<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
IDS Life Special Income Fund, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:*
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
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<PAGE>
IDS LIFE SPECIAL INCOME FUND
901 MARQUETTE AVENUE SOUTH
SUITE 2810
MINNEAPOLIS, MINNESOTA 55402-3268
NOTICE OF REGULAR MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 9, 1994
September 17, 1994
Dear Shareholder:
As an owner of, participant in, or person receiving annuity payments from
(collectively the "shareholders" to simplify the following discussions) an
annuity invested in IDS Life Special Income Fund, Inc. (the "Fund"), you are
invited to attend the regular shareholder meeting of the Fund. The meeting will
be held at 2:00 p.m. on November 9, 1994, at the Marquette Hotel, 7th and
Marquette, Minneapolis, Minnesota in the Lake Superior Room on the fourth floor.
The purposes of the meeting include the election of Board members, consideration
of a new agreement between the Fund and IDS Life Insurance Company ("IDS Life")
with changes in the fee structure, and changes to the Fund's investment
policies. The agenda for the meeting is on the next page.
Please take the time to read the proxy statement which discusses each agenda
item. The Board of Directors has approved the proposals and recommends that you
vote in favor of each item. If you were a shareholder on September 11, 1994, you
may vote at the meeting or any adjournment of the meeting. We hope you can
attend. For those of you who cannot attend, the enclosed card is for your vote.
Please be sure to sign the card and return it to us as soon as possible in the
enclosed postage-paid envelope. The latest annual report was previously mailed
to you.
LESLIE L. OGG
Secretary
IT IS IMPORTANT THAT YOU VOTE PROMPTLY. PLEASE FILL IN AND SIGN THE ENCLOSED
CARD. PROMPT RESPONSE WILL SAVE YOUR FUND THE COST OF ADDITIONAL MAILINGS.
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AGENDA
(1) To elect 14 Board members;
(2) To ratify or reject the selection of KPMG Peat Marwick as the independent
auditors for the Fund;
(3) To approve or reject a new Investment Management and Services Agreement with
IDS Life with an increase in the fee;
(4) To approve or reject a change in the investment policies of the Fund to
permit the Fund to invest all of its assets in another investment company
with substantially the same investment objectives, policies and restrictions
as the Fund;
(5) To approve or reject changes to certain of the Fund's fundamental investment
policies;
(6) To transact any other business that comes before the meeting.
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PROXY STATEMENT
As an owner of, participant in, or person receiving annuity payments from
(collectively the "shareholders" to simplify the following discussions) an
annuity invested in IDS Life Special Income Fund, Inc. (the "Fund") you are
invited to the regular shareholder meeting of the Fund, issues will be voted on
as described below.
On September 11, 1994, the Fund had shares outstanding. Although you
will vote the shares, all of the outstanding shares are held by IDS Life
Insurance Company ("IDS Life") and IDS Life Insurance Company of New York ("IDS
Life of New York"), a wholly-owned subsidiary of IDS Life. On July 31, 1994, IDS
Life held 135,328,895 shares for 213,019 persons with voting rights and IDS Life
of New York held 6,094,926 shares for 9,232 persons with voting rights.
IDS Life and IDS Life of New York are each responsible for mailing this
proxy material to you. You will notify IDS Life or IDS Life of New York, as the
case may be, as to how you want your shares voted. IDS Life and IDS Life of New
York will vote the shares held in proportion to the instructions they receive.
If proper instructions are not received, the shares will be voted in the same
ratio as those shares for which proper instructions were received from other
shareholders. It is estimated that this proxy statement will be mailed on
September 17, 1994.
To avoid the cost of further solicitation, it is important for you to vote
promptly. If you think you might not attend, please complete the card. If your
plans change and you can attend, simply see the Secretary at the meeting and
tell him you will be voting your shares in person. Also, if you change your mind
after you send in the card, you may change your vote or revoke it by writing us
or by sending another card. Make sure you sign and date the card and return it
to us.
(1) ELECTION OF BOARD MEMBERS
The Board has set the number of persons who serve on the Board at 14. Each
Board member will serve until the next regular meeting or until he or she
reaches the mandatory retirement age established by resolution of the Board.
Under the current resolution of the Board, members who were serving on the Board
of any fund in the IDS MUTUAL FUND GROUP (the "GROUP") on January 1, 1988, serve
until the end of the meeting of the Board following their 75th birthday and all
other members serve through the meeting following their 70th birthday.
In voting for Board members, you may vote all of your shares cumulatively.
This means that you have the right to give each nominee an equal number of votes
or divide the votes among the nominees as you wish. You have as many votes as
the number of shares attributed to you, including fractional shares, multiplied
by the number of members to be elected. By
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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 for James Mitchell. Mr. Mitchell is a nominee of each of the
funds offered only through annuity contracts ("Life 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 meeting except for Lynne Cheney, David
Hubers, Heinz Hutter and Angus Wurtele.
All of the nominees have agreed to serve. If an unforeseen event prevents a
nominee from serving, your votes will be cast for the election of a substitute
selected by the Board. Information about each nominee is provided below. It
includes the period of service as a Board member of funds in the GROUP, the
number of shares each owns in all the funds in the GROUP and the current
committee assignments. None of the nominees own shares in this Fund. Election
requires a vote by a majority of the shares present or represented at the
meeting.
LYNNE V. CHENEY Board member since 1994 Age 53
Distinguished Fellow, American Enterprise Institute for Public Policy Research.
Former Chair of National Endowment of the Humanities. Director, The Reader's
Digest Association Inc., Lockhead Corporation, and the Interpublic Group of
Companies, Inc. (advertising).
Shares owned: GROUP
Committee assignment: Audit
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: GROUP
Committee assignments: Contracts, Executive, Personnel
4
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DAVID R. HUBERS** Board member since 1993 Age 51
President, chief executive officer and director of IDS. Previously, senior vice
president, finance and chief financial officer of IDS.
Shares owned: GROUP
HEINZ F. HUTTER Board member since 1994 Age 65
President and chief operating officer, Cargill, Incorporated (commodity
merchants and processors) since February 1991. Executive vice president from
1981 to February 1991.
Shares owned: GROUP
ANNE P. JONES Board member since 1985 Age 59
Partner, law firm of Sutherland, Asbill & Brennan. Director, Motorola, Inc. and
C-Cor Electronics, Inc.
Shares owned: GROUP
Committee assignment: Contracts
DONALD M. KENDALL Board member since 1968 Age 73
Former chairman and chief executive officer, PepsiCo, Inc.
Shares owned: GROUP
Committee assignment: Audit
MELVIN R. LAIRD Board member since 1974 Age 72
Senior counsellor for national and international affairs, The Reader's Digest
Association, Inc. Chairman of the board, COMSAT Corporation, former nine-term
congressman, secretary of defense and presidential counsellor. Director, Martin
Marietta Corp., Metropolitan Life Insurance Co., The Reader's Digest
Association, Inc., Science Applications International Corp., Wallace Reader's
Digest Funds and Public Oversight Board (SEC Practice Section, American
Institute of Certified Public Accountants).
Shares owned: GROUP
Committee assignment: Personnel
5
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LEWIS W. LEHR Board member since 1986 Age 73
Former chairman of the board and chief executive officer, Minnesota Mining and
Manufacturing Company (3M). Director, Jack Eckerd Corporation (drugstores).
Advisory Director, Peregrine Inc. (microelectronics).
Shares owned: GROUP
Committee assignments: Audit, Personnel
JAMES A. MITCHELL** Board member since 1984 Age 53
Executive Vice President, IDS. Chairman of the Board and Chief Executive
Officer, IDS Life.
Shares owned: GROUP
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: GROUP
Committee assignments: Contracts, Executive
EDSON W. SPENCER Board member since 1991 Age 68
President, Spencer Associates Inc. (consulting). Chairman of the board, Mayo
Foundation (healthcare). Former chairman of the board and chief executive
officer, Honeywell Inc. Director, Boise Cascade Corporation (forest products)
and CBS Inc. Member of International Advisory Councils, Robert Bosch (Germany)
and NEC (Japan).
Shares owned: GROUP
Committee assignments: Audit, Executive
JOHN R. THOMAS** Board member since 1987 Age 57
Senior vice president and director of IDS.
Shares owned: GROUP
WHEELOCK WHITNEY Board member since 1977 Age 68
Chairman, Whitney Management Company (manages family assets).
Shares owned: GROUP
Committee assignment: Audit, Contracts, Executive, Personnel
6
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C. ANGUS WURTELE Board member since 1994 Age 60
Chairman of the board and chief executive officer, The Valspar Corporation
(paints). Director, Bemis Corporation (packaging), Donaldson Company (air
cleaners & mufflers) and General Mills, Inc. (consumer foods).
Shares owned: GROUP
*Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, director, securityholder
and/or employee of IDS or American Express Company ("American Express").
+Shares owned by family members in which nominee disclaims any beneficial
ownership.
As of September 1, 1994, all executive officers and Board members as a group
beneficially owned directly or indirectly less than 1% of the shares of the
Fund.
The committees have been appointed to facilitate the work of the Board. The
Executive Committee has authority to act for the full Board between meetings. It
focuses on investment activities, routine compliance issues and oversight of
various operational functions. The Joint Audit Committee meets with
representatives of the independent auditors to consider the scope of annual
audits and reviews the results of those audits. It receives reports from IDS
Internal Audit that pertain to the Fund's operations and addresses special areas
of concern. The Contracts Committee, under the full Board's direction,
negotiates contracts and monitors, evaluates and reports to the Board the
performance under the terms of those contracts. The Joint Personnel Committee
makes recommendations with respect to the composition of the Board and the
compensation of the members, officers and staff of the Fund. Candidates for
vacancies on the Board must have a background that gives promise of making a
significant contribution to furthering the interests of all shareholders.
Shareholders wishing to suggest candidates should write in care of Joint
Personnel Committee, IDS MUTUAL FUND GROUP, 901 Marquette Avenue South, Suite
2810, Minneapolis, MN 55402-3268.
Over the last fiscal year, the Board held 10 meetings, the Executive
Committee met twice a month, and the Audit, Contracts and Personnel Committees
met 5, 4 and 6 times respectively. Average attendance at the Board was 92% and
no nominee attended less than 75% of the meetings of the Board and the
committees on which she or he serves except for James Mitchell (70%).
Members who are not officers of the Fund or directors of IDS receive an
annual fee and retirement benefits from the Fund. They also receive attendance
and other fees, the cost of which the Fund shares with the other funds in the
GROUP. Members of this Fund's Board receive an annual fee of $2,250 and upon
retirement at age 70, or earlier if for health reasons, such members receive
monthly payments equal to 1/2 of the annual fee divided by 12 for as
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many months as the member served on the Board up to 120 months or until the date
of death. There are no death benefits and the plan is not funded. The fees
shared with other funds are those for attendance for meetings of the Contracts
Committee or Board, $500, meetings of the Audit, Executive, and Personnel
Committees, $300, out-of state, $500, and Chair of Contracts Committee, $5,000.
Expenses also are reimbursed.
During the last fiscal year, the members of the Board, for attending up to
49 meetings, received the following compensation, in total, from all the funds
in the GROUP.
NOMINEE COMPENSATION FROM GROUP
<TABLE>
<CAPTION>
Retirement Estimated
Aggregate Benefits Annual Total Cash
Compensation Accrued as Benefit on Compensation
Nominee from Fund Fund Expenses Retirement from GROUP
- ---------------------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Lynne V. Cheney
Robert F. Froehlke
(part of year)
Anne P. Jones
Donald M. Kendall
Melvin R. Laird
Lewis W. Lehr
William R. Pearce
(part of year)
Edson W. Spencer
Wheelock Whitney
</TABLE>
Besides Mr. Pearce, who is president, the Fund's other officers are:
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.
Robert O. Schneider, 63, Controller of the Fund since 1982. [IDS title]
Melinda S. Urion, 40, Treasurer of the Fund since 19 . [IDS title]
William N. Westhoff, 47, Vice President -- Investments since 1991. [IDS
title]
Officers serve at the pleasure of the Board.
During the last fiscal year, no officer earned more than $60,000 from the
Fund. All officers as a group (five persons) earned cash compensation from the
Fund, including salaries and thrift plan, of $46,130 for the last fiscal year.
8
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(2) RATIFY OR REJECT THE SELECTION OF
KPMG PEAT MARWICK AS INDEPENDENT AUDITORS
For the fiscal year ending August 31, 1995, KPMG Peat Marwick has been
selected to serve as the independent auditors for the Fund. This selection was
made by the members of the Board who are not officers of the Fund or associated
with the investment manager pursuant to a recommendation by the Joint Audit
Committee. When a meeting of shareholders is held, the selection also is
considered by the shareholders.
The audit services provided to the funds in the GROUP by KPMG Peat Marwick
include the examination of the annual financial statements, assistance in
connection with filings with the Securities and Exchange Commission (the "SEC")
and meeting with the Joint Audit Committee. A representative of KPMG Peat
Marwick is expected to be at the meeting and will have the opportunity to make a
statement and answer questions.
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that you vote to
ratify the selection of the independent auditors. Ratification of the selection
requires a vote by a majority of the shares present or represented at the
meeting. If the selection of the independent auditors is not ratified, the Board
will consider what further action must be taken.
(3) APPROVE OR REJECT A NEW INVESTMENT
MANAGEMENT AND SERVICES AGREEMENT
WITH AN INCREASE IN THE FEE
IDS Life and its affiliates have provided the Fund investment advice,
administrative services, transfer agent services and distribution since the Fund
began operation.
The Fund is considering a change in its current fee structure.
Under the proposed contract, based on the net asset values and the number of
accounts invested in in the Fund in 1993, shareholders would have paid an
additional $.10 for each $1,000 invested.
BOARD DELIBERATIONS. In February, Board members who are not affiliated with
IDS (the "independent members") began an evaluation of the proposed contract
against two standards: first, it had to offer important benefits both to the
Fund and its shareholders and, second, it 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 Life 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.
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Independent members of the Board also reviewed five performance reports
prepared by IDS and IDS Life 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 and IDS Life, 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 and IDS Life 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 Life
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 Life.
The fee paid IDS Life 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 0.25% of the net assets of the Fund
itself. Under the Investment Advisory Agreement ("Advisory Agreement") with IDS,
dated July 11, 1984, IDS Life pays IDS for investment advice at a rate of 0.25%
of the Fund's average daily net assets (0.50% for Life International Equity
Fund). 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.
In addition to paying its own management fee, brokerage costs and certain
taxes, the Fund pays IDS Life or its affiliates an amount equal to the cost of
certain expenses incurred and paid by IDS Life in connection with the Fund's
operations. The expenses which the Fund has agreed to reimburse are: custodian
fees and expenses; audit expenses; costs of items sent to shareholders; postage;
fees and expenses of directors who are not officers or employees of IDS Life or
its affiliates; fees and expenses of attorneys; costs of fidelity and surety
bonds; SEC registration fees; expenses of preparing prospectuses and of printing
and distributing prospectuses to existing shareholders; losses due to theft or
other wrongdoing, or due to liabilities not covered by bond or agreement;
expenses incurred in connection with lending portfolio securities; and other
expenses properly payable by the Fund, approved by the Board. All other expenses
are borne by IDS Life.
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PROPOSED INVESTMENT MANAGEMENT AND SERVICES AGREEMENT. The proposed
agreement is the same as the current IMS Agreement except that: (a) the fee is
based solely on the assets of the Fund, not on assets of the GROUP and on the
unique characteristics of the Fund, including the Fund's use of the services
provided by IDS in the areas of investment research, portfolio management and
investment services and (b) in order to facilitate the implementation of a
master/feeder structure in the future, certain provisions relating to
administration and accounting services have been eliminated. IDS will continue
to provide those administration and accounting services under a separate
Administrative Services Agreement (the "Admin Agreement"). A copy of the
proposed IMS Agreement reflecting these changes is set forth as Exhibit A. The
proposed fees under the IMS Agreement and the Admin Agreement are shown below:
PROPOSED FEES
<TABLE>
<CAPTION>
PROPOSED IMS
AGREEMENT PROPOSED ADMIN AGREEMENT
Assets Annual Rate At Annual Rate At
(Billions) Each Asset Level Each Asset Level
- ---------- ---------------- -----------------------------
<S> <C> <C>
First $1 0.% 0.%
Next $1 0. 0.
Next $1 0. 0.
Next $3 0. 0.
Over $6 0. 0.
</TABLE>
Based on the current net assets in the GROUP, the effective rate paid by the
Fund under the current IMS Agreement is 0. % and under the proposed IMS
Agreement is 0. %. In subsequent years, the Board could consider changing the
fees under the Admin Agreement without shareholder approval.
On July 31, 1994, the Fund's net assets were approximately $1.6 billion; for
1993, approximately $1.6 billion; and for 1992, approximately $1.1 billion.
The Board's independent members based their evaluation of the proposed IMS
Agreement on a number of factors. The IDS annual report on investment
performance describes the total return of each of the funds in the GROUP;
reviews IDS' organizational structure and the performance of the portfolio
managers; and provides other information about IDS' and IDS Life's
qualifications to serve as investment adviser. Periodic reports to committees of
the Board reflect the ability of IDS and IDS Life 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
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<PAGE>
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 Life 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 Life's accurate and timely
recordkeeping and, as a GROUP, a majority of funds are consistently in the
second quartile of their competitive groupings.
- 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 and proposed Admin Agreement had been in effect are shown
below:
FUND EXPENSES
(AS A PERCENT OF AVERAGE DAILY NET ASSETS)
<TABLE>
<CAPTION>
Actual Pro Forma
------------ ------------
<S> <C> <C>
Annual Operating Expenses
IMS Agreement
Other Expenses
Total Fund Operating Expenses
</TABLE>
EXAMPLE: Suppose for each year for the next 10 years, fund expenses are as
above and annual return is 5%. If you sold your shares at the end of the
following years, for each $1,000 invested, you would pay total expenses of:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
</TABLE>
If the proposed IMS Agreement had been in effect, in the last fiscal year
the Fund would have paid $ to IDS Life under that agreement, an increase
of %.
For the last fiscal year, IDS Life received $ from the Fund under the
IMS Agreement. In addition, IDS received $ from IDS Life pursuant to the
Advisory Agreement.
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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 and IDS Life have provided and expect
to provide under the proposed contract. They considered IDS and IDS Life's
present distribution strategies, past success and willingness to invest
additional resources in developing new markets for the Fund. They noted IDS and
IDS Life's commitment to compliance with all applicable laws and regulations and
the benefits IDS and IDS Life receive from relationships with the Fund. The
members considered IDS and IDS Life's investment performance; the Fund's expense
ratio; the profitability IDS and IDS Life realize from investment company
operations; and the trend of IDS and IDS Life 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 and IDS Life's 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 Life or by a vote of a majority of the outstanding shares of the
Fund.
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that you approve the
proposed IMS Agreement. Approval requires the affirmative vote of the majority
of the outstanding shares of the Fund which the Investment Company Act of 1940
(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.
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(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
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. The
master/feeder structure will be implemented for the Fund only if the Board
determines that it is in the best interest of the Fund and its shareholders and
any issues relating to current interpretations and federal tax laws are
resolved.
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 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 you approve the
new investment policy. Approval requires the affirmative vote of 67% or more of
the shares represented at the meeting if more than 50% are represented or more
than 50% of the shares entitled to vote, whichever is less. If the change is not
approved, the Fund will continue to operate in the same fashion as it is now
operating.
(5) APPROVE OR REJECT CHANGES TO FUNDAMENTAL POLICIES
The Fund has a number of investment policies that can be changed only with
approval of shareholders. These policies are referred to as "fundamental"
policies. Policies that can be changed by the Board are called "non-
fundamental". The Board recommends changing the fundamental policies described
below. These policies were established a number of years ago. New
14
<PAGE>
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 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. Under existing investment policies, the
Fund can implement the same type of strategies using derivative instruments.
Depending on market conditions, however, it may be preferable to pursue a
strategy in the cash market instead of the derivatives market. To assure the
proper use of leverage transactions, the Fund imposes limitations. One
limitation is that its investment portfolio must have investment performance
characteristics similar to those it would have if all of its assets were
invested in the cash market. Accordingly, its investment portfolio overall will
not be leveraged. If the policies pertaining to use of margin and short-selling
are non-fundamental, as market conditions change, the Board can consider
requests of the portfolio manager to employ investment strategies using these
techniques.
B. PERMIT THE BOARD TO ESTABLISH POLICIES FOR INVESTING IN OTHER INVESTMENT
COMPANIES. The Fund is prohibited from investing in other investment companies
except by purchases in the open market where the dealer's or sponsor's profit is
the regular commission. This policy was adopted to conform to current law. It
may be appropriate to make such investments in ways other than open market
purchases in the future if the law changes. If the policy is changed to
non-fundamental, the Board could react to changes in the law.
C. 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.
D. PERMIT THE BOARD TO ESTABLISH POLICIES FOR INVESTING IN OIL, GAS OR
OTHER MINERAL EXPLORATION OR DEVELOPMENT PROGRAMS. Currently, the law
15
<PAGE>
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.
E. PERMIT THE BOARD TO ESTABLISH POLICIES WITH RESPECT TO INVESTMENTS IN
ILLIQUID SECURITIES. The Fund may not invest more than 10% of its net assets in
securities and derivative instruments that cannot be sold in the ordinary course
of business. Changing this policy to non-fundamental would permit the Board to
change the limit as appropriate.
F. REVISE THE FUNDAMENTAL POLICY ON MAKING LOANS. Currently, the Fund has
a fundamental policy prohibiting it from making cash loans. It is proposed to
revise the policy to state that "THE FUND MAY 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.
G. REVISE THE FUNDAMENTAL POLICY ON INVESTING IN REAL ESTATE. Currently,
the Fund has a fundamental policy that states that the Fund will not buy or sell
real estate, commodities or commodity contracts, except the Fund may enter into
futures contracts. It is proposed to separate the policy into two parts. The
commodities policy will remain unchanged. The real estate policy will be revised
as follows: "THE FUND WILL NOT BUY OR SELL REAL ESTATE, UNLESS ACQUIRED AS A
RESULT OF OWNERSHIP OF SECURITIES OR OTHER INSTRUMENTS, EXCEPT THIS SHALL NOT
PREVENT THE FUND FROM INVESTING IN SECURITIES OR OTHER INSTRUMENTS BACKED BY
REAL ESTATE OR SECURITIES OF COMPANIES ENGAGED IN THE REAL ESTATE BUSINESS." The
Fund does not expect to hold real estate directly. However, it may invest in
securities issued or guaranteed by companies engaged in acquiring, constructing,
financing, developing or operating real estate projects, including real estate
investment trusts (REITs).
RECOMMENDATION AND VOTE REQUIRED. The Board recommends that you 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.
16
<PAGE>
CERTAIN INFORMATION CONCERNING IDS LIFE
PRESIDENT AND BOARD OF DIRECTORS OF IDS LIFE. Richard W. Kling is President
and James A. Mitchell is Chief Executive Officer of IDS Life. Listed below are
the names and principal occupations of the directors of IDS Life as of July 31,
1994. The address of each director is IDS Tower 10, Minneapolis, Minnesota
55440-0010.
<TABLE>
<CAPTION>
Name Principal Occupation
- --------------------- ------------------------------------------------
<S> <C>
Louis C. Fornetti Senior Vice President and Chief Financial
Officer, IDS
David R. Hubers President and Chief Executive Officer, IDS
Richard W. Kling President
Paul F. Kolkman Vice President
Peter A. Lefferts Executive Vice President
Janis E. Miller Executive Vice President
James A. Mitchell Chairman of the Board and Chief Executive
Officer
Barry J. Murphy Executive Vice President
Stuart A. Sedlacek Vice President
Melinda S. Urion Vice President and Corporate Controller
</TABLE>
IDS Life and IDS Life of New York are the record holders of all outstanding
shares of the Life Funds. These shares were purchased and are currently held by
IDS Life and IDS Life of New York pursuant to instructions from shareholders of
annuity contracts issued by IDS Life and IDS Life of New York.
OWNERSHIP AND HEADQUARTERS OF IDS LIFE. The mailing address of IDS Life is
IDS Tower 10, Minneapolis, Minnesota 55440-0010. IDS Life is a wholly-owned
subsidiary of IDS, IDS Tower 10, Minneapolis, Minnesota 55440-0010.
17
<PAGE>
CERTAIN INFORMATION CONCERNING IDS
IDS is the adviser or subadviser for the 42 funds in the GROUP. The size of
each fund, as of July 31, 1994, and the fee schedule for each fund under its
management agreement are shown below:
<TABLE>
<CAPTION>
Name Net Assets
- ----------------------- ----------------
<S> <C>
Publicly Offered Funds
(Non-Money Market):
-------------------
Blue Chip
Advantage............ $ 142,209,588
Bond................... 2,259,063,867
California
Tax-Exempt........... 258,866,435
Discovery.............. 522,606,718
Diversified Equity
Income............... 864,567,489
Equity Plus............ 607,697,337
Extra Income........... 1,671,295,135
Federal Income......... 1,029,328,886
Global Bond............ 452,984,951
Global Growth.......... 568,444,460
Growth................. 951,623,593
High Yield............. 6,356,086,929
Insured
Tax-Exempt........... 533,030,027
International.......... 721,297,012
Managed
Retirement........... 2,127,121,745
Massachusetts
Tax-Exempt........... 72,980,822
Michigan
Tax-Exempt........... 77,856,447
<CAPTION>
Name Net Assets
- ----------------------- ----------------
<S> <C>
Minnesota
Tax-Exempt........... $ 415,296,413
Mutual................. 3,036,337,955
New Dimensions......... 4,110,064,854
New York
Tax-Exempt........... 121,406,333
Ohio
Tax-Exempt........... 72,861,916
Precious Metals........ 68,615,909
Progressive............ 268,085,661
Selective.............. 1,510,417,028
Stock.................. 2,288,148,561
Strategy --
Aggressive
Equity............. 642,558,227
Equity............... 1,145,543,613
Income............... 706,837,475
Short-Term Income.... 217,227,269
Worldwide Growth..... 276,483,905
Tax-Exempt Bond........ 1,190,034,011
Utilities Income....... 658,813,634
</TABLE>
Life Funds Offered Only Through Annuities
(Non-Money Market):
- -------------------
<TABLE>
<S> <C>
Aggressive Growth....... $ 669,816,381
Capital Resource........ 2,714,729,872
International Equity.... $1,029,638,190
Managed................. 2,414,506,241
Special Income.......... 1,577,327,715
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Group Asset Charge
- ---------------------------------------------------
Group Assets Annual Rate at Effective
(in billions) Each Asset Level Annual Rate
- --------------- ---------------- -----------
<S> <C> <C>
First $5 0.46% 0.46%
Next $5 0.44 0.45
Next $5 0.42 0.44
Next $5 0.40 0.43
Next $5 0.39 0.422
Next $5 0.38 0.415
Next $5 0.36 0.407
Next $5 0.35 0.40
Next $5 0.34 0.393
Next $5 0.33 0.387
Over $50 0.32
</TABLE>
- ----------------------------------------------------------------
Individual Asset Charge
- --------------------------------------------------------------------------------
(% of average daily net assets)
<TABLE>
<S> <C>
Blue Chip Advantage...... 0.10%
Bond..................... 0.13
California Tax-Exempt.... 0.13
Discovery................ 0.23
Diversified Equity
Income.................. 0.14
Equity Plus.............. 0.14
Extra Income............. 0.21
Federal Income........... 0.13
Global Bond.............. 0.46
Global Growth............ 0.46
Growth................... 0.23
High Yield............... 0.11
Insured Tax-Exempt....... 0.13
International............ 0.46
Managed Retirement....... 0.14
Massachusetts
Tax-Exempt.............. 0.13
Michigan
Tax-Exempt.............. 0.13
Minnesota
Tax-Exempt.............. 0.13
Mutual................... 0.14
New Dimensions........... 0.23%
New York
Tax-Exempt.............. 0.13
Ohio Tax-Exempt.......... 0.13
Precious Metals.......... 0.46
Progressive.............. 0.23
Selective................ 0.13
Stock.................... 0.14
Strategy --
Aggressive Equity...... 0.23
Equity................. 0.14
Income................. 0.13
Short-Term Income...... 0.13
Worldwide Growth....... 0.46
Tax-Exempt Bond.......... 0.13
Utilities Income......... 0.14
Life Aggressive Growth... 0.25
Life Capital Resource.... 0.25
Life International
Equity.................. 0.50
Life Managed............. 0.25
Life Special Income...... 0.25
</TABLE>
- ----------------------------------------------------------------
19
<PAGE>
Money Market Funds:
- -------------------
<TABLE>
<CAPTION>
Name Net Assets
- --------------------- ----------------
<S> <C>
Cash $ 1,153,600,779
Planned Investment 25,859,200
<CAPTION>
Name Net Assets
- --------------------- ----------------
<S> <C>
Tax-Free $ 120,773,901
Life Moneyshare 184,907,484
</TABLE>
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Asset Charge
(in Cash Planned
Money Market Funds billions) Tax-Free Investment Moneyshare
- ------------------------------ ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Cash First $1 0.34% 0.20% 0.54%
Planned Investment Next 0.5 0.32 0.18 0.52
Tax-Free Next 0.5 0.30 0.16 0.50
Life Moneyshare Next 0.5 0.28 0.14 0.48
Over 2.5 0.26 0.12 0.46
</TABLE>
IDS manages investments for its own account and has an investment advisory
agreement with a subsidiary, IDS Certificate Company ("IDSC"), a face amount
certificate company having total assets, as of July 31, 1994, of approximately
$2.8 billion. The current advisory agreement between IDS and IDSC provides for a
graduated scale of fees equal on an annual basis to 0.75% of the first $250
million total book value (carrying cost) of assets of IDSC, 0.65% on the next
$250 million, 0.55% on the next $250 million, 0.50% on the next $250 million and
0.45% on the value in excess of $1 billion. Not included in this computation are
mortgages, real estate and other assets on which IDSC pays a service fee leaving
a balance of approximately $2.5 billion.
IDS has advisory agreements to furnish investment advice to IDS Life
relative to investment of the six Life Funds in the GROUP described above as
well as the three additional funds listed below. The fee under each advisory
agreement is 0.25% of the Fund's average daily net assets (0.50% for Life
International Equity Fund). The size of the three additional funds, as of July
31, 1994 is:
<TABLE>
<CAPTION>
Net Assets
----------------
<S> <C>
IDS Life Variable Annuity A $ 228,562,074
IDS Life Variable Annuity B 505,695,830
IDS Life Series Fund, Inc. --
Equity Portfolio 160,257,659
Government Securities Portfolio 11,431,837
Income Portfolio 34,594,515
Managed Portfolio 174,232,786
Money Market Portfolio 10,130,671
</TABLE>
There are additional expenses that apply to the variable accounts and the
life insurance policies or annuity contracts.
20
<PAGE>
IDS is paid at a rate of 1% of the net assets for providing investment
advice to Sunrise Fund which had net assets of $63,696,199 as of July 31, 1994.
PRESIDENT AND BOARD OF DIRECTORS OF IDS. David R. Hubers is President and
Chief Executive Officer of IDS. Listed below are the names and principal
occupations of the directors of IDS as of July 31, 1994. Except as otherwise
noted below, the address of each director is IDS Tower, Minneapolis, MN
55440-0010.
<TABLE>
<CAPTION>
Name and Address Principal Occupation
- -------------------------------------------- -----------------------------------
<S> <C>
Peter J. Anderson Sr. Vice President
Karl J. Breyer Sr. Vice President and General
Counsel
James E. Choat Sr. Vice President
William H. Dudley Executive Vice President
Roger S. Edgar Sr. Vice President
Gordon L. Eid Sr. Vice President and Deputy
General Counsel
Louis C. Fornetti Sr. Vice President
Harvey Golub Chairman, American Express
American Express
New York, New York
David R. Hubers President and Chief Executive
Officer
Marietta L. Johns Sr. Vice President
Susan D. Kinder Sr. Vice President
Steven C. Kumagai Sr. Vice President
Peter A. Lefferts Sr. Vice President
Douglas A. Lennick Exec. Vice President
Jonathan S. Linen Vice Chairman, American Express
American Express
New York, New York
James A. Mitchell Exec. Vice President
Barry Murphy Sr. Vice President
Erven A. Samsel Sr. Vice President
R. Reed Saunders Sr. Vice President
Jeffrey E. Stiefler President, American Express
American Express
New York, New York
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address Principal Occupation
- -------------------------------------------- -----------------------------------
<S> <C>
Fenton R. Talbot Sr. Vice President, American
American Express Express
New York, New York
John R. Thomas Sr. Vice President
Norman Weaver, Jr. Sr. Vice President
William N. Westhoff Sr. Vice President
Michael R. Woodward Sr. Vice President
</TABLE>
IDS is a wholly owned subsidiary of American Express. American Express is a
financial services company located at American Express Tower, World Financial
Center, New York, New York.
MISCELLANEOUS
INVESTMENT DECISIONS, PORTFOLIO TRANSACTIONS AND BROKERAGE. Each investment
decision made for the Fund is made independently from any decision made for
another fund in the GROUP or other account advised by IDS or IDS Life or any of
its subsidiaries. On occasion the Fund and one of the other funds in the GROUP
or another client of the investment manager may simultaneously purchase or sell
the same security. In that case, IDS or IDS Life executes the transaction in a
manner which the Fund agrees in advance is fair. Ordinarily, the transactions of
the Fund and another fund or client of IDS or IDS Life will be averaged as to
price and allocated as to amount between the Fund and the other fund or client
pursuant to a formula considered equitable by the parties to the transactions.
Although sharing in large transactions may at times adversely affect the price
or volume of securities purchased or sold by the Fund, the Fund hopes to gain an
overall advantage in execution.
In selecting broker-dealers to execute transactions, IDS or IDS Life may
consider the price of the security, including commission or mark-up, the size
and difficulty of the order, the reliability, integrity, financial soundness and
general operation and execution capabilities of the broker, the broker's
expertise in particular markets, and research services provided by the broker.
Under the IMS Agreement, IDS Life has responsibility for making the Fund's
investment decisions, for effecting the execution of trades for the Fund's
portfolio and for negotiating brokerage commissions. Under the Advisory
Agreement, IDS is authorized to execute trades and negotiate commissions on the
Fund's behalf. When IDS acts on IDS Life's behalf for the Fund, IDS follows the
procedures described here as applicable to IDS Life.
IDS Life is directed to use its best efforts to obtain the best available
price and most favorable execution except where otherwise authorized by the
Board. In so doing, if, in the professional opinion of the person responsible
22
<PAGE>
for selecting the broker or dealer, several firms can execute the transaction on
that basis, consideration will be given to those firms that offer research
services. Research services may be used by IDS and IDS Life in providing advice
to all the funds in the GROUP or to other accounts advised by IDS and IDS Life
and, according to IDS and IDS Life, it is not possible to relate the benefits to
any particular fund or account.
During the last fiscal year, the Fund paid brokerage commissions aggregating
$14,954. Substantially all firms through whom transactions were executed provide
research services. Transactions amounting to $-0-, on which $-0-in commissions
were paid, were specifically directed to firms.
Certain brokerage transactions were executed through broker-dealer
affiliates of IDS as shown in the table below:
<TABLE>
<CAPTION>
Percent of
Total Value
of
Percent Trades Where
Nature of Amount of of All Commissions
Broker Affiliation* Commissions Commissions Were Paid
- ------------------------- ----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
None 1 $ % %
2
<FN>
* Nature of affiliation
(1) Under common control with IDS as a subsidiary of American Express
(2) Wholly owned subsidiary of IDS.
</TABLE>
These transactions were executed at rates determined to be reasonable and
fair as compared to the rates another broker would charge, pursuant to
procedures adopted by the Board.
OTHER BUSINESS. At this time the Board does not know of any other business
to come before the meetings. If something does come up, the proxies will use
their best judgment to vote for you on the matter.
SIMULTANEOUS MEETINGS. The regular meeting of shareholders of the Fund is
called to be held at the same time as the regular meetings of shareholders of
the other funds in the GROUP. It is anticipated that all meetings will be held
simultaneously. If any shareholder at the Fund's meeting objects to the holding
of a simultaneous meeting, the shareholder may move for an adjournment of the
Fund's meeting to a time immediately after the simultaneous meetings so that a
meeting of the Fund may be held separately. Should such a motion be made, the
persons named as proxies will take into consideration the reasons for the
objection in deciding whether to vote in favor of the adjournment.
SOLICITATION OF PROXIES. The Board is asking for your vote and for you to
return the proxy card by mail as promptly as possible. The Fund will pay
23
<PAGE>
the expenses for the proxy material and the postage. Supplementary solicitations
may be made by mail, telephone, telegraph or personal contact by financial
planners. The expenses of supplementary solicitation will be paid by the Fund.
SHAREHOLDER PROPOSALS. The Fund does not hold regular meetings of
shareholders on an annual basis. Therefore, no anticipated date of the next
regular meeting can be provided. If a shareholder has a proposal which she or he
feels should be presented to all shareholders, the shareholder should send the
proposal to the President of the Fund. The proposal will be considered at a
meeting of the Board as soon as practicable. Should it be a matter which would
have to be submitted to shareholders, it will be presented at the next special
or regular meeting of shareholders. In addition, should it be a matter which the
Board deems of such significance as to require a special meeting, such a meeting
will be called.
ADJOURNMENT. In the event that sufficient votes in favor of any of the
proposals set forth in the Notice of the Meeting and Proxy Statement are not
received by the time scheduled for the meeting, the persons named as proxies may
move for one or more adjournments of the meeting for a period or periods of not
more than 60 days in the aggregate to permit further solicitation of proxies
with respect to any of the proposals. Any adjournment will require the
affirmative vote of a majority of the shares present at the meeting. The persons
named as proxies will vote in favor of adjournment those shares which they are
entitled to vote which have voted in favor of the proposals. They will vote
against any adjournment those proxies which have voted against any of the
proposals. The costs of any additional solicitation and of any adjourned session
will be borne by the Fund.
By Order of the Board LESLIE L. OGG
September 17, 1994 Secretary
IMPORTANT! IF YOU DO NOT INTEND TO BE AT THE MEETING IN PERSON, PLEASE FILL IN
AND SIGN THE ENCLOSED PROXY AND MAIL IT AT ONCE. A RETURN ENVELOPE IS ENCLOSED
FOR YOUR CONVENIENCE.
24
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
<TABLE>
<CAPTION>
December 31,
1993
-------------
(Thousands)
<S> <C>
ASSETS
Investments:
Fixed maturities (Fair value: $20,425,979).............. $19,392,424
Mortgage loans on real estate (Fair value:
$2,125,686)........................................... 2,055,450
Policy loans.............................................. 350,501
Other investments......................................... 56,307
-------------
Total investments......................................... 21,854,682
-------------
Cash and cash equivalents................................. 146,281
Receivables:
Reinsurance............................................. 55,298
Amounts due from brokers................................ 5,719
Other accounts receivable............................... 21,459
Premiums due............................................ 1,329
-------------
Total receivables......................................... 83,805
-------------
Accrued investment income................................. 307,177
Deferred policy acquisition costs......................... 1,652,384
Other assets.............................................. 21,730
Assets held in segregated asset accounts, primarily common
stocks at market........................................ 8,991,694
-------------
Total assets...................................... $33,057,753
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities......................................... $ 18,492,135
Universal life-type insurance........................... 2,753,455
Traditional life-type insurance......................... 210,205
Disability income, health and long-term care
insurance............................................. 185,272
Policy claims and other policyholders' funds.............. 44,516
Deferred federal income taxes............................. 43,620
Amounts due to brokers.................................... 351,486
Other liabilities......................................... 292,024
Liabilities related to segregated asset accounts.......... 8,991,694
-------------
Total liabilities................................. 31,364,407
-------------
Stockholder's equity:
Capital stock, $30 per value per share; 100,000 shares
authorized, issued and outstanding...................... 3,000
Additional paid-in capital................................ 222,000
Net unrealized appreciation on equity securities.......... 114
Retained earnings......................................... 1,468,232
-------------
Total stockholder's equity........................ 1,693,346
-------------
Total liabilities and stockholder's equity................ $ 33,057,753
-------------
-------------
Commitments and contingencies (Note 6)
</TABLE>
See accompanying notes to consolidated balance sheet.
F-1
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. IDS Life Insurance Company (the Company) is engaged in
the insurance and annuity business. The Company sells various forms of fixed and
variable individual life insurance, group life insurance, individual and group
disability income insurance, long-term care insurance, and single and
installment premium fixed and variable annuities.
BASIS OF PRESENTATION. The Company is a wholly owned subsidiary of IDS
Financial Corporation (IDS), which is a wholly owned subsidiary of American
Express Company. The accompanying consolidated balance sheet includes the
accounts of the Company and its wholly owned subsidiaries, IDS Life Insurance
Company of New York and American Enterprise Life Insurance Company. All material
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated balance sheet has been prepared in conformity
with generally accepted accounting principles which vary in certain respects
from reporting practices prescribed or permitted by state insurance regulatory
authorities. Also, the consolidated balance sheet is presented on a historical
cost basis without adjustment of the net assets attributable to the 1984
acquisition of IDS by American Express Company.
INVESTMENTS. Investments in fixed maturities are carried at cost, adjusted
where appropriate for amortization of premiums and accretion of discounts.
Mortgage loans on real estate are carried principally at the unpaid principal
balances of the related loans. Policy loans are carried at the aggregate of the
unpaid loan balances which do not exceed the cash surrender values of the
related policies. Other investments include interest rate caps, real estate and
equity securities. When evidence indicates a decline, which is other than
temporary, in the underlying value or earning power of individual investments,
such investments are written down to the estimated realizable value by a charge
to income. Equity securities are carried at market value and the related net
unrealized appreciation or depreciation is reported as a credit or charge to
stockholder's equity.
The Company has the ability and the intent to recover the costs of these
investments by holding them for the forseeable future. The ability to hold
investments to scheduled maturity dates is dependent on, among other things,
annuity contract owners maintaining their annuity contracts in force.
The Company will implement, effective January 1, 1994, Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the new rules, debt securities that the
Company has both the positive intent and ability to hold to maturity will be
carried at amortized cost. Debt securities that the Company does not
F-2
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
have the positive intent and ability to hold to maturity and all marketable
equity securities will be classified as available-for-sale and carried at fair
value. Unrealized gains and losses on securites classified as available-for-sale
will be carried as a separate component of stockholder's equity. The effect of
the new rules will be to increase stockholder's equity by approximately $181
million, net of taxes, as of January 1, 1994, but the new rules will have no
material impact on the Company's results of operations.
Interest rate cap contracts are purchased to reduce the Company's exposure
to rising interest rates which would increase the cost of future policy benefits
for interest sensitive products. Costs are amortized over the lives of the
agreements and benefits are recognized when realized.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received from
brokers who deal in mortgage-backed securities.
DEFERRED POLICY ACQUISITION COSTS. The costs of acquiring new business,
principally sales compensation, policy issue costs, underwriting and certain
sales expenses, have been deferred on insurance and annuity contracts. The
deferred acquisition costs for single premium deferred annuities and installment
annuities are amortized based upon surrender charge revenue and a portion of the
excess of investment income earned from investment of the contract
considerations over the interest credited to contract owners. The costs for
universal life-type insurance are amortized over the lives of the policies as a
percentage of the estimated gross profits expected to be realized on the
policies. For traditional life, disability income, health and long-term care
insurance policies, the costs are amortized over an appropriate period in
proportion to premium revenue.
LIABILITIES FOR FUTURE POLICY BENEFITS. Liabilities for universal life-type
insurance, single premium deferred annuities and installment annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on the
Progressive Annuity Table with interest at 5 percent, the 1971 Individual
Annuity Table with interest at 7 percent or 8.25 percent, or the 1983a Table
with various interest rates ranging from 5.5 percent to 9.5 percent, depending
on year of issue.
Liabilities for future benefits on traditional life insurance have been
computed principally by the net level premium method, based on anticipated rates
of mortality (approximating the 1965-1970 Select and Ultimate Basic Table for
policies issued after 1980 and the 1955-1960 Select and Ultimate
F-3
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Basic Table for policies issued prior to 1981), policy persistency derived from
Company experience data (first year rates ranging from approximately 70 percent
to 90 percent and increasing rates thereafter), and estimated future investment
yields of 4 percent for policies issued before 1974 and 5.25 percent for
policies issued from 1974 to 1980. Cash value plans issued in 1980 and later
assume future investment rates that grade from 9.5 percent to 5 percent over 20
years. Term insurance issued from 1981 to 1984 assumes an 8 percent level
investment rate and term insurance issued after 1984 assumes investment rates
that grade from 10 percent to 6 percent over 20 years.
Liabilities for future disability income policy benefits have been computed
principally by the net level premium method, based on the 1964 Commissioners
Disability Table with the 1958 Commissioners Standard Ordinary Mortality Table
at 3 percent interest for 1980 and prior, 8 percent interest for persons
disabled from 1981 to 1991 and 6 percent interest for persons disabled after
1991.
Liabilities for future benefits on long-term care insurance have been
computed principally by the net level premium method, using morbidity rates
based on the 1985 National Nursing Home Survey and mortality rates based on the
1983a Table. The interest rate basis is 9.5 percent grading to 7 percent over
ten years for policies issued from 1989 to 1992, 7.75 percent grading to 7
percent over four years for policies issued after 1992, 8 percent for claims
incurred in 1989 to 1991 and 6 percent for claims incurred after 1991.
At December 31, 1993, the carrying amount and fair value of fixed annuities
future policy benefits, after excluding life insurance-related contracts carried
at $913,127, were $17,579,008 and $16,881,747, respectively. The fair value is
net of policy loans of $59,132. The fair value of these benefits is based on the
status of the annuities at December 31, 1993. The fair value of deferred
annuities is estimated as the carrying amount less any surrender charges and
related loans. The fair value for annuities in non-life contingent payout status
is estimated as the present value of projected benefit payments at the rate
appropriate for contracts issued in 1993.
REINSURANCE. The maximum amount of life insurance risk retained by the
Company on any one life is $750 of life and waiver of premium benefits plus $50
of accidental death benefits. The maximum amount of disability income risk
retained by the Company on any one life is $6 of monthly benefit for benefit
periods longer than three years. The excesses are reinsured with other life
insurance companies on a yearly renewable term basis. Graded premium whole life
policies and long term care are primarily reinsured on a coinsurance basis.
F-4
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
In 1993 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." Under SFAS No. 113, amounts paid or deemed to have
been paid for reinsurance contracts are recorded as reinsurance receivables.
Prior to 1993, these amounts were recorded as a reduction of the liability for
future insurance policy benefits. The cost of reinsurance is accounted for over
the period covered by the reinsurance contract.
FEDERAL INCOME TAXES. The Company's taxable income is included in the
consolidated federal income tax return of American Express Company. The Company
provides for income taxes on a separate return basis, except that, under an
agreement between IDS and American Express Company, tax benefit is recognized
for losses to the extent they can be used on the consolidated tax return. It is
the policy of IDS and its subsidiaries that IDS will reimburse a subsidiary for
any tax benefit.
Included in other liabilities at December 31, 1993 is $14,709 payable to IDS
for federal income taxes.
SEGREGATED ASSET ACCOUNT BUSINESS. The segregated asset account assets and
liabilities represent funds held for the exclusive benefit of the variable
annuity and variable life insurance contract owners. The Company receives
investment management and mortality and expense assurance fees from the variable
annuity and variable life insurance mutual funds and segregated asset accounts.
The Company also deducts a monthly cost of insurance charge and receives a
minimum death benefit guarantee fee and issue and administrative fee from the
variable life insurance segregated asset accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the segregated asset accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and the beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the segregated asset accounts for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company guarantees, for
the variable life insurance policyholders, the cost of the contractual insurance
rate and that the death benefit will never be less than the death benefit at the
date of issuance.
F-5
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
At December 31, 1993 the fair value of liabilities related to segregated
asset accounts was $8,305,209. The fair value of these liabilities is estimated
as the carrying amount less variable insurance contracts carried at $346,276 and
surrender charges, if applicable.
2. INVESTMENTS
Market values of investments in fixed maturities represent quoted market
prices and estimated fair values when quoted prices are not available. Estimated
fair values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers and
financial files.
The change in net unrealized appreciation (depreciation) of investments for
the year ended December 31, 1993 is summarized as follows:
<TABLE>
<S> <C>
Fixed maturities..................... $ 323,060
Equity securities.................... (156)
</TABLE>
Fair values of and gross unrealized gains and losses on investments in fixed
maturities carried at amortized cost at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government agency
obligations $ 63,532 $ 3,546 $ 1,377 $ 65,701
State and municipal obligations 11,072 2,380 -- 13,452
Corporate bonds and obligations 9,362,074 768,747 45,706 10,085,115
Mortgage-backed securities 9,978,523 341,067 57,879 10,261,711
------------- ------------ ----------- -------------
19,415,201 1,115,740 104,962 20,425,979
Less allowance for losses 22,777 -- 22,777 --
------------- ------------ ----------- -------------
$ 19,392,424 $ 1,115,740 $ 82,185 $ 20,425,979
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
</TABLE>
The amortized cost and fair value of investments in fixed maturities at
December 31, 1993 by contractual maturity are shown below. Expected
F-6
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
2. INVESTMENTS -- CONTINUED
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 89,160 $ 90,928
Due from one to five years 1,430,756 1,532,298
Due from five to ten years 5,488,955 5,924,580
Due in more than ten years 2,427,807 2,616,462
Mortgage-backed securities 9,978,523 10,261,711
------------- -------------
$ 19,415,201 $ 20,425,979
------------- -------------
------------- -------------
</TABLE>
At December 31, 1993, the amount of net unrealized appreciation on equity
securities included $160 of gross unrealized appreciation, $nil of gross
unrealized depreciation and deferred tax credits of $46. The fair value of
equity securities was $1,900 at December 31, 1993.
Included in other investments at December 31, 1993 are interest rate caps at
amortized cost of $26,923 with a fair value of $14,201. These interest rate caps
carry a notional amount of $4,400,000 and expire on various dates from 1994 to
1998.
At December 31, 1993, bonds carried at $4,184 were on deposit with various
states as required by law.
At December 31, 1993, investments in fixed maturities comprised 89 percent
of the Company's total invested assets. These securities are rated by Moody's
and Standard & Poor's (S&P), except for approximately $2.1 billion which is
rated by IDS internal analysts using criteria similar to Moody's and S&P. A
summary of investments in fixed maturities by rating on December 31, 1993 is as
follows:
<TABLE>
<CAPTION>
Rating
- -------------------------------------------
<S> <C>
Aaa/AAA $ 9,959,884
Aa/AA 258,659
Aa/A 160,638
A/A 2,021,177
A/BBB 654,949
Baa/BBB 3,936,366
Baa/BB 717,606
Below investment grade 1,705,922
-------------
$ 19,415,201
-------------
-------------
</TABLE>
F-7
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
2. INVESTMENTS -- CONTINUED
At December 31, 1993, 99 percent of the securities rated Aaa/AAA are GNMA,
FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than 1 percent of the Company's total investments in fixed maturities.
At December 31, 1993, approximately 9.4 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by region
of the United States and by type of real estate at December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
On Balance Commitments
Region Sheet to Purchase
- ------------------------------------------ ------------ -------------
<S> <C> <C>
East North Central $ 552,150 $ 20,933
West North Central 361,704 16,746
South Atlantic 452,679 52,440
Middle Atlantic 260,239 41,090
New England 155,214 17,620
Pacific 120,378 15,492
West South Central 43,948 525
East South Central 73,748 --
Mountain 70,410 14,594
------------ -------------
2,090,470 179,440
Less allowance for losses 35,020 --
------------ -------------
$ 2,055,450 $ 179,440
------------ -------------
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
On Balance Commitments
Property Type Sheet to Purchase
- ------------------------------------------ ------------ -------------
<S> <C> <C>
Apartments $ 744,788 $ 79,153
Department/retail stores 624,651 65,402
Office buildings 234,042 15,583
Industrial buildings 217,648 9,279
Nursing/retirement homes 83,768 917
Hotels/motels 33,138 --
Medical buildings 30,429 5,954
Residential 78 --
Other 121,928 3,152
------------ -------------
2,090,470 179,440
Less allowance for losses 35,020 --
------------ -------------
$ 2,055,450 $ 179,440
------------ -------------
------------ -------------
</TABLE>
F-8
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
2. INVESTMENTS -- CONTINUED
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at the
time of origination of the loan. The Company holds the mortgage document, which
gives the right to take possession of the property if the borrower fails to
perform according to the terms of the agreement. The fair value of the mortgage
loans is determined by a discounted cash flow analysis using mortgage interest
rates currently offered for mortgages of similar maturities. Commitments to
purchase mortgages are made in the ordinary course of business. The fair value
of the mortgage commitments is $nil.
3. INCOME TAXES
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
A portion of life insurance company income earned prior to 1984 was not
subject to current taxation but was accumulated, for tax purposes, in a
"policyholders' surplus account." At December 31, 1993, the Company had a
policyholders' surplus account balance of $19,032. The policyholders' surplus
account is only taxable if dividends to the stockholder exceed the stockholder's
surplus account or if the Company is liquidated. Deferred income taxes of $6,661
have not been established because no distributions of such amounts are
contemplated.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets
- --------------------------------------------------------
<S> <C>
Policy reserves $ 453,436
Life insurance guarantee fund assessment reserve 35,000
----------
Total deferred tax assets 488,436
----------
<CAPTION>
Deferred tax liabilities
- --------------------------------------------------------
<S> <C>
Deferred policy acquisition costs 509,868
Investments 10,105
Other 12,083
----------
Total deferred tax liabilities 532,056
----------
Net deferred tax liabilities $ 43,620
----------
----------
</TABLE>
F-9
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
4. STOCKHOLDER'S EQUITY
Retained earnings available for distribution as dividends to parent are
limited to the Company's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory authorities. Statutory
unassigned surplus aggregated $922,246 as of December 31, 1993 (see Note 3 with
respect to the income tax effect of certain distributions). In addition, any
dividend distributions in 1994 in excess of approximately $259,063 would require
approval of the Department of Commerce of the State of Minnesota.
Statutory stockholder's equity as of December 31, 1993 was $1,157,022.
5. RELATED PARTY TRANSACTIONS
The Company has loaned funds or agreed to loan funds to IDS under two
separate loan agreements. The balance of the first loan was $75,000 at December
31, 1993. This loan can be increased to a maximum of $100,000 and pays interest
at a rate equal to the preceding month's effective new money rate for the
Company's permanent investments. It is collateralized by equities valued at
$96,790 at December 31, 1993. The second loan was used to fund the construction
of the IDS Operations Center. This loan had an outstanding balance of $84,588 at
December 31, 1993. The loan is secured by a first lien on the IDS Operations
Center property and has an interest rate of 9.89 percent. The Company also has a
loan to an affiliate which was used to fund construction of the IDS Learning
Center. At December 31, 1993, the balance outstanding was $22,573. The loan is
secured by a first lien on the IDS Learning Center property and has an interest
rate of 9.82 percent.
The Company purchased a five year secured note from an affiliated company
which had an outstanding balance of $27,222 at December 31, 1993. The note bears
a market interest rate, revised semi-annually, which at December 31, 1993 was
8.42 percent.
The Company has a reinsurance agreement whereby it assumed 100 percent of a
block of single premium life insurance business from an affiliated company. The
accompanying consolidated balance sheet at December 31, 1993 included $759,714
of future policy benefits related to this agreement.
The Company has a reinsurance agreement to cede 50 percent of its long-term
care insurance business to an affiliated company. The accompanying consolidated
balance sheet at December 31, 1993 includes $44,086 of reinsurance receivables
related to this agreement.
The Company participates in the retirement plan of IDS which covers all
permanent employees age 21 and over who have met certain employment
requirements. The benefits are based on the number of years the employee
participates in the plan, their final average monthly salary, the level of
social
F-10
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED BALANCE SHEET -- CONTINUED
($ THOUSANDS)
5. RELATED PARTY TRANSACTIONS -- CONTINUED
security benefits the employee is eligible for and the level of vesting the
employee has earned in the plan. IDS' policy is to fund retirement plan costs
accrued subject to ERISA and federal income tax considerations.
The Company also participates in defined contribution pension plans of IDS
which cover all employees who have met certain employment requirements. Company
contributions to the plans are a percent of either each employee's eligible
compensation or basic contributions.
The Company participates in defined benefit health care plans of IDS that
provide health care and life insurance benefits to retired employees and retired
financial planners. The plans include participant contributions and
service-related eligibility requirements. Upon retirement, such employees are
considered to have been employees of IDS. IDS expenses these benefits and
allocates the expenses to its subsidiaries. Accordingly, costs of such benefits
to the Company are included in employee compensation and benefits and cannot be
identified on a separate company basis.
6. COMMITMENTS AND CONTINGENCIES
At December 31, 1993, traditional life insurance and universal life-type
insurance in force aggregated $46,125,515 of which $3,038,426 was reinsured. The
Company also reinsures a portion of the risks assumed under disability income
policies.
Reinsurance contracts do not relieve the Company from its primary obligation
to policyholders.
The Company is a defendant in various lawsuits, none of which, in the
opinion of the Company counsel, will result in a material liability.
The Company received the revenue agent's report for the tax years 1984
through 1986 in February 1992, and has settled on all agreed audit issues. The
Company will protest the remaining open issues and, while the outcome of the
appeal is not known at this time, management does not believe there will be any
material impact as a result of this audit.
7. LINES OF CREDIT
The Company has available lines of credit with two banks aggregating $75,000
at 45 to 80 basis points over the banks' cost of funds or equal to the prime
rate, depending on which line of credit agreement is used. Borrowings
outstanding under these agreements totalled $1,519 at December 31, 1993.
F-11
<PAGE>
DRAFT CONSENT
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheet of IDS Life
Insurance Company (a wholly owned subsidiary of IDS Financial Corporation) as of
December 31, 1993. This consolidated balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated balance sheet. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
balance sheet presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the consolidated financial position of IDS
Life Insurance Company at December 31, 1993, in conformity with generally
accepted accounting principles.
Ernst & Young
Minneapolis, Minnesota
February 3, 1994
F-12
<PAGE>
IDS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
($ THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Investments:
Investment securities at amortized cost -- fair value
$23,253,854........................................... $22,156,263
Other securities generally at cost -- fair value
$214,108.............................................. 191,718
Mortgage loans -- fair value $2,301,866................. 2,231,302
Cash and cash equivalents................................. 90,715
Life insurance policy and investment certificate loans.... 417,931
Accounts and notes receivable............................. 563,450
Deferred acquisition costs................................ 1,746,291
Consumer loans............................................ 296,161
Land, buildings and equipment -- less accumulated
depreciation, $103,460.................................. 213,984
Goodwill -- less accumulated amortization, $83,970........ 251,897
Other assets.............................................. 199,805
Assets held in segregated asset accounts -- primarily
common stocks at fair value............................. 8,991,694
-------------
$37,351,211
-------------
-------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Fixed annuity reserves.................................. $18,492,135
Life and disability insurance reserves.................. 3,169,569
Investment certificate reserves......................... 2,751,825
Career Distributors' Retirement Plan.................... 234,112
Open securities transactions............................ 299,710
Short-term borrowings................................... 302,894
Accounts payable, accrued expenses and other
liabilities........................................... 961,428
Liabilities related to segregated asset accounts........ 8,991,694
-------------
Total liabilities................................. 35,203,367
-------------
Stockholder's Equity:
Common stock -- $.01 par -- 100 shares authorized,
issued and outstanding................................ --
Additional paid-in capital.............................. 1,150,119
Net unrealized appreciation on equity securities........ 114
Retained earnings....................................... 997,611
-------------
Total stockholder's equity........................ 2,147,844
-------------
$37,351,211
-------------
-------------
Commitments and contingencies
</TABLE>
See accompanying notes to condensed consolidated balance sheet.
F-13
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IDS Financial Corporation (hereinafter referred to as IDS) is a wholly owned
subsidiary of American Express Company (parent).
PRINCIPLES OF CONSOLIDATION. The accompanying condensed consolidated
balance sheet is prepared in accordance with generally accepted accounting
principles. It includes the accounts of IDS and all of its subsidiaries. All
material intercompany accounts have been eliminated in consolidation.
ANNUITY ACCOUNTING. Liabilities for single premium deferred annuities and
installment annuities are accumulation values. Liabilities for fixed annuities
in benefit status are the present value of future benefits using established
industry mortality tables.
INSURANCE ACCOUNTING. Liabilities for future benefits on traditional life
and disability income and health insurance policies are generally calculated
using anticipated rates of mortality, morbidity, policy persistency and
investment yields. Liabilities for universal life-type life insurance are
accumulation values.
DEFERRED ACQUISITION COSTS. The costs of acquiring new business,
principally sales compensation, policy issue costs and underwriting, have been
deferred on annuity, life insurance and other long-term products.
For annuities, the costs are amortized in relation to surrender charge
revenue and a portion of the excess of investment income earned from investment
of contract considerations over the interest credited to contract owners. For
traditional life insurance, and disability income and health insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue. For universal life-type insurance, the costs are amortized over the
lives of the policies as a percentage of the estimated gross profits expected to
be realized on the policies.
SEGREGATED ASSET ACCOUNTS. Assets and liabilities related to segregated
asset accounts represent funds held for the exclusive benefit of the variable
annuity and variable life insurance contract owners.
IDS makes contractual mortality assurances to the variable annuity contract
owners that the net assets of the segregated asset accounts will not be affected
by future variations in the actual life expectancy experience of the annuitants
and beneficiaries from the mortality assumptions implicit in the annuity
contracts. IDS makes periodic fund transfers to, or withdrawals from, the
segregated asset accounts for such actuarial adjustments for variable annuities
that are in the benefit payment period. IDS guarantees, for the
F-14
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
variable life insurance funds, the cost of the contractual insurance rates and
that the death benefit will never be less than the death benefit at the date of
issuance.
INVESTMENT CERTIFICATES. Investment certificates entitle certificate
holders, who have either made lump-sum or installment payments, to receive a
definite sum of money at maturity. Payments from certificate holders are
credited to investment certificate reserves. Investment certificate reserves
accumulate at specified percentage rates of accumulation. For certificates that
allow for the deduction of a surrender charge, cash surrender values may be less
than accumulated investment certificate reserves prior to maturity dates.
Investment certificate reserves are maintained for advance payments by
certificate holders, additional credits granted and interest accrued on each.
The payment distribution, reserve accumulation rates, cash surrender values and
reserve values, among other matters, are governed by the Investment Company Act
of 1940.
GOODWILL. Goodwill represents the unamortized excess of cost over the
underlying fair value of the net tangible assets of IDS as of the date of
acquisition by its parent. Goodwill is being amortized on a straight-line basis
over the next 30 years.
INCOME TAXES. IDS taxable income is included in the consolidated Federal
tax return of IDS' parent. Each eligible subsidiary of IDS' parent provides for
income taxes on a separate return basis.
INVESTMENTS. Bonds and notes, mortgage-backed securities, and preferred
stocks that either must be redeemed by the issuer or may be redeemed by the
issuer at the holder's request are carried at amortized cost. The expected
maturities of these investments are, for the most part, matched with the
expected payments of fixed annuity, life and disability insurance, and
investment certificate future benefits. IDS has the ability to hold these
investments to their maturities and has the intent to hold them for the
foreseeable future. When there is a decline in value, which is other than
temporary, the investments are carried at estimated realizable value.
Marketable equity securities of IDS and its subsidiaries, other than the
life insurance subsidiary, are carried at the lower of aggregate cost or market
value. Common and nonredeemable preferred stocks of the life insurance
subsidiary are carried at market value. The net unrealized appreciation/
depreciation on such securities is included in stockholder's equity. When there
is a decline in value, which is other than temporary, the securities are carried
at estimated realizable value.
F-15
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received from
brokerage firms which deal in mortgage-backed securities.
INTEREST RATE CAPS. IDS purchases interest rate caps as protection against
exposed interest rate positions. Cost is amortized to the expiration dates on a
straight-line basis. Benefits are recognized when realized.
MORTGAGE LOANS. Mortgage loans on real estate are carried at amortized cost
less reserve for losses. When credit and economic evaluations of the underlying
real estate indicate a loss on the loan is likely to occur, an allowance for
such loss is recorded. IDS generally stops accruing interest on loans for which
interest payments are delinquent more than three months.
The estimated fair value of the mortgage loans is determined by a discounted
cash flow analysis using mortgage interest rates currently offered for mortgages
of similar maturities.
LAND, BUILDINGS AND EQUIPMENT. Land, buildings and equipment are carried at
cost less accumulated depreciation. IDS generally utilizes the straight-line
method of computing depreciation.
2. QUALIFIED ASSETS AND ASSETS ON DEPOSIT
IDS' subsidiary, IDS Certificate Company, has issued investment certificates
to clients. The terms of the investment certificates and the provisions of the
Investment Company Act of 1940 require the maintenance of qualified assets. The
carrying value of qualified assets at December 31, 1993 aggregated $2,931,737
and exceeded legal requirements.
Under the terms of the investment certificates, the Investment Company Act
of 1940, depository agreements and the statutes of various states relating to
investment certificates, assets are required to be on deposit with the states or
authorized depositories. Investments, mortgage loans and other assets on deposit
at December 31, 1993, aggregated $2,814,974 and exceeded legal requirements.
IDS' banking subsidiaries are generally required to maintain reserve
balances with the Federal Reserve Bank, the Depository Trust Company and other
institutions. Based upon the dollar volumes and types of deposit liabilities,
the subsidiaries maintained $1,373 in reserves at December 31, 1993.
3. INVESTMENTS
Fair values of bonds and notes, mortgage-backed securities, and common and
preferred stocks represent quoted market prices where available. In
F-16
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
3. INVESTMENTS -- CONTINUED
the absence of quoted market prices, estimated fair values are determined by
established procedures involving, among other things, review of market indices,
price levels of current offerings and comparable issues, price estimates and
market data from independent brokers.
Fair values, and gross unrealized gains and losses of investment securities
at amortized cost at December 31, 1993 were:
<TABLE>
<CAPTION>
Gross Gross
Fair Unrealized Unrealized
Cost Value Gains Losses
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Mortgage-backed Securities $ 10,697,725 $ 10,995,052 $ 358,609 $ 61,284
Corporate Bonds and Obligations 10,373,609 11,112,009 792,684 54,282
Preferred Stocks 801,747 839,941 40,851 2,657
State and Municipal Obligations 258,447 283,010 24,602 39
U.S. Government Agency
Obligations 24,735 23,842 484 1,377
------------- ------------- ------------ -----------
Total Investment Securities $ 22,156,263 $ 23,253,854 $ 1,217,230 $ 119,639
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
</TABLE>
Contractual maturities of debt securities carried at amortized cost as of
December 31, 1993 were:
<TABLE>
<CAPTION>
Fair
Cost Value
------------- -------------
<S> <C> <C>
Due within 1 year $ 553,129 $ 558,107
Due after 1 year through 5 years 2,062,332 2,174,664
Due after 5 years through 10 years 6,107,705 6,581,514
Due after 10 years 2,735,372 2,944,517
------------- -------------
11,458,538 12,258,802
Mortgage-backed Securities 10,697,725 10,995,052
------------- -------------
Total Investment Securities $ 22,156,263 $ 23,253,854
------------- -------------
------------- -------------
</TABLE>
(The timing of actual receipts will differ from contractual maturities
because issuers may call or prepay obligations.)
At December 31, 1993, IDS had a valuation allowance of $114 reflecting the
net unrealized appreciation of equity securities carried at fair value at that
date. The amount is net of $160 of gross unrealized appreciation and deferred
taxes of $46.
IDS will implement, effective January 1, 1994, Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
F-17
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
3. INVESTMENTS -- CONTINUED
and Equity Securities". Under the new rules, debt securities that IDS has both
the positive intent and ability to hold to maturity will be carried at amortized
cost. Debt securities that IDS does not have the positive intent and ability to
hold to maturity, as well as all marketable equity securities, will be
classified as available for sale or trading and carried at fair value.
Unrealized gains and losses on securities classified as available for sale will
be carried as a separate component of Stockholder's Equity. Unrealized holding
gains and losses on securities classified as trading will be reported in
earnings. The effect of the new rules will be to increase Stockholder's Equity
by approximately $200 million, net of taxes, as of January 1, 1994. The
measurement of unrealized securities gains (losses) in Stockholder's Equity is
affected by market conditions, and therefore, subject to volatility.
Other securities, at cost, include shares in affiliated mutual funds at
December 31, 1993 of $106,131. The fair value was $115,465.
Included in bonds and notes at December 31, 1993 are interest rate caps at
amortized cost of $51,733 with an estimated fair value of $21,117. These
interest rate caps carry a notional amount of $5,570,000 and expire on various
dates from 1994 to 1998.
4. SHORT-TERM BORROWINGS
IDS has lines of credit with various banks totaling $495,000, of which
$302,894 was outstanding at December 31, 1993. $75,000 of the amount outstanding
was borrowed from a related party. The weighted average interest rate on the
borrowings was 3.71 percent at December 31, 1993.
IDS has entered into an interest rate swap agreement expiring in 1999
enabling it to convert $21,000 of its variable-rate borrowings to a fixed
interest rate of 8.88 percent. IDS has estimated the cost to terminate the
agreement in the current interest rate environment at $2.0 million at December
31, 1993.
5. RETIREMENT PLANS
IDS and its subsidiaries have qualified and non-qualified pension plans
which cover all permanent employees age 21 and over and certain other employees.
Pension benefits generally depend upon length of service, compensation and other
factors. Funding of retirement costs for the qualified plan complies with the
applicable minimum funding requirements specified by the Employee Retirement
Income Security Act of 1974, as amended.
F-18
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
5. RETIREMENT PLANS -- CONTINUED
The funded status of the plans at December 31, 1993 is set forth in the
table below:
<TABLE>
<CAPTION>
Unfunded
Funded Plan Plan
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation........................ $ (67,260) $ (2,283)
----------- -----------
----------- -----------
Projected benefit obligation for service rendered to
date................................................ (107,261) (7,003)
Fair value of plan assets, primarily invested in bonds
and equities........................................... 131,637 --
----------- -----------
Plan assets in excess of projected benefit obligation... 24,376 (7,003)
Unrecognized prior service cost being recognized over
14.2 years............................................. (1,395) 2,978
Unrecognized net (gain) loss from past experience
different from assumptions and effects of changes in
assumptions............................................ (10,266) 801
Unrecognized net transition asset being recognized over
13.7 years............................................. (10,812) --
----------- -----------
Prepaid (accrued) pension cost included in other
assets................................................. $ 1,903 $ (3,224)
----------- -----------
----------- -----------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation of all plans was 7.25 percent. The
rate of increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation of all plans was 6.0 percent.
The weighted average expected long-term rates of return on plan assets was 9.5
percent.
The Career Distributors' Retirement Plan is an unfunded, noncontributory,
non-qualified deferred compensation plan for IDS financial planners, district
managers and division vice presidents, based on their independent contractor
earnings.
IDS sponsors defined benefit health care plans that provide health care and
life insurance benefits to employees and financial planners who retire after
having worked five years and attained age 55 while in service with IDS or its
subsidiaries. Upon retirement, annual health care premiums will be paid through
participant contributions and fixed amounts contributed by IDS
F-19
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
5. RETIREMENT PLANS -- CONTINUED
based on years of service. For employees and financial planners who retired
prior to April, 1990, IDS contributes a percentage of their annual health care
premiums. The cost of retiree life insurance will be paid entirely by IDS. IDS
funds the cost of these benefits as they are incurred.
The accrued postretirement benefit cost included in other liabilities at
December 31, 1993 was $31,883.
The weighted average discount rates used in determining the 1993
postretirement benefit obligation was 7.25. The rate of increase in the per
capita cost of covered benefits was assumed to be 13 percent for 1994; the rate
was assumed to decrease one percent per year to seven percent in 2000 and remain
at the level thereafter. An increase in the assumed health care cost trend rates
by one percentage point, in each year, would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $1,653.
6. STOCKHOLDER'S EQUITY
Various state laws, the Investment Company Act of 1940 and terms of
investment certificates restrict the amount of dividends that the subsidiaries
may pay to IDS. The amount of net assets of subsidiaries which may be
transferred to IDS was approximately $699.
7. COMMITMENTS AND CONTINGENCIES
IDS is committed to pay aggregate minimum rentals under noncancelable leases
for office facilities and equipment in future years as follows: 1994, $57,313;
1995, $50,341; 1996, $40,737; 1997, $30,572; 1998, $24,337 and an aggregate of
$70,334 thereafter.
Life insurance in force aggregated $46.1 billion at December 31, 1993, of
which $3.0 billion was reinsured. Reinsured risks could become a liability in
the event the reinsurers become unable to meet the obligations they have
assumed.
Approved but unused consumer lines of credit aggregated $457,038 at December
31, 1993. Of the amount approved, 95 percent is in lines of $25 or less, and
less than 1 percent is in lines exceeding $100.
IDS and certain of its subsidiaries are defendants in various lawsuits. In
the opinion of management, the ultimate resolution of these lawsuits, taken in
the aggregate, will not materially affect IDS' consolidated financial position.
F-20
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
8. CREDIT RISK CONCENTRATIONS
Concentrations of credit risk of investment securities at cost at December
31, 1993 were:
<TABLE>
<CAPTION>
On Balance
Sheet
-------------
<S> <C>
By Investment Grade:
Mortgage-backed Securities $ 10,697,725
Aaa/AAA 493,228
Aa/AA 288,727
Aa/A 144,222
A/A 2,619,628
A/BBB 671,159
Baa/BBB 5,182,582
Below Investment Grade 2,058,992
-------------
$ 22,156,263
-------------
-------------
</TABLE>
Mortgage-backed securities are FHLMC, FNMA and GNMA pools which are
guaranteed as to principal and interest by agencies of the U.S. Government.
Other debt securities are rated by Moody's and Standard & Poors (S&P) except for
approximately $2.4 billion which is rated by IDS' analysts using criteria
similar to Moody's and S&P. Commitments to purchase investments were $nil at
December 31, 1993.
Concentrations of credit risk of mortgage loans at December 31, 1993 were:
<TABLE>
<CAPTION>
On Balance Commitments
Sheet to Purchase
------------ -------------
<S> <C> <C>
Mortgage Loans By Region:
North Central $ 896,174 $ 36,325
Atlantic 819,082 94,345
New England 162,227 18,130
South Central 137,707 900
Pacific 128,311 15,140
Mountain 87,801 14,600
------------ -------------
$ 2,231,302 $ 179,440
------------ -------------
------------ -------------
</TABLE>
F-21
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
8. CREDIT RISK CONCENTRATIONS -- CONTINUED
<TABLE>
<CAPTION>
On Balance Commitments
Sheet to Purchase
------------ -------------
<S> <C> <C>
Mortgage Loans By Property Type:
Apartments $ 821,645 $ 78,560
Shopping Ctrs/Retail 705,319 67,355
Office Buildings 261,673 15,675
Industrial Buildings 253,557 9,250
Retirement Homes 85,338 1,000
Hotels/Motels 36,743 --
Medical Buildings 30,430 6,100
Residential 142 --
Other 36,455 1,500
------------ -------------
$ 2,231,302 $ 179,440
------------ -------------
------------ -------------
</TABLE>
Mortgage loans are first mortgages on real estate. IDS' underwriting policy
is that at the time of loan origination, the loan amount cannot exceed 75
percent of appraised value. If a mortgage is in default, IDS can begin
foreclosure proceedings. Commitments to purchase mortgages are made in the
ordinary course of business. The estimated fair value of the mortgage
commitments is $nil.
Concentrations of credit risk of unsecured consumer loans at December 31,
1993 were:
<TABLE>
<CAPTION>
On Balance Approved
Sheet But Unused
----------- -------------
<S> <C> <C>
Consumer Loans By Region:
North Central $ 88,790 $ 165,829
Atlantic 76,827 120,307
Pacific 51,707 80,205
South Central 34,696 38,637
New England 25,805 27,541
Mountain 18,336 24,519
----------- -------------
$ 296,161 $ 457,038
----------- -------------
----------- -------------
</TABLE>
Consumer loans have a variable rate of interest. As a result, the estimated
fair value of the consumer loans is approximated to be the carrying value. The
estimated fair value of the approved but unused lines of credit is $nil.
F-22
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
8. CREDIT RISK CONCENTRATIONS -- CONTINUED
Included in accounts receivable at December 31, 1993 are interest and
dividends receivable on investments of $350,098 and fees receivable from
affiliated mutual funds of $25,507.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following are fair values of financial instruments not presented
elsewhere in the condensed consolidated balance sheet, and methods and
assumptions that were used to estimate these fair values.
The estimated fair values for short-term financial instruments, such as cash
and cash equivalents, short-term borrowings and customers' deposits are
approximated to be the carrying amounts disclosed in the condensed consolidated
balance sheet.
The estimated fair value of fixed annuities future policy benefits is based
on the status of the annuities at December 31, 1993. The estimated fair value
for deferred annuities approximates the carrying amount less any surrender
charges and related loans. The estimated fair value for annuities in non-life
contingent payout status approximates the present value of projected benefit
payments at the rate appropriate for contracts issued in 1993. At December 31,
1993, the carrying amount and fair value of fixed annuities future policy
benefits, after excluding life insurance-related contracts carried at $913,127
was $17,579,008 and $16,881,747, respectively. The fair value is net of policy
loans of $59,132 at December 31, 1993.
The estimated fair value of investment certificate reserves is based upon a
method appropriate for each class of certificate. The estimated fair value for
investment certificates that reprice within a year approximates the carrying
value. The estimated fair value for other investment certificates is determined
by a discounted cash flow analysis using investment rates currently offered for
investment certificates of similar remaining maturities. These amounts are
reduced by applicable surrender charges and related loans. At December 31, 1993,
the estimated fair value of the investment certificate reserves was $2,694,720,
net of certificate loans of $67,429.
The estimated fair value of liabilities related to segregated asset accounts
is the carrying amount less variable insurance contracts carried at $346,276 and
surrender charges, if applicable. At December 31, 1993, the estimated fair value
of these liabilities was $8,305,209.
10. RELATED PARTY TRANSACTIONS
IDS has entered into various related party transactions with its parent and
the parent's other affiliates.
F-23
<PAGE>
IDS FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED
BALANCE SHEET -- CONTINUED
($ THOUSANDS)
10. RELATED PARTY TRANSACTIONS -- CONTINUED
IDS has a reinsurance agreement to assume a single premium life line of
business from an affiliated company. The accompanying condensed consolidated
balance sheet at December 31, 1993 includes $759,714 of liabilities for future
policy benefits related to this agreement.
IDS has a reinsurance agreement to cede 50 percent of its long-term care
insurance business to an affiliated company. The accompanying condensed
consolidated balance sheet at December 31, 1993 includes $44,086 of reinsurance
receivables related to this agreement.
IDS purchased a $35,000 five year secured note from an affiliated company.
The note bears a market interest rate, revised semi-annually, which was 8.42
percent at December 31, 1993.
Included in other liabilities is $30,420 at December 31, 1993 for federal
income taxes payable to the parent.
11. INCOME TAXES
At December 31, 1993, the life insurance subsidiary had a policyholders'
surplus account balance of $19,032. The policyholders' surplus is only taxable
if dividends to shareholders exceed the shareholders' surplus account and/or the
company is liquidated. Deferred taxes of $6,661 have not been established
because no distributions of such amounts are contemplated.
F-24
<PAGE>
DRAFT CONSENT
The Board of Directors and Shareholders
IDS Financial Corporation
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of IDS Financial Corporation at December
31, 1993, not presented separately herein, and in our report dated February 3,
1994, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet is fairly stated in all material respects
in relation to the consolidated financial statements from which it has been
derived.
Ernst & Young
Minneapolis, Minnesota
February 3, 1994
F-25
<PAGE>
EXHIBIT A
FORM OF
INVESTMENT MANAGEMENT AND SERVICES AGREEMENT
AGREEMENT made the th day of , 199 , by and between IDS Life
Special Income Fund, Inc. (the "Fund"), a Minnesota corporation, and IDS Life
Insurance Company ("IDS Life"), a Minnesota corporation.
PART ONE: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Fund hereby retains IDS Life, and IDS Life hereby agrees, for the
period of this Agreement and under the terms and conditions hereinafter set
forth, to furnish the Fund continuously with suggested investment planning; to
determine, consistent with the Fund's investment objectives and policies, which
securities in IDS Life's discretion shall be purchased, held or sold and to
execute or cause the execution of purchase or sell orders; to prepare and make
available to the Fund all necessary research and statistical data in connection
therewith; to furnish all administrative, accounting, clerical, statistical,
correspondence, corporate and all other services of whatever nature required in
connection with the management and administration of the Fund including transfer
agent and dividend-disbursing agent services; to furnish or pay for all
supplies, printed material, office equipment, furniture and office space as the
Fund may require; and to pay or reimburse such expenses of the Fund as may be
provided for in Part Three; subject always to the direction and control of the
Board of Directors (the "Board"), the Executive Committee and the authorized
officers of the Fund. IDS Life agrees to maintain (directly or through the
contract described in paragraph (7) of this Part One) an adequate organization
of competent persons to provide the services and to perform the functions herein
mentioned. IDS Life agrees to meet with any persons at such times as the Board
deems appropriate for the purpose of reviewing IDS Life's performance under this
Agreement.
(2) IDS Life agrees that the investment planning and investment decisions
will be in accordance with general investment policies of the Fund as disclosed
to IDS Life from time to time by the Fund and as set forth in its prospectuses
and registration statements filed with the United States Securities and Exchange
Commission (the "SEC").
(3) IDS Life agrees that it will maintain all required records, memoranda,
instructions or authorizations relating to the acquisition or disposition of
securities for the Fund.
(4) The Fund agrees that it will furnish to IDS Life any information that
the latter may reasonably request with respect to the services performed or to
be performed by IDS Life under this Agreement.
A-1
<PAGE>
(5) IDS Life is authorized to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and is
directed to use its best efforts to obtain the best available price and most
favorable execution, except as prescribed herein. Subject to prior authorization
by the Fund's Board of appropriate policies and procedures, and subject to
termination at any time by the Board, IDS Life may also be authorized to effect
individual securities transactions at commission rates in excess of the minimum
commission rates available, to the extent authorized by law, if IDS Life
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or IDS
Financial Corporation's ("IDS") or IDS Life's overall responsibilities with
respect to the Fund and other funds for which it acts as investment adviser.
(6) It is understood and agreed that in furnishing the Fund with the
services as herein provided, neither IDS Life, nor any officer, director or
agent thereof shall be held liable to the Fund or its creditors or shareholders
for errors of judgment or for anything except willful misfeasance, bad faith, or
gross negligence in the performance of its duties, or reckless disregard of its
obligations and duties under the terms of this Agreement. It is further
understood and agreed that IDS Life may rely upon information furnished to it
reasonably believed to be accurate and reliable.
(7) The existence of an investment advisory agreement between IDS Life and
IDS is specifically acknowledged and approved.
PART TWO: COMPENSATION TO INVESTMENT MANAGER
(1) The Fund agrees to pay to IDS Life, and IDS Life covenants and agrees to
accept from the Fund in full payment for the services furnished, a fee for each
calendar day of each year equal to the total of 1/365th (1/366th in each leap
year) of each of the respective percentages set forth below of the net assets of
the Fund; to be computed for each day on the basis of net assets as of the close
of business of the full business day two (2) business days prior to the day for
which the computation is being made. In the case of the suspension of the
computation of net asset value, the asset charge for each day during such
suspension shall be computed as of the close of business on
A-2
<PAGE>
the last full business day on which the net assets were computed. Net assets as
of the close of a full business day shall include all transactions in shares of
the Fund recorded on the books of the Fund for that day.
ASSET CHARGE
<TABLE>
<CAPTION>
Assets Annual Rate at
(Billions) Each Asset Level
- ---------- ----------------
<S> <C>
First $1
Next $1
Next $1
Next $3
Next $3
Over $9
</TABLE>
(2) The fee shall be paid on a monthly basis and, in the event of the
termination of this Agreement, the fee accrued shall be prorated on the basis of
the number of days that this Agreement is in effect during the month with
respect to which such payment is made.
(3) The fee provided for hereunder shall be paid in cash by the Fund to IDS
Life within five business days after the last day of each month.
PART THREE: ALLOCATION OF EXPENSES
(1) The Fund agrees to pay:
(a) Fees payable to IDS Life for the latter's services under this
Agreement.
(b) All fees, costs, expenses and allowances payable to any person, firm
or corporation for services under any agreement entered into by the Fund
covering the offering for sale, sale and distribution of the Fund's shares.
(c) All taxes of any kind payable by the Fund other than federal
original issuance taxes on shares issued by the Fund.
(d) All brokerage commissions and charges in the purchase and sale of
assets.
(2) The Fund agrees to reimburse IDS Life or its affiliates for the
aggregate cost of the services listed below incurred by IDS Life in its
operation of the Funds.
(a) All custodian or trustee fees, costs and expenses.
(b) Costs and expenses in connection with the auditing and certification
of the records and accounts of the Fund by independent certified public
accountants.
(c) Costs of obtaining and printing of dividend checks, reports to
shareholders, notices, proxies, proxy statements and tax notices to
shareholders, and also the cost of envelopes in which such are to be mailed.
A-3
<PAGE>
(d) Postage on all communications, notices and statements to brokers,
dealers, and the Fund's shareholders.
(e) All fees and expenses paid to directors of the Fund; however, IDS
Life will pay fees to directors who are officers or employees of IDS Life or
its affiliated companies.
(f) Costs of fidelity and surety bonds covering officers, directors and
employees of the Fund.
(g) All fees and expenses of attorneys who are not officers or employees
of IDS Life or any of its affiliates.
(h) All fees paid for the qualification and registration for public
sales of the securities of the Fund under the laws of the United States and
of the several states of the United States in which the securities of the
Fund shall be offered for sale.
(i) Cost of printing prospectuses, statements of additional information
and application forms for existing shareholders, and any supplements
thereto.
(j) Any losses due to theft and defalcation of the assets of the Fund,
or due to judgments or adjustments not covered by surety or fidelity bonds,
and not covered by agreement or obligation.
(k) Expenses incurred in connection with lending portfolio securities of
the Fund.
(l) Expenses properly payable by the Fund, approved by the Board.
PART FOUR: MISCELLANEOUS
(1) IDS Life shall be deemed to be an independent contractor and, except as
expressly provided or authorized in this Agreement, shall have no authority to
act for or represent the Fund.
(2) A "full business day" shall be as defined in the By-laws.
(3) The Fund recognizes that IDS and IDS Life now render and may continue to
render investment advice and other services to other investment companies and
persons which may or may not have investment policies and investments similar to
those of the Fund and that IDS and IDS Life manage their own investments and/or
those of their subsidiaries. IDS and IDS Life shall be free to render such
investment advice and other services and the Fund hereby consents thereto.
(4) Neither this Agreement nor any transaction had pursuant hereto shall be
invalidated or in any way affected by the fact that directors, officers, agents
and/or shareholders of the Fund are or may be interested in IDS or IDS Life or
any successor or assignee thereof, as directors, officers, stockholders or
otherwise; that directors, officers, stockholders or agents of IDS or IDS Life
are or may be interested in the Fund as directors, officers, shareholders, or
otherwise; or that IDS or IDS Life or any successor or assignee, is or may be
interested in the Fund as shareholder or otherwise, provided,
A-4
<PAGE>
however, that neither IDS or IDS Life, nor any officer, director or employee
thereof or of the Fund, shall sell to or buy from the Fund any property or
security other than shares issued by the Fund, except in accordance with
applicable regulations or orders of the SEC.
(5) Any notice under this Agreement shall be given in writing, addressed,
and delivered, or mailed postpaid, to the party to this Agreement entitled to
receive such, at such party's principal place of business in Minneapolis,
Minnesota, or to such other address as either party may designate in writing
mailed to the other.
(6) IDS Life agrees that no officer, director or employee of IDS Life will
deal for or on behalf of the Fund with himself as principal or agent, or with
any corporation or partnership in which he may have a financial interest, except
that this shall not prohibit:
(a) Officers, directors or employees of IDS Life from having a financial
interest in the Fund or in IDS Life.
(b) The purchase of securities for the Fund, or the sale of securities
owned by the Fund, through a security broker or dealer, one or more of whose
partners, officers, directors or employees is an officer, director or
employee of IDS Life, provided such transactions are handled in the capacity
of broker only and provided commissions charged do not exceed customary
brokerage charges for such services.
(c) Transactions with the Fund by a broker-dealer affiliate of IDS Life
as may be allowed by rule or order of the SEC, and if made pursuant to
procedures adopted by the Fund's Board.
(7) IDS Life agrees that, except as herein otherwise expressly provided or
as may be permitted consistent with the use of a broker-dealer affiliate of IDS
Life under applicable provisions of the federal securities laws, neither it nor
any of its officers, directors or employees shall at any time during the period
of this Agreement, make, accept or receive, directly or indirectly, any fees,
profits or emoluments of any character in connection with the purchase or sale
of securities (except shares issued by the Fund) or other assets by or for the
Fund.
PART FIVE: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect until , 199 , or until a
new agreement is approved by a vote of the majority of the outstanding shares of
the Fund and by vote of the Fund's Board, including the vote required by (b) of
this paragraph, and if no new agreement is so approved, this Agreement shall
continue from year to year thereafter unless and until terminated by either
party as hereinafter provided, except that such continuance shall be
specifically approved at least annually (a) by the Board of the Fund or by a
vote of the majority of the outstanding shares of the Fund and (b) by the vote
of a majority of the directors who are not parties to this Agreement or
interested persons of any such party, cast in person at a
A-5
<PAGE>
meeting called for the purpose of voting on such approval. As used in this
paragraph, the term "interested person" shall have the same meaning as set forth
in the Investment Company Act of 1940, as amended (the "1940 Act").
(2) This Agreement may be terminated by either the Fund or IDS Life at any
time by giving the other party 60 days' written notice of such intention to
terminate, provided that any termination shall be made without the payment of
any penalty, and provided further that termination may be effected either by the
Board of the Fund or by a vote of the majority of the outstanding voting shares
of the Fund. The vote of the majority of the outstanding voting shares of the
Fund for the purpose of this Part Five shall be the vote at a shareholders'
regular meeting, or a special meeting duly called for the purpose, of 67% or
more of the Fund's shares present at such meeting if the holders of more than
50% of the outstanding voting shares are present or represented by proxy, or
more than 50% of the outstanding voting shares of the Fund, whichever is less.
(3) This Agreement shall terminate in the event of its assignment, the term
"assignment" for this purpose having the same meaning as set forth in the 1940
Act.
IN WITNESS THEREOF, the parties hereto have executed the foregoing Agreement
as of the day and year first above written.
IDS LIFE SPECIAL INCOME FUND, INC.
By:
-----------------------------------
IDS LIFE INSURANCE COMPANY
By:
-----------------------------------
A-6
<PAGE>
FORM OF PROXY CARD
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
IDS LIFE SPECIAL INCOME FUND, INC.
PROXY/VOTING
INSTRUCTION CARD
___________________________________________________________________
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints William R. Pearce, Leslie L. Ogg and Robert F.
Froehlke, or any one of them, as proxies, with full power of substitution, to
represent and to vote all of the shares of the undersigned at the regular
meeting to be held on November 9, 1994, and any adjournment thereof.
TO HAVE YOUR VOTE COUNTED, YOU MUST SIGN, DATE AND RETURN THIS PROXY. IT WILL
BE VOTED AS MARKED, OR IF NOT MARKED, WILL BE VOTED "FOR" EACH PROPOSAL.
THE BOARD RECOMMENDS A VOTE "FOR" ALL PROPOSALS.
(client name and address)
X
- --------------------------------
X
- --------------------------------
Date_____________, 1994
Owners please sign as names appear at left. Executors, administrators,
trustees, etc., should indicate position when signing.
<PAGE>
For With- Excep-
held tion
1. Election of Board Members ( ) ( ) ( )
TO VOTE FOR ALL NOMINEES, MARK THE "FOR" BOX IN ITEM 1. TO WITHHOLD AUTHORITY
TO VOTE FOR ALL NOMINEES, MARK THE "WITHHOLD" BOX. TO WITHHOLD AUTHORITY TO
VOTE FOR ANY NOMINEE, MARK THE "EXCEPTION" BOX AND STRIKE A LINE THROUGH THE
NOMINEE'S NAME.
Fourteen board members are to be elected at the meeting. The nominees are LYNNE
V. CHENEY, ROBERT F. FROEHLKE, DAVID R. HUBERS, HEINZ F. HUTTER, ANNE P. JONES,
DONALD M. KENDALL, MELVIN R. LAIRD, LEWIS W. LEHR, JAMES A. MITCHELL, WILLIAM R.
PEARCE, EDSON W. SPENCER, JOHN R. THOMAS, WHEELOCK WHITNEY, C. ANGUS WURTELE.
For Against Abstain
2. Ratification of
Independent Auditors ( ) ( ) ( )
3. Approval of New Investment
Management and
Services Agreement ( ) ( ) ( )
4. Approval of a Change in
Investment Policies to Permit
the Fund to Invest All its
Assets in Another Investment
Company ( ) ( ) ( )
5. Approval of Changes in FOR each policy
Fundamental Investment listed below (except AGAINST ABSTAIN
Policies as marked to the ALL ALL
contrary)
( ) ( ) ( )
If you do NOT wish to approve a policy change, please check the appropriate box
below:
( ) A. Margin/Sell Short ( ) E. Illiquid Securities
( ) B. Investment Companies ( ) F. Cash Loans
( ) C. Control or Manage ( ) G. Real Estate
( ) D. Exploration/Development
<PAGE>
Dear Contract Owner,
IDS Life Insurance Company and IDS Life of New York are asking for your
instructions on how to vote the shares of the Fund. It is important for you
to study the proposals in the enclosed proxy statement carefully. For a quick
review of the proposals, here is a summary.
The first two proposals, election of directors and ratification of auditors,
are matters requiring shareholder action at every regular meeting of
shareholders. The third proposal is a new Investment and Services Agreement.
The other Fund Boards in the IDS MUTUAL FUND GROUP are recommending changes in
the structures of their Funds whereby the Funds would offer multiple classes
of shares. This creates a need to eliminate the group asset component from
the Investment Management and Services Agreement. Except for the change in the
fee schedule, the new Investment and Services Agreement is the same as the
current agreement.
Proposal (4) is a new investment policy that will permit the fund to invest
all of its assets in another investment company. If this proposal is
approved, the Board could adopt a new structure which would be a master
investment fund and related feeder shareholder funds. This is explained in
detail in the proxy. The
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<PAGE>
Board would approve such structure only if it believes the structure is in the
interest of shareholders.
Proposal (5) makes a number of investment policies "non-fundamental." That
is, the Board, instead of shareholders as is now the case, could make changes
to the policies. The purpose is flexibility. By giving the power to change
the policies to the Board, changes can be made as regulations change or as new
investment strategies and products are developed.
Let me urge you to study and vote the enclosed proxy card. The Board strongly
supports these proposals because they serve contract holder's interests.
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