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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. 1 /X/
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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It is proposed that this filing will become effective on September 12, 1994
pursuant to rule 488.
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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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PART A: INFORMATION REQUIRED IN THE PROSPECTUS
IDS STRATEGY FUND, INC. - SHORT-TERM INCOME FUND
IDS TOWER 10
MINNEAPOLIS, MINNESOTA 55440-0010
September 19, 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 that
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. Both funds are managed by IDS Financial
Corporation. Short-Term Income 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. 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
will acquire all the assets and liabilities of Short-Term Income and your shares
will become shares of Federal Income. Your new Federal Income shares will have
the same total value as your Short-Term Income shares on the date of the
consolidation. The consolidation will be tax-free.
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As you read through the material, you will find the nominees for the Board
are the same for Short-Term Income and Federal Income, 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 with
Federal Income, you would have been asked to approve the new agreements. Under
these new agreements, your cost as a shareholder of Federal Income is expected
to be very similar to your cost as a shareholder of Short-Term Income. Proposed
changes in investment policies will allow Federal Income'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"), a separate series of capital stock forming part of IDS
Strategy Fund, Inc. (the "Corporation") on November 9, 1994, at 2:00 p.m. at the
Marquette Hotel, 7th and Marquette, Minneapolis, Minnesota in the Lake Superior
Room on the fourth floor. The agenda for the meeting is:
1. To approve or reject the Agreement and Plan of Reorganization providing
for (i) the acquisition of all of the assets of Short-Term Income by IDS
Federal Income Fund, Inc. ("Federal Income"), in exchange for shares of
Federal Income, (ii) the distribution of shares of Federal Income to
shareholders of Short-Term Income in liquidation of Short-Term Income and
(iii) the subsequent dissolution of Short-Term Income. 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 LLP as the
independent auditors.
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 19, 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 19, 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"), 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 2:00 p.m.,
at the Marquette Hotel, Minneapolis, Minnesota, 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 assets by IDS
Federal Income Fund, Inc. ("Federal Income") in exchange for shares of
Federal Income,
2. To elect members to the Board, and
3. To ratify or reject the selection of KPMG Peat Marwick LLP as the
independent auditors.
The Plan provides that Federal Income will acquire all of the assets of
Short-Term Income in exchange for shares of Federal Income (the
"Reorganization") (Short-Term Income and Federal Income are referred to
individually as a "Fund" and collectively as the "Funds"). Following the
Reorganization, shares of Federal Income will be distributed to shareholders of
Short-Term Income and Short-Term Income will be dissolved. As a result of the
proposed Reorganization, each shareholder of Short-Term Income will receive
shares of Federal Income equal in value to the value of that shareholder's
shares of Short-Term Income on the effective date of the Reorganization. Any
contingent deferred sales charge ("CDSC") applicable to a Short-Term Income
shareholder's investment will continue to apply, and, in calculating the
applicable CDSC payable upon a subsequent redemption of shares of Federal
Income, the period during which a Short-Term Income shareholder held shares of
Short-Term Income will be counted. The Reorganization is being structured as a
tax-free reorganization.
Federal Income is an open-end, diversified management investment company.
The Corporation, of which Short-Term Income forms a part, is also an open-end
management investment company. The goals of Federal Income and Short-Term Income
are substantially similar. The goal of Federal Income is to provide a high level
of current income and safety of principal
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consistent with investment in U.S. government and government agency securities.
The goal of Short-Term Income 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 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 by reference. A statement of additional information dated September
19, 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 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 29, 1994 of IDS Federal Income Fund, Inc. is
incorporated 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 by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a copy of
the 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) Approve or Reject the Plan of Reorganization
Summary............................................................. 7
Risk Factors........................................................ 12
Reasons for the Reorganization...................................... 12
Information about the Reorganization................................ 13
Information about Federal Income and Short-Term Income.............. 16
Comparison of Goals and Investment Policies......................... 17
Fees and Expenses................................................... 20
Recommendation and Vote Required.................................... 20
(2) Election of Board Members............................................ 21
(3) Ratify or Reject the Selection of KPMG Peat Marwick LLP
as Independent Auditors.............................................. 26
Voting Information........................................................ 26
Financial Statements and Experts.......................................... 28
Exhibit A: Agreement and Plan of Reorganization........................... A-1
Exhibit B: Matters Subject to Approval at Regular Meeting of Federal
Income Shareholders...................................................... B-1
Exhibit C: Management's Discussion........................................ C-1
Exhibit D: Minnesota Business Corporation Act, Sections 302A.471 and
302A.473................................................................. D-1
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(1) APPROVE OR REJECT THE PLAN OF REORGANIZATION
SUMMARY
PROPOSED REORGANIZATION. The Plan provides for the transfer of all of the
assets of Short-Term Income in exchange for shares of Federal Income. The Plan
also calls for the distribution of shares of Federal Income to Short-Term Income
shareholders in liquidation of Short-Term Income. As a result of the
Reorganization, each shareholder of Short-Term Income will receive full and
fractional shares of Federal Income equal in value to the value of the
shareholder's shares of Short-Term Income as of the close of business on the
date that Short-Term Income's assets are exchanged for shares of Federal Income.
Short-Term Income was created to provide investors wanting to invest in a
portfolio of debt securities like Federal Income with the option to pay the
sales charge on an investment over time by way of a CDSC. With the ability to
offer multiple classes of shares in one fund, it is no longer necessary to offer
shares in two separate mutual funds with substantially similar investment
portfolios. Accordingly, the Board of Directors (the "Board") of the Corporation
determined that the Reorganization should eliminate the duplication inherent in
marketing two funds with similar investment goals.
The Board, 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 and that the interests of Short-Term Income's
existing shareholders would not be diluted as a result of the transaction
contemplated by the Reorganization. Therefore, the Board has approved the
Reorganization and has submitted the Plan for approval by Short-Term Income's
shareholders. Approval of the Plan will require the affirmative vote of a
majority of the outstanding shares of Short-Term Income. The Board of Federal
Income has also concluded that the Reorganization would be in the best interests
of Federal Income's existing shareholders and has approved the Reorganization.
TAX CONSEQUENCES. Prior to completion of the Reorganization, Short-Term
Income will have received a private letter ruling issued by the Internal Revenue
Service, or, if the private letter ruling has not yet been issued, an opinion
from counsel, that upon the Reorganization and the transfer of the assets of
Short-Term Income, no gain or loss will be recognized by Short-Term Income or
its shareholders for federal income tax purposes. The holding period and
aggregate tax basis of shares of Federal Income received by each Short-Term
Income shareholder will be the same as the holding period and aggregate tax
basis of the shares of Short-Term Income previously held by that shareholder. In
addition, the holding period and tax basis of the assets of
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Short-Term Income in the hands of Federal Income as a result of the
Reorganization will be the same as in the hands of Short-Term Income immediately
prior to the Reorganization.
GOALS, INVESTMENT POLICIES AND RESTRICTIONS. Federal Income and Short-Term
Income have substantially similar goals. The goal of Federal Income 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 is to provide high current income consistent with conservation
of capital. Under normal market conditions, Federal Income invests at least 65%
of its total assets in government securities. Short-Term Income has no similar
percentage requirement, although it invests principally in government
securities. The dollar weighted average life of Short-Term Income's investments
is limited to three years. Federal Income does not have a similar limit. Each
Fund may invest in non-government debt securities rated in the three highest
rating categories. Federal Income also may invest in unrated non-government debt
securities. Short-Term Income may invest in other investment companies up to 10%
of its total assets, while Federal Income has no limit. Short-Term Income may
not pledge or mortgage its assets beyond 30% of its total assets; Federal Income
may not pledge or mortgage its assets beyond 15% of its total assets. Short-Term
Income may invest in foreign securities up to 15% of its total assets, while
Federal Income may not invest in foreign securities. Short-Term Income may
invest more than 25% of its total assets in obligations of domestic banks, while
Federal Income has no similar policy. Federal Income may not invest in a company
if its investment would result in the total holdings of all the funds in the
GROUP exceeding 15% of the company's issued shares. Short-Term Income does not
have this policy.
Simultaneously with the meeting of Short-Term Income shareholders held to
approve the Reorganization, a meeting of Federal Income shareholders will be
held to approve, among other things, reclassifying certain of Federal Income's
investment policies from fundamental to non-fundamental. Federal Income has
proposed reclassifying the status of these 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 will
vote to approve the reclassification.
IMPLEMENTATION OF REORGANIZATION. The Reorganization is expected to occur
shortly before March 31, 1995. Pursuant to an exemptive order (the "Exemptive
Order") of the SEC obtained on behalf of Federal Income and other funds managed
by IDS Financial Corporation ("IDS"), Federal Income will implement a multiple
class structure of three classes of shares: Class A shares, Class B shares and
Class Y shares. All three classes will represent identical interests in Federal
Income'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 CDSC and Class Y
shares will not be subject to a
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sales charge. In addition, Class B shares will be subject to a distribution fee
while Class A and Class Y shares will not be subject to distribution fees. The
higher distribution fee for Class B shares is necessary to help defray costs not
covered by the CDSC. Class B shares will convert to Class A shares after a
holding period of approximately eight years, and the number of years a
Short-Term Income shareholder held shares prior to the Reorganization will be
included for purposes of calculating this holding period. Existing shareholders
of Federal Income will receive either Class A shares or, upon meeting certain
requirements, Class Y shares of Federal Income at the time the multiple class
structure is implemented. Most shareholders of Short-Term Income will receive
Class B shares of Federal Income in exchange for their shares of Short-Term
Income. Shareholders of Short-Term Income who are entitled to a waiver of the
CDSC will receive Class A shares of Federal Income.
FEES AND EXPENSES.
- INVESTMENT MANAGEMENT AND SERVICES AGREEMENT ("IMS
Agreement"). Currently, Federal Income and Short-Term Income each has an
agreement 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. The first component is based on the combined average
daily net assets of all mutual funds (other than money market funds) in the IDS
MUTUAL FUND GROUP (the "GROUP") and is calculated at a rate of 0.46% 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% 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 and
is calculated at a rate of 0.13% for both Federal Income and Short-Term Income.
For the fiscal year ended June 30, 1994, Federal Income paid IDS a total
investment management fee of 0.53% of its average daily net assets. For the
fiscal year ended March 31, 1994, Short-Term Income paid IDS a total investment
management fee of 0.53% of its average daily net assets. Each Fund also pays
taxes, brokerage commissions and non-advisory expenses.
- TRANSFER AGENCY AGREEMENT ("TA Agreement"). Federal Income and Short-Term
Income each have a TA Agreement with IDS pursuant to which IDS maintains
shareholder accounts and records for each Fund. Federal Income pays IDS an
annual fee of $15.50 per shareholder account and Short-Term Income pays IDS an
annual fee of $16.50 per shareholder account for the transfer agency services
rendered by IDS.
- DISTRIBUTION AGREEMENT. Currently, the shares of Federal Income and
Short-Term Income are both sold subject to distribution plans adopted pursuant
to Rule 12b-1 under the 1940 Act. Under the 12b-1 plan for Federal
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Income, IDS is paid a fee at an annual rate of $6 per shareholder account. Total
12b-1 fees paid by Federal Income were 0.05% of its average daily net assets for
the fiscal year ended June 30, 1994.
Under the 12b-1 plan for Short-Term Income, IDS is paid a distribution fee
at an annual rate equal to 1% of the lesser of (i) aggregate purchase payments
of shares sold since inception, including purchase payments of shares exchanged
from another fund in the 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. The first 0.75%
is for distribution of Short-Term Income shares and the balance of the fee, up
to 0.25%, represents service fees for personal services rendered to shareholders
of the Fund. Total 12b-1 fees paid by Short-Term Income were 0.87% of its
average daily net assets for the fiscal year ended March 31, 1994.
- TOTAL FEES AND EXPENSES. Total fees and expenses for Federal Income for
the fiscal year ended June 30, 1994 were 0.76% of average daily net assets.
Total fees and expenses for Short-Term Income for the fiscal year ended March
31, 1994 were 1.73% of average daily net assets.
- PROPOSED IMS AGREEMENT. It is anticipated that the investment management
and services fee, the transfer agency fee and the distribution fee of Federal
Income will change at the time of the Reorganization. Simultaneously with the
meeting of Short-Term Income shareholders to vote on the Plan, a meeting of
Federal Income shareholders will be held to vote on, among other matters, a new
IMS Agreement with IDS. If approved, the new IMS 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 0.52% on the first $1
billion in net assets and decreasing thereafter at reduced percentage rates to a
minimum rate of 0.395% on all net assets in excess of $9 billion.
- PROPOSED ADMINISTRATION AND ACCOUNTING AGREEMENT ("Admin Agreement"). A
new Admin Agreement with IDS will provide for a graduated fee to be paid to IDS
calculated at a rate of 0.05% on the first $1 billion in net assets and
decreasing at reduced percentage rates to a minimum rate of 0.025% on all net
assets in excess of $9 billion.
- PROPOSED TA AGREEMENT. The new TA Agreement with IDS will provide that
Federal Income will pay IDS an annual fee of $15.50 per account for Class A
shares, $16.50 per account for Class B shares and $15.50 per account for Class Y
shares.
- PROPOSED DISTRIBUTION AND SERVICING AGREEMENTS. Immediately prior to the
Reorganization, IDS, as the sole Class B shareholder of Federal Income, will
vote to approve a new 12b-1 distribution plan applicable to Class B shares. This
distribution plan will provide for an annual distribution fee calculated at the
rate of 0.75% of Federal Income's average daily net
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assets. In addition, Class B shares will be subject to a service fee calculated
at a rate of 0.175% of average daily net assets. Class A shares will not be
subject to a 12b-1 distribution fee, but will be subject to a service fee
calculated at the rate of 0.175% of average daily net assets. Class Y shares
will not be subject to a distribution fee or a service fee.
- PROPOSED TOTAL FEES AND EXPENSES. The expense ratio of Class B shares of
Federal Income is expected to be substantially similar to the current expense
ratio of Short-Term Income. If the changes in management, distribution and
transfer agency fees are approved, it is expected that total Federal Income fees
and expenses stated as a percentage of average net assets subsequent to the
Reorganization will be 0.92% for Class A, 1.68% for Class B and 0.75% for Class
Y.
PURCHASE AND SALE PROCEDURES. Purchase of shares of Federal Income and
Short-Term Income must be made through IDS Financial Services Inc. at their
respective public offering prices (net asset value next determined).
Redemptions of Short-Term Income shares are, and Federal Income Class B
shares will be, subject to a CDSC. Redemptions of Federal Income and Short-Term
Income shares may be made in writing or by telephone.
EXCHANGE PRIVILEGES. Shareholders of Federal Income may exchange their
shares at net asset value for shares in any publicly offered fund in the GROUP.
Shareholders of Short-Term Income 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 may, however, sell their shares and purchase shares of another
fund in the GROUP.
After the Reorganization, Class A, Class B and Class Y shareholders of
Federal Income may exchange their shares at net asset value for shares of the
same class in any fund in the GROUP. No 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.
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 and
Short-Term Income 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 and each quarter with respect to Short-Term Income.
Distributions of any net realized capital gains are made before the end of the
calendar year. For each Fund, dividend and capital gain
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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. All classes will vote together on most issues,
such as election of directors, and as separate classes on issues that affect
only a particular class, such as 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% 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 and Short-Term
Income are substantially the same, the investment risks associated with each
Fund are substantially the same. These risks include: investment 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 extremely
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 investing in the Funds, see "Facts about
Investments and their Risks" in the accompanying prospectus of Federal Income
and the prospectus of Short-Term Income.
REASONS FOR THE REORGANIZATION
The Board of the Corporation, including all of the non-interested directors,
has determined that it is advantageous to combine Short-Term Income with Federal
Income. The Funds have substantially similar goals and investment policies and
the Funds have the same investment manager, portfolio manager, custodian,
auditors and transfer agent.
Short-Term Income was created to provide investors wanting to invest in a
portfolio of debt securities like Federal Income with the option to pay the
sales charge on an investment over time by way of a CDSC. With the ability to
offer multiple classes of shares in one fund pursuant to the Exemptive Order, it
is no longer necessary to offer shares in two separate mutual funds with
substantially similar investment portfolios. Accordingly, the Board has
determined that the Reorganization should eliminate the duplication inherent in
marketing two funds with similar investment goals. The Board also determined
that a combination of the Funds would not dilute the interests of
12
<PAGE>
Short-Term Income shareholders and has received advice from counsel that the
Reorganization will be effected as a tax-free reorganization. In light of the
foregoing, the Board has decided that it is in the best interest of Short-Term
Income and its shareholders to combine with Federal Income.
The Board of Federal Income also determined that a combination of the Funds
would not dilute the interests of Federal Income shareholders and has received
advice from counsel that the Reorganization will be effected as a tax-free
reorganization. Accordingly, the Board has decided that it is in the best
interest of Federal Income and its shareholders to acquire the assets of
Short-Term Income 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 will acquire all of the assets of Short-Term Income
in exchange for shares of Federal Income on or about March 31, 1995, or a later
date agreed upon by the parties (the "Closing Date"). The number of full and
fractional shares of Federal Income to be issued to Short-Term Income
shareholders will be determined on the basis of the relative net asset values of
Federal Income and Short-Term Income as of the close of business on the Closing
Date. Net asset value is determined by dividing total assets, less liabilities,
by the total number of shares outstanding. Both Funds will use 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 will declare a dividend
which, together with all previous dividends, will have the effect of
distributing to Short-Term Income's shareholders all taxable income for, and all
of its net capital gains realized in, the taxable year ending on or prior to the
Closing Date.
As soon as practicable after the Closing Date, the Corporation will
distribute pro rata to Short-Term Income shareholders of record as of the
Closing Date, the shares of Federal Income, and the Corporation will take all
necessary steps to effect the liquidation and termination of Short-Term Income.
The distribution of Federal Income shares will be accomplished by establishing
Federal Income accounts in the name of each shareholder of Short-Term Income
representing the respective number of shares, including fractional shares, of
Federal Income due each shareholder. Shareholders of Short-Term Income whose
shares are represented by certificates will be required to surrender the
certificates to Federal Income in order to redeem Federal Income 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 or an authorized officer of
13
<PAGE>
the Corporation. Conditions that may be waived are limited to those
representations and warranties that will not affect the ability of the Funds to
finalize the reorganization. The Plan may be terminated and the proposed
transaction abandoned at any time, before or after approval by the shareholders
of Short-Term Income, prior to the Closing Date by either the Board or a
designated officer of the Corporation.
Federal Income and Short-Term Income each will pay their own expenses, if
any, incurred in connection with the Reorganization; provided, however, that
certain expenses of Short-Term Income 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.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding shares of Short-Term Income. If the Reorganization is not approved,
the Board will consider other possible courses of action.
DESCRIPTION OF FEDERAL INCOME SHARES. Assuming the multiple class structure
discussed in the summary is implemented, full and fractional shares of Federal
Income will be issued in accordance with the procedures detailed in the Plan and
as described in Federal Income's prospectus. Most shareholders will receive
Class B shares of Federal Income in exchange for their shares of Short-Term
Income. Shareholders of Short-Term Income entitled to a waiver of the CDSC will
receive Class A shares of Federal Income. The shares of Federal Income will
represent shares of common stock, with $.01 par value, in Federal Income, 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's portfolio of investments.
<TABLE>
<CAPTION>
Service
Sales Charge 12b-1 Fee Fee TA Fee
------------- --------- ---------- ----------------
<S> <C> <C> <C> <C>
Class A................ Front-End None Yes $15.50/account
Class B................ Contingent Yes Yes $16.50/account
Deferred
Class Y................ None None None $15.50/account
</TABLE>
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 12b-1 distribution policies. At the time
multiple classes of shares are implemented, IDS will purchase shares of Class B
and Class Y and, as sole shareholder, will approve the IMS Agreement applicable
to Class B and Class Y and the 12b-1 plan applicable to Class B, prior to shares
of those classes being offered to the public.
14
<PAGE>
Class A, Class B and Class Y shares of Federal Income 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 prospectus and statement of additional information. Federal Income does
not issue certificates to shareholders.
FEDERAL INCOME TAX CONSEQUENCES. The completion of the Reorganization is
contingent upon the receipt by the Corporation of a private letter ruling issued
by the Internal Revenue Service, or, if the private letter ruling has not yet
been issued, an opinion from Ropes & Gray, to the effect that the Reorganization
will constitute a tax-free reorganization under section 368(a)(1)(C) of the
Internal Revenue Code. As such, no gain or loss will be recognized by Short-Term
Income, Federal Income or their respective shareholders as a result of the
proposed transaction, the tax basis of the shares of Federal Income received by
Short-Term Income shareholders will be the same as the tax basis of their
Short-Term Income shares, and the tax basis of the assets of Short-Term Income
in the hands of Federal Income will be the same as the tax basis of such assets
in the hands of Short-Term Income prior to the Reorganization.
RELATED PROPOSALS OF INTEREST TO SHORT-TERM INCOME
SHAREHOLDERS. Simultaneously with the meeting of Short-Term Income shareholders
to approve the Plan, a regular meeting of Federal Income shareholders will be
held to vote on the following proposals: (1) election of directors; (2)
ratification of KPMG Peat Marwick LLP as the independent auditors; (3) approval
of an investment management services agreement with IDS; (4) approval of changes
in the investment policies to permit investment of all of the Fund's assets in
another investment company with substantially the same investment objectives,
policies and restrictions; and (5) approval of changes to certain fundamental
policies. Each of the proposals is discussed in detail in Exhibit B. There can
be no assurance that shareholders of Federal Income will vote to approve any or
all of these proposals.
The new investment management services agreement will provide for a
graduated management fee to be paid to IDS calculated at a rate of 0.52% on the
first $1 billion in net assets and decreasing thereafter at reduced percentage
rates to a minimum rate of 0.395% on all net assets in excess of $9 billion.
If shareholders approve the investment management services agreement, the
Board will approve a new administration and accounting agreement with fees
calculated at a rate ranging from 0.05% to 0.025%, decreasing as assets
increase.
A service fee will apply to Class A shares. The service fee will be
calculated at a rate of 0.175% of average daily net assets. Class B shares will
be subject to a 12b-1 distribution plan. This distribution plan will provide for
15
<PAGE>
an annual distribution fee to be paid to IDS calculated at the rate of 0.75% of
average daily net assets. In addition, a service fee calculated at a rate of
0.175% of average daily net assets will apply to Class B shares. Class Y shares
will not be subject to distribution fees or to service fees.
At the meeting of Federal Income shareholders, shareholders will also vote
on whether to approve changes to certain of Federal Income's fundamental
investment policies.
CAPITALIZATION. The following table shows the capitalization of Short-Term
Income and Federal Income as of June 30, 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
Short-Term Pro forma for
Federal Income* Income** Reorganization
--------------- -------------- --------------
(In thousands, except per share values)
<S> <C> <C> <C>
Class A Shares
- ------------------------------
Net assets.................... $ 938,413,636 $ 0 $ 938,413,636
Net asset value per share..... $ 4.85 $ 0.00 $ 4.85
Shares outstanding............ 193,642,265 0 193,642,265
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 44,196,170
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............ 17,933,557 0 17,933,557
<FN>
*Current shares of Federal Income are shown as either Class A shares or Class Y
shares, into which such shares will be converted upon implementation of the
multiple class structure.
**Current shares of Short-Term Income are shown as Class B shares, for which
such shares will be exchanged upon the Reorganization.
</TABLE>
INFORMATION ABOUT FEDERAL INCOME AND
SHORT-TERM INCOME
Information concerning Federal Income is incorporated by reference from the
current Federal Income prospectus, dated August 29, 1994, accompanying this
Prospectus/Proxy Statement. Information concerning Short-Term Income is
incorporated by reference from the Corporation's prospectus, dated May 27, 1994.
Both Federal Income and the Corporation are subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and
file reports and other information including proxy material, reports and charter
documents with the SEC. These reports can be inspected
16
<PAGE>
and copies obtained at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the New York Regional
Office of the SEC, Seven World Trade Center, 13th Floor, New York, New York
10048. Copies 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 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, investment policies and restrictions of Federal Income and
Short-Term Income are substantially similar.
GOALS
The goals of Federal Income and Short-Term Income are substantially the
same. The goal of Federal Income 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 is 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's total
assets are invested in government securities. Short-Term Income 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's investments is limited to three
years. Federal Income is not so limited. As of August 31, 1994, the average life
of Federal Income's portfolio was 5.2 years. Securities with longer maturities
are more sensitive to changes in interest rates.
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 addition, Federal Income may
invest in unrated non-government debt securities if its investment manager
determines that the securities are of equivalent investment quality to the rated
securities. Government related mortgage-
17
<PAGE>
backed securities include mortgage pass through certificates of the Government
National Mortgage Association (GNMA), and obligations of the Federal Home Loan
Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA).
GNMA securities are guaranteed by the United States. FHLMC and FNMA securities
are supported by the right of the issuer to borrow from the Treasury.
Non-governmental mortgage-related securities include bonds, debentures and
collateralized mortgage obligations secured by mortgages on commercial real
estate or residential rental properties.
Both Funds may invest in zero-coupon bonds, inverse floaters, interest only
obligations and principal only obligations. A zero-coupon security is a security
that is sold at a deep discount from its face value and makes no periodic
interest payments. The buyer receives a rate of return by gradual appreciation
of the security, which is redeemed at face value on the maturity date. Inverse
floaters are created by underwriters using the interest payment on securities. A
portion of the interest received is paid to holders of instruments based on
current interest rates for short-term securities. What is left over, less a
servicing fee, is paid to holders of the inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floater. Interest only (IO) and principal only (PO) obligations are classes of
stripped mortgage-backed securities. IOs entitle the holder to receive
distributions consisting of all or a portion of the interest on the underlying
pool of mortgage loans or mortgage-backed securities. POs entitle the holder to
receive distributions consisting of all or a portion of the principal of the
underlying pool of mortgage loans or mortgage-backed securities. The cash flows
and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities.
Certain of the Funds' 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 and Federal Income may make these
investments but only on the open market where the dealer's or sponsor's profit
is the regular commission; however, Short-Term Income'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 may not pledge or mortgage its
assets beyond 15% of its total assets at cost. Short-Term Income may invest in
foreign securities subject to a limit of 15% of its total assets while Federal
Income may not invest its assets in foreign securities.
18
<PAGE>
Short-Term Income is subject to certain investment policies to which Federal
Income is not subject. Short-Term Income 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 has no similar policy with respect to concentration of investment
in obligations of domestic banks. Short-Term Income 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 is subject to an investment policy to which Short-Term Income
is not subject. Federal Income may not invest in a company if its investment
would result in the total holdings of all the funds in the GROUP exceeding 15%
of the company's issued shares.
Management's discussion of those factors that materially affected each
Fund's performance for its last fiscal year is included in Exhibit C.
At the meeting of Federal Income shareholders to be held simultaneously with
the meeting of Short-Term Income shareholders, Federal Income shareholders will
vote on whether to approve the reclassification of certain of Federal Income's
investment policies and restrictions from fundamental to non-fundamental. The
Board of Federal Income has proposed the reclassification in order to provide
the Fund with greater flexibility in managing its portfolio of investments. In
addition, Federal Income shareholders will vote on modifications to fundamental
policies regarding cash loans and real estate.
19
<PAGE>
FEES AND EXPENSES
The following table compares the current agreements for Short-Term Income
and Federal Income with the proposed agreements for Federal Income. There is no
guarantee that Federal Income shareholders will approve the proposed changes.
<TABLE>
<CAPTION>
Current Fees Current Fees Proposed Fees
Short-Term Income Federal Income Federal Income
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
IMS Agreement... Based on the combined Based on the combined Based on Fund assets:
net assets of all net assets of all 0.52% on the first
funds in the GROUP: funds in the GROUP: $1 billion, scaling
0.46% of the first 0.46% of the first down to 0.395% for
$5 billion, scaling $5 billion, scaling all assets over $9
down to 0.32% on all down to 0.32% on all billion
net assets over $50 net assets over $50
billion; plus billion; plus
individual asset fee individual asset fee
of 0.13% of 0.13%
Admin
Agreement....... None None 0.05% on the first $1
billion of Fund
assets, scaling down
to 0.025% for all
assets over $9
billion
TA Agreement.... $16.50/account $15.50/account Class A:
$15.50/account
Class B:
16.50/account
Class Y:
15.50/account
12b-1 Plan...... 1% of the lessor of $6/account Class A: None
purchase payments or Class B: 0.75% of
average daily net average daily net
assets, 0.75% for assets
distribution, Class Y: None
remainder for
service
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Current Fees Current Fees Proposed Fees
Short-Term Income Federal Income Federal Income
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Service Fee..... See 12b-1 plan None Class A: 0.175% of
average daily net
assets
Class B: 0.175% of
average daily net
assets
Class Y: None
</TABLE>
RECOMMENDATION AND VOTE REQUIRED
The Board of Short-Term Income, 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 entitled to vote.
(2) ELECTION OF BOARD MEMBERS
The Board has set the number of persons who serve on the Board at 14. Each
Board member will serve until the next regular shareholders' meeting or until he
or she reaches the mandatory retirement age established by resolution of the
Board. Under the current resolution of the Board, members who were serving on
the Board of any fund in the 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
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 are set forth below. Each of the
nominees is a nominee for trustee or director of each of the other funds within
the GROUP except William Dudley who is director of all the publicly offered
funds. The GROUP currently consists of 42 funds with assets of approximately $44
billion. Each nominee was elected a member of the Board at the last
shareholders' meeting except for Lynne Cheney, David Hubers, Heinz Hutter and
Angus Wurtele.
21
<PAGE>
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 the current committee assignments.
The shareholders of Short-Term Income 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 Corp., and the Interpublic Group of
Companies, Inc. (advertising).
Shares owned: Short-Term Income 0 GROUP 24,328
Committee assignment: Audit
WILLIAM H. DUDLEY** Board member since 1991 Age 62
Executive vice president and director of IDS.
Shares owned: Short-Term Income 0 GROUP 726,479
24,209+
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 0 GROUP 155,355+
Committee assignments: Contracts, Executive, Personnel
22
<PAGE>
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 0 GROUP 128,719
HEINZ F. HUTTER Board member since 1994 Age 65
President and chief operating officer, Cargill, Incorporated (commodity
merchants and processors) from February 1991 to September 1994. Executive vice
president from 1981 to February 1991.
Shares owned: Short-Term Income 0 GROUP 0
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 0 GROUP 17,043
Committee assignment: Contracts
DONALD M. KENDALL Board member since 1968 Age 73
Former chairman and chief executive officer, PepsiCo, Inc.
Shares owned: Short-Term Income 0 GROUP 0
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 0 GROUP 200,468
137,949+
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).
23
<PAGE>
Shares owned: Short-Term Income 0 GROUP 5,446
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 0 GROUP 546,356
190,395+
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 0 GROUP 15,403
Committee assignments: Audit, Executive
JOHN R. THOMAS** Board member since 1987 Age 57
Senior vice president and director of IDS.
Shares owned: Short-Term Income 0 GROUP 630,858
4,732+
WHEELOCK WHITNEY Board member since 1977 Age 68
Chairman, Whitney Management Company (manages family assets).
Shares owned: Short-Term Income 0 GROUP 2,204,645
Committee assignment: Audit, Contracts, Executive, Personnel
C. ANGUS WURTELE Board member since 1994 Age 60
Chairman of the board and chief executive officer, The Valspar Corporation
(paints). Director, Bemis Corporation (packaging), Donaldson Company (air
cleaners & mufflers) and General Mills, Inc. (consumer products).
Shares owned: Short-Term Income 0 GROUP 0
*Interested person by reason of being an officer and employee of Short-Term
Income.
**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.
24
<PAGE>
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
Short-Term Income.
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 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.
Candidates for vacancies on the Board must have a background that gives promise
of making a significant contribution to furthering the interests of all
shareholders. Shareholders wishing to suggest candidates should write in care of
Joint Personnel Committee, IDS MUTUAL FUND GROUP, 901 Marquette Avenue South,
Suite 2810, Minneapolis, MN 55402-3268.
Over the last fiscal year, the Board held 10 meetings, the Executive
Committee met twice a month, and the Audit, Contracts and Personnel Committees
met 5, 4 and 7 times, respectively. Average attendance at the Board was 93% and
no nominee attended less than 75% of the meetings of the Board and the
committees on which she or he serves.
Members who are not officers of Short-Term Income or directors of IDS
receive an annual fee and retirement benefits from Short-Term Income. They also
receive attendance and other fees, the cost of which Short-Term Income shares
with the other funds in the GROUP. Members of the Board receive an annual fee of
$250 and upon retirement at age 70, or earlier if for health reasons, such
members receive monthly payments equal to 1/2 of the annual fee divided by 12
for as many months as the member served on the Board up to 120 months or until
the date of death. There are no death benefits and the plan is not funded. The
fees shared with other funds are those for attendance for meetings of the
Contracts Committee or Board, $500, meetings of the Audit, Executive, and
Personnel Committees, $300, out-of-state, $500, and Chair of Contracts
Committee, $5,000. Expenses are also reimbursed.
25
<PAGE>
During the last fiscal year, the members of the Board, for attending up to
50 meetings, received the following compensation, in total, from all the funds
in the GROUP.
<TABLE>
<CAPTION>
Retirement
Aggregate Benefits
Compensation Accrued as Estimated
from Short-Term Annual Total Cash
Short-Term Income Benefit on Compensation
Nominee Income Expenses Retirement from GROUP
- ------------------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Lynne V. Cheney $ 45 $ -- $ 125 $ 6,000
(part of year)
Robert F. Froehlke 561 314 125 64,534
(part of year)
Anne P. Jones 518 81 125 72,200
Donald M. Kendall 459 453 125 66,000
Melvin R. Laird 542 321 125 71,900
Lewis W. Lehr 504 441 122 70,500
William R. Pearce 108 150 125 13,367
(part of year)
Edson W. Spencer 552 222 67 72,700
Wheelock Whitney 600 184 125 74,800
</TABLE>
Besides Mr. Pearce, who is president, Short-Term Income's other officer is:
Leslie L. Ogg, 56, Vice president and general counsel of all publicly offered
funds in the GROUP since 1978. Vice president and secretary of the Life Funds
and treasurer and secretary of all publicly offered funds in the GROUP since
July 1989.
Officers of Short-Term Income serve at the pleasure of the Board.
During the last fiscal year, no officer earned more than $60,000 from
Short-Term Income. All officers as a group (two persons) earned cash
compensation, including salaries and thrift plan, of $3,023 for the last fiscal
year.
(3) RATIFY OR REJECT THE SELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT
AUDITORS
For the fiscal year ending March 31, 1995, KPMG Peat Marwick LLP has been
selected to serve as the independent auditors for the Corporation. 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
LLP include the examination of the annual financial statements, assistance in
connection with filings with the SEC and meeting with the Joint
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Audit Committee. A representative of KPMG Peat Marwick LLP is expected to be at
the meeting and will have the opportunity to make a statement and answer
questions.
RECOMMENDATION AND VOTE REQUIRED.
The Board recommends that you vote to ratify the selection of the
independent auditors. Ratification of the selection requires a vote by a
majority of the shares present or represented at the meeting. The shareholders
of Short-Term Income 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 first being mailed to
shareholders of Short-Term Income on or about September 19, 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 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 to the
Fund. Shareholders are entitled to one vote for each share.
Election of Board members 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 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
include Aggressive Equity Fund, Equity Fund, Income Fund and Worldwide Growth
Fund. As of the Record Date, each of the funds had shares outstanding as
follows: Aggressive Equity -- 49,016,669; Equity -- 124,133,994; Income --
115,020,579; Short-Term Income -- 217,905,690; and Worldwide Growth --
51,377,307.
Proxies are solicited by mail. Additional solicitations may be made by mail,
telephone, telegraph or personal contact by financial planners. The cost of
solicitation will be borne by Short-Term Income.
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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 are not entitled to vote on the Plan 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"), Short-Term Income
shareholders of record on September 11, 1994 are entitled to assert dissenters'
rights in connection with the Reorganization and obtain payment of the "fair
value" of their shares, provided that such shareholders comply with the
requirements of the MBCA Sections. A copy of the MBCA Sections is attached as
Exhibit D.
Notwithstanding the provisions of the MBCA Sections, 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 be 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, the Corporation will determine dissenters' rights in accordance with the
Division's interpretation. ACCORDINGLY, IF ANY SHAREHOLDER ELECTS TO EXERCISE
DISSENTERS' RIGHTS UNDER MINNESOTA LAW, THE CORPORATION INTENDS TO SUBMIT THIS
QUESTION TO A COURT OF COMPETENT JURISDICTION. IN THAT EVENT, A DISSENTING
SHAREHOLDER WOULD NOT RECEIVE ANY PAYMENT UNTIL THE END OF THE COURT PROCEEDING.
INTEREST OF CERTAIN PERSONS. The following receive payments from Federal
Income for services rendered pursuant to contractual arrangements: IDS, 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 Fund.
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FINANCIAL STATEMENTS AND EXPERTS
The audited financial statements of Federal Income and Short-Term Income 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 financial highlights, all as incorporated by reference into
the respective statements of additional information of Federal Income, dated
August 29, 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 LLP, independent auditors for each of the
Funds, given on the authority of such firms as experts in accounting and
auditing.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of September 8, 1994, between
IDS Strategy Fund, Inc., a Minnesota corporation (the "Corporation"), on behalf
of Short-Term Income Fund ("Short-Term Income") and IDS Federal Income Fund,
Inc., a Minnesota corporation ("Federal Income").
In consideration of the mutual promises herein contained, the parties hereto
agree as follows:
1. SHAREHOLDER APPROVAL
A meeting of the shareholders of Short-Term Income shall be called and held
for the purpose of approving this Agreement and the transactions it
contemplates. Federal Income shall furnish data and information as reasonably
requested by the Corporation for inclusion in the information to be furnished to
Short-Term Income shareholders at the meeting.
2. REORGANIZATION
(a) PLAN OF REORGANIZATION. The Corporation will convey, transfer and
deliver to Federal Income all of the assets of Short-Term Income at the closing
provided for in Section 2(b) (the "Closing"). Federal Income shall assume all
liabilities, expenses, costs, charges and reserves reflected on an unaudited
statement of assets and liabilities of Short-Term Income as of the Valuation
Date (as defined in paragraph 3(a)), in accordance with generally accepted
accounting principles. Federal Income shall assume only those liabilities of
Short-Term Income reflected in the unaudited statement of assets and liabilities
and shall not assume any other liabilities, whether absolute or contingent,
known or unknown, accrued or unaccrued. At the Closing, Federal Income agrees to
deliver to the Corporation the number of shares of Federal Income including
fractional shares, determined by dividing the value of the net assets of
Short-Term Income, computed as set forth in paragraph 3(a), by the net asset
value of one share computed as set forth in paragraph 3(b). It is agreed that
there will be no sales charge on the transfer of Federal Income shares to
Short-Term Income in exchange for the assets of Short-Term Income, or to any of
the shareholders of Short-Term Income upon distribution of the Federal Income
shares to them. Shareholders of Short-Term Income entitled to a waiver of the
contingent deferred sales charge will receive Class A shares of Federal Income
in exchange for their shares of Short-Term Income. All other shareholders of
Short-Term Income will receive Class B 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
at which this Agreement will be considered and (iii) implementation
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of a multiple class share structure by Federal Income pursuant to an Exemptive
Order (the "Exemptive Order") obtained on behalf of Federal Income and other
funds managed by IDS Financial Corporation, 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 to be transferred to
Federal Income 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 (the "Valuation Date") using the valuation procedures set
forth in the Federal Income prospectus.
(b) The net asset value per share of Federal Income shares for purposes of
Section 2(a) shall be determined as of the close of regular trading on the NYSE,
on the Valuation Date using the valuation procedures set forth in the Federal
Income prospectus.
(c) A copy of the computations showing in reasonable detail the valuation of
Short-Term Income's net assets on the Valuation Date, certified by an officer of
the investment manager, shall be furnished to Federal Income at the Closing. A
copy of the computations showing in reasonable detail the determination of the
net asset value per share of Federal Income shares on the Valuation Date,
certified by an officer of the investment manager, shall be furnished to the
Corporation at the Closing.
4. LIQUIDATION AND DISSOLUTION OF SHORT-TERM INCOME
(a) As soon as practicable after the Valuation Date, the Corporation will
liquidate and distribute to Short-Term Income shareholders of record, the
Federal Income shares received by the Corporation pursuant to this section.
Liquidation and distribution will be accomplished by establishing Federal Income
shareholder accounts in the names of each Short-Term Income shareholder,
representing the respective pro rata number of full and fractional shares of
Federal Income due to each. All issued and outstanding shares of Short-Term
Income will simultaneously be cancelled on the books of the Corporation,
although stock certificates representing interests in Short-Term Income will
represent a number of shares of Federal Income after the Valuation Date
determined in accordance with Section 2(a). No shareholder accounts shall be
established by Federal Income or its transfer agent except pursuant to written
instructions from the Corporation, and the Corporation agrees to provide
instructions on the Valuation Date.
(b) Promptly after the distribution described in Section 4(a) appropriate
notification will be mailed by Federal Income or its transfer agent to each
shareholder of Short-Term Income receiving shares informing the shareholder of
the number of shares distributed to the shareholder and confirming the
registration in the shareholder's name.
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(c) As promptly as practicable after the liquidation of Short-Term Income,
and in no event later than twelve months from the date hereof, Short-Term Income
shall be dissolved.
(d) Immediately after the Valuation Date, the share transfer books of the
Corporation relating to Short-Term Income shall be closed and no further
transfer of shares shall be made.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF FEDERAL INCOME
Federal Income represents and warrants to the Corporation as follows:
(a) ORGANIZATION, EXISTENCE, ETC. Federal Income 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.
(b) REGISTRATION AS INVESTMENT COMPANY. Federal Income 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 has an authorized capital of
10,000,000,000 shares of common stock, par value $0.01 per share, of which as of
September 1, 1994, 210,874,642 shares were outstanding and no shares were held
in the treasury. All of the outstanding shares have been duly authorized and are
validly issued, fully paid and non-assessable. Since Federal Income 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 has the authority, pursuant to the Exemptive Order, to implement
a multiple class structure and to create multiple classes of common stock.
Federal Income agrees that, prior to the Closing, it shall implement a multiple
class structure in accordance with the Exemptive Order.
(d) FINANCIAL STATEMENTS. The audited financial statements as of June 30,
1994 of Federal Income (the "Federal Income Financial Statements"), previously
delivered to the Corporation, fairly present the financial position of Federal
Income, 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 at the
time of the Reorganization will be validly issued, fully paid and non-
assessable.
(f) AUTHORITY RELATIVE TO THIS AGREEMENT. Federal Income has the power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the transactions contemplated
hereby have been duly authorized by its Board of Directors and no other
proceedings by Federal Income are necessary to authorize its officers to
effectuate this Agreement and the transactions contemplated hereby.
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(g) NO VIOLATION. Federal Income 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 agreement or condition contained in any material
contract 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 pursuant to any material contract or other instrument to which
Federal Income 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; and no consent,
approval, authorization or order of any court or governmental authority or
agency is required for the consummation by Federal Income 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, whether or
not determined or determinable, other than liabilities disclosed in the Federal
Income Financial Statements and liabilities incurred in the ordinary course of
business subsequent to June 30, 1994, 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.
(i) LITIGATION. There are no claims, actions, suits or proceedings pending
or, to the knowledge of Federal Income, threatened which would adversely affect
Federal Income 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 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 tax returns of Federal Income have been filed for
all taxable years to and including the taxable year ended December 31, 1993.
Federal Income has qualified and will qualify as a regulated investment company
under the Internal Revenue Code with respect to each taxable year since
commencement of its operations.
(l) REGISTRATION STATEMENT. Federal Income 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, 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, 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
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misleading; provided, however, that none of the representations and 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 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.
(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
10,000,000,000 shares of common stock, par value $0.01 per share, of which as of
September 1, 1994, 218,448,896 shares of Short-Term Income were outstanding and
no shares were held in the treasury of the Corporation. All of the outstanding
shares of the Short-Term Income have been duly authorized and are validly
issued, fully paid and non-assessable. Since the Corporation is engaged in the
continuous offering and redemption of its shares, the number of outstanding
shares of Short-Term Income 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 (the "Short-Term Income Financial Statements"),
previously delivered to Federal Income, fairly present the financial position of
Short-Term Income 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 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, no other proceedings by
the Corporation are necessary to authorize its officers to effectuate this
Agreement and the transactions contemplated hereby.
(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 agreement or condition contained in any material
contract 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
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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 pursuant to any material contract or other
instrument to which the Corporation is subject, nor will such action result in
any violation of the Charter or any 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, whether or
not determined or determinable, other than liabilities disclosed in the
Short-Term Income Financial Statements and liabilities incurred in the ordinary
course of business subsequent to March 31, 1994, or otherwise previously
disclosed to Federal Income, none of which has been materially adverse to the
business, assets or results of operations of Short-Term Income.
(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 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 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 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 has
qualified, and will qualify, as a regulated investment company under the
Internal Revenue Code with respect to each taxable year since commencement of
its operations.
(k) FUND SECURITIES. All securities to be listed in the schedule of
investments of Short-Term Income as of the Effective Time of the Reorganization
will be owned by Short-Term Income free and clear of any liens, claims, charges,
options and encumbrances, except as indicated in the schedule, and, except as so
indicated, none of the securities is or, after the Reorganization, 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. The Corporation will cooperate with Federal
Income and will furnish the information relating to the Corporation or
Short-Term Income required by the Securities Act and the Regulations to be set
forth in the Registration Statement. 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
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and statement of additional information, as amended or supplemented, insofar as
it relates to the Corporation or Short-Term Income, 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 with respect to 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 of the outstanding shares of
common stock of Short-Term Income.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Federal Income shall have
complied with each of its agreements herein, each of the representations and
warranties 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 audited or certified by an officer of Federal
Income, 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 since June 30, 1994, and the Corporation shall have
received a certificate of an officer of Federal Income satisfactory in form and
substance to the Corporation so stating.
(c) CREATION OF CLASSES OF SHARES. Federal Income shall have implemented
the multiple class share structure contemplated by the Exemptive Order and shall
have created and authorized the issuance of the classes of shares to be issued
to Short-Term Income 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 the federal income tax
consequences of the Reorganization under the Internal Revenue Code of 1986 to
Short-Term Income and its shareholders. For purposes of rendering their opinion
Ropes & Gray may rely exclusively and without
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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 in connection with the Reorganization, and
upon such other written representations as an officer of the Corporation and
Federal Income, 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 nor Federal Income will recognize any gain or loss
upon the transfer of the assets of Short-Term Income to, and the assumption of
its liabilities by, Federal Income in exchange for shares of Federal Income and
upon the distribution of the shares to Short-Term Income shareholders in
exchange for their shares of Short-Term Income; (ii) the shareholders of
Short-Term Income who receive shares of Federal Income pursuant to the
Reorganization will not recognize any gain or loss upon the exchange of their
shares of Short-Term Income for shares of Federal Income (including any
fractional share interests they are deemed to have received) pursuant to the
Reorganization; (iii) the holding period and the basis of the shares received by
the Short-Term Income shareholders will be the same as the holding period and
the basis of the shares of Short-Term Income surrendered in the exchange; and
(iv) the holding period and the basis of the assets acquired by Federal Income
will be the same as the holding period and the basis of such assets to
Short-Term Income immediately prior to the Reorganization.
(f) OPINION OF COUNSEL. The Corporation shall have received the opinion of
Leslie L. Ogg, counsel for Federal Income, 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 is a corporation duly
organized and validly existing under the laws of the State of Minnesota; (ii)
Federal Income is an open-end investment company of the management type
registered under the 1940 Act; (iii) this Agreement and the Reorganization have
been duly authorized and approved by all requisite action of Federal Income and
this Agreement has been duly executed and delivered by, and is a valid and
binding obligation of, Federal Income; and (iv) the shares to be issued in the
Reorganization are, duly authorized and upon issuance in accordance with this
Agreement will be validly issued, fully paid and non-assessable shares of
Federal Income.
8. CONDITIONS TO OBLIGATIONS OF FEDERAL INCOME
The obligations of Federal Income hereunder with respect to 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
Short-Term Income.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Corporation shall have
complied with each of its agreements herein, each of the representations and
warranties herein shall be true in all material respects as of the
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Effective Time of the Reorganization, and except as otherwise indicated in any
financial statements of the Corporation or Short-Term Income, audited or
certified by an officer of the Corporation, which may be delivered to Federal
Income 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 Short-Term Income since March 31,
1994 and Federal Income shall have received a certificate of an officer of the
Corporation satisfactory in form and substance to Federal Income 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 shall have received the opinion of
Leslie L. Ogg, counsel for the Corporation, dated the Effective Time of the
Reorganization, addressed to and in form and substance satisfactory to Federal
Income, to the effect that (i) the Corporation is a corporation duly organized
and validly existing under the laws of the State of Minnesota; (ii) the
Corporation is an open-end investment company of the management type registered
under the 1940 Act; (iii) this Agreement and the Reorganization have been duly
authorized and approved by all requisite action of the Corporation and this
Agreement has been duly executed and delivered and is a valid and binding
obligation of the Corporation with respect to Short-Term Income.
(e) DECLARATION OF DIVIDEND. The Corporation shall have declared a
dividend with respect to Short-Term Income which, together with all previous
such dividends, shall have the effect of distributing to Short-Term Income's
shareholders all of Short-Term Income'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 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 (i) waive any inaccuracies in the
representations and warranties made to it and (ii) waive compliance with any of
the covenants or conditions made for its benefit.
(c) The Corporation may terminate this Agreement at any time prior to the
Effective Time of the Reorganization by notice to Federal Income if
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(i) a material condition to its performance or a material covenant of Federal
Income 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 that is not cured.
(d) Federal Income 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 by any party at any time prior to the
Effective Time of the Reorganization, whether before or after approval by the
shareholders of Short-Term Income, without any liability on the part of either
party hereto or its respective directors, officers or shareholders, on written
notice to the other party, and shall be terminated without liability as of the
close of business on December 31, 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 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, 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. 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 "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 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
A-10
<PAGE>
the indemnitee may be or may have been involved as a party or otherwise or with
which the indemnitee may be or may have been threatened, with respect to actions
taken hereunder or thereafter by reason of the indemnitee's 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 the
indemnitee's position.
IN WITNESS WHEREOF, each of the parties has caused this Agreement and Plan
of Reorganization to be executed, as of the day and year first above written.
Attest: IDS Federal Income Fund, Inc.
By /s/ Valeda A. Binford By /s/ Leslie L. Ogg
- -------------------------- --------------------------
Assistant Secretary Name: Leslie L. Ogg
Title:Vice President and General
Counsel
IDS Strategy Fund, Inc.
on behalf of
Short-Term Income Fund
By /s/ Valeda A. Binford By /s/ Leslie L. Ogg
- -------------------------- --------------------------
Assistant Secretary Name: Leslie L. Ogg
Title:Vice President and General
Counsel
A-11
<PAGE>
EXHIBIT B
MATTERS SUBJECT TO APPROVAL
AT REGULAR MEETING OF
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 SERVICES 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 necessarily be used by all funds in the GROUP and will be implemented
for this Fund only if the Board determines that it is in the best interests of
the Fund and its shareholders.
In order to proceed with the changes, new contracts with IDS are necessary.
Under the proposed contracts, based on the net asset values and the number of
shareholder accounts in the Fund in 1994, shareholders would have paid an
additional $1.60 for each $1,000 invested. In return for that increase, IDS
believes it can provide more and better services to shareholders.
The proposed contracts will become effective only if and when the Fund
issues multiple classes of shares. If the proposed contracts are approved, the
Fund plans to offer multiple classes of shares before the end of March 1995.
BOARD DELIBERATIONS.__In considering the desirability of issuing multiple
classes of shares, the members of the Board took several steps. First, they
asked the Board's Contracts Committee, composed of members who are not
affiliated with IDS ("independent members"), to test and evaluate a plan to
offer multiple classes of shares. The Committee determined that many investment
companies are now offering multiple classes of shares because they give
investors the choice among several sales charge options. Also, they determined
that issuing multiple classes of shares enables an investment company to offer
shares more effectively to institutional and retirement
B-1
<PAGE>
accounts. Second, the Board asked the Committee to consider terms of the new
contracts. By the end of 1993, proposed contract terms were deemed sufficiently
complete to be considered and evaluated by all independent members of the Board.
Third, the members of the Board approved the filing of an application with the
SEC for the necessary authority to offer multiple classes of shares. An order
approving the application was granted on March 16, 1994. Fourth, the Board
authorized the Fund to seek a private letter ruling from the Internal Revenue
Service to assure the plan to offer multiple classes of shares would not create
any tax problems for the Fund or its shareholders. Multiple classes of shares
will be issued only if that assurance is provided. If the private letter ruling
has not yet been issued at the time the Fund intends to implement multiple
classes of shares, the Fund may rely on an opinion of tax counsel.
In February, the independent members of the Board began an evaluation of the
plan and the proposed contracts against two standards: first, they had to offer
important benefits both to the Fund and its shareholders and, second, they had
to be fair to the Fund and its shareholders. In the course of this evaluation,
independent members met with representatives of American Express, the parent
company of IDS, and IDS to discuss the business plans of both companies. Also,
they reviewed the changes taking place in the money management industry with
noted research analysts and industry executives. And, they considered the
benefits existing shareholders derive from continued growth of the Fund and
tested the fairness of contract terms by employing the services of consultants
considered experts in their fields.
Independent members of the Board also reviewed five performance reports
prepared by IDS and an extensive review of those reports by Price Waterhouse, a
service it has provided the Fund in each of the past 13 years. The five reports,
prepared for the Fund each year by IDS, cover investment performance,
shareholder services, compliance, sales and marketing, and IDS' profitability
from its relationships with all funds in the GROUP. In addition, they considered
information provided by IDS in response to questions asked by the independent
members and the Fund's staff and from various periodic reports given to the
Board or to committees of the Board.
CURRENT INVESTMENT MANAGEMENT AND SERVICES AGREEMENT.__Currently, IDS
provides investment advice and administrative services to the Fund under an
Investment Management and Services Agreement (the "IMS Agreement") which was
last approved by shareholders on November 13, 1991. At that time, shareholders
approved a change in the rate of the fee payable to IDS, a change in the
language pertaining to payment of expenses, and the elimination of the
contractual provisions applicable to services provided as transfer agent and
dividend-disbursing agent. The Fund and IDS then entered into a separate
Transfer Agent Agreement (the "TA Agreement").
B-2
<PAGE>
The fee paid to IDS for its services under the IMS Agreement is based on two
components. The first component of the fee, a group asset charge, is based on a
graduated scale applied to the net assets of all the funds, except the
money-market funds, in the GROUP. The scale begins at 0.46% of net assets for
the first $5 billion and declines for each additional $5 billion until a fee of
0.32% is paid for net assets exceeding $50 billion. The second component, an
individual asset charge, is a fixed fee of 0.13% of the net assets of the Fund
itself. The complete group asset charge schedule and net assets for all funds in
the GROUP appear under the caption "Certain Information Concerning IDS" which
follows later in this proxy statement.
The Fund pays its taxes, brokerage commissions and nonadvisory expenses,
which include custodian fees; audit and certain legal fees; fidelity bond
premiums; registration fees for shares; office expenses of the Fund; consultant
fees; compensation of Board members, officers and employees (except anyone who
is also an officer, director or employee of IDS or its affiliates); corporate
filing fees; a portion of the Investment Company Institute dues; organizational
expenses; expenses incurred in connection with lending portfolio securities; and
other expenses properly payable by the Fund, approved by the Board.
If, at the end of any month, the fees payable by the Fund under the IMS
Agreement and its nonadvisory expenses exceed the most restrictive applicable
state expense limitation -- which at the current time is 2.5% of the first $30
million of the average daily net assets, 2% of the next $70 million and 1.5% of
average daily net assets over $100 million on an annual basis -- IDS will assume
all expenses in excess of the limit. IDS then may bill the Fund for those
expenses in subsequent months up to the end of that fiscal year, but not after
that date.
PROPOSED INVESTMENT MANAGEMENT SERVICES AGREEMENT.__The proposed agreement
is the same as the current IMS Agreement except that: (a) the fee is based
solely on the assets of the Fund, not on assets of the GROUP and on the unique
characteristics of the Fund, including the Fund's use of the services provided
by IDS in the areas of investment research, portfolio management and investment
services and (b) in order to facilitate the implementation of a master/feeder
structure in the future, certain provisions relating to administration and
accounting services have been eliminated. IDS will continue to provide those
administration and accounting services under a separate Administrative Services
Agreement (the "Admin
B-3
<PAGE>
Agreement"). A copy of the proposed IMS Agreement reflecting these changes is
set forth as Exhibit A. The proposed fees under the IMS Agreement are shown
below:
PROPOSED FEES
<TABLE>
<CAPTION>
Assets Annual Rate At
(Billions) Each Asset Level
- ---------- ----------------------
<S> <C>
First $1 0.520%
Next $1 0.495
Next $1 0.470
Next $3 0.445
Next $3 0.420
Over $9 0.395
</TABLE>
On July 31, 1994, the Fund's net assets were approximately $1.0 billion; for
1993, approximately $1.0 billion; and for 1992, approximately $0.8 billion.
Based on the current net assets in the GROUP, the effective rate paid by the
Fund under the current IMS Agreement is 0.53% and under the proposed IMS
Agreement is 0.52%.
The Board's independent members based their evaluation of the proposed IMS
Agreement on a number of factors. The IDS annual report on investment
performance describes the total return of each of the funds in the GROUP;
reviews IDS' organizational structure and the performance of the portfolio
managers; and provides other information about IDS' qualifications to serve as
investment adviser. Periodic reports to committees of the Board reflect the
ability of IDS to actually carry out the duties of administrator which include,
among other things, pricing portfolios, maintaining accurate accounting records,
issuing timely financial and tax reports, and complying with federal and state
requirements. Terms of the proposed contract, especially the graduated fee scale
and the types of expenses paid by the Fund, were compared to those of other
investment companies deemed by a respected, independent industry authority most
comparable to the Fund. The independent members concluded that IDS has the
qualifications needed to serve the Fund as investment adviser under the IMS
Agreement. Overall the funds in the GROUP have benefited from IDS' accurate and
timely recordkeeping and, as a GROUP, a majority of funds have been 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). At
the time multiple classes are implemented, IDS, as sole shareholder of Class B
and Class Y shares, will approve the 12b-1 plan for Class B
B-4
<PAGE>
and the IMS Agreement for Class B and Class Y. The 12b-1 plan and the contracts
are discussed below. The shares you currently own will become Class A shares.
- SHAREHOLDER SERVICES.__IDS now provides shareholder services under a plan
and supplemental agreement of distribution. Because distribution services are
included, it is considered a 12b-1 plan (so called because it is authorized
under Rule 12b-1, a regulation issued under the Investment Company Act of 1940,
the "1940 Act"). The Fund currently pays a fee determined by multiplying all the
active shareholder accounts by $6. The fee is intended to help IDS defray that
portion of its distribution costs not covered by the sales charges, further
costs incurred in maintaining and improving shareholder services and in
financing the sale of shares. The fee paid to IDS in 1994 under this plan was
equal to 0.05% of net assets.
The proposed contract for shareholder services does not cover any
distribution costs and is not a 12b-1 plan. The Fund will pay 0.15% of net
assets of accounts holding Class A or Class B shares directly for the benefit of
planners and servicing agents for the services they provide shareholders. The
Fund also will pay IDS 0.025% for use in monitoring those services and providing
additional training and support to planners and servicing agents to assure the
Fund shareholders receive good service. The services provided are designed to
help shareholders consider thoughtfully their investment goals and monitor the
progress they are making in achieving those goals. The Fund will pay the service
fee only with respect to net assets of accounts actually serviced by an IDS
planner or other servicing agents. The fee will not be used to finance the sale
of shares.
In evaluating the proposed contract, the independent members of the Board
considered both the general use of such fees in the industry and the proposed
level in relation to the services provided and similar fees charged by others.
They concluded the services contemplated will provide important benefits to
shareholders and that the terms of the proposed contract are fair both to the
Fund and its shareholders. Accordingly, the Board will approve the contract for
shareholder services if shareholders approve the proposed IMS Agreement.
- 12B-1 PLAN.__IDS Financial Services Inc. ("IDSFS"), as exclusive
underwriter for the Fund, has agreed to offer multiple classes of shares for the
Fund. IDSFS will incur substantial costs on the date Class B shares (those
shares that do not pay a sales charge at the time of purchase) are sold. IDSFS
is repaid those costs by the Fund over several years out of the assets of Class
B shares.
The 12b-1 plan applies only to Class B shares. Under the plan, the Fund will
pay IDSFS 0.75% of the assets of that class each year to cover the sales costs
IDSFS incurs. After eight years, Class B shares will be converted to Class A
shares. Class B shares redeemed before being converted to Class A
B-5
<PAGE>
shares will be assessed a contingent deferred sales charge designed to
approximate the sales charge that would have been paid had the shares been held
for eight years. The sales charges for Class A and Class B shares are structured
so that investors will have approximately the same total returns at the end of
eight years regardless of which class is chosen.
The independent members concluded that the proposed contract should
contribute to positive cash flows, growing asset size, and services of enhanced
scope and quality that can be provided by a growing and profitable investment
manager and distributor. The ability to offer multiple classes of shares should
help IDS develop new markets for the Fund in light of current trends in the
investment market. The members of the Board have approved the adoption of the
multiple class structure believing that it serves the best interest of the Fund
and its shareholders. Accordingly, if the shareholders approve the proposed IMS
Agreement a new 12b-1 plan will be approved. Any changes in the 12b-1 plan will
require the approval of the Class B shareholders, if and when shares of that
class are sold.
- ADMIN AGREEMENT.__Currently, administration and accounting services are
included in the current IMS Agreement. Going forward it is proposed to cover
those services in a separate agreement. The fees under the proposed Admin
Agreement are as follows:
<TABLE>
<CAPTION>
Assets Annual Rate At
(Billions) Each Asset Level
- ---------- ----------------------
<S> <C>
First $1 0.050%
Next $1 0.045
Next $1 0.040
Next $3 0.035
Next $3 0.030
Over $9 0.025
</TABLE>
If shareholders approve the IMS Agreement, the Board will approve a new
Admin Agreement. In subsequent years, the Board could consider changing the fees
under the Admin Agreement without shareholder approval.
- TRANSFER AGENT SERVICES.__The Board reviewed the annual report provided by
IDS with respect to the scope and quality of the services it provides
shareholders as transfer agent. The report describes the standards by which IDS
measures the quality of transfer agent services and assesses how well it has met
those standards. The report describes the types of services IDS offers
(including providing shareholders with an average cost basis of their
investments in the Fund made over time) and compares them to the services
offered by others.
Under the proposed TA Agreement, the fee for the current class of
shareholders will not change. IDS will be paid a fee by the Fund for these
services out of the assets of Class A shares determined by multiplying the
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<PAGE>
number of Class A shareholder accounts by $15.50 and, from the assets of Class B
shares, by multiplying the number of Class B accounts by $16.50 and, from the
assets of Class Y shares, by multiplying the number of Class Y accounts by
$15.50. The members of the Board will approve the proposed TA Agreement if
shareholders approve the proposed IMS Agreement. The TA Agreement is reviewed
annually. It may be changed at any time by agreement between IDS and the Fund.
- DISTRIBUTION.__The distribution contract between IDSFS and the Fund
provides that IDSFS has the exclusive right to act as principal underwriter for
the Fund. The contract will be modified to reflect the changes that result from
implementation of the multiple class structure.
- BROKERAGE.__The Fund executes some portfolio transactions through American
Enterprise Investment Services Inc., a wholly owned subsidiary of IDS, at
advantageous rates. Executions of the Fund's remaining portfolio transactions
are through other brokerage firms at competitive rates which enable IDS to
receive services, such as market research, that benefit the Fund.
- CUSTODIAN.__IDS Trust Company serves as custodian for the assets of the
Fund. The contract is reviewed annually to determine that IDS Trust Company
provides required custodial services at least equal in scope and quality to
those provided by others at rates that are fair and reasonable in light of the
usual and customary charges made by others.
CURRENT AND PRO FORMA DATA.__For the last fiscal year, fees and expenses the
Fund actually paid as well as fees and expenses the Fund would have paid if the
proposed IMS Agreement, proposed Admin Agreement, proposed shareholder service
agreement and proposed TA Agreement had been in effect are shown below:
FUND EXPENSES
(AS A PERCENT OF AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
Pro Forma
Actual Class A*
---------- ----------
<S> <C> <C>
Annual Operating Expenses
IMS Agreement 0.53% 0.52%
12b-1 Plan 0.05 --
Other Expenses 0.18 0.40
Total Fund Operating Expenses 0.76 0.92
<FN>
*The figures for Class A include a small percentage of shares that will be moved
into Class Y.
</TABLE>
B-7
<PAGE>
EXAMPLE: Suppose for each year for the next 10 years, pro forma fund
expenses are as above and annual return is 5%. If you sold your shares at the
end of the following years, for each $1,000 invested, you would pay total
expenses of:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
$ 59 $ 78 $ 98 $ 158
</TABLE>
If the proposed IMS Agreement had been in effect, in the last fiscal year
the Fund would have paid $5,287,150 to IDS under that agreement, a decrease of
1.5%.
For the last fiscal year, IDS received $5,369,312 from the Fund under the
IMS Agreement, $458,958 under the 12b-1 Plan and $1,172,477 under the TA
Agreement. In addition, IDSFS, a wholly owned subsidiary of IDS, received
$23,989,780 in sales charges from sales of shares of the Fund.
BASIS OF RECOMMENDATION BY THE BOARD ON THE PROPOSED IMS AGREEMENT.__In
reaching its recommendation to shareholders, the members of the Board considered
the scope and quality of all services IDS has provided and expects to provide
under the proposed contracts. They considered IDS' present distribution
strategies, its past success and its willingness to invest additional resources
in developing new markets for the Fund. They noted IDS' commitment to compliance
with all applicable laws and regulations and the benefits IDS receives from its
relationships with the Fund. The members considered IDS' investment performance;
the Fund's expense ratio; the profitability IDS realizes from its investment
company operations; and the trend of IDS profitability from fund operations as
well as that of other investment managers. The members of the Board concluded
the services provided, measured in both scope and quality, have been above
average in the industry; investment performance for funds in the GROUP in most
years has been consistent and generally a majority of the funds perform above
the median of a group of their competitive funds; expense ratios remain in line
with other funds; and IDS' profitability is not unreasonable. Based on its
conclusions, the members of the Board have approved the proposed IMS Agreement
and recommend unanimously that the shareholders approve it.
On May 12, 1994, at a meeting called for the purpose of considering the
proposed IMS Agreement, the independent members first and then the Board as a
whole, by vote, cast in person, approved the terms of the proposed IMS
Agreement. After the second year, the proposed IMS Agreement will continue from
year to year provided continuance is approved at least annually by the Board.
The proposed IMS Agreement may be terminated without penalty either by the
Board, by IDS or by a vote of a majority of the outstanding shares of the Fund.
RECOMMENDATION AND VOTE REQUIRED.__The Board recommends that shareholders
approve the proposed IMS Agreement. Approval requires the affirmative vote of
the majority of the outstanding shares of the Fund which
B-8
<PAGE>
the 1940 Act defines as 67% or more of the shares represented at the meeting
held to consider the issue if more than 50% are represented or more than 50% of
the shares entitled to vote, whichever is less.
(4) APPROVE OR DISAPPROVE A NEW INVESTMENT POLICY
TO PERMIT THE FUND TO INVEST ALL OF
ITS ASSETS IN AN INVESTMENT COMPANY WITH
SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVES,
POLICIES AND RESTRICTIONS AS THE FUND
As discussed in Proposal 3 above, at some future time the Board may
determine that it is in the best interests of the Fund and its shareholders to
create what is known as a master/feeder fund structure. Such a structure allows
several investment companies and other investment groups, including pensions
plans and trust accounts, to have their investment portfolios managed as a
combined pool called the master fund. The purpose of the structure is to achieve
operational efficiencies.
Currently, the Fund's investment policies, including those pertaining to
investing all of its assets in one company, would prohibit the master/feeder
structure. The Board recommends that shareholders adopt the following investment
policy: "NOTWITHSTANDING ANY OF THE FUND'S OTHER INVESTMENT POLICIES, THE FUND
MAY INVEST ITS ASSETS IN AN OPEN-END MANAGEMENT INVESTMENT COMPANY HAVING
SUBSTANTIALLY THE SAME INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS AS THE
FUND FOR THE PURPOSE OF HAVING THOSE ASSETS MANAGED AS PART OF A COMBINED POOL."
Adoption of this policy will permit the Fund to invest its assets in a
master fund, without any additional vote of shareholders. The Fund's operations
and shareholder services will not be affected. Even though the assets are
invested in securities of the master fund, you will continue to receive
information about the underlying investments the same as you now receive in your
annual and semi-annual reports. Fees and expenses are not expected to increase
as a result of that change.
RECOMMENDATION AND VOTE REQUIRED.__The Board recommends that shareholders
approve the new investment policy. Approval requires the affirmative vote of 67%
or more of the shares represented at the meeting if more than 50% are
represented or more than 50% of the shares entitled to vote, whichever is less.
If the change is not approved, the Fund will continue to operate in the same
fashion as it is now operating.
(5) APPROVE OR REJECT CHANGES TO FUNDAMENTAL POLICIES
The Fund has a number of investment policies that can be changed only with
approval of shareholders. These policies are referred to as "fundamental"
policies. Policies that can be changed by the Board are called "non-
fundamental". The Board recommends changing the fundamental policies
B-9
<PAGE>
described below. These policies were established a number of years ago. New
investment strategies and new investment instruments continue to be created and
developed. If the policies are changed to non-fundamental or revised, the Fund
will have the flexibility to use those strategies and instruments promptly
without incurring the cost of shareholder meetings. Some policies were
established to conform to the requirements of federal or state law that existed
at the time. These policies do not need to be fundamental under those laws and,
if changed to non-fundamental, the Board could react to changes in the laws.
A.__PERMIT THE FUND TO 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 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. Currently, the Fund can implement similar
strategies to buying on margin or selling short. Depending on market conditions,
however, it may be preferable to use these strategies. The Fund would use these
strategies only to the extent consistent with its goal and in a conservative
fashion. 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 15% of its total
assets as collateral for loans or other purposes. If the policy is changed to
non-fundamental, when appropriate, the Board would be able to raise or lower the
maximum percentage in order to implement investment strategies or to meet other
possible needs.
C.__PERMIT THE BOARD TO CHANGE THE LIMIT ON INVESTMENTS IN ISSUERS WITH LESS
THAN THREE YEARS OF OPERATING HISTORY.__The Fund may not invest more than 5% of
its total assets in companies that have less than three 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,
such as country-specific funds 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. Currently those funds also can be acquired in private
placements. It may be appropriate to purchase private placements 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.
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<PAGE>
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 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 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.
H.__REVISE THE FUNDAMENTAL POLICY ON MAKING LOANS.__Currently, the Fund has
a fundamental policy prohibiting it from making cash loans. It is proposed to
revise the policy to state that "THE FUND WILL NOT MAKE CASH LOANS, IF THE TOTAL
COMMITMENT AMOUNT EXCEEDS 5% OF THE FUND'S TOTAL ASSETS." In certain
circumstances the Fund may make investments, such as purchasing short-term debt
instruments from banks, that may be considered cash loans. The Fund will not
make loans to affiliated companies or to any individual.
I/J.__REVISE THE FUNDAMENTAL POLICY ON INVESTING IN REAL ESTATE AND
COMMODITIES.__Currently, the Fund has a fundamental policy that states that the
Fund will not buy or sell real estate, commodities or commodity contracts,
except the Fund may enter into interest rate futures contracts and make margin
deposits on such contracts. It is proposed to separate the policy into two
parts.
I.__REAL ESTATE.__The real estate policy will be revised as follows: THE
FUND WILL NOT BUY OR SELL REAL ESTATE, UNLESS ACQUIRED AS A RESULT OF OWNERSHIP
OF SECURITIES OR OTHER INSTRUMENTS, EXCEPT THIS SHALL NOT PREVENT THE FUND FROM
INVESTING IN SECURITIES OR OTHER INSTRUMENTS BACKED BY REAL ESTATE OR SECURITIES
OF COMPANIES ENGAGED IN THE REAL ESTATE BUSINESS. The Fund does not expect to
hold real estate directly. However, it may invest in securities issued or
guaranteed by companies engaged in acquiring, constructing, financing,
developing or operating real estate projects, including real estate investment
trusts (REITs).
J.__COMMODITIES.__The commodities policy will be changed to read as follows:
THE FUND WILL NOT BUY OR SELL PHYSICAL COMMODITIES UNLESS ACQUIRED AS A RESULT
OF OWNERSHIP OF SECURITIES OR OTHER INSTRUMENTS, EXCEPT THIS SHALL NOT PREVENT
THE FUND FROM BUYING OR SELLING OPTIONS AND FUTURES CONTRACTS OR FROM INVESTING
IN
B-11
<PAGE>
SECURITIES OR OTHER INSTRUMENTS BACKED BY, OR WHOSE VALUE IS DERIVED FROM,
PHYSICAL COMMODITIES. The proposed limitation would clarify that the Fund may
invest without limit in securities or other instruments backed by, or whose
value is derived from, physical commodities.
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-12
<PAGE>
EXHIBIT C
MANAGEMENT'S DISCUSSION
FEDERAL INCOME FUND
FOR THE FISCAL YEAR ENDED JUNE 30, 1994
FROM THE PORTFOLIO MANAGER
Rising interest rates caused considerable disruption in the bond market
during the past several months. As was the case for investors in most short-term
fixed-income funds, the result was a decline in share prices.
After many months of very modest growth, the economy began showing signs of
gaining meaningful momentum in the summer of 1993. Most of the time, a stronger
economy fuels fears of higher inflation, which usually results in higher
interest rates.
That proved to be the case, as interest rates, which had been on a largely
downward path for some two years, moved slightly higher from mid-October through
November. Rates then stabilized until early February, when the Federal Reserve
began pushing rates higher to head off a potentially rapid increase in the
inflation rate. The interest rate rise continued almost unabated through April.
RATES UP, VALUES DOWN
We manage the fund to reduce fluctuations in net asset value by investing in
securities with different maturity dates and using derivative instruments. About
6% of the fund's portfolio is in inverse floaters and 2% in interest-only
instruments. Even so, as interest rates move up or down, the net asset value of
the fund will change.
Because the majority of the portfolio is invested in mortgage-backed
securities issued by agencies of the U.S. government, the level of refinancings
has a direct effect on the fund. The high level of refinancings resulted in a
higher level of mortgage prepayments. When mortgages with higher interest rates
are paid off early, interest-only instruments decline in value rapidly. In
addition, the fund must reinvest the money received from principal payments at
lower yields.
SHIFTS PROVE PRODUCTIVE
To counter the effects of the increasing interest rate and refinancing
factors, we lowered the average maturity level of the portfolio, reduced
holdings of inverse floaters, interest-only instruments and mortgage-backed
securities, and added to our position in short-term U.S. Treasury securities.
These strategies made the fund less vulnerable to interest-rate swings and, in
general, added stability to fund's net asset value. The positive effect of the
changes was evident during the final two months of the fiscal year.
As we have since the fund's inception, we continued to hold a small amount
of financial derivatives (comprising less than 8% of the portfolio).
C-1
<PAGE>
We use these securities to hedge mainly against the potentially adverse impact
of interest rate swings. In the long run, we believe derivatives help lessen net
asset value fluctuations while possibly enhancing the fund's total return.
Looking ahead, we expect a calmer bond market than we experienced during the
past 12 months. If that plays out, fixed-income funds should enjoy a less
volatile environment. With our present portfolio structure, we are in a position
to move assets efficiently and take advantage of attractive buying opportunities
as they become available.
James Snyder
C-2
<PAGE>
YOUR FUND'S LONG-TERM PERFORMANCE
FEDERAL INCOME FUND
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IDS Federal Income Lehman Treasury Lehman Aggregate
<S> <C> <C> <C>
Fund, Inc. Index Bond Index
85 9,500 10,000 10,000
86 10,531 11,830 11,821
87 11,307 12,300 12,473
88 12,304 13,159 13,487
89 13,340 14,697 15,133
90 14,441 15,689 16,320
91 15,992 17,201 18,061
92 17,430 19,447 20,599
93 19,004 21,855 23,027
94 18,901 19,392 22,725
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
(AS OF JUNE 30, 1994)
<TABLE>
<CAPTION>
Since
1 year 5 years 8/19/85
<S> <C> <C>
-5.5% +6.12% +7.40%
</TABLE>
On the chart above you can see how the fund's total return compared to two
widely cited performance indexes, Lehman Treasury Index and Lehman Aggregate
Bond Index. In comparing Federal Income Fund to the two indexes, you should take
into account the fact that the fund's performance reflects the maximum sales
charge of 5%, while such charges are not reflected in the performance of the
indexes. If you were actually to buy either individual stocks or growth mutual
funds, any sales charges that you pay would reduce your total return as well.
Assumes:
- Holding period from 9/1/85 to 6/30/94.
- Returns do not reflect taxes payable on distributions.
- Also see "Performance" in the fund's current prospectus.
- Reinvestment of all income and capital gain distributions for the fund,
with a value of $9,626.
Lehman Treasury and Aggregate Bond Indexes are generally recognized by the
mutual fund industry as providing measures of comparative performance.
C-3
<PAGE>
MANAGEMENT'S DISCUSSION
SHORT-TERM INCOME FUND
FOR THE FISCAL YEAR ENDED MAR. 31, 1994
FROM THE PORTFOLIO MANAGER
Short-term interest rates remained low throughout most of the past fiscal
year, resulting in a modest return for the fund. The net asset value declined
slightly, but was offset by the fund's dividend payments.
We continued to emphasize adjustable-rate mortgage securities and short-term
U.S. Treasury securities to provide attractive income and net asset value
stability. As the year progressed, we also raised our level of cash reserves.
This strategy was based on our outlook for higher short-term interest rates, a
trend that developed early in 1994. Higher interest rates reduce the value of
fixed-income securities. The fund's higher cash level tempered the effect of the
rate rise. Mortgage-backed securities, now about 30% of our holdings, continued
to comprise the bulk of the fund.
During the next several months, we plan to take some of the cash and invest
it in one-year U.S. Treasury notes. We expect this to improve the fund's yield,
while adding only minimal risk to the fund.
Still, the chief goal of the fund is to provide a stable net asset value. To
accomplish this in what we expect to be an environment of increasing short-term
interest rates, we will keep a relatively high cash position, while maintaining
corporate and mortgage-backed securities near their current levels.
James W. Snyder
C-4
<PAGE>
YOUR FUND'S LONG-TERM PERFORMANCE
SHORT-TERM INCOME FUND
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
IDS Strategy Merrill Lynch 1-3
Short-Term Year Lehman Treasury Index
<S> <C> <C> <C>
Income Fund Government Index
2/1/89 10,000 10,000 10,000
3/31/89 10,204 10,019 10,065
3/31/90 10,974 11,124 11,241
3/31/91 11,890 12,422 12,631
3/31/92 12,724 13,765 14,003
3/31/93 13,506 15,106 15,988
3/31/94 13,676 15,493 16,415
</TABLE>
AVERAGE ANNUAL TOTAL RETURN*
(AS OF MAR. 31, 1994)
<TABLE>
<CAPTION>
Since
1 year 5 years 2/1/89
<S> <C> <C>
-2.7% +5.8% +6.2%
</TABLE>
On the chart above you can see how the fund's total return compared to two
widely cited performance indexes, the Merrill Lynch 1-3 year Government and the
Lehman Treasury Bond Index. In comparing Strategy Short-Term Income Fund to the
two indexes, you should take into account the fact that the fund's performance
reflects the appropriate deferred sales charge, while such charges are not
reflected in the performance of the indexes. If you were actually to buy either
individual stocks or growth mutual funds, any sales charges that you pay would
reduce your total return as well.
Your investment and return value fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost. This was a period of
widely fluctuating security prices. Past performance is no guarantee of future
results.
*The 1 and 5 year total return numbers reflect payment of the applicable
deferred sales charges.
**On Feb. 1, 1989, the fund's goal was changed and the fund's name was changed
from Money Market to Short-Term Income Fund.
C-5
<PAGE>
Assumes:
- Holding period from 2/1/89 to 3/31/94.
- Returns do not reflect taxes payable on distributions.
- Also see "Performance" in the fund's current prospectus.
- Reinvestment of all income and capital gain distributions for the fund,
with a value of $3,726.
Merrill Lynch 1-3 Year Government Index is an unmanaged list of all treasury
and agency securities. The index is used here as a general measure of
performance. However, the securities used to create the index may not be
representative of the debt securities held in IDS Strategy Short-Term Income
Fund.
Lehman Treasury Bond Index is made up of a representative list of general
obligation, revenue, insured and prefunded bonds. The index is frequently used
as a general measure of tax-exempt bond market performance.
C-6
<PAGE>
EXHIBIT D
MINNESOTA BUSINESS CORPORATION ACT
SECTIONS 302A.471 AND 302A.473
Minnesota law requires that we provide you with a copy of the state law on
dissenters' rights. Notwithstanding the provisions of the law set out below, the
Division of Investment Management of the SEC has taken the position that
adherence to state appraisal procedures by a registered investment company such
as the Corporation would be a violation of Rule 22c-1 under the 1940 Act. As a
result, if any shareholder elects to exercise dissenters' rights under Minnesota
law, the Corporation intends to submit this question to a court of competent
jurisdiction. In that event, a dissenting shareholder would not receive any
payment until the end of the court proceeding.
302A 471.__RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1.__ACTIONS CREATING RIGHTS.__A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a)_An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1)_alters or abolishes a preferential right of the shares;
(2)_creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3)_alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4)_excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited through
the authorization or issuance of securities of an existing or new class or
series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to
the right to obtain payment under this section;
(b)_A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation not made in the usual or
regular course of its business, but not including a disposition in dissolution
described in section 302A.725, subdivision 2, or a disposition pursuant to an
order of a court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year after
the date of disposition;
(c)_A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
D-1
<PAGE>
(d)_A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e)_Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
SUBDIVISION 2.__BENEFICIAL OWNERS.__(a)_A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b)_The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBDIVISION 3.__RIGHTS NOT TO APPLY.__Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
SUBDIVISION 4.__OTHER RIGHTS.__The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473.__PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1.__DEFINITIONS.__(a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b)_"Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c)_"Fair value of the shares" means the value of the shares of a
corporation immediately before the effect date of the corporate action referred
to in section 302A.471, subdivision 1.
D-2
<PAGE>
(d)_"Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBDIVISION 2.__NOTICE OF ACTION.__If a corporation calls a shareholder
meeting at which any action described in section 302A.471, subdivision 1 is to
be voted upon, the notice of the meeting shall inform each shareholder of the
right to dissent and shall include a copy of section 302A.471 and this section
and a brief description of the procedure to be followed under these sections.
SUBDIVISION 3.__NOTICE OF DISSENT.__If the proposed action must be approved
by the shareholders, a shareholder who wishes to exercise dissenters' rights
must file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
SUBDIVISION 4.__NOTICE OF PROCEDURE; DEPOSIT OF SHARES.__(a) After the
proposed action has been approved by the board and, if necessary, the
shareholders, the corporation shall send to all shareholders who have complied
with subdivision 3 and to all shareholders entitled to dissent if no shareholder
vote was required, a notice that contains:
(1)_The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2)_Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3)_A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4)_A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b)_In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBDIVISION 5.__PAYMENT; RETURN OF SHARES.__(a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting
D-3
<PAGE>
shareholder who has complied with subdivisions 3 and 4 the amount the
corporation estimates to be the fair value of the shares, plus interest,
accompanied by:
(1)_The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of
the corporate action, together with the latest available interim financial
statements;
(2)_An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3)_A copy of section 302A.471 and this section, and a brief description
of the procedure to be followed in demanding supplemental payment.
(b)_The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c)_If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBDIVISION 6.__SUPPLEMENTAL PAYMENT; DEMAND.__If a dissenter believes that
the amount remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to the corporation
of the dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
SUBDIVISION 7.__PETITION; DETERMINATION.__If the corporation receives a
demand under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
D-4
<PAGE>
shall file the petition in the county in this state in which the last registered
office of the constituent corporation was located. The petition shall name as
parties all dissenters who have demanded payment under subdivision 6 and who
have not reached agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy of the petition
under the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBDIVISION 8.__COSTS; FEES; EXPENSES.__(a) The court shall determine the
costs and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary
vexatious, or not in good faith.
(b)_If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c)_The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
D-5
<PAGE>
IDS FEDERAL INCOME FUND
PROSPECTUS
AUG. 29, 1994
The goals of IDS Federal Income Fund, Inc. are to provide shareholders with
a high level of current income and safety of principal consistent with
investment in U.S. government and government agency securities.
This prospectus contains facts that can help you decide if the fund is the
right investment for you. Read it before you invest and keep it for future
reference.
Additional facts about the fund are in a Statement of Additional Information
(SAI), filed with the Securities and Exchange Commission. The SAI, dated Aug.
29, 1994, is incorporated here by reference. For a free copy contact IDS
Shareholder Service.
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
IDS Shareholder Service
P.O. Box 534
Minneapolis, MN
55440-0534
612-671-3733
TTY: 800-846-4852
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND IN BRIEF
Goal
Types of fund investments
Manager and distributor
Portfolio manager
SALES CHARGE AND FUND EXPENSES
Sales charge
Operating expenses
PERFORMANCE
Financial highlights
Total returns
Yield
Key terms
INVESTMENT POLICIES AND RISKS
Facts about investments and their risks
Valuing assets
HOW TO BUY, EXCHANGE OR SELL SHARES
How to buy shares
How to exchange shares
How to sell shares
Reductions of the sales charge
Waivers of the sales charge
SPECIAL SHAREHOLDER SERVICES
Services
Quick telephone reference
DISTRIBUTIONS AND TAXES
Dividend and capital gain distributions
Reinvestments
Taxes
HOW THE FUND IS ORGANIZED
Shares
Voting rights
Shareholder meetings
Directors and officers
Investment manager and transfer agent
Distributor
ABOUT IDS
General information
</TABLE>
2
<PAGE>
THE FUND IN BRIEF
GOALS
IDS Federal Income Fund seeks to provide shareholders with a high level of
current income and safety of principal consistent with investment in U.S.
government and government agency securities. Because any investment involves
risk, achieving this goal cannot be guaranteed. Only shareholders can change the
goal.
TYPES OF FUND INVESTMENTS
The fund is a diversified mutual fund that invests at least 65% of its total
assets in securities issued or guaranteed as to principal and interest by the
U.S. government and its agencies. Most investments are in pools of mortgage
loans. The fund also may invest in non-governmental debt securities, derivative
instruments and money market instruments. Some of the fund's investments may be
considered speculative and involve additional investment risks.
MANAGER AND DISTRIBUTOR
The fund is managed by IDS Financial Corporation (IDS), a provider of
financial services since 1894. IDS currently manages more than $36 billion in
assets for the IDS MUTUAL FUND GROUP. Shares of the fund are sold through IDS
Financial Services Inc., a wholly owned subsidiary of IDS.
PORTFOLIO MANAGER
Jim Snyder joined IDS in 1989 as an investment analyst. He was appointed
portfolio manager of this fund in 1993 after having served as associate
portfolio manager of this fund from 1992 to 1993. He also is portfolio manager
of IDS Strategy, Short-Term Income Fund and IDS Life Series Fund, Government
Securities Portfolio. Prior to joining IDS, he had been a Quantitative
Investment Analyst at Harris Trust.
SALES CHARGE AND FUND EXPENSES
SALES CHARGE
When you buy shares, you pay a maximum sales charge of 5% of the public
offering price. This charge can be reduced, depending on your total investments
in IDS funds. See "Reductions of the sales charge."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
- ----------------------------------------------------------------------
Maximum sales charge on purchases
(as a percent of offering price)...................... 5%
- ----------------------------------------------------------------------
</TABLE>
OPERATING EXPENSES
The fund pays certain expenses out of its assets; the expenses are reflected
in the fund's daily share price and dividends, and are not charged directly to
shareholder accounts. The following chart gives a projection of these expenses
- -- based on historical expenses.
3
<PAGE>
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(% of average daily net assets):
- ----------------------------------------------------------------------
Management fee.......................................... 0.53%
12b-1 fee............................................... 0.05
Other expenses.......................................... 0.18
- ----------------------------------------------------------------------
Total................................................... 0.76%
- ----------------------------------------------------------------------
</TABLE>
EXAMPLE:
<TABLE>
<S> <C> <C>
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:
1 year................................... $ 57
3 years.................................. 73
5 years.................................. 90
10 years................................. 140
</TABLE>
THIS EXAMPLE DOES NOT REPRESENT ACTUAL EXPENSES, PAST OR FUTURE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. Because the fund pays annual
distribution fees, shareholders who stay in the fund for more than 20 years may
indirectly pay an equivalent of more than a 7.25% sales charge, the maximum
permitted by the National Association of Securities Dealers.
Fund expenses include fees paid to IDS for:
- managing its portfolio, providing investment research and administrative
services
- distribution (known as 12b-1 fees, after the federal rule that authorizes
them)
- transfer agent services, including handling shareholder accounts and
records.
4
<PAGE>
PERFORMANCE
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal period ended June 30,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986**
--------- --------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE INCOME AND
CAPITAL CHANGES*
Net asset value beginning
of period................. $ 5.30 $ 5.19 $ 5.10 $ 5.00 $ 5.02 $ 5.02 $ 5.01 $ 5.07 $ 5.00
--------- --------- --------- --------- --------- --------- --------- --------- -----
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income...... .29 .32 .36 .42 .42 .40 .41 .40 .41
Net gains (losses) on
securities (both realized
and unrealized)........... (.31) .13 .09 .09 (.02) -- .01 (.03) .10
--------- --------- --------- --------- --------- --------- --------- --------- -----
Total from investment
operations............. (.02) .45 .45 .51 .40 .40 .42 .37 .51
--------- --------- --------- --------- --------- --------- --------- --------- -----
LESS DISTRIBUTIONS:
Dividends from net
investment income......... (.29) (.32) (.36) (.41) (.42) (.40) (.41) (.40) (.41)
Distributions from realized
gains..................... (.14) (.02) -- -- -- -- -- (.03) (.03)
--------- --------- --------- --------- --------- --------- --------- --------- -----
Total distributions...... (.43) (.34) (.36) (.41) (.42) (.40) (.41) (.43) (.44)
--------- --------- --------- --------- --------- --------- --------- --------- -----
Net asset value, end of
period.................... $ 4.85 $ 5.30 $ 5.19 $ 5.10 $ 5.00 $ 5.02 $ 5.02 $ 5.01 $ 5.07
--------- --------- --------- --------- --------- --------- --------- --------- -----
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in millions)............. $ 1,025 $ 1,025 $ 834 $ 397 $ 234 $ 183 $ 183 $ 181 $ 202
Ratio of expenses to
average daily net
assets.................... .76% .77% .79% .80% .82% .79% .80% .86% .73%
Ratio of net income to
average daily net
assets.................... 5.64% 6.03% 6.93% 8.20% 8.53% 8.15% 8.24% 7.81% 9.09%***
Portfolio turnover rate
(excluding short-term
securities)............... 304% 227% 104% 52% 104% 81% 143% 36% 108%
Total return+.............. (0.5%) 9.0% 9.0% 10.8% 8.3% 8.4% 8.8% 7.4% 10.5%++
</TABLE>
* For a share outstanding throughout the period. Rounded to the nearest cent.
** Commencement of operations. Period from Aug. 19, 1985 to June 30, 1986.
*** Adjusted to an annual basis.
+ Total return does not reflect payment of a sales charge.
++ For the fiscal period ended June 30, 1986, the annualized total return is
12.2%.
The information in this table has been audited by KPMG Peat Marwick,
independent auditors. The independent auditors' report and additional
information about the performance of the fund is contained in the fund's annual
report which, if not included with this prospectus, may be obtained without
charge.
5
<PAGE>
TOTAL RETURNS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS as of June 30, 1994
Purchase 1 year 5 years Since
made ago ago inception*
- ----------------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
IDS Federal Income Fund.................. -5.5% +6.1% +7.5%
Lehman Aggregate
Bond Index............................. -1.3% +8.5% +9.7%
Lehman Treasury Bond
Index.................................. -1.3% +8.3% +9.2%
</TABLE>
*Aug. 19, 1985
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURNS as of June 30, 1994
Purchase 1 year 5 years Since
made ago ago inception*
- ----------------------------------------- ----------- ------------ -----------
<S> <C> <C> <C>
IDS Federal Income Fund.................. -5.5% +34.6% +88.3%
Lehman Aggregate
Bond Index............................. -1.3% +50.2% +127.3%
Lehman Treasury Bond
Index.................................. -1.3% +49.1% +119.1%
</TABLE>
*Aug. 19, 1985
These examples show total returns from hypothetical investments in the fund.
These returns are compared to those of popular indexes for the same periods.
For purposes of calculation, information about the fund assumes a sales
charge of 5%, makes no adjustments for taxes an investor may have paid on the
reinvested income and capital gains, and covers a period of widely fluctuating
securities prices. Returns shown should not be considered a representation of
the fund's future performance.
The fund invests primarily in debt securities that may be different from
those in the indexes. The indexes reflect reinvestment of all distributions and
changes in market prices, but exclude brokerage commissions or other fees.
Lehman Aggregate Bond Index is made up of a representative list of
government and corporate bonds as well as asset-backed securities and
mortgage-backed securities. The index is frequently used as a general measure of
bond market performance. However, the securities used to create the index may
not be representative of the bonds held in the fund.
Lehman Treasury Bond Index is made up of a representative list of government
bonds which include all publicly issued obligations of the U.S. Treasury. The
index is frequently used as a general measure of bond market performance.
However, the securities used to create the index may not be representative of
the debt securities held in the fund.
6
<PAGE>
YIELD
The fund's annualized yield for the 30-day period ended June 30, 1994, was
5.37%.
The fund calculates this 30-day annualized yield by dividing:
- net investment income per share deemed earned during a 30-day
period by
- the public offering price per share on the last day of the
period, and
- converting the result to a yearly equivalent figure.
The fund's yield varies from day to day, mainly because share values and
offering prices (which are calculated daily) vary in response to changes in
interest rates. Net investment income normally changes much less in the short
run. Thus, when interest rates rise and share values fall, yield tends to rise.
When interest rates fall, yield tends to follow.
Past yields should not be considered an indicator of future yields.
KEY TERMS
NET ASSET VALUE (NAV) -- Value of a single fund share. It is the total
market value of all of a fund's investments and other assets, less any
liabilities, divided by the number of shares outstanding.
The NAV is the price you receive when you sell your shares. It usually
changes from day to day, and is calculated at the close of business, normally 3
p.m. Central time, each business day (any day the New York Stock Exchange is
open). NAV generally declines as interest rates increase and rises as interest
rates decline.
PUBLIC OFFERING PRICE -- Price at which you buy shares. It is the NAV plus
the sales charge. NAVs and public offering prices of IDS funds are listed each
day in major newspapers and financial publications.
INVESTMENT INCOME -- Dividends and interest earned on securities held by the
fund.
CAPITAL GAINS OR LOSSES -- Increase or decrease in value of the securities
the fund holds. Gains or losses are realized when securities that have increased
or decreased in value are sold. A fund also may have unrealized gains or losses
when securities increase or decrease in value but are not sold.
DISTRIBUTIONS -- Payments to shareholders of two types: investment income
(dividends) and realized net long-term capital gains (capital gains
distributions).
TOTAL RETURN -- Sum of all of your returns for a given period, assuming you
reinvest all distributions. Calculated by taking the total value of shares you
own at the end of the period (including shares acquired by reinvestment), less
the price of shares you purchased at the beginning of the period.
AVERAGE ANNUAL TOTAL RETURN -- The annually compounded rate of return over a
given time period (usually two or more years) -- total return for the period
converted to an equivalent annual figure.
7
<PAGE>
YIELD -- Net investment income earned per share for a specified time period,
divided by the offering price at the end of the period.
INVESTMENT POLICIES AND RISKS
The fund invests primarily in securities issued or guaranteed as to
principal and interest by the U.S. government, its agencies and
instrumentalities. Under normal market conditions, at least 65% of the fund's
total assets will be invested in such securities. Although the fund may invest
in any U.S. government securities, it is anticipated that most of the portfolio
will consist of U.S. government securities representing part ownership of pools
of mortgage loans.
The various types of investments the portfolio manager uses to achieve
investment performance are described in more detail in the next section and in
the SAI.
FACTS ABOUT INVESTMENTS AND THEIR RISKS
GOVERNMENT SECURITIES: U.S. Treasury bonds, notes and bills, and securities
including mortgage pass-through certificates of the Government National Mortgage
Association (GNMA), are guaranteed by the United States. Other U.S. government
securities are issued or guaranteed by federal agencies or government-sponsored
enterprises but are not direct obligations of the United States. These include
securities supported by the right of the issuer to borrow from the Treasury,
such as obligations of Federal Home Loan Mortgage Corporation (FHLMC) and
Federal National Mortgage Association (FNMA) bonds. Because the U.S. government
is not obligated to provide financial support to its instrumentalities, the fund
will invest only in securities issued by those instrumentalities where the
investment manager is satisfied the credit risk is minimal.
MORTGAGE-BACKED SECURITIES: A mortgage pass-through certificate that
represents an interest in a pool, or group, of mortgage loans assembled by GNMA,
FNMA, or FHLMC or non-governmental entities. In pass-through certificates, both
principal and interest payments, including prepayments, are passed through to
the holder of the certificate. Prepayments on underlying mortgages result in a
loss of anticipated interest, and the actual yield (or total return) to the
fund, which is influenced by both stated interest rates and market conditions,
may be different than the quoted yield on the certificates. The fund may also
invest in non-governmental mortgage-related securities and debt securities, such
as bonds, debentures and collateralized mortgage obligations secured by
mortgages on commercial real estate or residential rental properties, provided
such securities are rated A or better by Moody's Investors Service, Inc. or
Standard & Poor's Corporation or, if not rated, are of equivalent investment
quality as determined by the fund's investment
8
<PAGE>
manager. Some U.S. government securities may be purchased on a "when-issued"
basis, which means that it may take as long as 45 days after the purchase before
the securities are delivered to the fund.
The fund may invest in stripped mortgage-backed securities. Generally, there
are two classes of stripped mortgage-backed securities: Interest Only (IO) and
Principal Only (PO). IOs entitle the holder to receive distributions consisting
of all or a portion of the interest on the underlying pool of mortgage loans or
mortgage-backed securities. POs entitle the holder to receive distributions
consisting of all or a portion of the principal of the underlying pool of
mortgage loans or mortgage-backed securities. The cash flows and yields on IOs
and POs are extremely sensitive to the rate of principal payments (including
prepayments) on the underlying mortgage loans or mortgage-backed securities. A
rapid rate of principal payments may adversely affect the yield to maturity of
IOs. A slow rate of principal payments may adversely affect the yield to
maturity of POs. If prepayments of principal are greater than anticipated, an
investor may incur substantial losses. If prepayment of principal are slower
than anticipated, the yield on a PO will be affected more severely than would be
the case with a traditional mortgage-backed security.
The fund may purchase mortgage-backed security (MBS) put spread options and
write covered MBS call spread options. MBS spread options are based upon the
changes in the price spread between a specified mortgage-backed security and a
like-duration Treasury security. MBS spread options are traded in the OTC market
and are of short duration, typically one to two months. The fund would buy or
sell covered MBS call spread options in situations where mortgage-backed
securities are expected to under perform like-duration Treasury securities.
DEBT SECURITIES: The price of an investment-grade bond fluctuates as
interest rates change or if its credit rating is upgraded or downgraded.
Securities that are subsequently downgraded in quality may continue to be held
by the fund and will be sold only if the fund's portfolio manager believes it is
advantageous to do so.
DERIVATIVE INSTRUMENTS: The portfolio manager may use derivative
instruments in addition to securities to achieve investment performance.
Derivative instruments include futures, options and forward contracts. Such
instruments may be used to maintain cash reserves while remaining fully
invested, to offset anticipated declines in values of investments, to facilitate
trading, to reduce transaction costs, or to pursue higher investment returns.
Derivative instruments are characterized by requiring little or no initial
payment and a daily change in price based on or derived from a security, a
currency, a group of securities or currencies, or an index. A number of
strategies or combination of instruments can be used to achieve the desired
investment performance characteristics. A small change in the value of the
underlying security, currency or index will cause a sizable gain or loss in the
9
<PAGE>
price of the derivative instrument. Derivative instruments allow the portfolio
manager to change the investment performance characteristics very quickly and at
lower costs. Risks include losses of premiums, rapid changes in prices, defaults
by other parties, and inability to close such instruments. The fund will use
derivative instruments only to achieve the same investment performance
characteristics it could achieve by directly holding those securities and
currencies permitted under the investment policies. The fund will designate cash
or appropriate liquid assets to cover its portfolio obligations. No more than 5%
of the fund's net assets can be used at any one time for good faith deposits on
futures and premiums for options on futures that do not offset existing
investment positions. For further information, see the options and futures
appendix in the SAI.
SECURITIES AND DERIVATIVE INSTRUMENTS THAT ARE ILLIQUID: Illiquid means the
security or derivative instrument cannot be sold quickly in the normal course of
business. Some investments cannot be resold to the U.S. public because of their
terms or government regulations. All securities and derivative instruments,
however, can be sold in private sales, and many may be sold to other
institutions and qualified buyers or on foreign markets. The portfolio manager
will follow guidelines established by the board of directors and consider
relevant factors such as the nature of the security and the number of likely
buyers when determining whether a security is illiquid. No more than 10% of the
fund's net assets will be held in securities and derivative instruments that are
illiquid.
MONEY MARKET INSTRUMENTS: Short-term debt securities rated in the top two
grades are used to meet daily cash needs and at various times to hold assets
until better investment opportunities arise. Generally less than 25% of the
fund's net assets are in these money market instruments. However, for temporary
defensive purposes these investments could exceed that amount for a limited
period of time.
The investment policies described above may be changed by the board of
directors.
LENDING PORTFOLIO SECURITIES: The fund may lend its securities to earn
income so long as borrowers provide collateral equal to the market value of the
loans. The risks are that borrowers will not provide collateral when required or
return securities when due.
Unless shareholders approve otherwise, loans may not exceed 30% of the
fund's net assets.
The various types of investments the portfolio manager uses to achieve
investment performance are described in more detail in the next section and in
the SAI.
VALUING ASSETS
- Securities (except bonds) and assets with available market values are
valued on that basis.
10
<PAGE>
- Securities maturing in 60 days or less are valued at amortized cost.
- Bonds and assets without readily available market values are valued
according to methods selected in good faith by the board of directors.
HOW TO BUY, EXCHANGE OR SELL SHARES
HOW TO BUY SHARES
If you're investing in this fund for the first time, you'll need to set up
an account. Your financial planner will help you fill out and submit an
application. Once your account is set up, you can choose among several
convenient ways to invest.
IMPORTANT: When opening an account, you must provide IDS with your correct
Taxpayer Identification Number (Social Security or Employer Identification
number). See "Distributions and taxes."
When you buy shares for a new or existing account, the price you pay per
share is determined at the close of business on the day your investment is
received and accepted at the Minneapolis headquarters.
PURCHASE POLICIES:
- Investments must be received and accepted in the Minneapolis headquarters
on a business day before 3 p.m. Central time to be included in your
account that day and to receive that day's share price. Otherwise your
purchase will be processed the next business day and you will pay the next
day's share price.
- The minimums allowed for investment may change from time to time.
- Wire orders can be accepted only on days when your bank, IDS, the fund and
Norwest Bank Minneapolis are open for business.
- Wire purchases are completed when wired payment is received and the fund
accepts the purchase.
- IDS and the fund are not responsible for any delays that occur in wiring
funds, including delays in processing by the bank.
- You must pay any fee the bank charges for wiring.
- The fund reserves the right to reject any application for any reason.
11
<PAGE>
THREE WAYS TO INVEST
1 BY REGULAR ACCOUNT
<TABLE>
<S> <C> <C>
Send your check and MINIMUM AMOUNTS
application
(or your name and account Initial investment: $ 2,000
number if you have an Additional investments: $ 100
established account) to: Account balances: $ 300*
IDS Financial Services Inc.
P.O. Box 74
Minneapolis, MN 55440-0074
Your financial planner will Qualified retirement
help you with this process. accounts: none
</TABLE>
2 BY SCHEDULED INVESTMENT PLAN
<TABLE>
<S> <C> <C>
Contact your financial MINIMUM AMOUNTS
planner
to set up one of the
following Initial investment: $ 100
scheduled plans: Additional investments: $ 100/mo
- automatic payroll
deduction Account balances: none
- bank authorization
- direct deposit of Social
Security check
- other plan approved by (on active plans of
the fund monthly payments)
</TABLE>
3 BY WIRE
<TABLE>
<S> <C>
If you have an established
account, you may wire money If this information is not
to: included, the order may be
rejected and all money received
by the fund, less
any costs the fund or IDS
incurs,
Norwest Bank Minneapolis will be returned promptly.
Routing No. 091000019 MINIMUM AMOUNTS
Minneapolis, MN Each wire investment: $1,000
Attn: Domestic Wire Dept.
Give these instructions:
Credit IDS Account #00-30-015
for personal account # (your
account number) for (your
name).
</TABLE>
*If your account balance falls below $300, IDS will ask you in writing to bring
it up to $300 or establish a scheduled investment plan. If you don't do so
within 30 days, your shares can be redeemed and the proceeds mailed to you.
12
<PAGE>
HOW TO EXCHANGE SHARES
You can exchange your shares of the fund at no charge for shares of any
other publicly offered fund in the IDS MUTUAL FUND GROUP available in your
state. For complete information, including fees and expenses, read the
prospectus carefully before exchanging into a new fund.
If your exchange request arrives at the Minneapolis headquarters before the
close of business, your shares will be redeemed at the net asset value set for
that day. The proceeds will be used to purchase new fund shares the same day.
Otherwise, your exchange will take place the next business day at that day's net
asset value.
For tax purposes, an exchange represents a sale and purchase and may result
in a gain or loss. However, you cannot create a tax loss (or reduce a taxable
gain) by exchanging from the fund within 91 days of your purchase. For further
explanation, see the SAI.
HOW TO SELL SHARES
You can sell (redeem) your shares at any time. IDS Shareholder Service will
mail payment within seven days after receiving your request.
When you sell shares, the amount you receive may be more or less than the
amount you invested. Your shares will be redeemed at net asset value at the
close of business on the day your request is accepted at the Minneapolis
headquarters. If your request arrives after the close of business, the price per
share will be the net asset value at the close of business on the next business
day.
A redemption is a taxable transaction. If the fund's net asset value when
you sell shares is more or less than the cost of your shares, you will have a
gain or loss, which can affect your tax liability. Redeeming shares held in an
IRA or qualified retirement account may subject you to certain federal taxes,
penalties and reporting requirements. Consult your tax adviser.
13
<PAGE>
TWO WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES
1 BY LETTER
<TABLE>
<S> <C>
REGULAR MAIL: Include in your letter:
IDS Shareholder Service
Attn: Redemptions - the name of the fund(s)
P.O. Box 534 - your account number(s) (for
Minneapolis, MN exchanges, both funds must be
55440-0534 registered in the same ownership)
- your Taxpayer Identification Number
(TIN)
EXPRESS MAIL:
IDS Shareholder Service - the dollar amount or number of
Attn: Redemptions shares you want to exchange or sell
733 Marquette Ave. - signature of all registered account
Minneapolis, MN 55402 owners
- for redemptions, indicate how you
want your sales proceeds delivered
to you
- any paper certificates of shares
you hold
</TABLE>
2 BY PHONE
<TABLE>
<S> <C>
- The fund and IDS will honor any
IDS Telephone telephone exchange or redemption
Transaction Service: request believed to be authentic
800-437-3133 or and will use reasonable procedures
612-671-3800 to confirm that they are. This
includes asking identifying
questions and tape recording calls.
So long as reasonable procedures
are followed, neither the fund nor
IDS will be liable for any loss
resulting from fraudulent requests.
- Phone exchange and redemption
privileges automatically apply to
all accounts except custodial,
corporate or qualified retirement
accounts unless you request these
privileges NOT apply by writing IDS
Shareholder Service. Each
registered owner must sign the
request.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
- IDS answers phone requests
promptly, but you may experience
delays when call volume is high. If
you are unable to get through, use
mail procedure as an alternative.
- Phone privileges may be modified or
discontinued at any time.
MINIMUM AMOUNT
Redemption: $100
MAXIMUM AMOUNT
Redemption: $50,000
</TABLE>
EXCHANGE POLICIES:
- You may make up to three exchanges within any 30-day period, with each
limited to $300,000. These limits do not apply to scheduled exchange
programs and certain employee benefit plans or other arrangements through
which one shareholder represents the interests of several. Exceptions may
be allowed with pre-approval of the fund.
- If your exchange creates a new account, it must satisfy the minimum
investment amount for new purchases.
- Once we receive your exchange request, you cannot cancel it.
- Shares of the new fund may not be used on the same day for another
exchange.
- If your shares are pledged as collateral, the exchange will be delayed
until written approval is obtained from the secured party.
- IDS and the fund reserve the right to reject any exchange, limit the
amount, or modify or discontinue the exchange privilege, to prevent abuse
or adverse effects on the fund and its shareholders. For example, if
exchanges are too numerous or too large, they may disrupt the fund's
investment strategies or increase its costs.
REDEMPTION POLICIES:
- A "change of mind" option allows you to change your mind after requesting
a redemption and to use all or part of the proceeds to buy new shares in
the same account at the net asset value, rather than the offering price on
the date of a new purchase. To do so, send a written request within 30
days of the date your redemption request was received. Include your
account number and mention this option. This privilege may be limited or
withdrawn at any time, and it may have tax consequences.
- A telephone redemption request will not be allowed within 30 days of a
phoned-in address change.
IMPORTANT: If you request a redemption of shares you recently purchased by
a check or money order that is not guaranteed, the fund will wait
15
<PAGE>
for your check to clear. Please expect a minimum of 10 days from the date of
purchase before IDS mails a check to you. (A check may be mailed earlier if your
bank provides evidence satisfactory to the fund and IDS that your check has
cleared.)
THREE WAYS TO RECEIVE PAYMENT WHEN YOU SELL SHARES
1 BY REGULAR OR EXPRESS MAIL
- Mailed to the address on record.
- Payable to names listed on the account.
NOTE: The express mail delivery charges you pay will vary depending on the
courier you select.
2 BY WIRE
- Minimum wire redemption: $1,000.
- Request that money be wired to your bank.
- Bank account must be in the same ownership as the IDS account.
NOTE: Pre-authorization required. For instructions, contact your financial
planner or IDS Shareholder Service.
3 BY SCHEDULED PAYOUT PLAN
- Minimum payment: $50.
- Contact your financial planner or IDS Shareholder Service to set up
regular payments to you on a monthly, bimonthly, quarterly, semiannual or
annual basis.
- Buying new shares while under a payout plan may be disadvantageous because
of sales charges.
REDUCTIONS OF THE SALES CHARGE
You pay a 5% sales charge on the first $50,000 of your total investment and
less on investments after the first $50,000:
<TABLE>
<CAPTION>
Sales charge as a percent
of:*
---------------------------
Public
offering Net amount
Total investment price invested
- ---------------------------------------------------- ------------- ------------
<S> <C> <C>
Up to $50,000....................................... 5.0% 5.26%
Next $50,000........................................ 4.5 4.71
Next $150,000....................................... 4.0 4.17
Next $250,000....................................... 3.0 3.09
Next $500,000....................................... 2.0 2.04
Next $2,000,000..................................... 1.0 1.01
More than $3,000,000................................ 0.5 0.50
</TABLE>
*To calculate the actual sales charge on an investment greater than $50,000,
amounts for each applicable increment must be totaled. See the SAI.
Your sales charge may be reduced, depending on the totals of:
16
<PAGE>
- the amount you are investing in this fund now,
- the amount of your existing investment in this fund, if any, and
- the amount you and your immediate family (spouse or unmarried children
under 21) are investing or have in other funds in the IDS MUTUAL FUND
GROUP that carry a sales charge.
Other policies that affect your sales charge:
- IDS Cash Management Fund and IDS Tax-Free Money Fund do not carry sales
charges. However, you may count investments in these funds if you acquired
shares in them by exchanging shares from IDS funds that carry sales
charges.
- IRA purchases or other employee benefit plan purchases made through a
payroll deduction plan or through a plan sponsored by an employer,
association of employers, employee organization or other similar entity,
may be added together to reduce sales charges for all shares purchased
through that plan.
For more details, see the SAI.
WAIVERS OF THE SALES CHARGE
Sales charges do not apply to:
- Current or retired trustees, directors, officers or employees of the fund
or IDS or its subsidiaries, their spouses and unmarried children under 21.
- Current or retired IDS planners, their spouses and unmarried children
under 21.
- Qualified employee benefit plans* if the plan:
- has at least $1 million invested in funds of the IDS MUTUAL FUND GROUP;
or
- has 500 or more participants; or
- uses a daily transfer recordkeeping service offering participants daily
access to IDS funds.
(Participants in certain qualified plans for which the initial sales charge
is waived may be subject to a deferred sales charge of up to 4% on certain
redemptions. For more information, see the SAI.)
- Trust companies or similar institutions, and charitable organizations that
meet the definition in Section 501(c)(3) of the Internal Revenue Code.*
These must have at least $1 million invested in funds of the IDS MUTUAL
FUND GROUP.
- Purchases made within 30 days after certain redemptions. A waiver applies
up to the amount redeemed from:
- an IDS product in a qualified plan subject to a deferred sales charge;
or
*Eligibility must be determined in advance by IDS. To do so, contact your
financial planner.
17
<PAGE>
- a qualified plan where IDS Trust acts as trustee and/or recordkeeper; or
- IDS Strategy Fund.
Send the fund a written request along with your payment, indicating the
amount of the redemption and the date on which it occurred.
- Purchases made with dividend or capital gain distributions from another
fund in the IDS MUTUAL FUND GROUP that has a sales charge.
SPECIAL SHAREHOLDER SERVICES
SERVICES
To help you track and evaluate the performance of your investments, IDS
provides these services:
QUARTERLY STATEMENTS listing all of your holdings and transactions during
the previous three months.
YEARLY TAX STATEMENTS featuring average-cost-basis reporting of capital
gains or losses if you redeem your shares along with distribution information --
which simplifies tax calculations.
A PERSONALIZED MUTUAL FUND PROGRESS REPORT detailing returns on your initial
investment and cash-flow activity in your account. It calculates a total return
to reflect your individual history in owning fund shares. This report is
available from your financial planner.
QUICK TELEPHONE REFERENCE
IDS TELEPHONE TRANSACTION SERVICE
Redemptions and exchanges, dividend payments or reinvestments and automatic
payment arrangements
National/Minnesota: 800-437-3133
Mpls./St. Paul area: 671-3800
IDS SHAREHOLDER SERVICE
Fund performance, objectives and account inquiries
612-671-3733
TTY SERVICE
For the hearing impaired
800-846-4852
IDS INFOLINE
Automated account information (TouchToneR phones only), including current fund
prices and performance, account values and recent account transactions
National/Minnesota: 800-272-4445
Mpls./St. Paul area: 671-1630
18
<PAGE>
DISTRIBUTIONS AND TAXES
The fund distributes to shareholders investment income and capital gains. It
does so to qualify as a regulated investment company and to avoid paying
corporate income and excise taxes. Dividend and capital gains distributions will
have tax consequences you should know about.
DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS
The fund distributes its net investment income (dividends and interest
earned on securities held by the fund, less operating expenses) to shareholders
of record monthly. Short-term capital gains distributed are included in net
investment income. Net realized capital gains, if any, from selling securities
are distributed at the end of the calendar year. Before they're distributed, net
capital gains are included in the value of each share. After they're
distributed, the value of each share drops by the per-share amount of the
distribution. (If your distributions are reinvested, the total value of your
holdings will not change.)
REINVESTMENTS
Dividends and capital gain distributions are automatically reinvested in
additional shares of the fund, unless:
- you request the fund in writing or by phone to pay distributions to you in
cash, or
- you direct the fund to invest your distributions in any publicly available
IDS fund for which you've previously opened an account.
You pay no sales charge on shares purchased through reinvestment from this
fund into any IDS fund. The reinvestment price is the net asset value at close
of business on the day the distribution is paid. (Your quarterly statement from
IDS will confirm the amount invested and the number of shares purchased.)
If you choose cash distributions, you will receive only those declared after
your request has been processed.
If the U.S. Postal Service cannot deliver the checks for the cash
distributions, we will reinvest the checks into your account at the then-current
net asset value and make future distributions in the form of additional shares.
TAXES
Distributions are subject to federal income tax. In certain states, fund
distributions, to the extent they consist of interest from securities of the
U.S. government and certain of its agencies or instrumentalities, may be exempt
from state and local taxes. Interest from obligations which are merely
guaranteed by the U.S. government or one of its agencies, such as GNMA
certificates, is not entitled to this exemption. Distributions are taxable in
the year the fund pays them regardless of whether you take them in cash or
reinvest them.
19
<PAGE>
Each January, IDS sends you a statement showing the kinds and total amount
of all distributions you received during the previous year. You must report all
distributions on your tax returns, even if they are reinvested in additional
shares.
"Buying a dividend" creates a tax liability. This means buying shares
shortly before a net investment income or a capital gain distribution. You pay
the full pre-distribution price for the shares, then receive a portion of your
investment back as a distribution, which is taxable.
Redemptions and exchanges subject you to a tax on any capital gain. If you
sell shares for more than their cost, the difference is a capital gain. Your
gain may be either short term (for shares held for one year or less) or long
term (for shares held for more than one year).
YOUR TAXPAYER IDENTIFICATION NUMBER (TIN) IS IMPORTANT. As with any
financial account you open, you must list your current and correct Taxpayer
Identification Number (TIN) -- either your Social Security or Employer
Identification number. The TIN must be certified under penalties of perjury on
your application when you open an account at IDS.
If you don't provide the TIN to IDS, or the TIN you report is incorrect, you
could be subject to backup withholding of 31% of taxable distributions and
proceeds from certain sales and exchanges. You also could be subject to further
penalties, such as:
- a $50 penalty for each failure to supply your correct TIN
- a civil penalty of $500 if you make a false statement that results in no
backup withholding
- criminal penalties for falsifying information
You also could be subject to backup withholding because you failed to report
interest or dividends on your tax return as required.
20
<PAGE>
HOW TO DETERMINE THE CORRECT TIN
<TABLE>
<CAPTION>
USE THE SOCIAL SECURITY OR
EMPLOYER IDENTIFICATION NUMBER
FOR THIS TYPE OF ACCOUNT: OF:
- -------------------------------- --------------------------------
<S> <C>
Individual or joint account The individual or first person
listed on the account
Custodian account of a minor The minor
(Uniform Gift/Transfer to Minors
Act)
A living trust The grantor-trustee (the person
who puts the money into the
trust)
An irrevocable trust, pension The legal entity (not the
trust or estate personal representative or
trustee, unless no legal entity
is designated in the account
title)
Sole proprietorship or The owner or partnership
partnership
Corporate The corporation
Association, club or tax-exempt The organization
organization
</TABLE>
For details on TIN requirements, ask your financial planner or local IDS
office for federal Form W-9, "Request for Taxpayer Identification Number and
Certification."
IMPORTANT: This information is a brief and selective summary of certain
federal tax rules that apply to this fund. Tax matters are highly individual and
complex, and you should consult a qualified tax adviser about your personal
situation.
HOW THE FUND IS ORGANIZED
The fund is a diversified, open-end management investment company, as
defined in the Investment Company Act of 1940. It was incorporated on March 12,
1985 in Minnesota. The fund headquarters are at 901 S. Marquette Ave., Suite
2810, Minneapolis, MN 55402-3268.
SHARES
The fund is owned by its shareholders. All shares issued by the fund are of
the same class -- capital stock. Par value is 1 cent per share. Both full and
fractional shares can be issued.
The fund no longer issues stock certificates.
21
<PAGE>
VOTING RIGHTS
As a shareholder, you have voting rights over the fund's management and
fundamental policies. You are entitled to one vote for each share you own.
SHAREHOLDER MEETINGS
The fund does not hold annual shareholder meetings. However, the directors
may call meetings at their discretion, or on demand by holders of 10% or more of
the outstanding shares, to elect or remove directors.
DIRECTORS AND OFFICERS
Shareholders elect a board of directors who oversee the operations of the
fund and choose its officers. Its officers are responsible for day-to-day
business decisions based on policies set by the board. The board has named an
executive committee that has authority to act on its behalf between meetings.
The directors also serve on the boards of all of the other funds in the IDS
MUTUAL FUND GROUP, except for Mr. Dudley, who is a director of all publicly
offered funds.
DIRECTORS AND OFFICERS OF THE FUND
PRESIDENT AND INTERESTED DIRECTOR
WILLIAM R. PEARCE
President of all funds in the IDS MUTUAL FUND GROUP.
INDEPENDENT DIRECTORS
LYNNE V. CHENEY
Distinguished fellow, American Enterprise Institute for Public Policy Research.
ROBERT F. FROEHLKE
Former president of all funds in the IDS MUTUAL FUND GROUP.
DONALD M. KENDALL
Former chairman and chief executive officer, PepsiCo, Inc.
MELVIN R. LAIRD
Senior counsellor for national and international affairs, The Reader's Digest
Association, Inc.
LEWIS W. LEHR
Former chairman and chief executive officer, Minnesota Mining and Manufacturing
Company (3M).
EDSON W. SPENCER
Former chairman and chief executive officer, Honeywell, Inc.
22
<PAGE>
WHEELOCK WHITNEY
Chairman, Whitney Management Company.
INTERESTED DIRECTOR WHO IS A PARTNER IN A LAW FIRM THAT HAS REPRESENTED AN IDS
SUBSIDIARY
ANNE P. JONES
Partner, law firm of Sutherland, Asbill & Brennan.
INTERESTED DIRECTORS WHO ARE OFFICERS AND/OR EMPLOYEES OF IDS
WILLIAM H. DUDLEY
Executive vice president, IDS.
DAVID R. HUBERS
President and chief executive officer, IDS.
JOHN R. THOMAS
Senior vice president, IDS.
OTHER OFFICER
LESLIE L. OGG
Vice president of all funds in the IDS MUTUAL FUND GROUP and general counsel and
treasurer of the publicly offered funds.
Refer to the SAI for the directors' and officers' biographies.
INVESTMENT MANAGER AND TRANSFER AGENT
The fund pays IDS for managing its portfolio, providing administrative
services and serving as transfer agent (handling shareholder accounts).
Under its Investment Management and Services Agreement, IDS determines which
securities will be purchased, held or sold (subject to the direction and control
of the fund's board of directors). For this services the fund pays IDS a
two-part fee.
The first part is based on the combined average daily net assets of all
funds in the IDS MUTUAL FUND GROUP, as follows:
<TABLE>
<CAPTION>
NET ASSETS OF
IDS MUTUAL FUND GROUP* ANNUAL FEE
- ---------------------------- ---------------------
<S> <C>
First $5 billion 0.46%
Each additional $5 billion Decreasing
percentages
More than $50 billion 0.32%
</TABLE>
* Includes all funds except the money market funds.
The second part is equal to 0.13% of the fund's average daily net assets
during the fiscal year.
23
<PAGE>
For the fiscal year ended June 30, 1994, the fund paid IDS a total
investment management fee of 0.53% of its average daily net assets. Under the
Agreement, the fund also pays taxes, brokerage commissions and nonadvisory
expenses.
In addition, under a separate Transfer Agency Agreement, IDS maintains
shareholder accounts and records. The fund pays IDS an annual fee of $15.50 per
shareholder account for this service.
DISTRIBUTOR
The fund sells shares through IDS Financial Services Inc., a wholly owned
subsidiary of IDS, under a Distribution Agreement. Financial planners
representing IDS Financial Services Inc. provide information to investors about
individual investment programs, the fund and its operations, new account
applications, exchange and redemption requests. The cost of these services is
paid partially by the fund's sales charge.
Portions of sales charges may be paid to securities dealers who have sold
the fund's shares, or to banks and other financial institutions. The proceeds
paid to others range from 0.8% to 4% of the fund's offering price depending on
the monthly sales volume.
To help defray costs not covered by sales charges, including costs for
marketing, sales administration, training, overhead, direct marketing programs,
advertising and related functions, the fund pays IDS a 12b-1 fee. This fee is
paid under a Plan and Supplemental Agreement of Distribution that follows the
terms of Rule 12b-1 of the Investment Company Act of 1940 (and a Securities and
Exchange Commission order). Under this Agreement, the fund pays IDS $6 per
shareholder account per year. The total 12b-1 fee paid by the fund for the
fiscal year ended June 30, 1994 was 0.05% of its average daily net assets. This
fee will not cover all of the costs incurred by IDS.
Total management and distribution fees and expenses paid by the fund in the
fiscal year ended June 30, 1994 were 0.76% of its average daily net assets.
Total fees and expenses (excluding taxes and brokerage commissions) cannot
exceed the most restrictive applicable state expense limitation.
ABOUT IDS
GENERAL INFORMATION
The IDS family of companies offers not only mutual funds but also insurance,
annuities, investment certificates and a broad range of financial management
services.
Besides managing investments for all publicly offered funds in the IDS
MUTUAL FUND GROUP, IDS also manages investments for itself and its subsidiaries,
IDS Certificate Company and IDS Life Insurance Company. Total assets under
management on June 30, 1994 were more than $100 billion.
24
<PAGE>
IDS Financial Services Inc. serves individuals and businesses through its
nationwide network of more than 175 offices and more than 7,800 planners.
Other IDS subsidiaries provide investment management and related services
for pension, profit sharing, employee savings and endowment funds of businesses
and institutions.
IDS is located at IDS Tower 10, Minneapolis, MN 55440-0010. It is a wholly
owned subsidiary of American Express Company, a financial services company with
headquarters at American Express Tower, World Financial Center, New York, NY
10285. The fund may pay brokerage commissions to broker-dealer affiliates of
American Express and IDS.
25
<PAGE>
PART B: INFORMATION REQUIRED IN A STATEMENT
OF ADDITIONAL INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 19, 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"), a separate series of IDS Strategy Fund, Inc. (the "Corporation"), to
IDS Federal Income Fund, Inc. ("Federal Income"), in exchange for shares of
Federal Income and the assumption by Federal Income of the liabilities of
Short-Term Income, 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 29, 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 19,
1994, relating to the above-referenced matter, which may be obtained without
charge by writing either Federal Income 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.
1
<PAGE>
FEDERAL INCOME FUND
STRATEGY-SHORT-TERM INCOME FUND
INTRODUCTION TO PROPOSED FUND MERGER
JUNE 30, 1994
The accompanying unaudited pro forma combining statement of assets and
liabilities and the statement of operations reflect the accounts of the two
funds at and for the year ended June 30, 1994. These statements have been
derived from the annual report for Federal Income Fund as of June 30, 1994, and
the underlying accounting records used in calculating daily net asset values for
the year ended June 30, 1994 for Strategy-Short-Term Income Fund. The Management
of the funds have elected not to present combining schedule of investments as
they believe such information is not meaningful since the reorganization will
not occur before March 1995. Separate schedule of investments for the funds are
included in their respective annual reports which are available upon request.
The pro forma combining statements have been prepared based upon the various
fee structures of the funds in existence as of June 30, 1994. No adjustments
have been made for proposed fee agreements to be voted on by shareholders on
November 9, 1994. Also, in connection with the proposed fee agreements, Federal
Income Fund is proposing to issue multiple classes of shares. The pro forma
combining statements have not been adjusted to reflect the proposed multiple
class structure.
2
<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 8,731,656 10,837,267
------------ -------------- --------------
Total assets............................................ $224,968,189 $1,115,142,569 $1,340,110,758
------------ -------------- --------------
------------ -------------- --------------
LIABILITIES
Dividends payable to shareholders........................... $ 64,411 $ 74,923 $ 139,334
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.......................... 148,080 38,414 186,494
Accrued transfer agency fee................................. 32,361 98,726 131,087
Other accrued expenses...................................... 111,829 246,670 358,499
Open option contracts written, at value (premium received
$234,539)................................................. 0 175,469 175,469
------------ -------------- --------------
Total liabilities....................................... 10,788,248 89,820,763 100,609,011
------------ -------------- --------------
Net assets applicable to outstanding capital stock...... $214,179,941 $1,025,321,806 $1,239,501,747
------------ -------------- --------------
------------ -------------- --------------
REPRESENTED BY
Capital stock and additional paid-in capital -- shares
outstanding, 218,550,960; 211,575,822 and 255,771,992
respectively (Note 2)..................................... $218,784,191 $1,086,135,776 $1,304,919,967
Undistributed net investment income......................... 41,782 (439,420) (397,638)
Accumulated net realized gain............................... (218,070) (32,269,181) (32,487,251)
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 1,025,321,806 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.
3
<PAGE>
PRO FORMA COMBINING
STATEMENT OF OPERATIONS
JUNE 30, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
Strategy- Federal
Short-Term Income
Fund Fund Adjustments Combined
----------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest.................................................. $10,543,228 $ 65,073,615 $ 0 $ 75,616,843
Dividends................................................. 0 0 0 0
----------- ------------ ----------------- ------------
Total income............................................ 10,543,228 65,073,615 0 75,616,843
----------- ------------ ----------------- ------------
Expenses:
Investment management and service fee..................... 977,775 5,369,312 0 6,347,087
12b-1 and distribution fee................................ 1,590,400 458,958 (1,451,698)(a) 597,660
Transfer agency fee....................................... 377,149 1,172,477 (22,855)(b) 1,526,771
Compensation of directors................................. 6,038 33,418 0 39,456
Compensation of officers.................................. 3,112 8,702 0 11,814
Custodian fees............................................ 31,570 100,341 0 131,911
Postage................................................... 76,100 265,731 0 341,831
Registration fees......................................... 86,562 145,630 0 232,192
Reports to shareholders................................... 19,564 53,088 0 72,652
Audit fees................................................ 8,359 31,500 0 39,859
Administrative............................................ 4,274 14,048 0 18,322
Other..................................................... 3,170 34,834 0 38,004
----------- ------------ ----------------- ------------
Total net expenses...................................... 3,184,073 7,688,039 (1,474,553) 9,397,559
----------- ------------ ----------------- ------------
Investment income -- net.............................. 7,359,155 57,385,576 1,474,553 66,219,284
----------- ------------ ----------------- ------------
----------- ------------ ----------------- ------------
REALIZED AND UNREALIZED GAIN -- NET
Net realized gain (loss) on security transactions........... 186,706 (34,576,043) 0 (34,389,337)
Net realized gain on closed interest rate futures
contracts.................................................. 0 8,449,197 0 8,449,197
Net realized gain on closed or expired option contracts
written.................................................... 0 1,374,791 0 1,374,791
----------- ------------ ----------------- ------------
Net realized gain (loss) on investments..................... 186,706 (24,752,055) 0 (24,565,349)
Net change in unrealized appreciation or depreciation....... 8,328,665 (38,009,969) 0 (29,681,304)
----------- ------------ ----------------- ------------
Net gain (loss) on investments.............................. 8,515,371 (62,762,024) 0 (54,246,653)
----------- ------------ ----------------- ------------
Net increase in assets resulting from operations............ $15,874,526 $ (5,376,448) $ 1,474,553 $ 11,972,631
----------- ------------ ----------------- ------------
----------- ------------ ----------------- ------------
<FN>
(a) Adjustment to reflect expected savings due to an annual rate of $6 per
shareholder account.
(b) Adjustment to reflect expected savings due to an annual rate of $15.50 per
shareholder account.
</TABLE>
See accompanying notes to pro forma
combining financial statements.
4
<PAGE>
IDS FEDERAL INCOME FUND
STRATEGY-SHORT-TERM INCOME FUND
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED AS TO JUNE 30, 1994)
1.__BASIS OF COMBINATION
The unaudited pro forma combining statement of assets and liabilities and
the statement of operations reflect the accounts of the two funds at and for the
year ended June 30, 1994. These statements have been derived from the annual
report for Federal Income Fund as of June 30, 1994, and the underlying
accounting records used in calculating daily net asset values for the year ended
June 30, 1994 for Strategy-Short-Term Fund. The Management of the funds have
elected not to present combining schedule of investments as they believe such
information is not meaningful since the reorganization will not occur before
March 1995. Separate schedule of investments for the funds are included in their
respective annual reports which are available upon request.
The pro forma statements give effect to the proposed transfer of the assets
and liabilities of Strategy-Short-Term Income Fund in exchange for shares of
Federal Income Fund under generally accepted accounting principles. The
historical cost of investment securities will be carried forward to Federal
Income Fund, the surviving entity, and the results of operations for Federal
Income Fund will not be restated for Strategy-Short-Term Income Fund's results
of operations for pre-combination periods. The Pro Forma statements do not
reflect the expenses of either fund in carrying out its obligations under the
Agreement and Plan of Reorganization.
The pro forma combining statements should be read in conjunction with the
historical financial statements of the funds incorporated by reference in the
Statement of Additional Information.
The pro forma statement of operations give effect to the proposed
transaction on the historical operations of the surviving entity, Federal Income
Fund, as if the transaction had occurred at the beginning of the year presented.
2.__CAPITAL SHARES
The pro forma net asset value per share assumes the issuance of additional
shares of Federal Income Fund if the reorganization were to have taken place on
June 30, 1994. The pro forma number of shares outstanding of 255,771,992
consists of 44,196,170 shares assumed to be issued to shareholders of
Strategy-Short-term Income plus 211,575,822 shares of Federal Income Fund
outstanding as of June 30, 1994.
5
<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. Opinion of counsel filed electronically herewith.
12. (a) Tax opinion filed electronically herewith.
12. (b) Consent as to the use of the tax opinion filed
electronically herewith.
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. Auditors consent filed electronically herewith.
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 Declaration of Registrant filed electronically herewith.
17. (b) Form of Proxy Card filed electronically herewith.
17. (c) Current prospectus for the Registrant, dated August 29, 1994, is
incorporated herein by reference from Part A of this filing.
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 12th of September, 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
12th of September, 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.
/s/ LESLIE L. OGG
---------------------------------------------
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.
/s/ LESLIE L. OGG
---------------------------------------------
Leslie L. Ogg
</TABLE>
<PAGE>
EXHIBIT INDEX TO FORM N-14
IDS FEDERAL INCOME FUND, INC.
<TABLE>
<CAPTION>
Exhibit Page
- ------------- -----
<C> <S> <C>
(4) Agreement and Plan of Reorganization.......................
(11) Opinion of Counsel........................................
(12)(a) Tax Opinion................................................
(12)(b) Consent as to the use of the Tax Opinion...................
(14) Auditors Consent...........................................
17(a) Rule 24f-2 Declaration 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 September 8, 1994, between
IDS Strategy Fund, Inc., a Minnesota corporation (the "Corporation"), on behalf
of Short-Term Income Fund ("Short-Term Income") and IDS Federal Income Fund,
Inc., a Minnesota corporation ("Federal Income").
In consideration of the mutual promises herein contained, the parties hereto
agree as follows:
1. SHAREHOLDER APPROVAL
A meeting of the shareholders of Short-Term Income shall be called and held
for the purpose of approving this Agreement and the transactions it
contemplates. Federal Income shall furnish data and information as reasonably
requested by the Corporation for inclusion in the information to be furnished to
Short-Term Income shareholders at the meeting.
2. REORGANIZATION
(a) PLAN OF REORGANIZATION. The Corporation will convey, transfer and
deliver to Federal Income all of the assets of Short-Term Income at the closing
provided for in Section 2(b) (the "Closing"). Federal Income shall assume all
liabilities, expenses, costs, charges and reserves reflected on an unaudited
statement of assets and liabilities of Short-Term Income as of the Valuation
Date (as defined in paragraph 3(a)), in accordance with generally accepted
accounting principles. Federal Income shall assume only those liabilities of
Short-Term Income reflected in the unaudited statement of assets and liabilities
and shall not assume any other liabilities, whether absolute or contingent,
known or unknown, accrued or unaccrued. At the Closing, Federal Income agrees to
deliver to the Corporation the number of shares of Federal Income including
fractional shares, determined by dividing the value of the net assets of
Short-Term Income, computed as set forth in paragraph 3(a), by the net asset
value of one share computed as set forth in paragraph 3(b). It is agreed that
there will be no sales charge on the transfer of Federal Income shares to
Short-Term Income in exchange for the assets of Short-Term Income, or to any of
the shareholders of Short-Term Income upon distribution of the Federal Income
shares to them. Shareholders of Short-Term Income entitled to a waiver of the
contingent deferred sales charge will receive Class A shares of Federal Income
in exchange for their shares of Short-Term Income. All other shareholders of
Short-Term Income will receive Class B 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
at which this Agreement will be considered and (iii) implementation
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of a multiple class share structure by Federal Income pursuant to an Exemptive
Order (the "Exemptive Order") obtained on behalf of Federal Income and other
funds managed by IDS Financial Corporation, 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 to be transferred to
Federal Income 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 (the "Valuation Date") using the valuation procedures set
forth in the Federal Income prospectus.
(b) The net asset value per share of Federal Income shares for purposes of
Section 2(a) shall be determined as of the close of regular trading on the NYSE,
on the Valuation Date using the valuation procedures set forth in the Federal
Income prospectus.
(c) A copy of the computations showing in reasonable detail the valuation of
Short-Term Income's net assets on the Valuation Date, certified by an officer of
the investment manager, shall be furnished to Federal Income at the Closing. A
copy of the computations showing in reasonable detail the determination of the
net asset value per share of Federal Income shares on the Valuation Date,
certified by an officer of the investment manager, shall be furnished to the
Corporation at the Closing.
4. LIQUIDATION AND DISSOLUTION OF SHORT-TERM INCOME
(a) As soon as practicable after the Valuation Date, the Corporation will
liquidate and distribute to Short-Term Income shareholders of record, the
Federal Income shares received by the Corporation pursuant to this section.
Liquidation and distribution will be accomplished by establishing Federal Income
shareholder accounts in the names of each Short-Term Income shareholder,
representing the respective pro rata number of full and fractional shares of
Federal Income due to each. All issued and outstanding shares of Short-Term
Income will simultaneously be cancelled on the books of the Corporation,
although stock certificates representing interests in Short-Term Income will
represent a number of shares of Federal Income after the Valuation Date
determined in accordance with Section 2(a). No shareholder accounts shall be
established by Federal Income or its transfer agent except pursuant to written
instructions from the Corporation, and the Corporation agrees to provide
instructions on the Valuation Date.
(b) Promptly after the distribution described in Section 4(a) appropriate
notification will be mailed by Federal Income or its transfer agent to each
shareholder of Short-Term Income receiving shares informing the shareholder of
the number of shares distributed to the shareholder and confirming the
registration in the shareholder's name.
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(c) As promptly as practicable after the liquidation of Short-Term Income,
and in no event later than twelve months from the date hereof, Short-Term Income
shall be dissolved.
(d) Immediately after the Valuation Date, the share transfer books of the
Corporation relating to Short-Term Income shall be closed and no further
transfer of shares shall be made.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF FEDERAL INCOME
Federal Income represents and warrants to the Corporation as follows:
(a) ORGANIZATION, EXISTENCE, ETC. Federal Income 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.
(b) REGISTRATION AS INVESTMENT COMPANY. Federal Income 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 has an authorized capital of
10,000,000,000 shares of common stock, par value $0.01 per share, of which as of
September 1, 1994, 210,874,642 shares were outstanding and no shares were held
in the treasury. All of the outstanding shares have been duly authorized and are
validly issued, fully paid and non-assessable. Since Federal Income 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 has the authority, pursuant to the Exemptive Order, to implement
a multiple class structure and to create multiple classes of common stock.
Federal Income agrees that, prior to the Closing, it shall implement a multiple
class structure in accordance with the Exemptive Order.
(d) FINANCIAL STATEMENTS. The audited financial statements as of June 30,
1994 of Federal Income (the "Federal Income Financial Statements"), previously
delivered to the Corporation, fairly present the financial position of Federal
Income, 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 at the
time of the Reorganization will be validly issued, fully paid and non-
assessable.
(f) AUTHORITY RELATIVE TO THIS AGREEMENT. Federal Income has the power to
enter into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement and the transactions contemplated
hereby have been duly authorized by its Board of Directors and no other
proceedings by Federal Income are necessary to authorize its officers to
effectuate this Agreement and the transactions contemplated hereby.
A-3
<PAGE>
(g) NO VIOLATION. Federal Income 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 agreement or condition contained in any material
contract 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 pursuant to any material contract or other instrument to which
Federal Income 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; and no consent,
approval, authorization or order of any court or governmental authority or
agency is required for the consummation by Federal Income 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, whether or
not determined or determinable, other than liabilities disclosed in the Federal
Income Financial Statements and liabilities incurred in the ordinary course of
business subsequent to June 30, 1994, 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.
(i) LITIGATION. There are no claims, actions, suits or proceedings pending
or, to the knowledge of Federal Income, threatened which would adversely affect
Federal Income 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 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 tax returns of Federal Income have been filed for
all taxable years to and including the taxable year ended December 31, 1993.
Federal Income has qualified and will qualify as a regulated investment company
under the Internal Revenue Code with respect to each taxable year since
commencement of its operations.
(l) REGISTRATION STATEMENT. Federal Income 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, 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, 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
A-4
<PAGE>
misleading; provided, however, that none of the representations and 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 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.
(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
10,000,000,000 shares of common stock, par value $0.01 per share, of which as of
September 1, 1994, 218,448,896 shares of Short-Term Income were outstanding and
no shares were held in the treasury of the Corporation. All of the outstanding
shares of the Short-Term Income have been duly authorized and are validly
issued, fully paid and non-assessable. Since the Corporation is engaged in the
continuous offering and redemption of its shares, the number of outstanding
shares of Short-Term Income 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 (the "Short-Term Income Financial Statements"),
previously delivered to Federal Income, fairly present the financial position of
Short-Term Income 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 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, no other proceedings by
the Corporation are necessary to authorize its officers to effectuate this
Agreement and the transactions contemplated hereby.
(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 agreement or condition contained in any material
contract 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
A-5
<PAGE>
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 pursuant to any material contract or other
instrument to which the Corporation is subject, nor will such action result in
any violation of the Charter or any 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, whether or
not determined or determinable, other than liabilities disclosed in the
Short-Term Income Financial Statements and liabilities incurred in the ordinary
course of business subsequent to March 31, 1994, or otherwise previously
disclosed to Federal Income, none of which has been materially adverse to the
business, assets or results of operations of Short-Term Income.
(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 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 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 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 has
qualified, and will qualify, as a regulated investment company under the
Internal Revenue Code with respect to each taxable year since commencement of
its operations.
(k) FUND SECURITIES. All securities to be listed in the schedule of
investments of Short-Term Income as of the Effective Time of the Reorganization
will be owned by Short-Term Income free and clear of any liens, claims, charges,
options and encumbrances, except as indicated in the schedule, and, except as so
indicated, none of the securities is or, after the Reorganization, 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. The Corporation will cooperate with Federal
Income and will furnish the information relating to the Corporation or
Short-Term Income required by the Securities Act and the Regulations to be set
forth in the Registration Statement. 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
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<PAGE>
and statement of additional information, as amended or supplemented, insofar as
it relates to the Corporation or Short-Term Income, 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 with respect to 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 of the outstanding shares of
common stock of Short-Term Income.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Federal Income shall have
complied with each of its agreements herein, each of the representations and
warranties 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 audited or certified by an officer of Federal
Income, 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 since June 30, 1994, and the Corporation shall have
received a certificate of an officer of Federal Income satisfactory in form and
substance to the Corporation so stating.
(c) CREATION OF CLASSES OF SHARES. Federal Income shall have implemented
the multiple class share structure contemplated by the Exemptive Order and shall
have created and authorized the issuance of the classes of shares to be issued
to Short-Term Income 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 the federal income tax
consequences of the Reorganization under the Internal Revenue Code of 1986 to
Short-Term Income and its shareholders. For purposes of rendering their opinion
Ropes & Gray may rely exclusively and without
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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 in connection with the Reorganization, and
upon such other written representations as an officer of the Corporation and
Federal Income, 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 nor Federal Income will recognize any gain or loss
upon the transfer of the assets of Short-Term Income to, and the assumption of
its liabilities by, Federal Income in exchange for shares of Federal Income and
upon the distribution of the shares to Short-Term Income shareholders in
exchange for their shares of Short-Term Income; (ii) the shareholders of
Short-Term Income who receive shares of Federal Income pursuant to the
Reorganization will not recognize any gain or loss upon the exchange of their
shares of Short-Term Income for shares of Federal Income (including any
fractional share interests they are deemed to have received) pursuant to the
Reorganization; (iii) the holding period and the basis of the shares received by
the Short-Term Income shareholders will be the same as the holding period and
the basis of the shares of Short-Term Income surrendered in the exchange; and
(iv) the holding period and the basis of the assets acquired by Federal Income
will be the same as the holding period and the basis of such assets to
Short-Term Income immediately prior to the Reorganization.
(f) OPINION OF COUNSEL. The Corporation shall have received the opinion of
Leslie L. Ogg, counsel for Federal Income, 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 is a corporation duly
organized and validly existing under the laws of the State of Minnesota; (ii)
Federal Income is an open-end investment company of the management type
registered under the 1940 Act; (iii) this Agreement and the Reorganization have
been duly authorized and approved by all requisite action of Federal Income and
this Agreement has been duly executed and delivered by, and is a valid and
binding obligation of, Federal Income; and (iv) the shares to be issued in the
Reorganization are, duly authorized and upon issuance in accordance with this
Agreement will be validly issued, fully paid and non-assessable shares of
Federal Income.
8. CONDITIONS TO OBLIGATIONS OF FEDERAL INCOME
The obligations of Federal Income hereunder with respect to 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
Short-Term Income.
(b) REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The Corporation shall have
complied with each of its agreements herein, each of the representations and
warranties herein shall be true in all material respects as of the
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Effective Time of the Reorganization, and except as otherwise indicated in any
financial statements of the Corporation or Short-Term Income, audited or
certified by an officer of the Corporation, which may be delivered to Federal
Income 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 Short-Term Income since March 31,
1994 and Federal Income shall have received a certificate of an officer of the
Corporation satisfactory in form and substance to Federal Income 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 shall have received the opinion of
Leslie L. Ogg, counsel for the Corporation, dated the Effective Time of the
Reorganization, addressed to and in form and substance satisfactory to Federal
Income, to the effect that (i) the Corporation is a corporation duly organized
and validly existing under the laws of the State of Minnesota; (ii) the
Corporation is an open-end investment company of the management type registered
under the 1940 Act; (iii) this Agreement and the Reorganization have been duly
authorized and approved by all requisite action of the Corporation and this
Agreement has been duly executed and delivered and is a valid and binding
obligation of the Corporation with respect to Short-Term Income.
(e) DECLARATION OF DIVIDEND. The Corporation shall have declared a
dividend with respect to Short-Term Income which, together with all previous
such dividends, shall have the effect of distributing to Short-Term Income's
shareholders all of Short-Term Income'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 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 (i) waive any inaccuracies in the
representations and warranties made to it and (ii) waive compliance with any of
the covenants or conditions made for its benefit.
(c) The Corporation may terminate this Agreement at any time prior to the
Effective Time of the Reorganization by notice to Federal Income if
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(i) a material condition to its performance or a material covenant of Federal
Income 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 that is not cured.
(d) Federal Income 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 by any party at any time prior to the
Effective Time of the Reorganization, whether before or after approval by the
shareholders of Short-Term Income, without any liability on the part of either
party hereto or its respective directors, officers or shareholders, on written
notice to the other party, and shall be terminated without liability as of the
close of business on December 31, 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 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, 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. 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 "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 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
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the indemnitee may be or may have been involved as a party or otherwise or with
which the indemnitee may be or may have been threatened, with respect to actions
taken hereunder or thereafter by reason of the indemnitee's 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 the
indemnitee's position.
IN WITNESS WHEREOF, each of the parties has caused this Agreement and Plan
of Reorganization to be executed, as of the day and year first above written.
Attest: IDS Federal Income Fund, Inc.
By /s/ Valeda A. Binford By /s/ Leslie L. Ogg
- -------------------------- --------------------------
Assistant Secretary Name: Leslie L. Ogg
Title:Vice President and General
Counsel
IDS Strategy Fund, Inc.
on behalf of
Short-Term Income Fund
By /s/ Valeda A. Binford By /s/ Leslie L. Ogg
- -------------------------- --------------------------
Assistant Secretary Name: Leslie L. Ogg
Title:Vice President and General
Counsel
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Exhibit 11
September 8, 1994
IDS Federal Income Fund, Inc.
IDS Tower 10
Minneapolis, MN 55440-0010
Gentlemen:
I have examined the Articles of Incorporation and the By-Laws of the Company and
all necessary certificates, permits, minute books, documents and records of the
Company, and the applicable statutes of the State of Minnesota, and it is my
opinion:
(a) That the Company is a corporation duly organized and existing under the
laws of the State of Minnesota with an authorized capital stock of
10,000,000,000 shares, all of $.01 par value, that such shares may be
issued as full or fractional shares and that on August 31, 1994,
212,234,998 shares were issued and outstanding;
(b) That all such authorized shares are, under the laws of the State of
Minnesota, redeemable as provided in the Articles of Incorporation of the
Company and upon redemption shall have the status of authorized and
unissued shares;
(c) That the Company has full power and authority, under the laws of the State
of Minnesota, and under its Articles of Incorporation, to issue
10,000,000,000 shares of its stock, an indefinite number of shares which
the Company has registered with the Federal Securities and Exchange
Commission and under state securities laws and that when sold at not less
than their par value such shares will be legally issued, fully paid and
non-assessable.
I hereby consent that the foregoing opinion may be used in connection with the
N-14 filing.
Very truly yours,
/s/ Leslie L. Ogg
Leslie L. Ogg
Attorney at Law
901 S. Marquette Avenue, Suite 2810
Minneapolis, MN 55402-3268
<PAGE>
Exhibit 12(a)
[ROPES & GRAY Letterhead]
September 6, 1994
IDS Strategy Fund, Inc. --
Short-Term Income Fund
IDS Tower 10
Minneapolis, Minnesota 55440-0010
IDS Federal Income Fund, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization (the "Agreement") to be dated as of September 8, 1994 between IDS
Strategy Fund, Inc., a Minnesota corporation, on behalf of its separate series,
the Short-Term Income Fund (the "Transferor Fund"), and IDS Federal Income Fund,
Inc., a Minnesota corporation (the "Acquiring Fund"). The Agreement describes
a proposed transaction (the "Transaction"), to occur on or about March 3, 1995
(the "Exchange Date"), pursuant to which Acquiring Fund will acquire
substantially all of the assets of Transferor Fund in exchange for the issuance
by Acquiring Fund to Transferor Fund of shares of beneficial interest in
Acquiring Fund (the "Acquiring Fund Shares") and the assumption by Acquiring
Fund of all of the liabilities of Transferor Fund, following which the Acquiring
Fund Shares will be distributed by the Transferor Fund to its shareholders in
liquidation and termination of Transferor Fund. This opinion as to certain
federal income tax consequences of the Transaction is furnished to you pursuant
to section 7(e) of the Agreement.
IDS Strategy Fund, Inc. is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company.
Shares of Transferor Fund are redeemable at net asset value at each
shareholder's option. Transferor Fund has elected to be a regulated investment
company for federal income tax purposes under section 851 of the Internal
Revenue Code of 1986, as amended (the "Code").
Acquiring Fund is registered under the 1940 Act as an open-end management
investment company. Shares of Acquiring Fund are redeemable at net asset value
at each shareholder's option. Acquiring Fund has elected to be a regulated
investment company for federal income tax purposes under section 851 of the
Code.
For purposes of this opinion, we have considered the Agreement, the Proxy
Statement/Prospectus to be dated September 19, 1994 which will be distributed to
Transferor Fund shareholders (including the items incorporated by reference
therein), and such other
<PAGE>
IDS Strategy Fund, Inc. -- -2- September 6, 1994
Short-Term Income Fund
IDS Federal Income Fund, Inc.
items as we have deemed necessary to render this opinion. In addition, you have
represented to us that the following facts, occurrences and information are true
as of the date hereof and will be true as of the Exchange Date, and have stated
that we may rely upon the accuracy and veracity of such facts, occurrences and
information in rendering this opinion (whether or not contained or reflected in
the documents and items referred to above):
1. Transferor Fund will transfer to Acquiring Fund substantially all of
its assets, and Acquiring Fund will assume all of the liabilities of Transferor
Fund (including those to which any transferred assets are subject), as of the
Exchange Date.
2. The fair market value of the Acquiring Fund Shares received by each
Transferor Fund shareholder will be approximately equal to the fair market value
of the Transferor Fund shares surrendered in exchange therefor. The
shareholders of the Transferor Fund will receive no consideration other than
Acquiring Fund Shares (which may include fractional shares) in exchange for
their Transferor Fund shares.
3. There is no plan or intention by any Transferor Fund shareholder who
owns 5% or more of the outstanding Transferor Fund shares, and to the best of
the knowledge of the management of the Transferor Fund, there is no plan or
intention on the part of the remaining Transferor Fund shareholders to sell,
exchange, or otherwise dispose of a number of Acquiring Fund Shares received in
the Transaction such that the Transferor Fund shareholders' ownership of
Acquiring Fund Shares, in the aggregate, would be reduced to a number of
Acquiring Fund Shares having a value, as of the date of the Transaction, of less
than 50 percent of the value of all of the formerly outstanding Transferor Fund
Shares as of the same date. For purposes of this representation, Transferor
Fund shares surrendered by dissenters (if any) will be treated as outstanding
Transferor Fund shares on the date of the Transaction. Additionally, Transferor
Fund shares surrendered in redemption by Transferor Fund shareholders, where
such redemptions (if any) appear to be initiated by Transferor Fund shareholders
in connection with or as a result of the Agreement or the Transaction, will be
treated as outstanding Transferor Fund shares on the date of Transaction.
4. Acquiring Fund will acquire at least 90 percent of the fair market
value of the net assets and at least 70 percent of the fair market value of the
gross assets held by the Transferor Fund immediately prior to the Transaction.
For purposes of this representation, (a) amounts (if any) paid by the Transferor
Fund to dissenters, (b) amounts paid by the Transferor Fund to Transferor Fund
shareholders in redemption of Transferor Fund shares, where such redemptions (if
any) appear to be initiated by Transferor Fund shareholders in connection with
or as a result of the Agreement or the Transaction, (c) amounts used by the
Transferor Fund to pay expenses of the Transaction, and (d) amounts used by the
Transferor Fund to effect any distributions (except for regular, normal
dividends and dividends declared and paid in order to ensure Transferor Fund's
continued qualification as a regulated investment company and to avoid
imposition of fund-level tax), will be included as assets of Transferor Fund
held immediately prior to the Transaction. Further, for purposes of this
representation, the amounts (if any) that Acquiring Fund pays after the
Transaction to Acquiring Fund shareholders who are former Transferor Fund
shareholders in redemption of Acquiring Fund Shares received in exchange for
Transferor Fund shares, where such redemptions appear to be initiated by such
shareholders in connection with or as a result of
<PAGE>
IDS Strategy Fund, Inc. -- -3- September 6, 1994
Short-Term Income Fund
IDS Federal Income Fund, Inc.
the Agreement or the Transaction, will be considered to be assets of Transferor
Fund that were not transferred to the Acquiring Fund.
5. Acquiring Fund has no plan or intention to reacquire any of the
Acquiring Fund Shares issued in the Transaction, except for Acquiring Fund
Shares reacquired in the ordinary course of its business as an open-end
investment company.
6. Transferor Fund will distribute the Acquiring Fund Shares it receives
in the Transaction, as well as any other property it holds following the
transfer of assets to Acquiring Fund and the payment of expenses.
7. The liabilities of Transferor Fund to be assumed by Acquiring Fund,
and the liabilities, if any, to which the assets transferred by Transferor Fund
will be subject, will have been incurred by Transferor Fund in the ordinary
course of its business and will be associated with the assets transferred to
Acquiring Fund. For purposes of this paragraph, expenses of the transaction are
not treated as liabilities.
8. Both the fair market value and the total adjusted basis of the
Transferor Fund assets transferred to the Acquiring Fund will equal or exceed
the sum of all of the liabilities assumed by the Acquiring Fund, plus the amount
of liabilities, if any, to which the transferred assets are subject.
9. Following the Transaction, Acquiring Fund will use a significant
portion (at least 50%) of Transferor Fund's historic business assets in its
business. Specifically, the Acquiring Fund will use such significant portion of
the Transferor Fund's historic business assets in its business by continuing to
hold the assets transferred to it by the Transferor Fund, except for
dispositions made in the ordinary course of business as an open-end investment
company (I.E., dispositions resulting from investment decisions made after the
Transaction on the basis of investment considerations independent of the
Transaction). Additionally, Acquiring Fund will continue the historic business
of Transferor Fund as an investment company which seeks high current income
consistent with the conservation of capital by investing principally in U.S.
government and government agency securities (including mortgage-backed
obligations).
10. Except as provided in the preceding paragraph, Acquiring Fund has no
plan or intention to sell or otherwise dispose of any of the assets of
Transferor Fund acquired in the Transaction, except for dispositions made in the
ordinary course of its business as an open-end investment company (I.E.,
dispositions resulting from investment decisions made on the basis of investment
considerations arising after, and independent of, the Transaction).
11. Transferor Fund, Acquiring Fund, and the shareholders of Transferor
Fund will pay their respective expenses, if any, incurred in connection with
the Transaction, except that Acquiring Fund may pay certain expenses related to
the Transferor Fund which arise after the Transaction, provided that Acquiring
Fund will pay or assume only those expenses of the Transferor Fund that are
solely and directly related to the Transaction, in accordance with the
guidelines established in Rev. Rul. 73-54, 1973-1 CB 187.
<PAGE>
IDS Strategy Fund, Inc. -- -4- September 6, 1994
Short-Term Income Fund
IDS Federal Income Fund, Inc.
12. There is no intercorporate indebtedness existing between the Acquiring
Fund and the Transferor Fund.
13. For federal income tax purposes, the Transferor Fund qualifies as a
regulated investment company, and the provisions of sections 851 through 855 of
the Code apply to the Transferor Fund for its current taxable year beginning
April 1, 1994, and will continue to apply to it through the Exchange Date.
In that regard, Transferor Fund will declare to Transferor Fund
shareholders of record on or prior to the Exchange Date a dividend or dividends
which together with all previous such dividends shall have the effect of
distributing (i) essentially all of Transferor Fund's investment company taxable
income (see Code section 852) for the taxable year ended March 31, 1994 and for
the short taxable year of Transferor Fund beginning on April 1, 1994 and ending
on the Exchange Date (computed in each case without regard to any deduction for
dividends paid) and (ii) essentially all of Transferor Fund's net capital gain
(see Code section 1222(11)) realized in its taxable year ended March 31, 1994
and in its short taxable year beginning on April 1, 1994 and ending on the
Exchange Date (after reduction for any capital loss carryover). Such dividends
will be made to ensure continued qualification of Transferor Fund as a regulated
investment company for tax purposes and to eliminate to the extent reasonably
practicable fund-level income and excise tax liabilities.
14. For federal income tax purposes, Acquiring Fund qualifies as a
regulated investment company, and the provisions of sections 851 through 855 of
the Code apply to Acquiring Fund for its current taxable year beginning
July 1, 1994, and will continue to apply to it through the Exchange Date.
15. Acquiring Fund does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any Transferor Fund shares.
16. Transferor Fund is not, and as of the Exchange Date will not be, under
the jurisdiction of a court in a Title 11 or similar case within the meaning of
section 368(a)(3)(A) of the Code.
17. None of the compensation received by any shareholder-employees of
Transferor Fund, if any, will be separate consideration for, or allocable to,
any of their Transferor Fund shares; none of the Acquiring Fund Shares received
by any Transferor Fund shareholder-employee will be separate consideration for,
or allocable to, any employment agreement; and the compensation paid to any
Acquiring Fund or Transferor Fund shareholder-employees, if any, will be for
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's length for similar services.
Based on the foregoing and our review of the documents and items referred
to above, we are of the opinion that for federal income tax purposes:
(i) No gain or loss will be recognized by Acquiring Fund upon its
receipt of the assets of Transferor Fund in exchange for
Acquiring Fund Shares and the
<PAGE>
IDS Strategy Fund, Inc. -- -5- September 6, 1994
Short-Term Income Fund
IDS Federal Income Fund, Inc.
assumption by Acquiring Fund of the liabilities of Transferor
Fund (including the liabilities to which the transferred assets
are subject, if any);
(ii) The basis in the hands of Acquiring Fund of the assets of
Transferor Fund transferred to Acquiring Fund will be the same as
the basis of such assets in the hands of Transferor Fund
immediately prior to the transfer;
(iii) The holding periods of the assets of Transferor Fund transferred
to Acquiring Fund will include the periods during which such
assets were considered held for federal income tax purposes by
Transferor Fund;
(iv) No gain or loss will be recognized by Transferor Fund upon the
transfer of Transferor Fund's assets and liabilities (including
the liabilities to which the transferred assets are subject, if
any) to Acquiring Fund or upon the distribution of Acquiring Fund
Shares by Transferor Fund to its shareholders in liquidation;
(v) No gain or loss will be recognized by the Transferor Fund
shareholders on the exchange of their Transferor Fund shares for
Acquiring Fund Shares;
(vi) The basis of the Acquiring Fund Shares received by Transferor
Fund shareholders will be the same, in the aggregate, as the
basis of the Transferor Fund shares exchanged therefor; and
(vii) The holding periods of the Acquiring Fund Shares received by
Transferor Fund shareholders will include the holding periods of
the Transferor Fund shares exchanged therefor, provided that at
the time of the Transaction the Transferor Fund shares are held
by such shareholders as capital assets.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
DJC/cmw
<PAGE>
Ropes & Gray
[Letterhead]
September 7, 1994
CONSENT OF TAX COUNSEL
The Board of Directors and Shareholders
IDS Federal Income Fund, Inc. and
Short-Term Income Fund, a series of
IDS Strategy Fund, Inc.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Re: Federal Income Tax Opinion
--------------------------
Ladies and Gentlemen:
We consent to the use of our tax opinion, included as
Exhibit 12(a) in this filing, and to the reference to our firm and
to the opinion under the heading "Federal Income Tax
Consequences" in Part A of the Registration Statement.
/s/ Ropes and Gray
Ropes and Gray
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
IDS Federal Income Fund, Inc.
IDS Strategy Fund, Inc.:
We consent to the use of our reports incorporated herein by reference and the
reference to our Firm under the heading "FINANCIAL STATEMENTS AND EXPERTS" in
the Prospectus contained in Part A of the combined Proxy and Registration
Statement on Form N-14.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 8, 1994
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
------
Pre-Effective Amendment No.
______ ------
Pre-Effective Amendment No.
______ ------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
------
Amendment No.
-------
IDS FEDERAL INCOME FUND, INC.
- --------------------------------------------------------------------------------
1000 Roanoke Building, Minneapolis, Minnesota 55402
- --------------------------------------------------------------------------------
(612) 372-3714
- --------------------------------------------------------------------------------
William C. Herber - 1000 Roanoke Building, Minneapolis, MN 55402
- --------------------------------------------------------------------------------
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective
(check appropriate box)
immediately upon filing pursuant to paragraph (b)
------
on (date) pursuant to paragraph (b)
------
60 days after filing pursuant to paragraph (a)
------
on (date) pursuant to paragraph (a) of rule (485 or 486)
------
As soon as practicable after June 1, 1985
DECLARATION REQUIRED BY RULE 24f-2(a)(1)
An indefinite number of shares of the common stock of the Registrant is being
registered by this Registration Statement.
The Registrant hereby amends the Registration Statement under the Securities Act
of 1933 on such date or dates as may be necessary to delay its effective date
until the 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 or until the Registration
Statement shall become effective on such date as the Commission, acting pursuant
to Section 8(a), may determine.
<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
Please fold and detach card at perforation before mailing
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 William R. Pearce, Leslie L. Ogg and Robert F.
Froehlke, or any one of them, as proxies, with full power of substitution, to
represent and to vote all of the shares of the undersigned at the regular
meeting to be held on November 9, 1994, and any adjournment thereof.
TO HAVE YOUR VOTE COUNTED, YOU MUST SIGN, DATE AND RETURN THIS PROXY. IT WILL BE
VOTED AS MARKED, OR IF NOT MARKED, WILL BE VOTED "FOR" EACH PROPOSAL.
THE BOARD RECOMMENDS A VOTE "FOR" ALL PROPOSALS.
(client name and address)
X
-----------------------------
X
----------------------------- Date________________, 1994
Owners please sign as names appear at left. Executors, administrators, trustees,
etc., should indicate position when signing.
<PAGE>
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE EXPENSE OF ADDITIONAL MAILINGS
Please fold and detach card at perforation before mailing
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.
Fourteen board members are to be elected at the meeting. The nominees are
LYNNE V. CHENEY, WILLIAM H. DUDLEY, ROBERT F. FROEHLKE, DAVID R. HUBERS,
HEINZ F. HUTTER, ANNE P. JONES, DONALD M. KENDALL, MELVIN R. LAIRD, LEWIS W.
LEHR, WILLIAM R. PEARCE, EDSON W. SPENCER, JOHN R. THOMAS, WHEELOCK WHITNEY,
C. ANGUS WURTELE.
For Against Abstain
3. Ratification of
Independent Auditors () () ()
