-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, OnnWrcQ2clZoF77aYn3ZafO2QiHBGdMGj4dk3Zb5F/lWn6eya6CRVKYgKWos12VJ gydBBDG8jGRHJBF1p6BCuA== 0000912057-94-003013.txt : 19940914 0000912057-94-003013.hdr.sgml : 19940914 ACCESSION NUMBER: 0000912057-94-003013 CONFORMED SUBMISSION TYPE: N14EL24 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19940912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS FEDERAL INCOME FUND INC CENTRAL INDEX KEY: 0000764802 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N14EL24 SEC ACT: 1933 Act SEC FILE NUMBER: 033-55423 FILM NUMBER: 94548641 BUSINESS ADDRESS: STREET 1: 80 SOUTH 8TH STREET CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6123722772 N14EL24 1 N14EL24 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PRE-EFFECTIVE AMENDMENT NO. 1 /X/ POST-EFFECTIVE AMENDMENT NO. / / ------------------ 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 ------------------------ 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. ------------------------ APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE FOLLOWING EFFECTIVENESS OF THIS REGISTRATION STATEMENT. ------------------------ It is proposed that this filing will become effective on September 12, 1994 pursuant to rule 488. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS-REFERENCE SHEET (AS REQUIRED BY RULE 481(A))
Part A of Form N-14 Prospectus/Proxy Caption - ---------------------------------------------------------------- ----------------------------------------------------- 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 Statement of Part B of Form N-14 Additional Information Caption - ---------------------------------------------------------------- ----------------------------------------------------- 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 Part C of Form N-14 - ---------------------------------------------------------------- Information required to be included in Part C is set forth under the appropriate item in Part C of this Registration Statement.
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. 1 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 2 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. 3 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 4 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. 5 TABLE OF CONTENTS
Page --------- (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
6 (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 7 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 8 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 9 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 10 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 11 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 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 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.
Service Sales Charge 12b-1 Fee Fee TA Fee ------------- --------- ---------- ---------------- 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
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 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 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:
Strategy Short-Term Pro forma for Federal Income* Income** Reorganization --------------- -------------- -------------- (In thousands, except per share values) 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 *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.
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 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 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 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 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.
Current Fees Current Fees Proposed Fees Short-Term Income Federal Income Federal Income --------------------- --------------------- --------------------- 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
20
Current Fees Current Fees Proposed Fees Short-Term Income Federal Income Federal Income --------------------- --------------------- --------------------- 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
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 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 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 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 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 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.
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 - ------------------------- --------------- ------------- ------------- ------------- 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
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 26 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. 27 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. 28 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. 29 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 A-1 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. A-2 (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 (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 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 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 A-6 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 A-7 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 A-8 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 A-9 (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 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 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 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 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 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
Assets Annual Rate At (Billions) Each Asset Level - ---------- ---------------------- First $1 0.520% Next $1 0.495 Next $1 0.470 Next $3 0.445 Next $3 0.420 Over $9 0.395
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 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 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:
Assets Annual Rate At (Billions) Each Asset Level - ---------- ---------------------- First $1 0.050% Next $1 0.045 Next $1 0.040 Next $3 0.035 Next $3 0.030 Over $9 0.025
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 B-6 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)
Pro Forma Actual Class A* ---------- ---------- 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 *The figures for Class A include a small percentage of shares that will be moved into Class Y.
B-7 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:
1 year 3 years 5 years 10 years - ----------- ----------- ----------- ----------- $ 59 $ 78 $ 98 $ 158
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 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 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. B-10 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 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 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 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 YOUR FUND'S LONG-TERM PERFORMANCE FEDERAL INCOME FUND EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
IDS Federal Income Lehman Treasury Lehman Aggregate 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
AVERAGE ANNUAL TOTAL RETURN (AS OF JUNE 30, 1994)
Since 1 year 5 years 8/19/85 -5.5% +6.12% +7.40%
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 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 YOUR FUND'S LONG-TERM PERFORMANCE SHORT-TERM INCOME FUND EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
IDS Strategy Merrill Lynch 1-3 Short-Term Year Lehman Treasury Index 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
AVERAGE ANNUAL TOTAL RETURN* (AS OF MAR. 31, 1994)
Since 1 year 5 years 2/1/89 -2.7% +5.8% +6.2%
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 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 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 (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 (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 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 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 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 TABLE OF CONTENTS 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
2 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." SHAREHOLDER TRANSACTION EXPENSES - ---------------------------------------------------------------------- Maximum sales charge on purchases (as a percent of offering price)...................... 5% - ----------------------------------------------------------------------
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 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% - ----------------------------------------------------------------------
EXAMPLE: Suppose for each year for the next 10 years, fund expenses are as above and annual return is 5%. If you sold your shares at the end of the following years, for each $1,000 invested, you would pay total expenses of: 1 year................................... $ 57 3 years.................................. 73 5 years.................................. 90 10 years................................. 140
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 PERFORMANCE FINANCIAL HIGHLIGHTS
Fiscal period ended June 30, --------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 1986** --------- --------- --------- --------- --------- --------- --------- --------- ----------- 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%++
* 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 TOTAL RETURNS
AVERAGE ANNUAL TOTAL RETURNS as of June 30, 1994 Purchase 1 year 5 years Since made ago ago inception* - ----------------------------------------- ----------- ------------ ----------- 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%
*Aug. 19, 1985
CUMULATIVE TOTAL RETURNS as of June 30, 1994 Purchase 1 year 5 years Since made ago ago inception* - ----------------------------------------- ----------- ------------ ----------- 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%
*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 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 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 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 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 - 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 THREE WAYS TO INVEST 1 BY REGULAR ACCOUNT 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
2 BY SCHEDULED INVESTMENT PLAN 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)
3 BY WIRE 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).
*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 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 TWO WAYS TO REQUEST AN EXCHANGE OR SALE OF SHARES 1 BY LETTER 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
2 BY PHONE - 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.
14 - 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
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 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:
Sales charge as a percent of:* --------------------------- Public offering Net amount Total investment price invested - ---------------------------------------------------- ------------- ------------ 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
*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 - 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 - 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 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 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 HOW TO DETERMINE THE CORRECT TIN
USE THE SOCIAL SECURITY OR EMPLOYER IDENTIFICATION NUMBER FOR THIS TYPE OF ACCOUNT: OF: - -------------------------------- -------------------------------- 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
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 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 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:
NET ASSETS OF IDS MUTUAL FUND GROUP* ANNUAL FEE - ---------------------------- --------------------- First $5 billion 0.46% Each additional $5 billion Decreasing percentages More than $50 billion 0.32%
* 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 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 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 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 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 PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1994 (UNAUDITED)
Strategy- Short-Term Federal Income Fund Fund Combined ------------ -------------- -------------- 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 ------------ -------------- -------------- ------------ -------------- --------------
See accompanying notes to pro forma combining financial statements. 3 PRO FORMA COMBINING STATEMENT OF OPERATIONS JUNE 30, 1994 (UNAUDITED)
Strategy- Federal Short-Term Income Fund Fund Adjustments Combined ----------- ------------ ----------------- ------------ 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 ----------- ------------ ----------------- ------------ ----------- ------------ ----------------- ------------ (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.
See accompanying notes to pro forma combining financial statements. 4 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 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. 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. 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.
Signatures Title - --------------------------------------------------------- -------------------------------- /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
Signatures Title - --------------------------------------------------------- -------------------------------- /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
EXHIBIT INDEX TO FORM N-14 IDS FEDERAL INCOME FUND, INC.
Exhibit Page - ------------- ----- (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.........................................
EX-4 2 EX-A 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 A-1 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. A-2 (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 (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 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 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 A-6 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 A-7 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 A-8 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 A-9 (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 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 EX-11 3 EXHIBIT 11 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 EX-12.A 4 EXHIBIT 12(A) 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 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 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. 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 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 EX-12.B 5 EXHIBIT 12(B) 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 EX-14 6 EXHIBIT 14 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 EX-17.A 7 EXHIBIT 17(A) 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. EX-17.B 8 EXHIBIT 17(B) 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. 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 () () () -----END PRIVACY-ENHANCED MESSAGE-----