incorporation of the Registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Minnesota, as now existing or hereafter
amended. The By-laws of the Registrant provide that present or former directors
or officers of the Fund made or threatened to be made a party to or involved
(including as a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by the Minnesota
Business Corporation Act, all as more fully set forth in the By-Laws filed as an
exhibit to this registration statement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
ITEM 16. EXHIBITS
1. Articles of Incorporation, as amended October 17, 1988, filed as Exhibit
No. 1 to Registrant's Post-Effective Amendment No. 27 to Registration Statement
No. 2-96512, is incorporated herein by reference.
2. By-laws, as amended January 12, 1989, filed as Exhibit No. 2 to
Registrant's Post-Effective Amendment No. 7 to Registration Statement No.
2-96512, is incorporated herein by reference.
3. Not Applicable.
4. Agreement and Plan of Reorganization filed electronically herewith.
5. Stock certificate, filed as Exhibit 4 to Registrant's Registration
Statement No. 2-96512, is incorporated herein by reference.
6. Investment Management and Services Agreement between Registrant and IDS
Financial Corporation, dated November 14, 1991, filed as Exhibit 5(a) to
Registrant's Post-Effective Amendment No. 12 to Registration Statement No.
2-96512, is incorporated herein by reference.
7. Distribution Agreement between Registrant and IDS Financial Services
Inc., dated January 1, 1987, filed as Exhibit No. 6 to Registrant's
Post-Effective Amendment No. 4 to Registration Statement No. 2-96512, is
incorporated herein by reference.
8. All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes each year
an amount up to 15 percent of their annual salaries, the maximum deductible
amount permitted under Section 404(a) of the Internal Revenue Code.
9. Custodian Agreement between Registrant and IDS Bank & Trust Company,
dated August 16, 1985, filed electronically as Exhibit No. 8 to Registrant's
Registration Statement No. 2-96512, is incorporated herein by reference.
10. Plan and Supplemental Agreement of Distribution between Registrant and
IDS Financial Corporation, dated January 1, 1987, filed as Exhibit No. 15 to
Registrant's Post-Effective Amendment No. 4 to Registration Statement No.
2-96512, is incorporated herein by reference.
<PAGE>
11. To be filed by amendment.
12. To be filed by amendment.
13. (a) Transfer Agency Agreement between Registrant and IDS Financial
Corporation, dated November 14, 1991, filed as Exhibit 9(a) to Registrant's
Post-Effective Amendment No. 12 to Registration Statement No. 2-96512, is
incorporated herein by reference.
13. (b) License Agreement between the Registrant and IDS Financial
Corporation, dated January 25, 1988, filed as Exhibit 9(b) to Registrant's
Post-Effective Amendment No. 37 to Registration Statement No. 2-96512, is
incorporated herein by reference.
14. To be filed by amendment.
15. Not applicable.
16. (a) Directors' power of attorney, dated October 14, 1993, to sign this
Registration Statement and amendments thereto filed as Exhibit 17(a) on
June 24, 1994 to Registrant's Post Effective Amendment No. 16 to Registration
Statement No. 2-96512 is incorporated herein by reference.
16. (b) Officers' power of attorney, dated June 1, 1993, to sign this
Registration Statement and amendments thereto filed as Exhibit 17(b) on June 24,
1994 to Registrant's Post Effective Amendment No. 16 to Registration Statement
No. 2-96512 is incorporated herein by reference.
17. (a) Rule 24f-2 Election of Registrant (filed herewith electronically).
17. (b) Form of Proxy Card (filed herewith electronically).
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of Minneapolis, State of
Minnesota on the 15th of July, 1994.
IDS FEDERAL INCOME FUND, INC.
By /s/ LESLIE L. OGG**
--------------------------------------
Leslie L. Ogg,
VICE PRESIDENT
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the
15th of July 1994.
<TABLE>
<CAPTION>
Signatures Title
- --------------------------------------------------------- --------------------------------
<C> <S>
/s/ WILLIAM R. PEARCE** President, Principal Executive
--------------------------------------------- Officer and Director
William R. Pearce
Treasurer and Secretary,
/s/ LESLIE L. OGG** Principal Financial Officer
--------------------------------------------- and Principal Accounting
Leslie L. Ogg Officer
--------------------------------------------- Director
Lynne V. Cheney
/s/ WILLIAM H. DUDLEY*
--------------------------------------------- Director
William H. Dudley
/s/ ROBERT F. FROEHLKE*
--------------------------------------------- Director
Robert F. Froehlke
/s/ DAVID R. HUBERS*
--------------------------------------------- Director
David R. Hubers
/s/ ANNE P. JONES*
--------------------------------------------- Director
Anne P. Jones
/s/ DONALD M. KENDALL*
--------------------------------------------- Director
Donald M. Kendall
/s/ MELVIN R. LAIRD*
--------------------------------------------- Director
Melvin R. Laird
/s/ LEWIS W. LEHR*
--------------------------------------------- Director
Lewis W. Lehr
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signatures Title
- --------------------------------------------------------- --------------------------------
<C> <S>
/s/ EDSON W. SPENCER*
--------------------------------------------- Director
Edson W. Spencer
/s/ JOHN R. THOMAS*
--------------------------------------------- Director
John R. Thomas
/s/ WHEELOCK WHITNEY*
--------------------------------------------- Director
Wheelock Whitney
*Signed pursuant to Directors' Power of Attorney, dated Oct. 14, 1993, filed
electronically as Exhibit 17(a) to Registrant's Post Effective Amendment
No. 16 to Registration Statement No. 2-96512.
---------------------------------------------
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney, dated June 1, 1993, filed
electronically as Exhibit 17(b) to Registrant's Post Effective Amendment
No. 16 to Registration statement No. 2-96512.
---------------------------------------------
Leslie L. Ogg
</TABLE>
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EXHIBIT INDEX TO FORM N-14
IDS FEDERAL INCOME FUND, INC.
<TABLE>
<CAPTION>
Exhibit Page
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<C> <S> <C>
(4) Agreement and Plan of Reorganization.......................
17(a) Rule 24f-2 Election of Registrant..........................
17(b) Form of Proxy Card.........................................
</TABLE>
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of [ ], 1994, between
IDS Strategy Fund, Inc., a Minnesota corporation ("the Corporation"), on behalf
of its Short-Term Income Fund ("Short-Term Income Fund") and IDS Federal Income
Fund, Inc., a Minnesota corporation ("Federal Income Fund").
In consideration of the mutual promises herein contained, the Parties hereto
agree as follows:
1. SHAREHOLDER APPROVAL
APPROVAL BY THE SHAREHOLDERS. A meeting of the shareholders of Short-Term
Income Fund shall be called and held for the purpose of acting upon this
Agreement and the transactions contemplated herein. Federal Income Fund shall
furnish to the Corporation such data and information as shall be reasonably
requested by the Corporation for inclusion in the information to be furnished to
its Short-Term Income Fund shareholders in connection with the meeting for the
purpose of acting upon this Agreement and the transactions contemplated herein.
2. REORGANIZATION
(a) PLAN OF REORGANIZATION. The Corporation will convey, transfer and
deliver to Federal Income Fund all of the then existing assets of Short-Term
Income Fund at the closing provided for in Section 2(b) (hereinafter called the
"Closing"). Federal Income Fund shall assume all liabilities, expenses, costs,
charges and reserves reflected on an unaudited statement of assets and
liabilities of Short-Term Income Fund as of the Valuation Date (as defined in
paragraph 3(a)), in accordance with generally accepted accounting principles
consistently applied from the prior audited period. Federal Income Fund shall
assume only those liabilities of Short-Term Income Fund reflected in such
unaudited statement of assets and liabilities and shall not assume any other
liabilities, whether absolute or contingent, known or unknown, accrued or
unaccrued. Federal Income Fund agrees to deliver at the Closing to the
Corporation the number of shares of common stock of Federal Income Fund (the
"Shares") including fractional Shares, determined by dividing the value of the
net assets of Short-Term Income Fund, computed in the manner and as of the time
and date set forth in paragraph 3(a), by the net asset value of one Share
computed in the manner and as of the time and date set forth in paragraph 3(b).
It is expressly agreed that there will be no sales charge on the sale of Federal
Income Fund's Shares to Short-Term Income Fund in exchange for the assets of
Short-Term Income Fund, or to any of the shareholders of Short-Term Income Fund
upon distribution of the Shares to them. Shareholders of Short-Term Income Fund
subject to CDSC will receive
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Class B Shares of Federal Income Fund in exchange for their shares of Short-Term
Income Fund. Shareholder of Short-Term Income Fund will receive Class A Shares.
(b) CLOSING AND EFFECTIVE TIME OF THE REORGANIZATION. The Closing shall
occur on (a) the later of (i) receipt of all necessary regulatory approvals,
(ii) the final adjournment of the meeting of shareholders of Short-Term Income
Fund at which this Agreement will be considered and (iii) implementation of a
multiple class share structure by Federal Income Fund pursuant to an Exemptive
Order (the "Exemptive Order") obtained on behalf of Federal Income Fund and
other funds managed by IDS Financial Corporation and, in connection therewith,
creation of the Class B Shares to be delivered to Short-Term Income Fund
shareholders in accordance with the terms thereof, or (b) such later date as the
Parties may mutually agree (the "Effective Time of the Reorganization").
3. VALUATION OF NET ASSETS
(a) The value of the net assets of Short-Term Income Fund to be transferred
to Federal Income Fund hereunder shall be computed as of the close of regular
trading on the New York Stock Exchange, Inc. (the "NYSE"), currently 4:00 p.m.
New York time, on the day of the Closing (hereinafter the "Valuation Date")
using the valuation procedures as set forth in the Federal Income Fund
Prospectus.
(b) The net asset value per share of Federal Income Fund's Shares for
purposes of Section 2(a) hereof shall be determined as of the close of regular
trading on the NYSE, currently 4:00 p.m. New York time, on the Valuation Date by
Federal Income Fund using the same valuation procedures as set forth in the
Federal Income Fund Prospectus.
(c) A copy of the computations showing in reasonably detail the valuation of
Short-Term Income Fund's net assets on the Valuation Date pursuant to Section
3(a) above, certified by an officer of the Corporation, shall be furnished by
the Corporation to Federal Income Fund at the Closing. A copy of the
computations showing in reasonable detail the determination of the net asset
value per share of Federal Income Fund's Shares on the Valuation Date pursuant
to Section 3(b) above, certified by an officer of Federal Income Fund, shall be
furnished by Federal Income Fund to the Corporation at the Closing.
4. LIQUIDATION AND DISSOLUTION OF SHORT-TERM INCOME FUND
(a) As soon as practicable after the Valuation Date, the Corporation will
liquidate and distribute pro rata to its Short-Term Income Fund shareholders of
record as of the close of regular trading on the NYSE, currently 4:00 p.m. New
York time, the Federal Income Fund Shares received by the Corporation pursuant
to this Section. Such liquidation and distribution will be accomplished by the
establishment of shareholder accounts on the share
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records of Federal Income Fund in the names of each such shareholder of
Short-Term Income Fund, representing the respective pro rata number of full and
fractional Shares of Federal Income Fund due to each. All issued and outstanding
shares of Short-Term Income Fund will simultaneously be cancelled on the books
of the Corporation, although stick certificates representing interests in
Short-Term Income Fund will represent a number of Shares of Federal Income Fund
after the Valuation Date determined in accordance with Section 2(a). No such
shareholder accounts shall be established by Federal Income Fund or its transfer
agent except pursuant to written instructions from the Corporation, and the
corporation agrees to provide on the Valuation Date instructions to transfer to
a shareholder account for each such former shareholder of Short-Term Income Fund
a pro rata share of the number of Shares of Federal Income Fund received
pursuant to Section 2(a) hereof.
(b) Promptly after the distribution described in Section 4(a) above,
appropriate notification will be mailed by Federal Income Fund or its transfer
agent to each shareholder of Short-Term Income Fund receiving such distribution
of the Shares informing such shareholder of the number of such shares
distributed to such shareholder and confirming the registration thereof in such
shareholder's name.
(c) As promptly as practicable after the liquidation of Short-Term Income
Fund, and in no event later than twelve months from the date hereof, Short-Term
Income Fund shall be dissolved.
(d) Immediately after the Valuation Date, the share transfer books of the
Corporation relating to Short-Term Income Fund shall be closed and no transfer
of shares shall thereafter be made on such books.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF FEDERAL INCOME FUND
Federal Income Fund represents and warrants to the Corporation as follows:
(a) ORGANIZATION, EXISTENCE, ETC. Federal Income Fund is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota and has the power to carry on its business as it is now being
conducted. Federal Income Fund has all necessary federal, state and local
authorization to own all of its properties and assets and to carry on its
business as now being conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. Federal Income Fund is a
corporation registered under the Investment Company Act of 1940 (the "1940 Act")
as an open-end, management investment company; such registration has not been
revoked or rescinded and is in full force and effect.
(c) CAPITALIZATION. Federal Income Fund has an authorized capital of
10,000,000,000 shares of common stock, par value $0.01 per share, of which as of
, 1994, shares of common stock of Federal Income Fund were
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outstanding and no shares were held in the treasury of Federal Income Fund. All
of the outstanding shares have been duly authorized and are validly issued,
fully paid and non-assessable. Since Federal Income Fund is engaged in the
continuous offering and redemption of its shares, the number of outstanding
shares may change prior to the Effective Time of the Reorganization. Federal
Income Fund has the authority, pursuant to the Exemptive Order, to implement a
multiple class share structure and to create multiple classes of Common Stock,
including the Class B Shares. Federal Income Fund hereby agrees that, prior to
the Closing, it shall implement a multiple class structure in accordance with
the Exemptive Order and create the Class B Shares to be issued to Short-Term
Income Fund shareholders in accordance with the terms hereof.
(d) FINANCIAL STATEMENTS. The audited financial statements as of June 30,
1994 of Federal Income Fund (the "Federal Income Fund Financial Statements"),
previously delivered to the Corporation, fairly present the financial position
of Federal Income Fund as of such respective dates, and the results of its
operations and changes in its net assets for the periods then ended.
(e) SHARES TO BE ISSUED UPON REORGANIZATION. The Shares to be issued in
connection with the Reorganization will have been duly authorized and upon
consummation of the Reorganization will be validly issued, fully paid and
non-assessable.
(f) AUTHORITY RELATIVE TO THIS AGREEMENT. Federal Income Fund has the
power to enter into this Agreement and to carry out its obligations hereunder.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and no other proceedings by Federal Income Fund are necessary to
authorize its officers to effectuate this Agreement and the transactions
contemplated hereby.
(g) NO VIOLATION. Federal Income Fund is not in violation of its Articles
of Incorporation or By-Laws (the "Charter") or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which it is a party or by which it or its
properties may be bound; and the execution and delivery of this Agreement and
the consummation of the transactions contemplated herein will not conflict with
or constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
Federal Income Fund pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which Federal Income Fund is
subject, nor will such action result in any violation of the provisions of the
Charter or any law, administrative regulation or administrative or court decree
applicable to Federal Income Fund;
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and no consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by Federal Income Fund of
the transactions contemplated by this Agreement other than the effectiveness of
the Registration Statement described below in Section 5(1).
(h) LIABILITIES. There are no liabilities of Federal Income Fund, whether
or not determined or determinable, other than liabilities disclosed or provided
for in Federal Income Fund's Financial Statements and liabilities incurred in
the ordinary course of business subsequent to August 31, 1993, or otherwise
previously disclosed to the Corporation, none of which has been materially
adverse to the business, assets or results of operations of Federal Income Fund.
(i) LITIGATION. There are no claims, actions, suits or proceedings pending
or, to the knowledge of Federal Income Fund, threatened which would adversely
affect Federal Income Fund or its assets or business or which would prevent or
hinder consummation of the transactions contemplated hereby.
(j) CONTRACTS. Except for contracts and agreements previously disclosed to
the Corporation under which no default exists, Federal Income Fund is not a
party to or subject to any material contract, debt instrument, plan, lease,
franchise, license or permit of any kind or nature whatsoever.
(k) TAXES. The federal income tax returns of Federal Income Fund have been
filed for all taxable years to and including the taxable year ended December 31,
1993. Federal Income Fund has qualified and will qualify as a regulated
investment company under the Internal Revenue Code with respect to each taxable
year of Federal Income Fund since commencement of its operations.
(l) REGISTRATION STATEMENT. Federal Income Fund shall cause to be filed
with the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form N-14 (the "Registration Statement") under the Securities Act
of 1933 ("Securities Act") relating to the Shares issuable hereunder. At the
time the Registration Statement becomes effective, the Registration Statement
(i) will comply in all material respects with the provisions of the Securities
Act and the rules and regulations of the Commission thereunder (the
"Regulations") and (ii) will not contain an untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; and at the time the Registration
Statement becomes effective, at the time of the shareholders' meeting referred
to in Section 1, and at the Effective Time of the Reorganization, the prospectus
and statement of additional information included therein, as amended or
supplemented by any amendments or supplements filed by Federal Income Fund, will
not contain an untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that none of the
representations and
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warranties in this subsection shall apply to statements in or omissions from the
Registration Statement or Prospectus and Statement of Additional Information
made in reliance upon and in conformity with information furnished by the
Corporation for use in the Registration Statement or Prospectus and Statement of
Additional Information as provided in Section 6(1).
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE CORPORATION
The Corporation represents and warrants to Federal Income Fund as follows:
(a) ORGANIZATION, EXISTENCE, ETC. The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota and has power to carry on its business as it is now being conducted.
The Corporation has all necessary federal, state and local authorization to own
all of its properties and assets and to carry on its business as now being
conducted.
(b) REGISTRATION AS INVESTMENT COMPANY. The Corporation is a corporation
registered under the 1940 Act as a open-end diversified management investment
company; such registration has not been revoked or rescinded and is in full
force and effect.
(c) CAPITALIZATION. The Corporation has an authorized capital of [ ]
shares of common stock, par value $0.01 per share, of which as of
[ ], 1994, shares of Short-Term Income Fund were outstanding
and no shares were held in the treasury of the Corporation. All of the
outstanding shares of the Short-Term Income Fund have been duly authorized and
are validly issued, fully paid and non-assessable. Since the Corporation is
engaged in the continuous offering and redemption if its shares, the number of
outstanding shares of Short-Term Income Fund may change prior to the Effective
Time of the Reorganization.
(d) FINANCIAL STATEMENTS. The audited financial statements as of March 31,
1994 of Short-Term Income Fund (the "Short-Term Income Fund Financial
Statements"), previously delivered to Federal Income Fund, fairly present the
financial position of Short-Term Income Fund as of such respective dates, and
the results of its operations and changes in its net assets for the periods then
ended.
(e) AUTHORITY RELATIVE TO THIS AGREEMENT. The Corporation has the power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated have been duly authorized by its Board of Directors,
and except for obtaining approval by the holders of shares of Short-Term Income
Fund common stock, no other proceedings by the Corporation are necessary to
authorize its officers to effectuate this Agreement and the transactions
contemplated hereby.
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(f) NO VIOLATION. The Corporation is not in violation of its Articles of
Incorporation or By-Laws (the "Charter") or in default in the performance or
observance of any material obligation, agreement, lease or other instrument to
which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein will not conflict with or constitute a breach
of, or default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of Short-Term Income Fund
pursuant to any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which the law, administrative regulation or
administrative or court decree applicable to the Corporation; and no consent,
approval, authorization or order of any court or governmental authority or
agency is required for the consummation by the Corporation of the transactions
contemplated by this Agreement.
(g) LIABILITIES. There are no liabilities of Short-Term Income Fund,
whether or not determined or determinable, other than liabilities disclosed or
provided for in the Short-Term Income Fund Financial Statements and liabilities
incurred in the ordinary course of business subsequent to March 31, 1994, or
otherwise previously disclosed to Federal Income Fund, none of which has been
materially adverse to the business, assets or results of operations of
Short-Term Income Fund.
(h) LITIGATION. There are no claims, actions, suits or proceedings pending
or, to the knowledge of the Corporation, threatened which would adversely affect
Short-Term Income Fund or its assets or business or which would prevent or
hinder consummation of the transactions contemplated hereby.
(i) CONTRACTS. Except for contracts and agreements previously disclosed to
Federal Income Fund under which no default exists, the Corporation is not a
party to or subject to any material contract, debt instrument, plan, lease,
franchise, license or permit of any kind or nature whatsoever.
(j) TAXES. The federal income tax returns of the Corporation have been
filed for all taxable years to and including the taxable year ended December 31,
1993, and all taxes payable pursuant to such returns have been paid. Short-Term
Income Fund has qualified, and will qualify, as a regulated investment company
under the Internal Revenue Code with respect to each taxable year of the
Corporation since commencement of its operations.
(k) FUND SECURITIES. All securities to be listed in the schedule of
investments of Short-Term Income Fund as of the Effective Time of the
Reorganization will be owned by the Corporation on behalf of Short-Term Income
Fund free and clear of any liens, claims, charges, options and encumbrances,
except as indicated in said schedule, and, except as so indicated, none of such
securities is or, after the Reorganization as contemplated
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hereby, will be subject to any restrictions, legal or contractual, on the
disposition thereof (including restrictions as to the public offering or sale
thereof under the Securities Act), and all such securities are or will be
readily marketable.
(l) REGISTRATION STATEMENT. In connection with the Registration Statement,
the Corporation will cooperate with Federal Income Fund and will furnish to
Federal Income Fund the information relating to the Corporation or Short-Term
Income Fund required by the Securities Act and the Regulations to be set forth
in the Registration Statement (including the Prospectus and Statement of
Additional Information). At the time the Registration Statement becomes
effective, the Registration Statement, insofar as it related to the Corporation
and Short-Term Income Fund, (i) will comply in all material respects with the
provisions of the Securities Act and the Regulations and (ii) will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and at the time the Registration Statement becomes effective, at the time of the
shareholders' meeting referred to in Section 1 and at the Effective Time of the
Reorganization, the Prospectus and Statement of Additional Information, as
amended or supplemented by any amendments or supplements filed by Federal Income
Fund, insofar as it related to the Corporation or Short-Term Income Fund, will
not contain an untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the
representations and warranties in this subsection shall apply only to statements
in or omissions from the Registration Statement or Prospectus and Statement of
Additional Information made in reliance upon and in conformity with information
furnished by the Corporation for use in the Registration Statement or Prospectus
and Statement of Additional Information as provided in this Section 6(1).
7. CONDITIONS TO OBLIGATIONS OF THE CORPORATION
The obligations of the Corporation hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions:
(a) SHAREHOLDER APPROVAL. This Agreement shall have been approved by the
affirmative vote of the holders of the majority, as such term is defined in the
1940 Act, of the outstanding shares of common stock of Short-Term Income Fund.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Federal Income Fund shall
have complied with each of its agreements contained herein, each of the
representations and warranties contained herein shall be true in all material
respects as of the Effective Time of the Reorganization, and except as otherwise
indicated in any financial statements of Federal Income Fund
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audited or certified by the Treasurer of Federal Income Fund, which may be
delivered to the Corporation on or prior to the last business day preceding the
Effective Time of the Reorganization, as of the Effective Time of the
Reorganization there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of Federal
Income Fund since August 31, 1993, and the Corporation shall have received a
certificate of the Chairman or President of Federal Income Fund satisfactory in
form and substance to the Corporation so stating.
(c) CREATION OF CLASS B SHARES. Federal Income Fund shall have implemented
the multiple class share structure contemplated by the Exemptive Order and shall
have created and authorized the issuance of the Class B Shares to be issued to
Short-Term Income Fund shareholders in accordance with the terms hereof.
(d) REGULATORY APPROVAL. The Registration Statement referred to in Section
5(1) shall have become effective and no stop orders under the Securities Act
pertaining thereto shall have been issued; and all approvals, registrations, and
exemptions under federal and state securities laws considered to be necessary
shall have been obtained.
(e) TAX OPINION. The Corporation shall have received the opinion of Ropes
& Gray, dated the Effective Time of the Reorganization, addressed to and in form
and substance satisfactory to the Corporation, as to certain of the federal
income tax consequences of the Reorganization under the Internal Revenue Code of
1986 to Short-Term Income Fund and the shareholders of Short-Term Income Fund
and Federal Income Fund. For purposes of rendering their opinion Ropes & Gray
may rely exclusively and without independent verification, as to factual
matters, upon the statements made in this Agreement, the proxy statement which
will be distributed to the shareholders of Short-Term Income Fund in connection
with the Reorganization, and upon such other written representations as the
Chairman or President of the Corporation and Federal Income Fund, respectively,
will have verified as of the Effective Time of the Reorganization. The opinion
of Ropes & Gray will be to the effect that, based on the facts and assumptions
stated therein, for Federal income tax purposes: (i) neither Short-Term Income
Fund nor Federal Income Fund will recognize any gain or loss upon the transfer
of the assets of Short-Term Income Fund to, and the assumption of its
liabilities by, Federal Income Fund in exchange for the Shares and upon the
distribution (whether actual or constructive) of the Shares to its shareholders
in exchange for their shares of common stock of Short-Term Income Fund; (ii) the
shareholders of Short-Term Income Fund who receive the Shares pursuant to the
Reorganization will not recognize any gain or loss upon the exchange (whether
actual or constructive) of their shares of common stock of Short-Term Income
Fund for the Shares (including any fractional share interests they are deemed to
have received) pursuant to the Reorganization; (iii) the
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holding period and the basis of the Shares received by the Short-Term Income
Fund shareholders will be the same as the holding period and the basis of the
shares of common stock of Short-Term Income Fund surrendered in the exchange;
and (iv) the holding period and the basis of the assets acquired by Federal
Income Fund will be the same as the holding period and the basis of such assets
to Short-Term Income Fund immediately prior to the Reorganization.
(f) OPINION OF COUNSEL. The Corporation shall have received the opinion of
Leslie L. Ogg, counsel for Federal Income Fund, dated the Effective Time of the
Reorganization, addressed to and in form and substance satisfactory to the
Corporation, to the effect that: (i) Federal Income Fund is a corporation duly
organized and validly existing under the laws of the State of Minnesota; (ii)
Federal Income Fund is an open-end investment company of the management type
registered under the 1940 Act; (iii) this Agreement and the Reorganization
provided for herein and the execution of this Agreement have been duly
authorized and approved by all requisite action of Federal Income Fund and this
Agreement has been duly executed and delivered by Federal Income Fund and is a
valid and binding obligation of Federal Income Fund; and (iv) the Shares to be
issued in the Reorganization are, to the extent of the number of shares of
common stock authorized to be issued by Federal Income Fund in its Charter less
the number of the then outstanding shares of common stock, duly authorized and
upon issuance thereof in accordance with this Agreement will be validly issued,
fully paid and non-assessable shares of common stock of Federal Income Fund.
8. CONDITIONS TO OBLIGATIONS OF FEDERAL INCOME FUND
The obligations of Federal Income Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions:
(a) SHAREHOLDER APPROVAL. This Agreement shall have been approved by the
affirmative vote of the holders of a majority of the outstanding shares of
common stock of Short-Term Income Fund.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Corporation shall have
complied with each of its agreements contained herein, each of the
representations and warranties contained herein shall be true in all material
respects as of the Effective Time of the Reorganization, and except as otherwise
indicated in any financial statements of the Corporation or Short-Term Income
Fund, audited or certified by an officer of the Corporation, which may be
delivered to Federal Income Fund on or prior to the last business day preceding
the Effective Time of the Reorganization, as of the Effective Time of the
Reorganization there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of
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Short-Term Income Fund since May 31, 1994 and Federal Income Fund shall have
received a certificate of the President of the Corporation satisfactory in form
and substance to Federal Income Fund so stating.
(c) REGULATORY APPROVAL. All approvals, registrations, and exemptions
under federal and state securities laws considered to be necessary shall have
been obtained.
(d) OPINION OF COUNSEL. Federal Income Fund shall have received the
opinion of Ropes & Gray, counsel for the Corporation, dated the Effective Time
of the Reorganization, addressed to and in form and substance satisfactory to
Federal Income Fund, to the effect that (a) the Corporation is a corporation
duly organized and validly existing under the laws of the State of Minnesota;
(b) the Corporation is an open-end investment company of the management type
registered under the 1940 Act; (c) this Agreement and the Reorganization
provided for herein and the execution and filing of this Agreement have been
duly authorized and approved by all requisite action of the Corporation and this
Agreement has been duly executed and delivered by the Corporation and is a valid
and binding obligation of the Corporation with respect to Short-Term Income
Fund.
(e) DECLARATION OF DIVIDEND. The Corporation shall have declared a
dividend with respect to Short-Term Income Fund which, together with all
previous such dividends, shall have the effect of distributing to Short-Term
Income Fund's shareholders all of Short-Term Income Fund's investment company
taxable income for all taxable years ending on or prior to the Closing (computed
without regard to deduction for dividends paid) and all of its net capital gain
realized in taxable years ending on or prior to the Closing (after reduction for
capital loss carryforward).
9. AMENDMENT; TERMINATIONS; NON-SURVIVAL OF
COVENANTS, WARRANTIES AND REPRESENTATIONS.
(a) The Parties hereto may, by agreement in writing authorized by their
respective Boards of Directors, amend this agreement at any time before or after
approval by the shareholders of Short-Term Income Fund but after such approval,
no amendment shall be made which substantially changes the terms of Paragraphs 2
and 3.
(b) At any time prior to the Effective Time of the Reorganization, any of
the Parties may by written instrument signed by it (i) waive any inaccuracies in
the representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein.
(c) The Corporation may terminate this Agreement at any time prior to the
Effective Time of the Reorganization by notice to Federal Income Fund if (i) a
material condition to its performance or a material covenant of
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Federal Income Fund shall not be fulfilled on or before the date specified for
the fulfillment thereof or (ii) a material default or material breach of this
Agreement shall be made by Federal Income Fund that is not cured.
(d) Federal Income Fund may terminate this Agreement at any time prior to
the Effective Time of the Reorganization by notice to the Corporation if (i) a
material condition to its performance or a material covenant of the Corporation
shall not be fulfilled on or before the date specified for the fulfillment
thereof or (ii) a material default or material breach of this Agreement shall be
made by the Corporation that is not cured.
(e) This Agreement may be terminated at any time prior to the Effective Time
of the Reorganization, whether before or after approval by the shareholders of
Short-Term Income Fund, without any liability on the part of either Party hereto
or its respective directors, officers or shareholders, by any Party on written
notice to the other Party, and shall be terminated without liability as of the
close of business on [ , 1995], or such later date as agreed upon by the
Parties, if the Effective Time of the Reorganization is not on or prior to such
date.
(f) No representation, warranty or covenant in or pursuant to this Agreement
(including certificates of officers) shall survive the Reorganization.
10. EXPENSES
Each Party shall bear its respective expenses of entering into and carrying
out the provisions of this Agreement as has been separately incurred by each
whether or not the Reorganization is consummated although such expenses may be
subject to expense limitation undertakings by the respective investment advisers
to the Parties hereto.
11. GENERAL
This Agreement supersedes all prior agreements between the Parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the Parties and may not be changed or terminated orally. This
Agreement may be executed in one or more counterparts, all of which shall be
considered one and the same agreement, and shall become effective when one or
more counterparts have been executed by the Corporation and Federal Income Fund
and delivered to each of the Parties hereto. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement.
12. INDEMNIFICATION
Each Party shall indemnify and hold the other and their officers, directors,
agents and persons controlled or controlling any of them (each an
A-12
<PAGE>
"indemnitee") harmless from and against any liability, damage, deficiency, tax,
assessment, charge or other cost and expense, including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees (all as provided in accordance with applicable corporate law) reasonably
incurred by such indemnitee in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, with respect to actions taken hereunder or thereafter by reason of
his having so acted in any such capacity, provided, however, that no indemnitee
shall be indemnified hereunder against any liability or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties involved in the
conduct of his position.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement and Plan
of Reorganization to be executed on its behalf by its Chairman, President or a
Vice President and its seal to be affixed hereto and attested by its Secretary
or Assistant Secretary, all of the day and year first above written.
(SEAL)
Attest: IDS Federal Income Fund, Inc.
By -------------------------- By --------------------------
Secretary Name:
Title:
(SEAL)
IDS Strategy Fund, Inc.
on behalf of the
Short-Term Growth Fund
By -------------------------- By --------------------------
Secretary Name:
Title:
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<PAGE> 1
Exhibit 17(a)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. (File No. 2-96512)
-----
Post-Effective Amendment No. 16 X
------ -----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 (File No. 811-4260) X
------ -----
IDS FEDERAL INCOME FUND, INC.
IDS Tower 10, Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810,
Minneapolis, MN 55402-3268
(612) 330-9283
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
- -----
on (date) pursuant to paragraph (b) of rule 485
- -----
60 days after filing pursuant to paragraph (a)
- -----
X on Aug. 29, 1994 pursuant to paragraph (a) of rule 485
- -----
The Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Section 24-f of the Investment Company
Act of 1940. Registrant's Rule 24f-2 Notice for its most recent fiscal year
ended June 30, 1993, will be filed on or about Aug. 29, 1994.
<PAGE>
Exhibit 17(b)
FORM OF PROXY CARD
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS
SHORT TERM INCOME FUND, A SERIES OF IDS STRATEGY FUND, INC.
PROXY/VOTING INSTRUCTION CARD
- ----------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints Leslie L. Ogg and __________________, or either
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 Against Abstain
1. Approve a Reorganization () () ()
providing for the
acquisition of Fund assets by
IDS Federal Income Fund, Inc.
in exchange for shares of
Federal Income
For With- Excep-
held tion
2. Election of Board Members () () ()
TO VOTE FOR ALL NOMINEES, MARK THE "FOR" BOX IN ITEM 2. TO WITHHOLD AUTHORITY TO
VOTE FOR ALL NOMINEES, MARK THE "WITHHELD" BOX. TO WITHHOLD AUTHORITY TO VOTE
FOR ANY NOMINEE, MARK THE "EXCEPTION" BOX AND STRIKE A LINE THROUGH THE
NOMINEE'S NAME.
Twelve board members are to be elected at the meeting. The nominees are LYNNE V.
CHENEY, WILLIAM H. DUDLEY, ROBERT F. FROEHLKE, DAVID R. HUBERS, ANNE P. JONES,
DONALD M. KENDALL, MELVIN R. LAIRD, LEWIS W. LEHR, WILLIAM R. PEARCE, EDSON W.
SPENCER, JOHN R. THOMAS, WHEELOCK WHITNEY.
For Against Abstain
3. Ratification of
Independent Auditors () () ()
