SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 38 (File No. 2-73115) [X]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 40 (File No. 811-3218) [X]
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AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC. formerly known as
IDS LIFE INVESTMENT SERIES, INC.
IDS Tower 10
Minneapolis, Minnesota 55440-0010
Leslie L. Ogg - 901 S. Marquette Ave., Suite 2810,
Minneapolis, MN 55402-3268
(612) 330-9283
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on August 11, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
AXPSM Variable Portfolio --
Blue Chip Advantage Fund
AXPSM Variable Portfolio --
Diversified Equity Income Fund
AXPSM Variable Portfolio --
Federal Income Fund
AXPSM Variable Portfolio --
Growth Fund
AXPSM Variable Portfolio --
Small Cap Advantage Fund
Please note that each Fund:
o is not a bank deposit
o is not federally insured
o is not endorsed by any bank or government agency
o is not guaranteed to achieve its goal
Like all mutual funds, the Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal offense.
Prospectus/AUG. 11, 1999
Managed by IDS Life Insurance Company
<PAGE>
Table of Contents
TAKE A CLOSER LOOK AT:
THE FUNDS 3p
AXP VARIABLE PORTFOLIO --
BLUE CHIP ADVANTAGE FUND 4p
Goal 4p
Investment Strategy 4p
Risks 5p
Past Performance 5p
Management 5p
AXP VARIABLE PORTFOLIO --
DIVERSIFIED EQUITY INCOME FUND 6p
Goal 6p
Investment Strategy 6p
Risks 7p
Past Performance 7p
Management 7p
AXP VARIABLE PORTFOLIO --
FEDERAL INCOME FUND 8p
Goal 8p
Investment Strategy 8p
Risks 9p
Past Performance 9p
Management 9p
AXP VARIABLE PORTFOLIO-- GROWTH FUND 10p
Goal 10p
Investment Strategy 10p
Risks 11p
Past Performance 11p
Management 11p
<PAGE>
AXP VARIABLE PORTFOLIO --
SMALL CAP ADVANTAGE FUND 12p
Goal 12p
Investment Strategy 12p
Risks 12p
Past Performance 13p
Management 13p
FEES AND EXPENSES 14p
Shareholder Fees 14p
Annual Fund Operating Expenses 14p
BUYING AND SELLING SHARES 16p
Valuing Fund Shares 16p
Purchasing Shares 16p
Transferring/Selling Shares 16p
DISTRIBUTIONS AND TAXES 16p
BUSINESS STRUCTURE 17p
<PAGE>
The Funds
References to "Fund" throughout this prospectus refer to AXP Variable Portfolio
- -- Blue Chip Advantage Fund, AXP Variable Portfolio -- Diversified Equity Income
Fund, AXP Variable Portfolio -- Federal Income Fund, AXP Variable Portfolio --
Growth Fund and AXP Variable Portfolio -- Small Cap Advantage Fund, singularly
or collectively as the context requires.
Please remember that you may not buy (nor will you own) shares of the Fund
directly. You invest by buying a variable annuity or
life insurance policy and allocating your purchase payments to the variable
subaccount or account (the subaccount) that invests in the Fund.
The Fund was patterned after an existing retail fund managed by American Express
Financial Corporation (AEFC), the Fund's investment advisor. The Fund has
substantially the same investment policies, goals and objectives as the retail
fund. In addition,
the Fund will be managed by the same portfolio manager and will have
substantially similar investment strategies, techniques and characteristics as
the retail fund. However, the Fund is not the same as the retail fund. The Fund
will have its own portfolio holdings and its own fees and operating expenses.
Therefore, the performance of the Fund may be greater or less than the
performance of the retail fund.
<PAGE>
AXP Variable Portfolio -- Blue Chip Advantage Fund
GOAL
The Fund seeks to provide shareholders with a long-term total return exceeding
that of the U.S. stock market. Because any investment involves risk, achieving
this goal cannot be guaranteed.
INVESTMENT STRATEGY
Currently, the Standard & Poor's 500 Stock Price Index (S&P 500) is the
unmanaged market index used to measure total return of the U.S. stock market
(the Fund may change this market index from time to time). Accordingly, the
Fund's assets primarily are invested in common stocks of companies that are
included in the S&P 500. To the extent practicable, the Fund's total assets are
fully invested in stocks with 65% of those being blue chip stocks. Blue chip
stocks are issued by companies with a market capitalization of at least $1
billion, an established management, a history of consistent earnings and a
leading position within their respective industries. Although the Fund invests
in common stocks that comprise the S&P 500, it is not an index fund, it will not
own all of the companies in the market index, and its results will likely differ
from the market index.
The selection of common stocks is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, AEFC, the Fund's investment adviser, chooses
equity investments by:
o Identifying companies that are included in the S&P 500 with:
-- effective management,
-- financial strength,
-- strong, sustainable earnings growth, and
-- competitive market position.
o Focusing on those companies that AEFC considers to be "blue chips."
o Establishing one or more industry classifications for each company (AEFC
will classify each company into one of at least 25 industries -- the
classifications may or may not be the same as the ones assigned by others).
o Assigning ratings to each company based on that company's merits and on its
industry grouping(s).
o Buying a diversified portfolio of securities. AEFC will over-weight certain
industry classifications based on AEFC's expectations for growth and for
expected market trends.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
- -- the security is overvalued,
- -- the security has reached AEFC's price objective,
- -- the company has met AEFC's earnings and/or growth expectations,
- -- political, economic, or other events could affect the company's
performance,
- -- AEFC wishes to minimize potential losses (i.e., in a market down-turn),
- -- AEFC wishes to lock-in profits,
- -- AEFC identifies a more attractive opportunity, and
- -- the company or the security continues to meet the other standards described
above.
<PAGE>
Although not a primary investment strategy, the Fund also may invest in other
instruments such as derivative instruments (generally options and futures
contracts that are based on the S&P 500) in order to remain fully invested and
money market securities. During weak or declining markets, the Fund may invest
more of its assets in money market securities. Although the Fund primarily will
invest in these securities to avoid losses, this type of investing also could
cause the Fund to lose the opportunity to participate in market improvement.
During these times, AEFC may make frequent securities trades that could result
in increased fees and expenses.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
This Fund is designed for investors with above-average risk tolerance. Please
remember that with any mutual fund investment you may lose money. Principal
risks associated with an investment in the Fund include:
Market Risk
Style Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Style Risk
The objective of the Fund is to provide shareholders with a long-term return
exceeding that of the U.S. stock market. Currently, the S&P 500 is the market
index used to measure total return of the U.S. stock market. However, unlike the
unmanaged index, the Fund's performance is affected by factors such as the size
of the Fund's portfolio, transaction costs, management fees and expenses,
brokerage commissions and fees, the extent and timing of cash flows in and out
of the Fund, stock selection, sector weightings, and other such factors. As a
result, once these factors are accounted for, the Fund may under-perform the
market index.
PAST PERFORMANCE
The Fund is new as of the date of this prospectus and therefore performance
information is not available.
MANAGEMENT
Keith Tufte and James Johnson are primarily responsible for the day-to-day
operations of AXP Variable Portfolio -- Blue Chip Advantage Fund.
Keith Tufte joined AEFC in 1990. Besides managing this Fund, he has managed AXP
Blue Chip Advantage Fund and Aggressive Growth Portfolio since November 1998. He
also became director of research-equities in 1998. Prior to that he was
portfolio manager of Equity Income Portfolio.
James Johnson joined AEFA in 1994. He began managing portfolios for American
Express Asset Management in 1996. Prior to joining AEFA, he worked for Piper
Capital Management as an equity quantitative analyst.
<PAGE>
AXP Variable Portfolio -- Diversified Equity Income Fund
GOAL
The Fund seeks to provide shareholders with a high level of current income and,
as a secondary goal, steady growth of capital. Because any investment involves
risk, achieving these goals cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in equity securities. Under normal
market conditions, the Fund will invest at least 65% of its net assets in
dividend-paying common and preferred stocks.
The selection of dividend-paying stocks is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, AEFC, the Fund's investment adviser, chooses
equity investments by:
o Identifying companies with:
-- dividend-paying stocks,
-- effective management,
-- financial strength, and
-- moderate growth potential.
o Determining specific industry weightings within the following sectors:
-- Consumer cyclical -- Energy
-- Consumer stable -- Technology
-- Financial -- Industrial
o Identifying stocks that are selling at low prices in relation to:
-- current and projected earnings,
-- current and projected dividends, and
-- historic price levels.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the security is overvalued,
-- the security has reached AEFC's price objective,
-- the company has met AEFC's earnings and/or growth expectations, and
-- the company or the security continues to meet the other standards
described above.
Although not a primary investment strategy, the Fund also may invest in other
instruments such as foreign securities, convertible securities, real estate
investment trusts, debt obligations and money market securities.
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund primarily will invest in these
securities to avoid losses, this type of investing also could cause the Fund to
lose the opportunity to participate in market improvement. During these times,
AEFC may make frequent securities trades that could result in increased fees and
expenses.
<PAGE>
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Sector/Concentration Risk
Inflation Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
PAST PERFORMANCE
The Fund is new as of the date of this prospectus and therefore performance
information is not available.
MANAGEMENT
Kurt Winters manages the day-to-day operations of AXP Variable Portfolio --
Diversified Equity Income Fund. He is a senior portfolio manager at AEFC. He
joined AEFC in 1987. Kurt is responsible for overall portfolio management,
including the determination of the sectors in which the Fund will invest. A team
of research professionals makes investment decisions within those sectors. From
1992 to 1995, he managed IDS Life Series Fund, Managed Portfolio. He also
manages AXP Discovery Fund and provides overall portfolio management for AXP
Equity Value Fund, AXP Progressive Fund, Balanced Portfolio, Equity Income
Portfolio and IDS Life Series Fund, Inc. -- Equity Income Portfolio.
<PAGE>
AXP Variable Portfolio -- Federal Income Fund
GOAL
The Fund seeks to provide shareholders with a high level of current income and
safety of principal consistent with an investment in U.S. government and
government agency securities. Because any investment involves risk, achieving
this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in debt obligations. Under normal
market conditions, at least 65% of the Fund's total assets are invested in
securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities. Although the Fund may invest in
any U.S. government securities, it is anticipated that U.S. government
securities representing part ownership in pools of mortgage loans
(mortgage-backed securities) will comprise a large percentage of the Fund's
investments. Additionally, the Fund will aggressively utilize derivative
instruments and when-issued securities to produce incremental earnings, to hedge
existing positions, and to increase flexibility. The Fund's potential losses
from the use of these instruments could extend beyond its initial investment.
The selection of debt obligations is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, AEFC, the Fund's investment adviser, chooses
investments by:
o Considering opportunities and risks by reviewing credit characteristics and
the interest rate outlook.
o Identifying and buying securities that:
-- are high quality or have similar qualities, in AEFC's opinion, even
though they are not rated or have been given a lower rating by a
rating agency, and
-- have short or intermediate-term maturities.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the interest rate or economic outlook changes,
-- the security is overvalued,
-- AEFC wishes to lock-in profits,
-- AEFC identifies a more attractive opportunity, and
-- the issuer or the security continues to meet the other standards
described above.
Although not a primary investment strategy, the Fund also may invest in other
instruments such as money market securities and investment grade
non-governmental debt obligations.
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund primarily will invest in these
securities to avoid losses, this type of investing also could cause the Fund to
lose the opportunity to participate in market improvement. During these times,
AEFC may make frequent securities trades that could result in increased fees and
expenses. Additionally, the Fund's portfolio turnover may be affected by
short-term investment strategies. High portfolio turnover could result in
increases in transaction costs.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
<PAGE>
RISKS
Please remember that with any mutual fund investment you may lose money.
Principal risks associated with an investment in the Fund include:
Market Risk
Correlation Risk
Interest Rate Risk
Call/Prepayment Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity.
PAST PERFORMANCE
The Fund is new as of the date of this prospectus and therefore performance
information is not available.
MANAGEMENT
Jim Snyder manages the day-to-day operations of AXP Variable Portfolio --
Federal Income Fund. Jim joined AEFC in 1989 and currently serves as vice
president and senior portfolio manager. Besides managing this Fund, he also
manages the assets of Government Income Portfolio.
<PAGE>
AXP Variable Portfolio -- Growth Fund
GOAL
The Fund seeks to provide shareholders with long-term capital growth. Because
any investment involves risk, achieving this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund primarily invests in common stocks and securities convertible into
common stocks that appear to offer growth opportunities. These growth
opportunities could result from new management, market developments, or
technological superiority. The Fund may invest up to 25% of its total assets in
foreign investments.
The selection of common stocks is the primary decision in building the
investment portfolio.
In pursuit of the Fund's goal, AEFC, the Fund's investment adviser, chooses
investments by:
o Identifying companies with:
-- effective management,
-- financial strength,
-- competitive market or product position, and
-- technological advantage.
o Selecting companies that AEFC believes have good long-term growth potential.
In evaluating whether to sell a security, AEFC considers, among other factors,
whether:
-- the company has met AEFC's earnings and/or growth expectations,
-- political, economic, or other events could affect the company's
performance,
-- AEFC identifies a more attractive opportunity, and
-- the company continues to meet the other standards described above.
Although not a primary investment strategy, the Fund also may invest in other
instruments such as money market securities, preferred stock, debt obligations,
derivative instruments and convertible securities.
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund primarily will invest in these
securities to avoid losses, this type of investing also could cause the Fund to
lose the opportunity to participate in market improvement. During these times,
AEFC may make frequent securities trades that could result in increased fees and
expenses.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
<PAGE>
RISKS
This Fund is designed for investors with above-average risk tolerance. Please
remember that with any mutual fund investment you may lose money. Principal
risks associated with an investment in the Fund include:
Market Risk
Style Risk
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Style Risk
AEFC purchases growth stocks based on the expectation that the companies will
have strong growth in earnings. The price paid often reflects an expected rate
of growth. If that growth fails to occur, the price of the stock may decline
quickly.
PAST PERFORMANCE
The Fund is new as of the date of this prospectus and therefore performance
information is not available.
MANAGEMENT
Mitzi Malevich manages the day-to-day operations of AXP Variable Portfolio --
Growth Fund. She joined AEFC in 1983 and currently serves as vice president and
senior portfolio manager. She also serves as portfolio manager of Growth
Portfolio and IDS Life Variable Annuity Funds A and B.
<PAGE>
AXP Variable Portfolio -- Small Cap Advantage Fund
GOAL
The Fund seeks to provide shareholders with long-term capital growth. Because
any investment involves risk, achieving this goal cannot be guaranteed.
INVESTMENT STRATEGY
The Fund's assets primarily are invested in equity securities. Under normal
market conditions, at least 80% of the Fund's net assets are invested in equity
securities of small companies. These companies will often be those included in
the S&P SmallCap 600 Index or the Russell 2000 Index.
In pursuit of the Fund's goal, the Fund's investment adviser, AEFC, employs an
active investment strategy that focuses on individual stock selection.
AEFC manages the Fund to provide diversified exposure to the small cap segment
of the U.S. stock market. Under normal market conditions, it is expected that
the Fund will be fully invested in common stocks, and will typically hold
between 175 and 225 issues, across a wide range of industries.
AEFC buys stocks based on an analysis of valuation and earnings. This selection
discipline favors companies that exhibit:
o Attractive valuations, based on measures such as the ratio of stock price
to company earnings, free cash flow or book value; and
o Improving earnings, based on an analysis of trends in earnings forecasts
and prior period earnings that were better than expected, as well as a
qualitative assessment of the company's competitive market position.
AEFC will normally sell a stock holding if:
-- the stock's price moves above a reasonable valuation target; or
-- the company's financial performance fails to meet expectations.
Although not a primary investment strategy, the Fund also may invest in other
instruments such as money market securities and debt securities.
During weak or declining markets, the Fund may invest more of its assets in
money market securities. Although the Fund would invest in these securities
primarily to reduce risk, this type of investment also could cause the Fund to
lose the opportunity to participate in market improvement. During these times,
AEFC may make frequent securities trades that could result in increased fees and
expenses.
For more information on strategies and holdings, see the Fund's Statement of
Additional Information (SAI) and the annual/semiannual reports.
RISKS
This Fund is designed for investors with above-average risk tolerance. Please
remember that with any mutual fund investment you may lose money. Principal
risks associated with an investment in the Fund include:
Market Risk
Small Company Risk
<PAGE>
Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
PAST PERFORMANCE
The Fund is new as of the date of this prospectus and therefore performance
information is not available.
MANAGEMENT
Jacob E. Hurwitz and Kent A. Kelly are primarily responsible for the day-to-day
management of AXP Variable Portfolio -- Small Cap Advantage Fund. They are both
principals and senior portfolio managers at Kenwood Capital Management LLC
(Kenwood), an indirect subsidiary of AEFC. Besides managing the assets of this
Fund, they have managed AXP Small Cap Advantage Fund since May 1999.
From 1992 until the establishment of Kenwood in 1998, Jake Hurwitz served as
senior vice president and equity portfolio manager at Travelers Investment
Management Company (TIMCO) where he had primary responsibility for stock
selection and portfolio management for TIMCO's small and mid-cap portfolios.
Prior to the establishment of Kenwood in 1998, Kent Kelley was chief executive
officer at TIMCO. From 1993 to 1995, Mr. Kelley served as TIMCO's president and
chief executive officer. As chief executive officer, he was responsible for all
portfolio management, research and trading operations.
<PAGE>
Fees and Expenses
Fund investors pay various expenses. The summary below describes the fees and
expenses that you would pay if you buy a variable annuity or life insurance
policy and allocate your purchase payments to the subaccount that invests in the
Fund.
Shareholder Fees (fees paid directly from your investment)
Because the Fund is the underlying investment vehicle for a variable annuity or
life insurance policy, there is no sales charge for the purchase or sale of Fund
shares. However, there may be charges associated with your annuity contract or
life insurance policy, including those that may be associated with surrender or
withdrawal. Any charges that apply to the subaccount and your contract or policy
are described in the annuity or life insurance policy prospectus.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets) o
Management Fees
The Fund pays IDS Life Insurance Company (IDS Life) a fee for managing its
assets. The fee schedule for each Fund is:
<TABLE>
<CAPTION>
AXP Variable Portfolio --
Blue Chip Advantage Fund and
AXP Variable Portfolio -- AXP Variable Portfolio --
Diversified Equity Income Fund Federal Income Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
<S> <C> <C> <C> <C>
First $0.50 0.560% First $1.00 0.610%
Next 0.50 0.545 Next 1.00 0.595
Next 1.00 0.530 Next 1.00 0.580
Next 1.00 0.515 Next 3.00 0.565
Next 3.00 0.500 Next 3.00 0.550
Over 6.00 0.470 Over 9.00 0.535
AXP Variable Portfolio -- AXP Variable Portfolio --
Growth Fund Small Cap Advantage Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
First $1.00 0.630% First $0.25 0.790%
Next 1.00 0.615 Next 0.25 0.770
Next 1.00 0.600 Next 0.25 0.750
Next 3.00 0.585 Next 0.25 0.730
Over 6.00 0.570 Next 1.00 0.710
Over 2.00 0.650
</TABLE>
o Distribution (12b-1) Fees
The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940. The Fund pays IDS Life an annual fee of up to 0.125% of average daily net
assets as payment for distributing its shares and providing shareholder
services. Because this fee is paid out of the Fund's assets on an on-going
basis, over time this fee will increase the cost of your investment and may cost
you more than paying other types of sales charges.
o Other Expenses
The Fund pays taxes, brokerage commissions and other nonadvisory expenses
including administrative and accounting services.
o Expense Limitation
Through Aug. 31, 2000, IDS Life and AEFC have agreed to waive certain fees and
reimburse expenses to the extent that total expenses exceed the following
percentage of Fund average daily net assets:
AXP Variable Portfolio -- Blue Chip Advantage Fund 0.950%
AXP Variable Portfolio -- Diversified Equity Income Fund 0.950
AXP Variable Portfolio -- Federal Income Fund 0.875
AXP Variable Portfolio -- Growth Fund 0.950
AXP Variable Portfolio -- Small Cap Advantage Fund 1.225
<PAGE>
Buying and Selling Shares
VALUING FUND SHARES
The net asset value (NAV) is the value of a single Fund share. The NAV usually
changes daily, and is calculated at the close of business of the New York Stock
Exchange, normally 3 p.m. Central Standard Time (CST), each business day (any
day the New York Stock Exchange is open).
The Fund's investments are valued based on market quotations, or where market
quotations are not readily available, based on methods selected in good faith by
the board. If the Fund's investment policies permit it to invest in securities
that are listed on foreign stock exchanges that trade on weekends or other days
when the Fund does not price its shares, the value of the Fund's underlying
investments may change on days when you could not buy or sell shares of the
Fund. Please see the SAI for further information.
PURCHASING SHARES
You may not buy (nor will you own) shares of the Fund directly. You invest by
buying a variable annuity or life insurance policy and allocating your purchase
payments to the subaccount that invests in the Fund. Your purchase price will be
the next NAV calculated after your request is received by the Fund or an
authorized insurance company.
For further information concerning minimum and maximum payments and submission
and acceptance of your application, see your annuity or life insurance policy
prospectus.
TRANSFERRING/SELLING SHARES
There is no sales charge for the sale of Fund shares, but there may be charges
associated with the surrender or withdrawal of your annuity contract or life
insurance policy. Any charges that apply to the subaccount and your contract or
policy are described in your annuity or life insurance policy prospectus.
You may transfer all or part of your value in a subaccount investing in shares
of the Fund to one or more of the other subaccounts investing in shares of other
funds with different investment objectives.
You may sell any shares you have allocated to the subaccounts. IDS Life or an
authorized agent will mail your payment within seven days after accepting your
surrender or withdrawal request. The amount you receive may be more or less than
the amount you invested. Your sale price will be the next NAV calculated after
your request is received by the Fund or an authorized insurance company.
Please refer to your annuity or life insurance policy prospectus for more
information about transfers among subaccounts as well as surrenders and
withdrawals.
Distributions and Taxes
The Fund distributes to shareholders (subaccounts) dividends and capital gains
to qualify as a regulated investment company and to avoid paying corporate
income and excise taxes.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund's net investment income is distributed to the shareholders
(subaccounts) as dividends. Capital gains are realized when a security is sold
for a higher price than was paid for it. Each realized capital gain or loss in
either short-term or long-term depending on whether the Fund held the security
for one year or less, or more than one year. Net short-term capital gains are
included in net investment income. Long-term capital gains are realized when a
security is held for more than one year. The Fund offsets any net realized
capital gains by any available capital loss carryovers. Net realized long-term
capital gains, if any, are distributed by the end of the calendar year as
capital gain distributions.
REINVESTMENT
Since the distributions are automatically reinvested in additional Fund shares,
the total value of your holdings will not change. The reinvestment price is the
next calculated NAV after the distribution is paid.
TAXES
The Fund intends to comply with the regulations relating to the diversification
requirements under section 817(h) of the Internal Revenue Code. Income received
by the Fund may be subject to foreign tax and withholding. Tax conventions
between certain countries and the U.S. may reduce or eliminate these taxes.
Important: This information is a brief and selective summary of some of the tax
rules that apply to this Fund. Because tax matters are highly individual and
complex, you should consult a qualified tax advisor.
Federal income taxation of subaccounts, life insurance companies and annuities
or life insurance policies is discussed in your annuity or life insurance policy
prospectus.
<PAGE>
<TABLE>
<CAPTION>
Business Structure
Annuity Contract owners invest in a subaccount
<S> <C> <C> <C> <C>
--------------------
Annuity Contract
owners invest in a
subaccount
--------------------
~/
-------------------- --------------------
Administrative Subaccount invests
Services Agent: in the Fund
--------------------
American Express
Financial ~/
Corporation
- ----------------------- -------------------- -------------------- ---------------------
Sub-Adviser: Investment Adviser: Provides Custodian:
Kenwood Capital American Express administrative and American Express
Management LLC Financial accounting <- Trust Company
Corporation services for the
Fund: receives a
fee based on
assets.
--------------------
<- <- The Fund ->
--------------------
Subadvises AXP Executes purchases Investment Manager: Provides
Variable Portfolio - and sales and IDS Life Insurance safekeeping of
Small Cap Advantage negotiates Company <- assets: receives a
Fund. brokerage as fee that varies
directed by IDS based on the number
Life. of securities held.
- ----------------------- -------------------- -------------------- ---------------------
Manages the
Fund's investments
and receives a fee
based on average
daily net assets.
--------------------
</TABLE>
<PAGE>
ABOUT IDS LIFE AND AEFC
IDS Life is a stock life insurance company organized in 1957 under the laws of
the State of Minnesota and located at IDS Tower 10, Minneapolis, MN 55440-0010.
IDS Life conducts a conventional life insurance business in the District of
Columbia and all states except New York.
IDS Life is a wholly-owned subsidiary of AEFC, located at IDS Tower 10,
Minneapolis, MN 55440-0010. The AEFC family of companies offers not only
insurance and annuities, but also mutual funds, investment certificates and a
broad range of financial management services. AEFC has been a provider of
financial services since 1894 and as of June 30, 1999 manages more than $232
billion in assets.
AEFC is a wholly-owned subsidiary of American Express Company, a financial
services company with headquarters at American Express Tower, World Financial
Center, New York, NY 10285.
YEAR 2000
The Fund could be adversely affected if the computer systems used by AEFC and
the Fund's other service providers do not properly process and calculate
date-related information from and after Jan. 1, 2000. While Year 2000-related
computer problems could have a negative effect on the Fund, AEFC is working to
avoid such problems and to obtain assurances from service providers that they
are taking similar steps.
The companies, governments or international markets in which the Fund invests
also may be adversely affected by Year 2000 issues. To the extent a portfolio
holding is adversely affected by a Year 2000 processing issue, the Fund's return
could be adversely affected.
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
Additional information about the Fund is available in the Fund's Statement of
Additional Information (SAI), annual and semiannual reports to shareholders. The
SAI is incorporated by reference in this prospectus. For a free copy of the SAI,
or to make inquiries about the Fund, contact American Express168 Variable
Portfolio Funds.
American Express Variable Portfolio Funds
IDS Tower 10
Minneapolis, MN 55440-0010
800-437-0602
TTY: 800-285-8846
You may review and copy information about the Fund, including the SAI, at the
Securities and Exchange Commission's (Commission) Public Reference Room in
Washington, D.C. (for information about the public reference room call
1-800-SEC-0330). Reports and other information about the Fund are available on
the Commission's Internet site at http://www.sec.gov. Copies of this information
may be obtained by writing and paying a duplicating fee to the Public Reference
Section of the Commission, Washington, D.C.
20549-6009.
Investment Company Act File #s:
AXP Variable Portfolio -- Blue Chip Advantage Fund 811-3218
AXP Variable Portfolio -- Diversified Equity Income Fund 811-4252
AXP Variable Portfolio -- Federal Income Fund 811-3219
AXP Variable Portfolio -- Growth Fund 811-3218
AXP Variable Portfolio -- Small Cap Advantage Fund 811-3218
S-6411 A (8/99)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
AXPSM Variable Portfolio - Income Series, Inc.
AXPSM Variable Portfolio - Federal Income Fund
AXPSM Variable Portfolio - Investment Series, Inc.
AXPSM Variable Portfolio - Blue Chip Advantage Fund
AXPSM Variable Portfolio - Growth Fund
AXPSM Variable Portfolio - Small Cap Advantage Fund
AXPSM Variable Portfolio - Managed Series, Inc.
AXPSM Variable Portfolio - Diversified Equity Income Fund
(singularly and collectively, where the context requires, referred to as the
Fund)
Aug. 11, 1999
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus that may be obtained from your financial
advisor or by writing to American Express(R) Variable Portfolio Funds, IDS Tower
10, Minneapolis, MN 55440-0010 or by calling 800-437-0602. The prospectus, dated
the same date as this SAI, is incorporated in this SAI by reference.
<PAGE>
TABLE OF CONTENTS
Fundamental Investment Policies........................................p. 3
Investment Strategies and Types of Investments.........................p. 7
Information Regarding Risks and Investment Strategies..................p. 11
Security Transactions..................................................p. 34
Brokerage Commissions Paid to Brokers Affiliated with IDS Life.........p. 35
Performance Information................................................p. 36
Valuing Fund Shares....................................................p. 38
Selling Shares.........................................................p. 39
Taxes..................................................................p. 39
Agreements.............................................................p. 40
Organizational Information.............................................p. 43
Board Members and Officers.............................................p. 45
Independent Auditors...................................................p. 47
Appendix: Description of Ratings......................................p. 48
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
Fundamental investment policies adopted by the Fund cannot be changed without
the approval of a majority of the outstanding voting securities of the Fund as
defined in the Investment Company Act of 1940, as amended (the 1940 Act).
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.
The policies below are fundamental policies that apply to the Fund and may be
changed only with shareholder approval. Unless holders of a majority of the
outstanding voting securities agree to make the change, the Fund will not:
AXP Variable Portfolio - Blue Chip Advantage Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the Securities and Exchange Commission (SEC), this means no more than 25%
of the Fund's total assets, based on current market value at time of
purchase, can be invested in any one industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o 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 or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Issue senior securities, except as permitted under the 1940 Act.
o Lend Fund securities in excess of 30% of its net assets.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
<PAGE>
AXP Variable Portfolio - Diversified Equity Income Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the SEC, this means no more than 25% of the Fund's total assets, based on
current market value at time of purchase, can be invested in any one
industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o 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 or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Issue senior securities, except as permitted under the 1940 Act.
o Lend Fund securities in excess of 30% of its net assets.
AXP Variable Portfolio - Federal Income Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the SEC, this means no more than 25% of the Fund's total assets, based on
current market value at time of purchase, can be invested in any one
industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
<PAGE>
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o 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 or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Issue senior securities, except as permitted under the 1940 Act.
o Lend Fund securities in excess of 30% of its net assets.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
AXP Variable Portfolio - Growth Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the SEC, this means no more than 25% of the Fund's total assets, based on
current market value at time of purchase, can be invested in any one
industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o 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 or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
<PAGE>
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Issue senior securities, except as permitted under the 1940 Act.
o Lend Fund securities in excess of 30% of its net assets.
o Make a loan of any part of its assets to American Express Financial
Corporation (AEFC), to the board members and officers of AEFC or to its own
board members and officers.
AXP Variable Portfolio - Small Cap Advantage Fund
o Act as an underwriter (sell securities for others). However, under the
securities laws, the Fund may be deemed to be an underwriter when it
purchases securities directly from the issuer and later resells them.
o Borrow money or property, except as a temporary measure for extraordinary
or emergency purposes, in an amount not exceeding one-third of the market
value of its total assets (including borrowings) less liabilities (other
than borrowings) immediately after the borrowing.
o Make cash loans if the total commitment amount exceeds 5% of the Fund's
total assets.
o Concentrate in any one industry. According to the present interpretation by
the SEC, this means no more than 25% of the Fund's total assets, based on
current market value at time of purchase, can be invested in any one
industry.
o Purchase more than 10% of the outstanding voting securities of an issuer.
o Invest more than 5% of its total assets in securities of any one company,
government, or political subdivision thereof, except the limitation will
not apply to investments in securities issued by the U.S. government, its
agencies, or instrumentalities, and except that up to 25% of the Fund's
total assets may be invested without regard to this 5% limitation.
o 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 or real estate
investment trusts. For purposes of this policy, real estate includes real
estate limited partnerships.
o Buy or sell physical commodities unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the Fund
from buying or selling options and futures contracts or from investing in
securities or other instruments backed by, or whose value is derived from,
physical commodities.
o Issue senior securities, except as permitted under the 1940 Act.
o Lend Fund securities in excess of 30% of its net assets.
Except for the fundamental investment policies listed above, the other
investment policies described in the prospectus and in this SAI are not
fundamental and may be changed by the board at any time.
<PAGE>
INVESTMENT STRATEGIES AND TYPES OF INVESTMENTS
This table shows various investment strategies and investments that many funds
are allowed to engage in and purchase. It also lists certain percentage
guidelines that are generally followed by the Fund's investment manager. This
table is intended to show the breadth of investments that the investment manager
may make on behalf of the Fund. For a description of principal risks, please see
the prospectus. Notwithstanding the Fund's ability to utilize these strategies
and techniques, the investment manager is not obligated to use them at any
particular time. For example, even though the investment manager is authorized
to adopt temporary defensive positions and is authorized to attempt to hedge
against certain types of risk, these practices are left to the investment
manager's sole discretion.
<TABLE>
<CAPTION>
- ----------------------------------------------- ----------------------------------------------------------------------
Investment strategies & types of investments: Allowable for
the Fund?
- ----------------------------------------------- ----------------------------------------------------------------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
AXP AXP AXP
Variable Variable AXP Variable Variable
Portfolio - Portfolio - Portfolio - AXP Portfolio -
Blue Chip Diversified Federal Variable Small Cap
Advantage Equity Income Fund Portfolio - Advantage
Fund Income Fund Growth Fund Fund
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Agency and Government Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Borrowing yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Cash/Money Market Instruments yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Collateralized Bond Obligations yes yes yes yes no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Commercial Paper yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Common Stock yes yes no yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Convertible Securities yes yes no yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Corporate Bonds yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Debt Obligations yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Depositary Receipts yes yes no yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Derivative Instruments yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Foreign Currency Transactions yes yes no yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Foreign Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
High-Yield (High-Risk) Securities (Junk no yes no no no
Bonds)
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Illiquid and Restricted Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Indexed Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Inverse Floaters no no yes no no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Investment Companies yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Lending of Portfolio Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Loan Participations yes yes yes yes no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Mortgage- and Asset-Backed Securities no yes yes yes no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Mortgage Dollar Rolls no no yes no no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Municipal Obligations yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Preferred Stock yes yes no yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Real Estate Investment Trusts yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Repurchase Agreements yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Reverse Repurchase Agreements yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Short Sales no no no no no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Sovereign Debt yes yes yes yes no
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Structured Products yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Variable- or Floating-Rate Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Warrants yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
When-Issued Securities yes yes yes yes yes
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
Zero-Coupon, Step-Coupon, and Pay-in-Kind yes yes yes yes yes
Securities
- ----------------------------------------------- ------------- ------------- -------------- ------------- -------------
</TABLE>
<PAGE>
The following are guidelines that may be changed by the board at any time:
AXP Variable Portfolio - Blue Chip Advantage Fund
o The Fund may invest up to 20% of its total assets in foreign investments
included in the market index.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o The Fund will not buy on margin or sell short, except the Fund may make
margin payments in connection with transactions in stock index futures
contracts.
o The Fund will not invest in a company to control or manage it.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to when-issued securities or forward
commitments.
AXP Variable Portfolio - Diversified Equity Income Fund
o Under normal market conditions, the Fund will invest at least 65% of its
net assets in dividend-paying common and preferred stocks.
o No more than 20% of the Fund's net assets may be invested in bonds below
investment grade unless the bonds are convertible securities.
o The Fund may invest up to 25% of its total assets in foreign investments.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may make
margin payments in connection with transactions in futures contracts.
o The Fund will not invest in a company to control or manage it.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to when-issued securities or forward
commitments.
<PAGE>
AXP Variable Portfolio - Federal Income Fund
o Under normal market conditions, at least 65% of the Fund's total assets
will be invested in securities issued or guaranteed as to principal and
interest by the U.S. government, its agencies or instrumentalities.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may enter
into interest rate futures contracts.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o The Fund will not invest in a company to control or manage it.
AXP Variable Portfolio - Growth Fund
o The Fund will not invest in bonds rated below investment grade.
o The Fund may invest up to 25% of its total assets in foreign investments.
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
o The Fund will not buy on margin or sell short, except the Fund may make
margin payments in connection with transactions in stock index futures
contracts.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o The Fund will not invest in a company to control or manage it.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to when-issued securities or forward
commitments.
AXP Variable Portfolio - Small Cap Advantage Fund
o No more than 5% of the Fund's net assets can be used at any one time for
good faith deposits on futures and premiums for options on futures that do
not offset existing investment positions.
o No more than 10% of the Fund's net assets will be held in securities and
other instruments that are illiquid.
o Ordinarily, less than 25% of the Fund's total assets are invested in money
market instruments.
<PAGE>
o The Fund will not buy on margin or sell short, except the Fund may make
margin payments in connection with transactions in derivative instruments.
o The Fund will not invest more than 10% of its total assets in securities of
investment companies.
o Under normal market conditions, the Fund does not intend to commit more
than 5% of its total assets to when-issued securities or forward
commitments.
<PAGE>
INFORMATION REGARDING RISKS AND INVESTMENT STRATEGIES
RISKS
The following is a summary of common risk characteristics. Following this
summary is a description of certain investments and investment strategies and
the risks most commonly associated with them (including certain risks not
described below and, in some cases, a more comprehensive discussion of how the
risks apply to a particular investment or investment strategy). Please remember
that a mutual fund's risk profile is largely defined by the fund's primary
securities and investment strategies. However, most mutual funds are allowed to
use certain other strategies and investments that may have different risk
characteristics. Accordingly, one or more of the following types of risk will be
associated with the Fund at any time (for a description of principal risks,
please see the prospectus):
Call/Prepayment Risk
The risk that a bond or other security might be called (or otherwise converted,
prepaid, or redeemed) before maturity. This type of risk is closely related to
"reinvestment risk."
Correlation Risk
The risk that a given transaction may fail to achieve its objectives due to an
imperfect relationship between markets. Certain investments may react more
negatively than others in response to changing market conditions.
Credit Risk
The risk that the issuer of a security, or the counterparty to a contract, will
default or otherwise become unable to honor a financial obligation (such as
payments due on a bond or a note). The price of junk bonds may react more to the
ability of the issuing company to pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations and are more
likely to experience a default.
Event Risk
Occasionally, the value of a security may be seriously and unexpectedly changed
by a natural or industrial accident or occurrence.
Foreign/Emerging Markets Risk
The following are all components of foreign/emerging markets risk:
Country risk includes the political, economic, and other conditions of
a country. These conditions include lack of publicly available information, less
government oversight (including lack of accounting, auditing, and financial
reporting standards), the possibility of government-imposed restrictions, and
even the nationalization of assets.
Currency risk results from the constantly changing exchange rate
between local currency and the U.S. dollar. Whenever the Fund holds securities
valued in a foreign currency or holds the currency, changes in the exchange rate
add or subtract from the value of the investment.
<PAGE>
Custody risk refers to the process of clearing and settling trades. It
also covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. Local agents are held only to the standard of care of the
local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a country's securities market is, the greater the
likelihood of problems occurring.
Emerging markets risk includes the dramatic pace of change (economic,
social, and political) in emerging market countries as well as the other
considerations listed above. These markets are in early stages of development
and are extremely volatile. They can be marked by extreme inflation, devaluation
of currencies, dependence on trade partners, and hostile relations with
neighboring countries.
Inflation Risk
Also known as purchasing power risk, inflation risk measures the effects of
continually rising prices on investments. If an investment's yield is lower than
the rate of inflation, your money will have less purchasing power as time goes
on.
Interest Rate Risk
The risk of losses attributable to changes in interest rates. This term is
generally associated with bond prices (when interest rates rise, bond prices
fall). In general, the longer the maturity of a debt obligation, the higher its
yield and the greater the sensitivity to changes in interest rates.
Issuer Risk
The risk that an issuer, or the value of its stocks or bonds, will perform
poorly. Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
Legal/Legislative Risk
Congress and other governmental units have the power to change existing laws
affecting securities. A change in law might affect an investment adversely.
Leverage Risk
Some derivative investments (such as options, futures, or options on futures)
require little or no initial payment and base their price on a security, a
currency, or an index. A small change in the value of the underlying security,
currency, or index may cause a sizable gain or loss in the price of the
instrument.
Liquidity Risk
Securities may be difficult or impossible to sell at the time that the Fund
would like. The Fund may have to lower the selling price, sell other
investments, or forego an investment opportunity.
Management Risk
The risk that a strategy or selection method utilized by the investment manager
may fail to produce the intended result. When all other factors have been
accounted for and the investment manager chooses an investment, there is always
the possibility that the choice will be a poor one.
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Market Risk
The market may drop and you may lose money. Market risk may affect a single
issuer, sector of the economy, industry, or the market as a whole. The market
value of all securities may move up and down, sometimes rapidly and
unpredictably.
Reinvestment Risk
The risk that an investor will not be able to reinvest their income or principal
at the same rate as it currently is earning.
Sector/Concentration Risk
Investments that are concentrated in a particular issuer, geographic region, or
industry will be more susceptible to changes in price (the more you diversify,
the more you spread risk).
Small Company Risk
Investments in small and medium companies often involve greater risks than
investments in larger, more established companies because small and medium
companies may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In addition, in
many instances the securities of small and medium companies are traded only
over-the-counter or on regional securities exchanges and the frequency and
volume of their trading is substantially less than is typical of larger
companies.
<PAGE>
INVESTMENT STRATEGIES
The following information supplements the discussion of the Fund's investment
objectives, policies, and strategies that are described in the prospectus and in
this SAI. The following describes many strategies that many mutual funds use and
types of securities that they purchase. Please refer to the section entitled
Investment Strategies and Types of Investments to see which are applicable to
the Fund.
Agency and Government Securities
The U.S. government and its agencies issue many different types of securities.
U.S. Treasury bonds, notes, and bills and securities including mortgage pass
through certificates of the Government National Mortgage Association (GNMA) are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or government-sponsored enterprises but are
not guaranteed by the U.S. government. This may increase the credit risk
associated with these investments.
Government-sponsored entities issuing securities include privately owned,
publicly chartered entities created to reduce borrowing costs for certain
sectors of the economy, such as farmers, homeowners, and students. They include
the Federal Farm Credit Bank System, Farm Credit Financial Assistance
Corporation, Federal Home Loan Bank, FHLMC, FNMA, Student Loan Marketing
Association (SLMA), and Resolution Trust Corporation (RTC). Government-sponsored
entities may issue discount notes (with maturities ranging from overnight to 360
days) and bonds. Agency and government securities are subject to the same
concerns as other debt obligations. (See also Debt Obligations and Mortgage- and
Asset-Backed Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with agency and government securities include:
Call/Prepayment Risk, Inflation Risk, Interest Rate Risk, Management Risk, and
Reinvestment Risk.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes and
make other investments or engage in other transactions permissible under the
1940 Act that may be considered a borrowing (such as derivative instruments).
Borrowings are subject to costs (in addition to any interest that may be paid)
and typically reduce the Fund's total return. Except as qualified above,
however, the Fund will not buy securities on margin.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with borrowing include: Inflation Risk and Management
Risk.
Cash/Money Market Instruments
The Fund may maintain a portion of its assets in cash and cash-equivalent
investments. Cash-equivalent investments include short-term U.S. and Canadian
government securities and negotiable certificates of deposit, non-negotiable
fixed-time deposits, bankers' acceptances, and letters of credit of banks or
savings and loan associations having capital, surplus, and undivided profits (as
of the date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign branch of
a U.S. bank) at the date of investment. The Fund also may purchase short-term
notes and obligations of U.S. and foreign banks and corporations and may use
repurchase agreements with broker-dealers registered under the Securities
Exchange Act of 1934 and with commercial banks. (See also Commercial Paper, Debt
Obligations, Repurchase Agreements, and Variable- or Floating-Rate Securities.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
See the appendix for a discussion of securities ratings.
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include: Credit
Risk, Inflation Risk, and Management Risk.
Collateralized Bond Obligations
Collateralized bond obligations (CBOs) are investment grade bonds backed by a
pool of junk bonds. CBOs are similar in concept to collateralized mortgage
obligations (CMOs), but differ in that CBOs represent different degrees of
credit quality rather than different maturities. (See also Mortgage- and
Asset-Backed Securities.) Underwriters of CBOs package a large and diversified
pool of high-risk, high-yield junk bonds, which is then separated into "tiers."
Typically, the first tier represents the higher quality collateral and pays the
lowest interest rate; the second tier is backed by riskier bonds and pays a
higher rate; the third tier represents the lowest credit quality and instead of
receiving a fixed interest rate receives the residual interest payments--money
that is left over after the higher tiers have been paid. CBOs, like CMOs, are
substantially overcollateralized and this, plus the diversification of the pool
backing them, earns them investment-grade bond ratings. Holders of third-tier
CBOs stand to earn high yields or less money depending on the rate of defaults
in the collateral pool. (See also High-Yield (High-Risk) Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with CBOs include: Call/Prepayment Risk, Credit Risk,
Interest Rate Risk, and Management Risk.
Commercial Paper
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with commercial paper include: Credit Risk, Liquidity
Risk, and Management Risk.
Common Stock
Common stock represents units of ownership in a corporation. Owners typically
are entitled to vote on the selection of directors and other important matters
as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with common stock include: Issuer Risk, Management
Risk, Market Risk, and Small Company Risk.
Convertible Securities
Convertible securities are bonds, debentures, notes, preferred stocks, or other
securities that may be converted into common stock of the same or a different
issuer within a particular period of time at a specified price. Some convertible
securities, such as preferred equity-redemption cumulative stock (PERCs), have
mandatory conversion features. Others are voluntary. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or the
dividend paid on preferred stock until the convertible security matures or is
redeemed, converted, or exchanged. Convertible securities have unique
<PAGE>
investment characteristics in that they generally (i) have higher yields than
common stocks but lower yields than comparable non-convertible securities, (ii)
are less subject to fluctuation in value than the underlying stock since they
have fixed income characteristics, and (iii) provide the potential for capital
appreciation if the market price of the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with convertible securities include: Call/Prepayment
Risk, Interest Rate Risk, Issuer Risk, Management Risk, Market Risk, and
Reinvestment Risk.
Corporate Bonds
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-Yield (High-Risk) Securities.)
Corporate bonds may be either secured or unsecured. Unsecured corporate bonds
are generally referred to as "debentures." See the appendix for a discussion of
securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Debt Obligations
Many different types of debt obligations exist (for example, bills, bonds, or
notes). Issuers of debt obligations have a contractual obligation to pay
interest at a specified rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or "call" a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
<PAGE>
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and return of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities, Corporate Bonds, and
High-Yield (High-Risk) Securities.)
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Fund. Neither event will require
the sale of such a security, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating organization or their rating systems, the Fund will attempt
to use comparable ratings as standards for selecting investments.
See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Call/Prepayment Risk,
Credit Risk, Interest Rate Risk, Issuer Risk, Management Risk, and Reinvestment
Risk.
Depositary Receipts
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with depositary receipts include: Foreign/Emerging
Markets Risk, Issuer Risk, Management Risk, and Market Risk.
Derivative Instruments
Derivative instruments are commonly defined to include securities or contracts
whose values depend on, in whole or in part, (or "derive" from) the value of one
or more other assets, such as securities, currencies, or commodities.
<PAGE>
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Such instruments may be
used to maintain cash reserves while remaining fully invested, to offset
anticipated declines in values of investments, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns. Derivative
instruments are characterized by requiring little or no initial payment. Their
value changes daily based on a security, a currency, a group of securities or
currencies, or an index. A small change in the value of the underlying security,
currency, or index can cause a sizable gain or loss in the price of the
derivative instrument.
Options and forward contracts are considered to be the basic "building blocks"
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as "futures contracts."
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of the
contract. A person who sells a call option is called a writer. The writer of a
call option agrees for the length of the contract to sell the security at the
set price when the buyer wants to exercise the option, no matter what the market
price of the security is at that time. A person who buys a put option has the
right to sell a security at a set price for the length of the contract. A person
who writes a put option agrees to buy the security at the set price if the
purchaser wants to exercise the option during the length of the contract, no
matter what the market price of the security is at that time. An option is
covered if the writer owns the security (in the case of a call) or sets aside
the cash or securities of equivalent value (in the case of a put) that would be
required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes, the price obtained
on the sale of the underlying security is the combination of the exercise price,
the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on many securities are listed on options exchanges. If the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, CBOE, or NASDAQ will be valued at the last quoted sales price
or, if such a price is not readily available, at the mean of the last bid and
ask prices.
<PAGE>
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures Contracts. A futures contract is a sales contract between a buyer
(holding the "long" position) and a seller (holding the "short" position) for an
asset with delivery deferred until a future date. The buyer agrees to pay a
fixed price at the agreed future date and the seller agrees to deliver the
asset. The seller hopes that the market price on the delivery date is less than
the agreed upon price, while the buyer hopes for the contrary. Many futures
contracts trade in a manner similar to the way a stock trades on a stock
exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day an
investor would pay out cash in an amount equal to any decline in the contract's
value or receive cash equal to any increase. At the time a futures contract is
closed out, a nominal commission is paid, which is generally lower than the
commission on a comparable transaction in the cash market.
Future contracts may be based on various securities, securities indices (such as
the S&P 500 Index), foreign currencies and other financial instruments and
indices.
Options on Futures Contracts. Options on futures contracts give the holder
a right to buy or sell futures contracts in the future. Unlike a futures
contract, which requires the parties to the contract to buy and sell a security
on a set date (some futures are settled in cash), an option on a futures
contract merely entitles its holder to decide on or before a future date (within
nine months of the date of issue) whether to enter into a contract. If the
holder decides not to enter into the contract, all that is lost is the amount
(premium) paid for the option. Further, because the value of the option is fixed
at the point of sale, there are no daily payments of cash to reflect the change
in the value of the underlying contract. However, since an option gives the
buyer the right to enter into a contract at a set price for a fixed period of
time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investor's obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on Stock Indexes. Options on stock indexes are securities traded
on national securities exchanges. An option on a stock index is similar to an
option on a futures contract except all settlements are in cash. A fund
exercising a put, for example, would receive the difference between the exercise
price and the current index level.
Tax Treatment. As permitted under federal income tax laws and to the
extent the Fund is allowed to invest in futures contacts, the Fund intends to
identify futures contracts as mixed straddles and not mark them to market, that
is, not treat them as having been sold at the end of the year at market value.
Such an election may result in the Fund being required to defer recognizing
losses incurred on futures contracts and on underlying securities identified as
hedged positions.
<PAGE>
Federal income tax treatment of gains or losses from transactions in options on
futures contracts and indexes will depend on whether the option is a section
1256 contract. If the option is a non-equity option, the Fund will either make a
1256(d) election and treat the option as a mixed straddle or mark to market the
option at fiscal year end and treat the gain/loss as 40% short-term and 60%
long-term.
The IRS has ruled publicly that an exchange-traded call option is a security for
purposes of the 50%-of-assets test and that its issuer is the issuer of the
underlying security, not the writer of the option, for purposes of the
diversification requirements.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Fund's agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each day's trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the
last-quoted sales price on their primary exchange.
Other Risks of Derivatives.
Derivatives are risky investments.
The primary risk of derivatives is the same as the risk of the underlying asset,
namely that the value of the underlying asset may go up or down. Adverse
movements in the value of an underlying asset can expose an investor to losses.
Derivative instruments may include elements of leverage and, accordingly, the
fluctuation of the value of the derivative instrument in relation to the
underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the investment manager's ability
to predict movements of the securities, currencies, and commodity markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed.
Another risk is the risk that a loss may be sustained as a result of the failure
of a counterparty to comply with the terms of a derivative instrument. The
counterparty risk for exchange-traded derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, since generally a
clearing agency, which is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For privately-negotiated
instruments, there is no similar clearing agency guarantee. In all transactions,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the
price movements of the two instruments. With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values of the derivative
instrument and its hedge are not perfectly correlated. For example, if the value
of a derivative instrument used in a short hedge (such as writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which these instruments are traded.
<PAGE>
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Another risk is caused by the legal unenforcibility of a party's obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(See also Foreign Currency Transactions.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with derivative instruments include: Leverage Risk,
Liquidity Risk, and Management Risk.
Foreign Currency Transactions
Since investments in foreign countries usually involve currencies of foreign
countries, the value of the Fund's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency exchange rates and
exchange control regulations. Also, the Fund may incur costs in connection with
conversions between various currencies. Currency exchange rates may fluctuate
significantly over short periods of time causing the Fund's NAV to fluctuate.
Currency exchange rates are generally determined by the forces of supply and
demand in the foreign exchange markets, actual or anticipated changes in
interest rates, and other complex factors. Currency exchange rates also can be
affected by the intervention of U.S. or foreign governments or central banks, or
the failure to intervene, or by currency controls or political developments.
Spot Rates and Derivative Instruments. The Fund conducts its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts) as a hedge against fluctuations in future foreign exchange
rates. (See also Derivative Instruments). These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market for the underlying foreign
currencies at prices that are less favorable than for round lots.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment in dollars. By entering into
a forward contract, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between different
currencies from the date the security is purchased or sold to the date on which
payment is made or received or when the dividend or interest is actually
received.
The Fund also may enter into forward contracts when management of the Fund
believes the currency of a particular foreign country may change in relationship
to another currency. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of securities in foreign currencies more than likely will change between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain. The
Fund will not enter into such forward contracts or maintain a net exposure to
such contracts when consummating the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
securities or other assets denominated in that currency.
<PAGE>
The Fund will designate cash or securities in an amount equal to the value of
the Fund's total assets committed to consummating forward contracts entered into
under the second circumstance set forth above. If the value of the securities
declines, additional cash or securities will be designated on a daily basis so
that the value of the cash or securities will equal the amount of the Fund's
commitments on such contracts.
At maturity of a forward contract, the Fund may either sell the security and
make delivery of the foreign currency or retain the security and terminate its
contractual obligation to deliver the foreign currency by purchasing an
offsetting contract with the same currency trader obligating it to buy, on the
same maturity date, the same amount of foreign currency.
If the Fund retains the security and engages in an offsetting transaction, the
Fund will incur a gain or loss (as described below) to the extent there has been
movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline between the date the Fund enters
into a forward contract for selling foreign currency and the date it enters into
an offsetting contract for purchasing the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to buy. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to buy exceeds the price of the currency it has agreed to
sell.
It is impossible to forecast what the market value of securities will be at the
expiration of a contract. Accordingly, it may be necessary for the Fund to buy
additional foreign currency on the spot market (and bear the expense of that
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
The Fund's dealing in forward contracts will be limited to the transactions
described above. This method of protecting the value of the Fund's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some point in time. Although forward contracts
tend to minimize the risk of loss due to a decline in value of hedged currency,
they tend to limit any potential gain that might result should the value of such
currency increase.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on Foreign Currencies. The Fund may buy options on foreign currencies
for hedging purposes. For example, a decline in the dollar value of a foreign
currency in which securities are denominated will reduce the dollar value of
such securities, even if their value in the foreign currency remains constant.
In order to protect against the diminutions in the value of securities, the Fund
may buy options on the foreign currency. If the value of the currency does
decline, the Fund will have the right to sell the currency for a fixed amount in
dollars and will offset, in whole or in part, the adverse effect on its
portfolio that otherwise would have resulted.
<PAGE>
As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options will be reduced by the amount
of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
The Fund may write options on foreign currencies for the same types of hedging
purposes. For example, when the Fund anticipates a decline in the dollar value
of foreign-denominated securities due to adverse fluctuations in exchange rates
it could, instead of purchasing a put options, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised and the diminution in value of securities will be fully or
partially offset by the amount of the premium received.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss that may not be offset by the amount of the
premium. Through the writing of options on foreign currencies, the Fund also may
be required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for that purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
<PAGE>
Foreign Currency Futures and Related Options. The Fund may enter into currency
futures contracts to sell currencies. It also may buy put options and write
covered call options on currency futures. Currency futures contracts are similar
to currency forward contracts, except that they are traded on exchanges (and
have margin requirements) and are standardized as to contract size and delivery
date. Most currency futures call for payment of delivery in U.S. dollars. The
Fund may use currency futures for the same purposes as currency forward
contracts, subject to Commodity Futures Trading Commission (CFTC) limitations.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the value of
the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Fund's investments
denominated in that currency over time.
The Fund will hold securities or other options or futures positions whose values
are expected to offset its obligations. The Fund will not enter into an option
or futures position that exposes the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or (ii) cash,
receivables and short-term debt securities with a value sufficient to cover its
potential obligations.
(See also Derivative Instruments and Foreign Securities.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign currency transactions include: Correlation
Risk, Interest Rate Risk, Leverage Risk, Liquidity Risk, and Management Risk.
Foreign Securities and Domestic Companies with Foreign Operations
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations involve special risks, including those set
forth below, which are not typically associated with investing in U.S.
securities. Foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. Additionally, many foreign stock markets, while growing in
volume of trading activity, have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of domestic companies. Similarly, volume and
liquidity in most foreign bond markets are less than the volume and liquidity in
the U.S. and, at times, volatility of price can be greater than in the U.S.
Further, foreign markets have different clearance, settlement, registration, and
communication procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in such
procedures could result in temporary periods when assets are uninvested and no
return is earned on them. The inability of an investor to make intended security
purchases due to such problems could cause the investor to miss attractive
investment opportunities. Payment for securities without delivery may be
required in certain foreign markets and, when participating in new issues, some
foreign countries require payment to be made in advance of issuance (at the time
of issuance, the market value of the security may be more or less than the
purchase price). Some foreign markets also have compulsory depositories (i.e.,
an investor does not have a choice as to where the securities are held). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, an investor may encounter difficulties
or be unable to pursue legal remedies and obtain judgments in foreign courts.
There is generally less government supervision and regulation of business and
industry practices, stock exchanges, brokers, and listed companies than in the
U.S. It may be more difficult for an investor's agents to keep currently
informed about corporate actions such as stock dividends or other matters that
may affect the prices of portfolio securities. Communications between the U.S.
and foreign countries may be less reliable than within the U.S., thus increasing
the risk of delays or loss of certificates
<PAGE>
for portfolio securities. In addition, with respect to certain foreign
countries, there is the possibility of nationalization, expropriation, the
imposition of additional withholding or confiscatory taxes, political, social,
or economic instability, diplomatic developments that could affect investments
in those countries, or other unforeseen actions by regulatory bodies (such as
changes to settlement or custody procedures).
The risks of foreign investing may be magnified for investments in emerging
markets, which may have relatively unstable governments, economies based on only
a few industries, and securities markets that trade a small number of
securities.
The introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates; the fluctuation
of the euro relative to non-euro currencies during the transition period from
January 1, 1999 to December 31, 2000 and beyond; whether the interest rate, tax
or labor regimes of European countries participating in the euro will converge
over time; and whether the conversion of the currencies of other EU countries
such as the United Kingdom, Denmark, and Greece into the euro and the admission
of other non-EU countries such as Poland, Latvia, and Lithuania as members of
the EU may have an impact on the euro.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with foreign securities include: Foreign/Emerging
Markets Risk, Issuer Risk, and Management Risk.
High-Yield (High-Risk) Securities (Junk Bonds)
High yield (high-risk) securities are sometimes referred to as "junk bonds."
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
The lower-quality and comparable unrated security market is relatively new and
its growth has paralleled a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged recession or economic downturn.
Such conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality securities may experience
financial stress and may not have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific corporate developments, the issuer's inability to
meet specific projected business forecast, or the unavailability of additional
financing. The risk of loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower quality security defaulted, an
investor might incur additional expenses to seek recovery.
<PAGE>
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Legislation may be adopted from time to time designed to limit the use of
certain lower quality and comparable unrated securities by certain issuers.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield (high-risk) securities include:
Call/Prepayment Risk, Credit Risk, Currency Risk, Interest Rate Risk, and
Management Risk.
Illiquid and Restricted Securities
The Fund may invest in illiquid securities (i.e., securities that are not
readily marketable). These securities may include, but are not limited to,
certain securities that are subject to legal or contractual restrictions on
resale, certain repurchase agreements, and derivative instruments.
To the extent the Fund invests in illiquid or restricted securities, it may
encounter difficulty in determining a market value for such securities.
Disposing of illiquid or restricted securities may involve time-consuming
negotiations and legal expense, and it may be difficult - or impossible for the
Fund to sell such an investment promptly and at an acceptable price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with illiquid and restricted securities include:
Liquidity Risk and Management Risk.
Indexed Securities
The value of indexed securities is linked to currencies, interest rates,
commodities, indexes, or other financial indicators. Most indexed securities are
short- to intermediate-term fixed income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be more volatile than the
underlying instrument itself and they may be less liquid than the securities
represented by the index. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with indexed securities include: Liquidity Risk,
Management Risk, and Market Risk.
<PAGE>
Inverse Floaters
Inverse floaters are created by underwriters using the interest payment on
securities. A portion of the interest received is paid to holders of instruments
based on current interest rates for short-term securities. The remainder, minus
a servicing fee, is paid to holders of inverse floaters. As interest rates go
down, the holders of the inverse floaters receive more income and an increase in
the price for the inverse floaters. As interest rates go up, the holders of the
inverse floaters receive less income and a decrease in the price for the inverse
floaters. (See also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with inverse floaters include: Interest Rate Risk and
Management Risk.
Investment Companies
The Fund may invest in securities issued by registered and unregistered
investment companies. These investments may involve the duplication of advisory
fees and certain other expenses.
Although one or more of the other risks described in this SAI may apply, the
largest risk associated with the securities of other investment companies
includes: Management Risk and Market Risk.
Lending of Portfolio Securities
The Fund may lend certain of its portfolio securities to broker-dealers. The
current policy of the Fund's board is to make these loans, either long- or
short-term, to broker-dealers. In making loans, the Fund receives the market
price in cash, U.S. government securities, letters of credit, or such other
collateral as may be permitted by regulatory agencies and approved by the board.
If the market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower may not
provide additional collateral when required or return the securities when due.
During the existence of the loan, the Fund receives cash payments equivalent to
all interest or other distributions paid on the loaned securities. The Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with the lending of portfolio securities include:
Credit Risk and Management Risk.
Loan Participations
Loans, loan participations, and interests in securitized loan pools are
interests in amounts owed by a corporate, governmental, or other borrower to a
lender or consortium of lenders (typically banks, insurance companies,
investment banks, government agencies, or international agencies). Loans involve
a risk of loss in case of default or insolvency of the borrower and may offer
less legal protection to an investor in the event of fraud or misrepresentation.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with loan participations include: Credit Risk and
Management Risk.
<PAGE>
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and Collateralized
Mortgage Obligations (CMOs). These securities may be issued or guaranteed by
U.S. government agencies or instrumentalities (see also Agency and Government
Securities), or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities. Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement.
Stripped mortgage-backed securities are a type of mortgage-backed security that
receive differing proportions of the interest and principal payments from the
underlying assets. Generally, there are two classes of stripped mortgage-backed
securities: Interest Only (IO) and Principal Only (PO). IOs entitle the holder
to receive distributions consisting of all or a portion of the interest on the
underlying pool of mortgage loans or mortgage-backed securities. POs entitle the
holder to receive distributions consisting of all or a portion of the principal
of the underlying pool of mortgage loans or mortgage-backed securities. The cash
flows and yields on IOs and POs are extremely sensitive to the rate of principal
payments (including prepayments) on the underlying mortgage loans or
mortgage-backed securities. A rapid rate of principal payments may adversely
affect the yield to maturity of IOs. A slow rate of principal payments may
adversely affect the yield to maturity of POs. If prepayments of principal are
greater than anticipated, an investor in IOs may incur substantial losses. If
prepayments of principal are slower than anticipated, the yield on a PO will be
affected more severely than would be the case with a traditional mortgage-backed
security.
CMOs are hybrid mortgage-related instruments secured by pools of mortgage loans
or other mortgage-related securities, such as mortgage pass through securities
or stripped mortgage-backed securities. CMOs may be structured into multiple
classes, often referred to as "tranches," with each class bearing a different
stated maturity and entitled to a different schedule for payments of principal
and interest, including prepayments. Principal prepayments on collateral
underlying a CMO may cause it to be retired substantially earlier than its
stated maturity.
The yield characteristics of mortgage-backed securities differ from those of
other debt securities. Among the differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and principal may be repaid at any time. These factors may reduce the
expected yield.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. Asset-backed debt obligations represent direct or
indirect participation in, or secured by and payable from, assets such as motor
vehicle installment sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and receivables from credit
card or other revolving credit arrangements. The credit quality of most
asset-backed securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement of the
securities. Payments or distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental credit enhancements
including letters of credit, reserve funds, overcollateralization, and
guarantees by third parties. The market for privately issued asset-backed debt
obligations is smaller and less liquid than the market for government sponsored
mortgage-backed securities. (See also Derivative Instruments.)
<PAGE>
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage- and asset-backed securities include:
Call/Prepayment Risk, Credit Risk, Interest Rate Risk, Liquidity Risk, and
Management Risk.
Mortgage Dollar Rolls
Mortgage dollar rolls are investments whereby an investor would sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to purchase substantially similar securities on a specified future
date. While an investor would forego principal and interest paid on the
mortgage-backed securities during the roll period, the investor would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The investor also could be compensated through the receipt
of fee income equivalent to a lower forward price.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with mortgage dollar rolls include: Credit Risk,
Interest Rate Risk, and Management Risk.
Municipal Obligations
Municipal obligations include debt obligations issued by or on behalf of states,
territories, possessions, or sovereign nations within the territorial boundaries
of the United States (including the District of Columbia). The interest on these
obligations is generally exempt from federal income tax. Municipal obligations
are generally classified as either "general obligations" or "revenue
obligations."
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of interest and principal. Revenue
bonds are payable only from the revenues derived from a project or facility or
from the proceeds of a specified revenue source. Industrial development bonds
are generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes, and similar instruments.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities. An
investor may purchase these obligations directly, or it may purchase
participation interests in such obligations. Municipal leases may be subject to
greater risks than general obligation or revenue bonds. State constitutions and
statutes set forth requirements that states or municipalities must meet in order
to issue municipal obligations. Municipal leases may contain a covenant by the
state or municipality to budget for and make payments due under the obligation.
Certain municipal leases may, however, provide that the issuer is not obligated
to make payments on the obligation in future years unless funds have been
appropriated for this purpose each year.
Yields on municipal bonds and notes depend on a variety of factors, including
money market conditions, municipal bond market conditions, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The municipal bond market has a large number of different issuers, many
having smaller sized bond issues, and a wide choice of different maturities
within each issue. For these reasons, most municipal bonds do not trade on a
daily basis and many trade only rarely. Because many of these bonds trade
infrequently, the spread between the bid and offer may be wider and the time
needed to develop a bid or an offer may be longer than other security markets.
See the appendix for a discussion of securities ratings. (See also Debt
Obligations.)
<PAGE>
Taxable Municipal Obligations. There is another type of municipal obligation
that is subject to federal income tax for a variety of reasons. These municipal
obligations do not qualify for the federal income exemption because (a) they did
not receive necessary authorization for tax-exempt treatment from state or local
government authorities, (b) they exceed certain regulatory limitations on the
cost of issuance for tax-exempt financing or (c) they finance public or private
activities that do not qualify for the federal income tax exemption. These
non-qualifying activities might include, for example, certain types of
multi-family housing, certain professional and local sports facilities,
refinancing of certain municipal debt, and borrowing to replenish a
municipality's underfunded pension plan.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with municipal obligations include: Credit Risk, Event
Risk, Inflation Risk, Interest Rate Risk, Legal/Legislative Risk, and Market
Risk.
Preferred Stock
Preferred stock is a type of stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
The price of a preferred stock is generally determined by earnings, type of
products or services, projected growth rates, experience of management,
liquidity, and general market conditions of the markets on which the stock
trades.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with preferred stock include: Issuer Risk, Management
Risk, and Market Risk.
Real Estate Investment Trusts
Real estate investment trusts (REITs) are entities that manage a portfolio of
real estate to earn profits for their shareholders. REITs can make investments
in real estate such as shopping centers, nursing homes, office buildings,
apartment complexes, and hotels. REITs can be subject to extreme volatility due
to fluctuations in the demand for real estate, changes in interest rates, and
adverse economic conditions. Additionally, the failure of a REIT to continue to
qualify as a REIT for tax purposes can materially affect its value.
Although one or more of the other risks described in this SAI may apply, the
largest associated with REITs include: Issuer Risk, Management Risk, and Market
Risk.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement thereby determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. Repurchase agreements could involve certain risks in the
event of a default or insolvency of the other party to the agreement, including
possible delays or restrictions upon the Fund's ability to dispose of the
underlying securities.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with repurchase agreements include: Credit Risk and
Management Risk.
<PAGE>
Reverse Repurchase Agreements
In a reverse repurchase agreement, the investor would sell a security and enter
into an agreement to repurchase the security at a specified future date and
price. The investor generally retains the right to interest and principal
payments on the security. Since the investor receives cash upon entering into a
reverse repurchase agreement, it may be considered a borrowing. (See also
Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include: Credit
Risk, Interest Rate Risk, and Management Risk.
Short Sales
With short sales, an investor sells a security that it does not own in
anticipation of a decline in the market value of the security. To complete the
transaction, the investor must borrow the security to make delivery to the
buyer. The investor is obligated to replace the security that was borrowed by
purchasing it at the market price on the replacement date. The price at such
time may be more or less than the price at which the investor sold the security.
A fund that is allowed to utilize short sales will designate cash or liquid
securities to cover its open short positions. Those funds also may engage in
"short sales against the box," a form of short-selling that involves selling a
security that an investor owns (or has an unconditioned right to purchase) for
delivery at a specified date in the future. This technique allows an investor to
hedge protectively against anticipated declines in the market of its securities.
If the value of the securities sold short increased prior to the scheduled
delivery date, the investor loses the opportunity to participate in the gain.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with short sales include: Management Risk and Market
Risk.
Sovereign Debt
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by a variety of factors, including its cash
flow situation, the extent of its reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
international lenders, and the political constraints to which a sovereign debtor
may be subject. (See also Foreign Securities.)
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing their
sovereign debt on a timely basis that led to defaults and the restructuring of
certain indebtedness.
Sovereign debt includes Brady Bonds, which are securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with sovereign debt include: Credit Risk,
Foreign/Emerging Markets Risk, and Management Risk.
<PAGE>
Structured Products
Structured products are over-the-counter financial instruments created
specifically to meet the needs of one or a small number of investors. The
instrument may consist of a warrant, an option, or a forward contract embedded
in a note or any of a wide variety of debt, equity, and/or currency
combinations. Risks of structured products include the inability to close such
instruments, rapid changes in the market, and defaults by other parties. (See
also Derivative Instruments.)
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured products include: Credit Risk,
Liquidity Risk, and Management Risk.
Variable- or Floating-Rate Securities
The Fund may invest in securities that offer a variable- or floating-rate of
interest. Variable-rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating-rate securities generally provide for automatic adjustment of the
interest rate whenever some specified interest rate index changes.
Variable- or floating-rate securities frequently include a demand feature
enabling the holder to sell the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time. Some securities that do not
have variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand notes that are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund as lender, and the
borrower. The interest rates on these notes fluctuate from time to time. The
issuer of such obligations normally has a corresponding right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Because these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded. There generally is not an established
secondary market for these obligations. Accordingly, where these obligations are
not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and may involve heightened risk of default by the issuer.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with variable- or floating-rate securities include:
Credit Risk and Management Risk.
Warrants
Warrants are securities giving the holder the right, but not the obligation, to
buy the stock of an issuer at a given price (generally higher than the value of
the stock at the time of issuance) during a specified period or perpetually.
Warrants may be acquired separately or in connection with the acquisition of
securities. Warrants do not carry with them the right to dividends or voting
rights and they do not represent any rights in the assets of the issuer.
Warrants may be considered to have more speculative characteristics than certain
other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to its expiration date.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with warrants include: Management Risk and Market Risk.
<PAGE>
When-Issued Securities
These instruments are contracts to purchase securities for a fixed price at a
future date beyond normal settlement time (when-issued securities or forward
commitments). The price of debt obligations purchased on a when-issued basis,
which may be expressed in yield terms, generally is fixed at the time the
commitment to purchase is made, but delivery and payment for the securities take
place at a later date. Normally, the settlement date occurs within 45 days of
the purchase although in some cases settlement may take longer. The investor
does not pay for the securities or receive dividends or interest on them until
the contractual settlement date. Such instruments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the investor's
other assets. In addition, when the Fund engages in forward commitment and
when-issued transactions, it relies on the counterparty to consummate the
transaction. The failure of the counterparty to consummate the transaction may
result in the Fund's losing the opportunity to obtain a price and yield
considered to be advantageous.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with when-issued securities include: Credit Risk and
Management Risk.
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities
These securities are debt obligations that do not make regular cash interest
payments (see also Debt Obligations). Zero-coupon and step-coupon securities are
sold at a deep discount to their face value because they do not pay interest
until maturity. Pay-in-kind securities pay interest through the issuance of
additional securities. Because these securities do not pay current cash income,
the price of these securities can be extremely volatile when interest rates
fluctuate. See the appendix for a discussion of securities ratings.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with zero-coupon, step-coupon, and pay-in-kind
securities include: Credit Risk, Interest Rate Risk, and Management Risk.
<PAGE>
SECURITY TRANSACTIONS
Subject to policies set by the board, IDS Life Insurance Company (IDS Life) is
authorized to determine, consistent with the Fund's investment goal and
policies, which securities will be purchased, held, or sold. In determining
where the buy and sell orders are to be placed, IDS Life has been directed to
use its best efforts to obtain the best available price and the most favorable
execution except where otherwise authorized by the board. IDS Life intends to
direct American Express Financial Corporation (AEFC) to execute trades and
negotiate commissions on its behalf. In selecting broker-dealers to execute
transactions, AEFC 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. These services are covered by the Investment Advisory
Agreement between IDS Life and AEFC. When AEFC acts on IDS Life's behalf, for
the Fund, it follows the guidelines stated below.
AEFC has a strict Code of Ethics that prohibits its affiliated personnel from
engaging in personal investment activities that compete with or attempt to take
advantage of planned portfolio transactions for any fund or trust for which it
acts as investment manager.
The Fund's securities may be traded on a principal rather than an agency basis.
In other words, AEFC will trade directly with the issuer or with a dealer who
buys or sells for its own account, rather than acting on behalf of another
client. AEFC does not pay the dealer commissions. Instead, the dealer's profit,
if any, is the difference, or spread, between the dealer's purchase and sale
price for the security.
On occasion, it may be desirable to compensate a broker for research services or
for brokerage services by paying a commission that might not otherwise be
charged or a commission in excess of the amount another broker might charge. The
board has adopted a policy authorizing IDS Life to do so to the extent
authorized by law, if IDS Life determines, in good faith, that such commission
is reasonable in relation to the value of the brokerage or research services
provided by a broker or dealer, viewed either in the light of that transaction
or IDS Life's or AEFC's overall responsibilities with respect to the Fund and
the other funds for which they act as investment managers.
Research provided by brokers supplements AEFC's own research activities. Such
services include economic data on, and analysis of, U.S. and foreign economies;
information on specific industries; information about specific companies,
including earnings estimates; purchase recommendations for stocks and bonds;
portfolio strategy services; political, economic, business, and industry trend
assessments; historical statistical information; market data services providing
information on specific issues and prices; and technical analysis of various
aspects of the securities markets, including technical charts. Research services
may take the form of written reports, computer software, or personal contact by
telephone or at seminars or other meetings. AEFC has obtained, and in the future
may obtain, computer hardware from brokers, including but not limited to
personal computers that will be used exclusively for investment decision-making
purposes, which include the research, portfolio management, and trading
functions and other services to the extent permitted under an interpretation by
the SEC.
When paying a commission that might not otherwise be charged or a commission in
excess of the amount another broker might charge, IDS Life must follow
procedures authorized by the board. To date, three procedures have been
authorized. One procedure permits IDS Life to direct an order to buy or sell a
security traded on a national securities exchange to a specific broker for
research services it has provided. The second procedure permits IDS Life, in
order to obtain research, to direct an order on an agency basis to buy or sell a
security traded in the over-the-counter market to a firm that does not make a
market in that security. The commission paid generally includes compensation for
research services. The third procedure permits IDS Life, in order to obtain
research and brokerage services, to cause the Fund to pay a commission in excess
of the amount another broker might have charged. IDS Life has advised the Fund
that it is necessary to do business with a number of brokerage firms on a
continuing basis to obtain such
<PAGE>
services as the handling of large orders, the willingness of a broker to risk
its own money by taking a position in a security, and the specialized handling
of a particular group of securities that only certain brokers may be able to
offer. As a result of this arrangement, some portfolio transactions may not be
effected at the lowest commission, but IDS Life believes it may obtain better
overall execution. IDS Life has represented that under all three procedures the
amount of commission paid will be reasonable and competitive in relation to the
value of the brokerage services performed or research provided.
All other transactions will be placed on the basis of obtaining the best
available price and the most favorable execution. In so doing, if in the
professional opinion of the person responsible for selecting the broker or
dealer, several firms can execute the transaction on the same basis,
consideration will be given by such person to those firms offering research
services. Such services may be used by IDS Life and AEFC in providing advice to
all the funds and accounts advised by IDS Life and AEFC even though it is not
possible to relate the benefits to any particular fund.
Each investment decision made for the Fund is made independently from any
decision made for another portfolio, fund, or other account advised by IDS Life,
AEFC or any of its subsidiaries. When the Fund buys or sells the same security
as another portfolio, fund, or account, AEFC carries out the purchase or sale in
a way the Fund agrees in advance is fair. Although sharing in large transactions
may adversely affect the price or volume purchased or sold by the Fund, the Fund
hopes to gain an overall advantage in execution.
On a periodic basis, AEFC makes a comprehensive review of the broker-dealers and
the overall reasonableness of their commissions. The review evaluates execution,
operational efficiency, and research services.
The Fund's portfolio turnover rate indicates changes in its portfolio of
securities and will vary from year to year. The Fund may experience relatively
higher portfolio turnover than normal during a period of rapid asset growth if
smaller positions acquired in connection with portfolio diversification
requirements are replaced by larger positions. High portfolio turnover could
result in increased transaction costs.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH IDS LIFE
Affiliates of American Express Company (of which IDS Life is a wholly-owned
indirect subsidiary) may engage in brokerage and other securities transactions
on behalf of the Fund according to procedures adopted by the board and to the
extent consistent with applicable provisions of the federal securities laws. IDS
Life will use an American Express affiliate only if (i) IDS Life determines that
the Fund will receive prices and executions at least as favorable as those
offered by qualified independent brokers performing similar brokerage and other
services for the Fund and (ii) the affiliate charges the Fund commission rates
consistent with those the affiliate charges comparable unaffiliated customers in
similar transactions and if such use is consistent with terms of the Investment
Management Services Agreement.
<PAGE>
PERFORMANCE INFORMATION
The Fund may quote various performance figures to illustrate past performance.
Average annual total return and current yield quotations, if applicable, used by
the Fund are based on standardized methods of computing performance as required
by the SEC. An explanation of the methods used by the Fund to compute
performance follows below.
Average annual total return
The Fund may calculate average annual total return for certain periods by
finding the average annual compounded rates of return over the period that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
Aggregate total return
The Fund may calculate aggregate total return for certain periods representing
the cumulative change in the value of an investment in a fund over a specified
period of time according to the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of a period, at the end of the period
(or fractional portion thereof)
The total return of the S&P 500 is calculated by several sources. Blue Chip
Advantage Fund will use the total return as calculated by Standard & Poor's
Corporation (S&P) to measure the U.S. stock market. The total return is
calculated by adding dividend income to price appreciation. Total return on the
S&P 500 is determined by reinvesting cash dividends paid on stocks on the
ex-dividend date - that is, the date on or after which a sale of stock does not
carry with it the right to a dividend already declared. S&P also makes
adjustments for special dividends, such as stock dividends. The percentage
changes for the indexes other than the S&P 500 reflect reinvestment of all
distributions on a quarterly basis and changes in market prices. The percentage
changes for all the indexes exclude brokerage commissions or other fees. By
comparison, the Fund will incur such fees and other expenses.
<PAGE>
Annualized yield
AXP Variable Portfolio - Diversified Equity Income Fund and AXP Variable
Portfolio - Federal Income Fund may calculate an annualized yield by dividing
the net investment income per share deemed earned during a 30-day period by the
net asset value per share on the last day of the period and annualizing the
results.
Yield is calculated according to the following formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
The Fund 's yield, calculated as described above according to the formula
prescribed by the SEC, is a hypothetical return based on market value yield to
maturity for the Fund's securities. It is not necessarily indicative of the
amount which was or may be paid to the Fund's shareholders. Actual amounts paid
to Fund shareholders are reflected in the distribution yield.
DISTRIBUTION YIELD
Distribution yield is calculated according to the following formula:
D x F = DY
NAV 30
where: D = sum of dividends for 30 day period
NAV = beginning of period net asset value
F = annualizing factor
DY = distribution yield
In its sales material and other communications, the Fund may quote, compare or
refer to rankings, yields, or returns as published by independent statistical
services or publishers and publications such as The Bank Rate Monitor National
Index, Barron's, Business Week, CDA Technologies, Donoghue's Money Market Fund
Report, Financial Services Week, Financial Times, Financial World, Forbes,
Fortune, Global Investor, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal Investor,
Shearson Lehman Aggregate Bond Index, Stanger Report, Sylvia Porter's Personal
Finance, USA Today, U.S. News and World Report, The Wall Street Journal, and
Wiesenberger Investment Companies Service. The Fund also may compare its
performance to a wide variety of indexes or averages. There are similarities and
differences between the investments that the Fund may purchase and the
investments measured by the indexes or averages and the composition of the
indexes or averages will differ from that of the Fund.
<PAGE>
VALUING FUND SHARES
In determining net assets before shareholder transactions, the Fund's securities
are valued as follows as of the close of business of the New York Stock Exchange
(the Exchange):
o Securities traded on a securities exchange for which a last-quoted sales
price is readily available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
o Securities traded on a securities exchange for which a last-quoted sales
price is not readily available are valued at the mean of the closing bid
and asked prices, looking first to the bid and asked prices on the exchange
where the security is primarily traded and if none exists, to the
over-the-counter market.
o Securities included in the NASDAQ National Market System are valued at the
last-quoted sales price in this market.
o Securities included in the NASDAQ National Market System for which a
last-quoted sales price is not readily available, and other securities
traded over-the-counter but not included in the NASDAQ National Market
System, are valued at the mean of the closing bid and asked prices.
o Futures and options traded on major exchanges are valued at the last-quoted
sales price on their primary exchange.
o Foreign securities traded outside the United States are generally valued as
of the time their trading is complete, which is usually different from the
close of the Exchange. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current rate of exchange. Occasionally,
events affecting the value of such securities may occur between such times
and the close of the Exchange that will not be reflected in the computation
of the Fund's net asset value. If events materially affecting the value of
such securities occur during such period, these securities will be valued
at their fair value according to procedures decided upon in good faith by
the board.
o Short-term securities maturing more than 60 days from the valuation date
are valued at the readily available market price or approximate market
value based on current interest rates. Short-term securities maturing in 60
days or less that originally had maturities of more than 60 days at
acquisition date are valued at amortized cost using the market value on the
61st day before maturity. Short-term securities maturing in 60 days or less
at acquisition date are valued at amortized cost. Amortized cost is an
approximation of market value determined by systematically increasing the
carrying value of a security if acquired at a discount, or reducing the
carrying value if acquired at a premium, so that the carrying value is
equal to maturity value on the maturity date.
o Securities without a readily available market price, and other assets are
valued at fair value as determined in good faith by the board. The board is
responsible for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from the Fund.
If a valuation of a bond is not available from a pricing service, the bond
will be valued by a dealer knowledgeable about the bond if such a dealer is
available.
<PAGE>
SELLING SHARES
The Fund will sell any shares presented by the shareholders (variable accounts
or subaccounts) for sale. The policies on when or whether to buy or sell Fund
shares are described in your annuity or life insurance policy prospectus.
During an emergency, the board can suspend the computation of net asset value,
stop accepting payments for purchase of shares, or suspend the duty of the Fund
to redeem shares for more than seven days. Such emergency situations would occur
if:
o The Exchange closes for reasons other than the usual weekend and holiday
closings or trading on the Exchange is restricted, or
o Disposal of the Fund's securities is not reasonably practicable or it is
not reasonably practicable for the Fund to determine the fair value of its
net assets, or
o The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the Fund stop selling shares, the board may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all contract owners.
REJECTION OF BUSINESS
The Fund reserves the right to reject any business, in its sole discretion.
TAXES
The Fund may be subject to U.S. taxes resulting from holdings in a passive
foreign investment company (PFIC). A foreign corporation is a PFIC when 75% or
more of its gross income for the taxable year is passive income or 50% or more
of the average value of its assets consists of assets that produce or could
produce passive income.
<PAGE>
AGREEMENTS
Investment Management Services Agreement
IDS Life, a wholly-owned subsidiary of AEFC, is the investment manager for the
Fund. Under the Investment Management Services Agreement, IDS Life, subject to
the policies set by the board, provides investment management services.
For its services, IDS Life is paid a fee monthly based on the following
schedule. The fee is calculated for each calendar day on the basis of net assets
as of the close of business two business days prior to the day for which the
calculation is made.
- ------------------------------------- -----------------------------------
AXP Variable Portfolio -
Blue Chip Advantage Fund and
AXP Variable Portfolio - AXP Variable Portfolio -
Diversified Equity Income Fund Federal Income Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
---------- ---------------- ---------- ----------------
First $0.50 0.560% First $1.00 0.610%
Next 0.50 0.545 Next 1.00 0.595
Next 1.00 0.530 Next 1.00 0.580
Next 1.00 0.515 Next 3.00 0.565
Next 3.00 0.500 Next 3.00 0.550
Over 6.00 0.470 Over 9.00 0.535
- ------------------- ----------------- ----------------- -----------------
- ------------------------------------- -----------------------------------
AXP Variable Portfolio - AXP Variable Portfolio -
Growth Fund Small Cap Advantage Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
First $1.00 0.630% First $0.25 0.790%
Next 1.00 0.615 Next 0.25 0.770
Next 1.00 0.600 Next 0.25 0.750
Next 3.00 0.585 Next 0.25 0.730
Over 6.00 0.570 Next 1.00 0.710
Over 2.00 0.650
- ------------------- ----------------- ----------------- -----------------
For each Fund other than AXP Variable Portfolio - Federal Income Fund, before
the fee based on the asset charge is paid, it is adjusted for investment
performance. The adjustment, determined monthly, will be calculated using the
percentage point difference between the change in the net asset value of one
share of the Fund and the change in the (i) Lipper Growth and Income Fund Index
(Index) for the AXP Variable Portfolio-Blue Chip Advantage Fund and AXP Variable
Portfolio-Growth Fund, (ii) Lipper Equity Income Fund Index for the AXP Variable
Portfolio-Diversified Equity Income Fund, and (iii) the Lipper Small Cap Fund
Index for the AXP Variable Portfolio-Small Cap Advantage Fund. The performance
of one share of the Fund is measured by computing the percentage difference
between the opening and closing net asset value of one share of the Fund, as of
the last business day of the period selected for comparison, adjusted for
dividend or capital gain distributions which are treated as reinvested at the
end of the month during which the distribution was made. The performance of the
Index for the same period is established by measuring the percentage difference
between the beginning and ending Index for the comparison period. The
performance is adjusted for dividend or capital gain distributions (on the
securities which comprise the Index), which are treated as reinvested at the end
of the month during which the distribution was made. One percentage point will
be subtracted from the calculation to help assure that incentive adjustments are
attributable to AEFC's management abilities rather than random fluctuations and
the result multiplied by 0.01%. That number will be multiplied times the Fund's
average net assets for the comparison period and then divided by the number of
months in the comparison period to determine the monthly adjustment.
<PAGE>
Where the Fund's share performance exceeds that of the Index, the base fee will
be increased. Where the performance of the Index exceeds the performance of the
Fund's shares, the base fee will be decreased. For the AXP Variable
Portfolio-Blue Chip Advantage Fund, AXP Variable Portfolio-Diversified Equity
Income Fund, and AXP Variable Portfolio-Growth Fund, the maximum monthly
increase or decrease will be 0.08% of each Fund's average net assets on an
annual basis. For the AXP Variable Portfolio-Small Cap Advantage Fund, the
maximum monthly increase or decrease will be 0.12% of the Fund's average net
assets on an annual basis
The 12 month comparison period will roll over with each succeeding month, so
that it always equals 12 months, ending with the month for which the performance
adjustment is being computed.
Under the Agreement, the Fund also pays taxes, brokerage commissions and
nonadvisory expenses, which include custodian fees and expenses, audit expenses,
cost of items sent to contract owners, postage, fees and expenses paid to board
members who are not officers or employees of IDS Life or AEFC, 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 contract owners, losses due to theft or other wrong doing or due to
liabilities not covered by bond or agreement, expenses incurred in connection
with lending securities and expenses properly payable by the Fund, approved by
the board. All other expenses are borne by IDS Life.
Investment Advisory Agreement
IDS Life and AEFC have an Investment Advisory Agreement under which AEFC
executes purchases and sales and negotiates brokerage as directed by IDS Life.
For its services, IDS Life pays AEFC an annual fee of 0.25% of each Fund's
average daily net assets.
Sub-Investment Adviser:
Kenwood Capital Management LLC (Sub-Adviser) an indirect subsidiary of AEFC
located at IDS Tower 10, Minneapolis, MN 55440-0010, sub-advises the assets of
Small Cap Advantage Fund. Sub-Adviser, subject to the supervision and approval
of AEFC, provides investment advisory assistance and day-to-day management of
the Fund's portfolio, as well as investment research and statistical
information, under an Investment Advisory Agreement with AEFC. Under the
agreement, the Sub-Adviser receives an annual fee of 0.35% of average daily net
assets.
<PAGE>
Administrative Services Agreement
The Fund has an Administrative Services Agreement with AEFC. Under this
agreement, the Fund pays AEFC a fee for providing administration and accounting
services. The fee, based on the following schedule, is calculated for each
calendar day on the basis of net assets as of the close of business two business
days prior to the day for which the calculation is made.
- ------------------------------------- -----------------------------------
AXP Variable Portfolio -
Blue Chip Advantage Fund and
AXP Variable Portfolio - AXP Variable Portfolio -
Diversified Equity Income Fund Federal Income Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
---------- ---------------- ---------- ----------------
First $0.50 0.040% First $1.00 0.050%
Next 0.50 0.035 Next 1.00 0.045
Next 1.00 0.030 Next 1.00 0.040
Next 1.00 0.025 Next 3.00 0.035
Next 3.00 0.020 Next 3.00 0.030
Over 6.00 0.020 Over 9.00 0.025
- ------------------- ----------------- ----------------- -----------------
- ------------------------------------- -----------------------------------
AXP Variable Portfolio - AXP Variable Portfolio -
Growth Fund Small Cap Advantage Fund
Assets Annual rate at Assets Annual rate at
(billions) each asset level (billions) each asset level
First $1.00 0.050% First $0.25 0.060%
Next 1.00 0.045 Next 0.25 0.055
Next 1.00 0.040 Next 0.25 0.050
Next 3.00 0.035 Next 0.25 0.045
Over 6.00 0.030 Next 1.00 0.040
Over 2.00 0.035
- ------------------- ----------------- ----------------- -----------------
PLAN AND AGREEMENT OF DISTRIBUTION
To help defray the cost of distribution and servicing, the Fund and IDS Life
entered into a Plan and Agreement of Distribution (Plan) pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, IDS Life is paid a fee up to actual expenses
incurred at an annual rate of up to 0.125% of the Fund's average daily net
assets.
Expenses covered under this Plan include sales commissions; business, employee
and financial advisor expenses charged to distribution of shares; and overhead
appropriately allocated to the sale of shares. These expenses also include costs
of providing personal service to shareholders. A substantial portion of the
costs are not specifically identified to any one of the American Express
Variable Portfolio Funds.
The Plan must be approved annually by the board, including a majority of the
disinterested board members, if it is to continue for more than a year. At least
quarterly, the board must review written reports concerning the amounts expended
under the Plan and the purposes for which such expenditures were made. The Plan
and any agreement related to it may be terminated at any time by vote of a
majority of board members who are not interested persons of the Fund and have no
direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan, or by vote of a majority of the outstanding
voting securities of the Fund or by IDS Life. The Plan (or any agreement related
to it) will terminate in the event of its assignment, as that term is defined in
the 1940 Act. The Plan may not be amended to increase the amount to be spent for
distribution without shareholder approval, and all material amendments to the
Plan must be approved by a majority of the board members, including a majority
of the board members who are not interested persons of the Fund and who do not
have a financial interest in the operation of the Plan or any agreement related
to it. The selection and nomination of disinterested board members is the
responsibility of the other disinterested board members. No board member who is
not an interested person has any direct or indirect financial interest in the
operation of the Plan or any related agreement.
<PAGE>
Custodian Agreement
The Fund's securities and cash are held by American Express Trust Company, 1200
Northstar Center West, 625 Marquette Ave., Minneapolis, MN 55402-2307, through a
custodian agreement. The custodian is permitted to deposit some or all of its
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodian's out-of-pocket expenses.
The custodian has entered into a sub-custodian agreement with Bank of New York,
90 Washington Street, New York, NY 10286. As part of this arrangement,
securities purchased outside the United Stated are maintained in the custody of
various foreign branches of Bank of New York or in other financial institutions
as permitted by law and by the Fund's sub-custodian agreement.
ORGANIZATIONAL INFORMATION
The Fund is an open-end management investment company. The Fund headquarters are
at IDS Tower 10, Minneapolis, MN 55440-0010.
SHARES
The Fund is owned by the subaccounts, its shareholders. The shares of the Fund
represent an interest in that fund's assets only (and profits or losses), and,
in the event of liquidation, each share of the Fund would have the same rights
to dividends and assets as every other share of that Fund.
VOTING RIGHTS
For a discussion of the rights of contract owners concerning the voting of
shares held by the subaccounts, please see your annuity or life insurance policy
prospectus. All shares have voting rights over the Fund's management and
fundamental policies. Each share is entitled to one vote for each share owned.
Each class, if applicable, has exclusive voting rights with respect to matters
for which separate class voting is appropriate under applicable law. All shares
have cumulative voting rights with respect to the election of board members.
This means that shareholders have as many votes as the number of shares owned,
including fractional shares, multiplied by the number of members to be elected.
Dividend Rights
Dividends paid by the Fund, if any, with respect to each class of shares, if
applicable, will be calculated in the same manner, at the same time, on the same
day, and will be in the same amount, except for differences resulting from
differences in fee structures.
<PAGE>
<TABLE>
<CAPTION>
FUND HISTORY TABLE FOR FUNDS MANAGED BY IDS LIFE
Date of Form of State of Fiscal Diversified
Organization Organization Organization Year End
- ----------------------------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
IDS Life Series Fund, Inc. 5/8/85 Corporation MN 4/30
Equity Portfolio Yes
Equity Income Portfolio Yes
Government Securities Yes
Portfolio
Income Portfolio Yes
International Equity Portfolio Yes
Managed Portfolio Yes
Money Market Portfolio Yes
- ----------------------------------- ------------- ------------ ------------- ------------- -------------
AXP Variable Portfolio - Income 4/27/81, Corporation NV/MN 8/31
Series, Inc. 6/13/86*
AXP Variable Portfolio - Bond Yes
Fund
AXP Variable Portfolio - Extra Yes
Income Fund
AXP Variable Portfolio - Yes
Federal Income Fund
AXP Variable Portfolio - No
Global Bond Fund
- ----------------------------------- ------------- ------------ ------------- ------------- -------------
AXP Variable Portfolio - 4/27/81, Corporation NV/MN 8/31
Investment Series, Inc. 6/13/86*
AXP Variable Portfolio - Blue Yes
Chip Advantage Fund
AXP Variable Portfolio - Yes
Capital Resource Fund
AXP Variable Portfolio - Yes
Growth Fund
AXP Variable Portfolio Yes
-International Fund
AXP Variable Portfolio - New Yes
Dimensions Fund
AXP Variable Portfolio - Small Yes
Cap Advantage Fund
AXP Variable Portfolio - Yes
Strategy Aggressive Fund
- ----------------------------------- ------------- ------------ ------------- ------------- -------------
AXP Variable Portfolio - Managed 3/5/85 Corporation MN 8/31
Series, Inc.
AXP Variable Portfolio - Yes
Diversified Equity Income Fund
AXP Variable Portfolio - Yes
Managed Fund
- ----------------------------------- ------------- ------------ ------------- ------------- -------------
AXP Variable Portfolio - Money 4/27/81, Corporation NV/MN 8/31
Market Series, Inc. 6/13/86*
AXP Variable Portfolio - Cash Yes
Management Fund
- ----------------------------------- ------------- ------------ ------------- ------------- -------------
* Date merged into a Minnesota corporation.
</TABLE>
<PAGE>
BOARD MEMBERS AND OFFICERS
Shareholders elect a board that oversees the Fund's operations. The board
appoints officers who are responsible for day-to-day business decisions based on
policies set by the board.
The following is a list of the Fund's board members. They serve 15 Master Trust
portfolios and 53 American Express Funds.
H. Brewster Atwater, Jr.'
Born in 1931
4900 IDS Tower
Minneapolis, MN
Retired chairman and chief executive officer, General Mills, Inc. Director,
Merck & Co., Inc. and Darden Restaurants, Inc.
Arne H. Carlson+'*
Born in 1934
901 S. Marquette Ave.
Minneapolis, MN
Chairman and chief executive officer of the Fund. Chairman, Board Services
Corporation (provides administrative services to boards). Former Governor of
Minnesota.
Lynne V. Cheney
Born in 1941
American Enterprise Institute
for Public Policy Research (AEI)
1150 17th St., N.W. Washington, D.C.
Distinguished Fellow AEI. Former Chair of National Endowment of the Humanities.
Director, The Reader's Digest Association Inc., Lockheed-Martin, and Union
Pacific Resources.
William H. Dudley'**
Born in 1932
2900 IDS Tower
Minneapolis, MN
Senior adviser to the chief executive officer of AEFC.
David R. Hubers**
Born in 1943
2900 IDS Tower
Minneapolis, MN
President, chief executive officer and director of AEFC.
<PAGE>
Heinz F. Hutter+'
Born in 1929
P.O. Box 2187
Minneapolis, MN
Retired president and chief operating officer, Cargill, Incorporated (commodity
merchants and processors).
Anne P. Jones+
Born in 1935
5716 Bent Branch Rd.
Bethesda, MD
Attorney and telecommunications consultant. Former partner, law firm of
Sutherland, Asbill & Brennan. Director, Motorola, Inc. (electronics), C-Cor
Electronics, Inc., and Amnex, Inc. (communications).
William R. Pearce'
Born in 1927
2050 One Financial Plaza
Minneapolis, MN
RII Weyerhaeuser World Timberfund, L.P. (develops timber resources) - management
committee. Retired vice chairman of the board, Cargill, Incorporated (commodity
merchants and processors). Former chairman, Board Services Corporation.
Alan K. Simpson+
Born in 1931
1201 Sunshine Ave.
Cody, WY
Director of The Institute of Politics, Harvard University. Former three-term
United States Senator for Wyoming. Former Assistant Republican Leader, U.S.
Senate. Director, PacifiCorp (electric power) and Biogen (bio-pharmaceuticals).
John R. Thomas+'**
Born in 1937
2900 IDS Tower
Minneapolis, MN
Senior vice president of AEFC.
C. Angus Wurtele+'
Born in 1934
Valspar Corporation
Suite 1700
Foshay Tower
Minneapolis, MN
Retired chairman of the board and chief executive officer, The Valspar
Corporation (paints). Director, Valspar, Bemis Corporation (packaging) and
General Mills, Inc. (consumer foods).
<PAGE>
+ Member of executive committee.
' Member of investment review committee.
* Interested person by reason of being an officer and employee of the Fund.
**Interested person by reason of being an officer, board member, employee and/or
shareholder of AEFC or American Express.
The board has appointed officers who are responsible for day-to-day business
decisions based on policies it has established. In addition to Mr. Carlson, who
is chairman of the board, and Mr. Thomas, who is president, the Fund's other
officers are:
Leslie L. Ogg
Born in 1938
901 S. Marquette Ave.
Minneapolis, MN
President of Board Services Corporation. Vice president, general counsel and
secretary for the Fund.
Officers who also are officers and employees of AEFC:
Peter J. Anderson
Born in 1942
IDS Tower 10
Minneapolis, MN
Director and senior vice president-investments of AEFC. Vice
president-investments for the Fund.
Frederick C. Quirsfeld
Born in 1947
IDS Tower 10
Minneapolis, MN
Vice president - taxable mutual fund investments of AEFC. Vice president - fixed
income investments for the Fund.
John M. Knight
Born in 1952
IDS Tower 10
Minneapolis, MN
Vice President - investment accounting of AEFC. Treasurer for the Fund.
INDEPENDENT AUDITORS
The financial statements contained in the Annual Report were audited by
independent auditors, KPMG Peat Marwick LLP, 4200 Norwest Center, 90 S. Seventh
St., Minneapolis, MN 55402-3900. The independent auditors also provide other
accounting and tax-related services as requested by the Fund.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
o Likelihood of default capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
o Nature of and provisions of the obligation.
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to
pay interest and repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
Speculative grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainies or exposure to adverse
business, financial, or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risk appear somewhat larger than in Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa - Bonds that are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements--their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from A-1 for the highest
quality obligations to D for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with
doubtful capacity for payment.
D Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.
<PAGE>
Standard & Poor's Note Ratings
An S&P note rating reflects the liquidity factors and market-access risks unique
to notes. Notes maturing in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating.
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over
the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-l (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-l
repayment ability will often be evidenced by many of the following
characteristics: (i) leading market positions in well-established
industries, (ii) high rates of return on funds employed, (iii)
conservative capitalization structure with moderate reliance on debt
and ample asset protection, (iv) broad margins in earnings coverage of
fixed financial charges and high internal cash generation, and (v) well
established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above, but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
<PAGE>
Moody's & S&P's
Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moody's and by S&P. The
ratings reflect the liquidity concerns and market access risks unique to notes.
Moody's MIG 1/VMIG 1 indicates the best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
Moody's MIG 2/VMIG 2 indicates high quality. Margins of protection are ample
although not so large as in the preceding group.
Moody's MIG 3/VMIG 3 indicates favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
Moody' s MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
Standard & Poor's rating SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
Standard & Poor's rating SP-2 indicates satisfactory capacity to pay principal
and interest.
Standard & Poor's rating SP-3 indicates speculative capacity to pay principal
and interest.
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Articles of Incorporation as amended Nov. 10, 1994, filed
electronically as Exhibit 1 to Registrant's Post-Effective Amendment
No. 34 to Registration Statement No. 2-73115, are incorporated by
reference.
(b) By-Laws as amended Jan. 12, 1989, filed electronically as Exhibit No.
2 to Registrant's Post-Effective Amendment No. 25 to Registration
Statement No. 2-73115, are incorporated by reference.
(c) Stock certificate for common shares, is on file at the Registrant's
headquarters.
(d)(1) Investment Management Services Agreement between Registrant, on behalf
of IDS Life Aggressive Growth Fund, IDS Life Capital Resource Fund and
IDS Life International Equity Fund, and IDS Life Insurance Company
dated March 20, 1995, filed electronically as Exhibit No. 5(a) to
Registrant's Post-Effective Amendment No. 30 to Registration Statement
No. 2-73115, is incorporated by reference.
(d)(2) Investment Management Services Agreement between Registrant, on behalf
of IDS Life Growth Dimensions Fund and IDS Life Insurance Company
dated April 11, 1996, filed electronically as Exhibit 5(b) to
Registrant's Post-Effective Amendment No. 33 to Registration Statement
No. 2-73115, is incorporated by reference.
(d)(3) Form of Investment Management Services Agreement dated Sept. 13, 1999,
between Registrant, on behalf of AXP Variable Portfolio - Blue Chip
Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable
Portfolio - Small Cap Advantage Fund and IDS Life Insurance Company is
filed electronically herewith.
(d)(4) Investment Advisory Agreement between IDS Life Insurance Company and
American Express Financial Corporation dated Oct. 14, 1998, is
incorporated by reference to Exhibit 5(c) to Registrant's
Post-Effective Amendment No. 36 filed on or about Oct. 30, 1998.
(d)(5) Form of Addendum to Investment Advisory Agreement dated Sept. 13, 1999
between IDS Life Insurance Company and American Express Financial
Corporation filed electronically as Exhibit (d)(5) to registrant's
Post-Effective Amendment No. 37 filed on or about May 28, 1999, is
incorporated by reference.
(d)(6) Investment Advisory Agreement between American Express Financial
Corporation Inc. and American Express Asset Management International
Inc. for IDS Life International Equity Fund dated February 11, 1999,
filed electronically as Exhibit (d)(6) to registrant's Post-Effective
Amendment No. 37 filed on or about May 28, 1999, is incorporated by
reference.
(d)(7) Administrative Services Agreement, dated March 20, 1995, between IDS
Life Investment Series, Inc., on behalf of IDS Life Aggressive Growth
Fund, IDS Life Capital Resource Fund and IDS Life International Equity
Fund, and American Express Financial Corporation, filed electronically
as Exhibit No. 5(d) to Registrant's Post-Effective Amendment No. 30 to
Registration Statement No. 2-73115, is incorporated by reference.
(d)(8) Administrative Services Agreement, dated April 11, 1996, between IDS
Life Investment Series, Inc. on behalf of IDS Life Growth Dimensions
Fund and American Express Financial Corporation, filed electronically
as Exhibit 5(f) to Registrant's Post-Effective Amendment No. 34 to
Registration Statement No. 2-73115, is incorporated by reference.
<PAGE>
(d)(9) Form of Administrative Services Agreement dated Sept. 13, 1999,
between AXP Variable Portfolio - Investment Series, Inc. on behalf of
AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable
Portfolio - Growth Fund and AXP Variable Portfolio - Small Cap
Advantage Fund and American Express Financial Corporation filed
electronically as Exhibit (d)(9) to registrant's Post-Effective
Amendment No. 37 filed on or about May 28, 1999, is incorporated by
reference.
(e) Underwriting contracts: Not Applicable.
(f) All employees are eligible to participate in a profit sharing plan.
Entry into the plan is Jan. 1 or July 1. The Registrant contributes
each year an amount up to 15 percent of their annual salaries, the
maximum deductible amount permitted under Section 404(a) of the
Internal Revenue Code.
(g)(1) Custodian Agreement dated March 20, 1995, between IDS Life Investment
Series, Inc., on behalf of IDS Life Aggressive Growth Fund, IDS Life
Capital Resource Fund and IDS Life International Equity Fund, and
American Express Trust Company, filed electronically as Exhibit No.
8(a) to Registrant's Post-Effective Amendment No. 30 to Registration
Statement No. 2-73115, is incorporated by reference.
(g)(2) Custodian Agreement dated April 11, 1996, between IDS Life Investment
Series, Inc. on behalf of IDS Life Growth Dimensions Fund and American
Express Trust Company, filed electronically as Exhibit 8(b) to
Registrant's Post-Effective Amendment No. 34 to Registration Statement
No. 2-73115, is incorporated by reference.
(g)(3) Form of Custodian Agreement dated Sept. 13, 1999, between AXP Variable
Portfolio - Investment Series, Inc. on behalf of AXP Variable
Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio - Growth
Fund and AXP Variable Portfolio - Small Cap Advantage Fund and
American Express Trust Company filed electronically as Exhibit (g)(3)
to registrant's Post-Effective Amendment No. 37 filed on or about May
28, 1999, is incorporated by reference.
(g)(4) Custodian Agreement dated May 13, 1999 between American Express Trust
Company and The Bank of New York is incorporated by reference to IDS
Precious Metal Fund, Inc.'s Post-Effective Amendment No. 33, File No.
2-93745 filed on or about May 24, 1999.
(h)(1) Plan and Agreement of Merger between IDS Life Capital Resource
Minnesota, Inc. and IDS Life Capital Resource Fund, Inc. dated April
10, 1986, filed electronically as Exhibit No. 9(a) to Registrant's
Post-Effective Amendment No. 25 to Registration Statement No. 2-73115,
is incorporated by reference.
(h)(2) License Agreement between Registrant and IDS Financial Corporation,
dated Jan. 25, 1988, filed electronically as Exhibit No. 9(b) to
Registrant's Post-Effective Amendment No. 25 to Registration Statement
No. 2-73115, is incorporated by reference.
(i) Opinion and consent of counsel as to the legality of the securities
being registered is incorporated by reference to Exhibit 10 to
Registrant's Post-Effective Amendment No. 36 filed on or about Oct.
30, 1998.
(j) Independent Auditors' Consent: Not Applicable.
(k) Omitted Financial Statements: Not Applicable.
(l) Investment Letter of IDS Life Insurance Company dated Oct. l3, l98l,
filed electronically as Exhibit 13 to Registrant's Post-Effective
Amendment No. 25 to Registration Statement No. 2-73115, is
incorporated by reference.
<PAGE>
(m) Plan and Agreement of Distribution dated Sept. 13, 1999, between
Registrant on behalf of AXP Variable Portfolio - Blue Chip Advantage
Fund, AXP Variable Portfolio - Growth Fund, and AXP Variable Portfolio
- Small Cap Advantage Fund, and IDS Life Insurance Company is filed
electronically herewith.
(n) Financial Data Schedules: Not Applicable.
(o) Rule 18f-3 Plan: Not Applicable.
(p)(1) Directors' Power of Attorney to sign Amendments to this Registration
Statement dated Jan. 14, 1999, filed electronically as Exhibit (p)(1)
to Registrant's Post-Effective Amendment No. 37 filed on or about May
28, 1999, is incorporated by reference.
(p)(2) Officers' Power of Attorney to sign Amendments to this Registration
Statement, dated March 1, 1999 filed electronically as Exhibit (p)(2)
to Registrant's Post-Effective Amendment No. 37 filed on or about May
28, 1999, is incorporated by reference.
Item 24. Persons Controlled by or under Common Control with Registrant
IDS Life and its subsidiaries are the record holders of all outstanding shares
of AXP Variable Portfolio - Investment Series, Inc., AXP Variable Portfolio -
Income Series, Inc., AXP Variable Portfolio - Money Market Series, Inc. and AXP
Variable Portfolio - Managed Series, Inc. All of such shares were purchased and
are held by IDS Life and its subsidiaries pursuant to instructions from owners
of variable annuity contracts issued by IDS Life and its subsidiaries.
Accordingly, IDS Life disclaims beneficial ownership of all shares of each fund.
Item 25. Indemnification
The Articles of Incorporation of the registrant provide that the Fund shall
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that she or he is or was a director, officer, employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another company, partnership, joint
venture, trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, and the Fund may purchase
liability insurance and advance legal expenses, all to the fullest extent
permitted by the laws of the State of Minnesota, as now existing or hereafter
amended. The By-laws of the registrant provide that present or former directors
or officers of the Fund made or threatened to be made a party to or involved
(including as a witness) in an actual or threatened action, suit or proceeding
shall be indemnified by the Fund to the full extent authorized by the Minnesota
Business Corporation Act, all as more fully set forth in the By-laws filed as an
exhibit to this registration statement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Any indemnification hereunder shall not be exclusive of any other rights of
indemnification to which the directors, officers, employees or agents might
otherwise be entitled. No indemnification shall be made in violation of the
Investment Company Act of 1940.
<PAGE>
<TABLE>
<CAPTION>
Item 26. Business and Other Connections of Investment Advisor (IDS Life Insurance Company).
Directors and officers of IDS Life Insurance Company who are directors and/or
officers of one or more other companies:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Name and Title Other company(s) Address Title within other
company(s)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Timothy V. Bechtold, American Centurion Life IDS Tower 10 Director and President
Executive Vice President Assurance Company Minneapolis, MN 55440
American Express Financial Vice President
Advisors Inc.
American Express Financial Vice President
Corporation
IDS Life Insurance Company P.O. Box 5144 Director and President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Mark W. Carter, American Express Financial IDS Tower 10 Senior Vice President and
Executive Vice President Advisors Inc. Minneapolis, MN 55440 Chief Marketing Officer
American Express Financial Director, Senior Vice
Corporation President and Chief
Marketing Officer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Robert M. Elconin, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Financial Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Lorraine R. Hart, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance Company
American Express Financial Vice President
Advisors Inc.
American Express Financial Vice President
Corporation
American Partners Life Director and Vice
Insurance Company President
IDS Certificate Company Vice President
IDS Life Series Fund, Inc. Vice President
IDS Life Variable Annuity Vice President
Funds A and B
Investors Syndicate Director and Vice
Development Corp. President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
IDS Property Casualty 1 WEG Blvd. Vice President
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Jeffrey S. Horton, AMEX Assurance Company IDS Tower 10 Vice President, Treasurer
Vice President Minneapolis, MN 55440 and Assistant Secretary
American Centurion Life Vice President and
Assurance Company Treasurer
American Enterprise Vice President and
Investment Services Inc. Treasurer
American Enterprise Life Vice President and
Insurance Company Treasurer
American Express Asset Vice President and
Management Group Inc. Treasurer
American Express Asset Vice President and
Management International Treasurer
Inc.
American Express Client Vice President and
Service Corporation Treasurer
American Express Vice President and
Corporation Treasurer
American Express Financial Vice President and
Advisors Inc. Treasurer
American Express Financial Vice President and
Corporation Corporate Treasurer
American Express Insurance Vice President and
Agency of Arizona Inc. Treasurer
American Express Insurance Vice President and
Agency of Idaho Inc. Treasurer
American Express Insurance Vice President and
Agency of Nevada Inc. Treasurer
American Express Insurance Vice President and
Agency of Oregon Inc. Treasurer
American Express Minnesota Vice President and
Foundation Treasurer
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Kentucky Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Maryland Inc.
American Express Property Vice President and
Casualty Insurance Agency Treasurer
of Pennsylvania Inc.
American Partners Life Vice President and
Insurance Company Treasurer
IDS Cable Corporation Director, Vice President
and Treasurer
IDS Cable II Corporation Director, Vice President
and Treasurer
IDS Capital Holdings Inc. Vice President, Treasurer
and Assistant Secretary
IDS Certificate Company Vice President and
Treasurer
IDS Insurance Agency of Vice President and
Alabama Inc. Treasurer
IDS Insurance Agency of Vice President and
Arkansas Inc. Treasurer
IDS Insurance Agency of Vice President and
Massachusetts Inc. Treasurer
IDS Insurance Agency of Vice President and
New Mexico Inc. Treasurer
IDS Insurance Agency of Vice President and
North Carolina Inc. Treasurer
IDS Insurance Agency of Vice President and
Ohio Inc. Treasurer
IDS Insurance Agency of Vice President and
Wyoming Inc. Treasurer
IDS Life Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Treasurer
IDS Life Series Fund Inc. Vice President and
Treasurer
IDS Life Variable Annuity Vice President and
Funds A & B Treasurer
IDS Management Corporation Director, Vice President
and Treasurer
IDS Partnership Services Vice President and
Corporation Treasurer
IDS Plan Services of Vice President and
California, Inc. Treasurer
IDS Real Estate Services, Vice President and
Inc. Treasurer
IDS Realty Corporation Vice President and
Treasurer
IDS Sales Support Inc. Vice President and
Treasurer
American Express Financial Vice President and
Advisors Japan Inc. Treasurer
Investors Syndicate Vice President and
Development Corp. Treasurer
IDS Property Casualty 1 WEG Blvd. Vice President, Treasurer
Insurance Company DePere, WI 54115 and Assistant Secretary
Public Employee Payment Vice President and
Company Treasurer
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
David R. Hubers, AMEX Assurance Company IDS Tower 10 Director
Director Minneapolis, MN 55440
American Express Financial Chairman, President and
Advisors Inc. Chief Executive Officer
American Express Financial Director, President and
Corporation Chief Executive Officer
American Express Service Director and President
Corporation
IDS Certificate Company Director
IDS Plan Services of Director and President
California, Inc.
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James M. Jensen, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Financial Vice President
Corporation
IDS Life Series Fund, Inc. Director
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Richard W. Kling, AMEX Assurance Company IDS Tower 10 Director
Director and President Minneapolis, MN 55440
American Centurion Life Director and Chairman of
Assurance Company the Board
American Enterprise Life Director and Chairman of
Insurance Company the Board
American Express Director and President
Corporation
American Express Financial Senior Vice President
Advisors Inc.
American Express Financial Director and Senior Vice
Corporation President
American Express Insurance Director and President
Agency of Arizona Inc.
American Express Insurance Director and President
Agency of Idaho Inc.
American Express Insurance Director and President
Agency of Nevada Inc.
American Express Insurance Director and President
Agency of Oregon Inc.
American Express Property Director and President
Casualty Insurance Agency
of Kentucky Inc.
American Express Property Director and President
Casualty Insurance Agency
of Maryland Inc.
American Express Property Director and President
Casualty Insurance Agency
of Pennsylvania Inc.
American Express Service Vice President
Corporation
American Partners Life Director and Chairman of
Insurance Company the Board
IDS Certificate Company Director and Chairman of
the Board
IDS Insurance Agency of Director and President
Alabama Inc.
IDS Insurance Agency of Director and President
Arkansas Inc.
IDS Insurance Agency of Director and President
Massachusetts Inc.
IDS Insurance Agency of Director and President
New Mexico Inc.
IDS Insurance Agency of Director and President
North Carolina Inc.
IDS Insurance Agency of Director and President
Ohio Inc.
IDS Insurance Agency of Director and President
Wyoming Inc.
IDS Life Series Fund, Inc. Director and President
IDS Life Variable Annuity Manager, Chairman of the
Funds A and B Board and President
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
IDS Life Insurance Company P.O. Box 5144 Director and Chairman of
of New York Albany, NY 12205 the Board
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paul F. Kolkman, American Express Financial IDS Tower 10 Vice President
Director and Executive Vice Advisors Inc. Minneapolis, MN 55440
President
American Express Financial Vice President
Corporation
IDS Life Series Fund, Inc. Vice President and Chief
Actuary
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Paula R. Meyer, American Enterprise Life IDS Tower 10 Vice President
Director and Executive Vice Insurance Company Minneapolis, MN 55440
President
American Express Director
Corporation
American Express Financial Vice President
Advisors Inc.
American Partners Life Director and President
Insurance Company
IDS Certificate Company Director and President
American Express Financial Vice President
Corporation
Investors Syndicate Director, Chairman of the
Development Corporation Board and President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Pamela J. Moret, American Express Financial IDS Tower 10 Vice President
Executive Vice President Advisors Inc. Minneapolis, MN 55440
American Express Financial Vice President
Corporation
American Express Trust Vice President
Company
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Barry J. Murphy, American Express Client IDS Tower 10 Director and President
Director and Executive Vice Service Corporation Minneapolis, MN 55440
President
American Express Financial Senior Vice President
Advisors Inc.
American Express Financial Director and Senior Vice
Corporation President
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
James R. Palmer, American Express Financial IDS Tower 10 Vice President
Vice President Advisors Inc. Minneapolis, MN 55440
American Express Financial Vice President
Corporation
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Stuart A. Sedlacek, AMEX Assurance Company IDS Tower 10 Director
Director and Executive Vice Minneapolis, MN 55440
President
American Enterprise Life Executive Vice President
Insurance Company
American Express Financial Senior Vice President and
Advisors Inc. Chief Financial Officer
American Express Financial Senior Vice President and
Corporation Chief Financial Officer
American Express Trust Director
Company
American Partners Life Director and Vice President
Insurance Agency
IDS Certificate Company Director and President
IDS Property Casualty 1 WEG Blvd. Director
Insurance Company DePere, WI 54115
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
F. Dale Simmons, AMEX Assurance Company IDS Tower 10 Vice President
Vice President Minneapolis, MN 55440
American Centurion Life Vice President
Assurance Company
American Enterprise Life Vice President
Insurance
American Express Financial Vice President
Advisors Inc.
American Express Financial Vice President
Corporation
American Partners Life Vice President
Insurance Company
IDS Certificate Company Vice President
IDS Partnership Services Director and Vice President
Corporation
IDS Real Estate Services Director and Vice President
Inc.
IDS Realty Corporation Director and Vice President
IDS Life Insurance Company P.O. Box 5144 Vice President
of New York Albany, NY 12205
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
William A. Stoltzmann, American Enterprise Life IDS Tower 10 Director, Vice President,
Vice President, General Insurance Company Minneapolis, MN 55440 General Counsel and
Counsel and Secretary Secretary
American Express Director, Vice President
Corporation and Secretary
American Express Financial Vice President and
Advisors Inc. Assistant General Counsel
American Express Financial Vice President and
Corporation Assistant General Counsel
American Partners Life Director, Vice President,
Insurance Company General Counsel and
Secretary
IDS Life Insurance Company Vice President, General
Counsel and Secretary
IDS Life Series Fund Inc. General Counsel and
Assistant Secretary
IDS Life Variable Annuity General Counsel and
Funds A & B Assistant Secretary
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Philip C. Wentzel, American Centurion Life IDS Tower 10 Vice President and
Vice President and Controller Assurance Company Minneapolis, MN 55440 Controller, Risk Management
American Enterprise Life Vice President and
Insurance Company Controller
IDS Life Insurance Company P.O. Box 5144 Vice President and
of New York Albany, NY 12205 Controller, Risk Management
</TABLE>
Item 27. Principal Underwriters
The Fund has no principal underwriter.
Item 28. Location of Accounts and Records
American Express Financial Corporation
IDS Tower 10
Minneapolis, MN 55440-0010
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant, AXP Variable Portfolio - Investment Series, Inc. certifies
that it meets the requirements for the effectiveness of this Amendment to its
Registration statement pursuant to Rule 485(b) under the Securities Act of 1933,
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis and State of Minnesota on the 10th day of August, 1999.
AXP Variable Portfolio - Investment Series, Inc.
By /s/ Arne H. Carlson**
Arne H. Carlson, Chief Executive Officer
By /s/ John Knight
John Knight, Treasurer
Pursuant to the requirements of the Securities Act, this Amendment to its
Registration Statement has been signed below by the following persons in the
capacities indicated on the 10th day of August, 1999.
Signature Capacity
/s/ H. Brewster Atwater, Jr.* Director
H. Brewster Atwater, Jr.
/s/ Arne H. Carlson* Chairman of the Board
Arne H. Carlson
/s/ Lynne V. Cheney* Director
Lynne V. Cheney
______________________________ Director
William H. Dudley
/s/ David R. Hubers* Director
David R. Hubers
/s/ Heinz F. Hutter* Director
Heinz F. Hutter
/s/ Anne P. Jones* Director
Anne P. Jones
/s/ William R. Pearce* Director
William R. Pearce
/s/ Alan K. Simpson* Director
Alan K. Simpson
/s/ John R. Thomas* Director
John R. Thomas
<PAGE>
/s/ C. Angus Wurtele* Director
C. Angus Wurtele
*Signed pursuant to Directors' Power of Attorney dated Jan. 14, 1999, filed
electronically as Exhibit (p)(1) to Registrant's Post-Effective Amendment No.
37, by:
/s/ Leslie L. Ogg
Leslie L. Ogg
**Signed pursuant to Officers' Power of Attorney dated March 1, 1999, filed
electronically as Exhibit (p)(2) to Registrant's Post-Effective Amendment No.
37, by:
/s/ Leslie L. Ogg
Leslie L. Ogg
<PAGE>
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 38
TO REGISTRATION STATEMENT NO. 2-73115
This post-effective amendment contains the following papers and documents:
The facing sheet.
Part A.
The prospectus.
Part B.
Statement of Additional Information.
Part C.
Other information.
The signatures.
Exhibit Index
(d)(3) Form of Investment Management Services Agreement dated Sept. 13, 1999,
between Registrant, on behalf of AXP Variable Portfolio - Blue Chip
Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable
Portfolio - Small Cap Advantage Fund and IDS Life Insurance Company.
(m) Plan and Agreement of Distribution dated Sept. 13, 1999, between
Registrant on behalf of AXP Variable Portfolio - Blue Chip Advantage
Fund, AXP Variable Portfolio - Growth Fund, and AXP Variable Portfolio
- Small Cap Advantage Fund, and IDS Life Insurance Company.
INVESTMENT MANAGEMENT SERVICES AGREEMENT
AGREEMENT made the 13th day of September, 1999, by and between AXP
Variable Portfolio Investment Series, Inc. (the "Corporation"), a Minnesota
corporation, on behalf of its underlying series funds: AXP Variable Portfolio -
Blue Chip Advantage Fund, AXP Variable Portfolio - Growth Fund and AXP Variable
Portfolio - Small Cap Advantage Fund (individually a "Fund" and collectively the
"Funds"), and IDS Life Insurance Company ("IDS Life") a Minnesota corporation.
Part One: INVESTMENT MANAGEMENT AND OTHER SERVICES
(1) The Corporation 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 Corporation continuously with suggested
investment planning; to determine, consistent with the Funds' 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 Funds all necessary research
and statistical data in connection therewith; to furnish all services of
whatever nature required in connection with the management 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 Funds 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 Corporation and its underlying 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 Funds 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 Funds.
(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.
(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 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 American Express Financial
Corporation's ("AEFC") or IDS Life's overall responsibilities with respect to
the Funds and other funds for which they act as investment adviser.
(6) It is understood and agreed that in furnishing the Funds with the
services as herein provided, neither IDS Life, nor any officer, director or
agent thereof shall be held liable to a Funds 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.
<PAGE>
(7) The existence of an investment advisory agreement between IDS Life
and AEFC is specifically acknowledged and approved.
Part Two: COMPENSATION TO INVESTMENT MANAGER
(1) The Corporation agrees to pay to IDS Life, and IDS Life covenants
and agrees to accept from the Corporation in full payment for the services
furnished, a fee composed of an asset charge and a performance incentive
adjustment.
(a) The asset charge
(i) The asset charge for each calendar day of each year shall be equal
to the total of 1/365th (1/366th in each leap year) of the amount computed in
accordance with paragraph (ii) below. The computation shall be made for each day
on the basis of net assets as of the close of business of the full business day
two (2) business days prior to the day for which the computation is being made.
In the case of the suspension of the computation of net asset value, the asset
charge for each day during such suspension shall be computed as of the close of
business on the last full business day on which the net assets were computed.
Net assets as of the close of a full business day shall include all transactions
in shares of the Funds recorded on the books of the Funds for that day.
(ii) The asset charge shall be based on the net assets of each Fund as
set forth in the following table.
AXP Variable Portfolio - Blue Chip Advantage Fund
Assets Annual rate at
(billions) each asset level
---------- ----------------
First $0.25 0.540%
Next 0.25 0.515
Next 0.25 0.490
Next 0.25 0.465
Next 1.00 0.440
Next 1.00 0.410
Next 3.00 0.380
Next 6.00 0.350
AXP Variable Portfolio - Growth Fund
Assets Annual rate at
(billions) each asset level
---------- ----------------
First $1.00 0.630%
Next 1.00 0.615
Next 1.00 0.600
Next 3.00 0.585
Over 6.00 0.570
AXP Variable Portfolio - Small Cap Advantage Fund
Assets Annual rate at
(billions) each asset level
---------- ----------------
First $0.25 0.790%
Next 0.25 0.770
Next 0.25 0.750
Next 0.25 0.730
Next 1.00 0.710
Over 2.00 0.650
<PAGE>
(b) The performance incentive adjustment
(i) The performance incentive adjustment, determined monthly, shall be
computed by measuring the percentage point difference between the performance of
one share of the Fund and the performance of an Index (the "Index"). The Index
for AXP Variable Portfolio - Blue Chip Advantage Fund and AXP Variable Portfolio
- - Growth Fund is the Lipper Growth and Income Fund Index. The Index for AXP
Variable Portfolio - Small Cap Advantage Fund is the Lipper Small Cap Fund
Index. The performance of one share of a Fund shall be measured by computing the
percentage difference, carried to two decimal places, between the opening net
asset value of one share of the Fund and the closing net asset value of such
share as of the last business day of the period selected for comparison,
adjusted for dividends or capital gain distributions treated as reinvested at
the end of the month during which the distribution was made but without
adjustment for expenses related to a particular class of shares. The performance
of the Index will then be established by measuring the percentage difference,
carried to two decimal places, between the beginning and ending Index for the
comparison period, with dividends or capital gain distributions on the
securities which comprise the Index being treated as reinvested at the end of
the month during which the distribution was made.
(ii) In computing the adjustment, one percentage point shall be
deducted from the difference, as determined in (b)(i) above. The result shall be
converted to a decimal value (e.g., 2.38% to 0.0238), multiplied by .01 and then
multiplied by the Funds' average net assets for the comparison period. This
product next shall be divided by 12 to put the adjustment on a monthly basis.
Where the performance of the Fund exceeds the Index, the amount so determined
shall be an increase in fees as computed under paragraph (a). Where Fund
performance is exceeded by the Index, the amount so determined shall be a
decrease in such fees. The percentage point difference between the performance
of the Fund and that of the Index, as determined above, is limited to a maximum
of 0.0008 per year for AXP Variable Portfolio - Blue Chip Advantage Fund and AXP
Variable Portfolio - Growth Fund, and 0.0012 per year for AXP Variable Portfolio
- - Small Cap Advantage Fund.
(iii) The 12 month comparison period will roll over with each
succeeding month, so that it always equals 12 months, ending with the month for
which the performance adjustment is being computed.
(iv) If the Index ceases to be published for a period of more than 90
days, changes in any material respect or otherwise becomes impracticable to use
for purposes of the adjustment, no adjustment will be made under this paragraph
(b) until such time as the Board approves a substitute index.
(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 Funds
to IDS Life within five business days after the last day of each month.
<PAGE>
Part Three: ALLOCATION OF EXPENSES
(1) The Corporation agrees to pay:
(a) Fees payable to IDS Life for the latter's services under
the terms of 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 Funds 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 Corporation 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 Fund.
(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.
(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 Funds;
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 Funds, 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 Funds.
(l) Expenses properly payable by the Funds, approved by the
Board.
<PAGE>
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) Each Fund recognizes that AEFC 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 Funds and that AEFC and IDS Life manage
their own investments and/or those of their subsidiaries. AEFC and IDS Life
shall be free to render such investment advice and other services and each 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 Funds are or may be interested in
AEFC or IDS Life or any successor or assignee thereof, as directors, officers,
stockholders or otherwise; that directors, officers, stockholders or agents of
AEFC or IDS Life are or may be interested in the Funds as directors, officers,
shareholders, or otherwise; or that AEFC or IDS Life or any successor or
assignee, is or may be interested in the Funds as shareholder or otherwise,
provided, however, that neither AEFC or IDS Life, nor any officer, director or
employee thereof or of the Funds, shall sell to or buy from the Funds any
property or security other than shares issued by the Funds, 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 Funds 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 Funds or in IDS Life.
(b) The purchase of securities for the Funds, or the sale of
securities owned by the Funds, 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 Funds 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 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 Funds) or other assets by or for
the Funds.
<PAGE>
Part Five: RENEWAL AND TERMINATION
(1) This Agreement shall continue in effect for two years from the date
of this Agreement, or until a new agreement is approved by a vote of the
majority of the outstanding shares of each Fund and by vote of the 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 or
by a vote of the majority of the outstanding shares of the Funds and (b) by the
vote of a majority of the directors who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. As used in this paragraph, the term
"interested person" shall have the same meaning as set forth in the Investment
Company Act of 1940, as amended (the "1940 Act").
(2) This Agreement may be terminated by either a 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 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.
AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC.
AXP Variable Portfolio - Blue Chip Advantage Fund
AXP Variable Portfolio - Growth Fund
AXP Variable Portfolio - Small Cap Advantage Fund
By
Leslie L. Ogg
Vice President
IDS LIFE INSURANCE COMPANY
By
Pamela J. Moret
Executive Vice President, Variable Assets
Plan and Agreement of Distribution
This Plan and Agreement of Distribution ("Plan") is between AXP Variable
Portfolio - Investment Series, Inc. on behalf of its series of capital stock,
AXP Variable Portfolio - Blue Chip Advantage Fund, AXP Variable Portfolio -
Growth Fund and AXP Variable Portfolio - Small Cap Advantage Fund, a registered
management investment company, ("the Portfolio") and IDS Life Insurance Company
("IDS Life"). It is effective September 13, 1999.
This Plan provides that:
1. IDS Life will purchase the Portfolio's shares on behalf of its separate
accounts and the separate accounts of its affiliated life insurance
companies established for the purpose of funding variable life insurance,
annuity contracts or both (collectively referred to as "Variable
Contracts"). Additionally, IDS Life may offer the Portfolio's shares to one
or more unaffiliated life insurance companies ("Unaffiliated Life
Companies") for purchase on behalf on certain of their separate accounts
established for the purpose of funding Variable Contracts.
2. The Portfolio will reimburse IDS Life up to 0.125% of its daily net assets
for various costs paid and accrued in connection with the distribution of
the Portfolio's shares and for services provided to existing and
prospective Variable Contract owners. Payments made under the Plan are
based on budgeted expenses and shall be made within five (5) business days
after each month. At the end of each calendar year, IDS Life shall furnish
a declaration setting out the actual expenses it has paid and accrued. Any
money that has been paid in excess of the amount of these expenses shall be
returned to the Portfolio.
3. IDS Life represents that the money paid by the Portfolio will benefit the
variable Contract owners and not the separate accounts that legally own the
shares and be for the following:
(a) printing and mailing prospectuses, Statements of Additional
Information, supplements, and reports to existing and prospective
Variable Contract owners;
(b) preparation and distribution of advertisement, sales literature,
brokers' materials and promotional materials relating to the
Portfolio;
(c) presentation of seminars and sales meetings describing or relating to
the Portfolio;
(d) training sales personnel regarding the Portfolio;
(e) compensation of sales personnel for sale of the Portfolio's shares;
(f) compensation of sales personnel for assisting Variable Contract owners
with respect to the Portfolio shares;
(g) overhead of IDS Life and its affiliates appropriately allocated to the
promotion of sale of the Portfolio's shares; and
(h) any activity primarily intended to result in the sale of the
Portfolio's shares, including payments to Unaffiliated Life Companies.
4. IDS Life shall provide all information relevant and necessary for the Board
to make informed determinations about whether the Plan should be continued
and shall:
(a) submit quarterly a report that sets out the expenses paid or accrued
by it, the names of the Unaffiliated Life Companies to whom the
Portfolio's shares are sold, and the payments made to each
Unaffiliated Life Company that has been reimbursed;
(b) monitor the level and quality of services provided by it and all
affiliated companies and will use its best efforts to assure that in
each case legitimate services are rendered in return for the
reimbursement pursuant to the Plan ;and
(c) meet with the Portfolio's representatives, as reasonably requested, to
provide additional information.
5. IDS Life represents that it and all affiliated insurance company sponsors
will provide full disclosure of the Portfolio's 12b-1 Plan in the
prospectus for any separate account investing in the Portfolio and will
clearly communicate the combined effect of all fees and costs, including
the reimbursement under the 12b-1 Plan, imposed by the separate account and
the Portfolio in accordance with applicable laws.
6. All payments by IDS Life to Unaffiliated Life Companies shall be made
pursuant to a written agreement (Related Agreement). All such written
agreements will be in a form approved by a majority of the Portfolio's
independent members of the board and the board as a whole before it shall
be used. The Related Agreement shall:
(a) require full disclosure of the combined effect of all fees and charges
in accordance with applicable laws;
(b) provide for the termination at any time without penalty as required by
Rule 12b-1; and
(c) continue so long as its continuance is done in accordance with the
requirements of Rule 12b-1.
7. The Portfolio represents that the Plan has been approved as required by
Rule 12b-1 and may continue for more than one year so long as it is
continued as required by Rule 12b-1 and shall terminate automatically in
the event of an assignment.
8. The Plan may not be amended to materially increase the amount of the
payments without the approval of the outstanding voting securities.
AXP VARIABLE PORTFOLIO - INVESTMENT SERIES, INC.
AXP Variable Portfolio - Blue Chip Advantage Fund
AXP Variable Portfolio - Growth Fund
AXP Variable Portfolio - Small Cap Advantage Fund
Leslie L. Ogg
Vice President
IDS LIFE INSURANCE COMPANY
Pamela J. Moret
Executive Vice President, Variable Assets
