SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
POST-EFFECTIVE AMENDMENT NO. 17
TO REGISTRATION STATEMENT NO. 33-13375
Under
The Securities Act of 1933
IDS Life Account RE
of
IDS Life Insurance Company
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(Exact name of registrant as specified in charter)
Minnesota
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(State or other jurisdiction of incorporation or organization)
63
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(Primary Standard Industrial Classification Code Number)
41-0823832
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(I.R.S. Employer Identification No.)
IDS Tower 10, Minneapolis, MN 55440-0010
(612) 671-3131
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(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
Mary Ellyn Minenko, Counsel
IDS Life Insurance Company
IDS Tower 10, Minneapolis, Minnesota 55440-0010
(612) 671-3678
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
It is proposed that this filing become effective on May 1, 1998.
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If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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<CAPTION>
Calculation of Registration Fee
<S> <C> <C> <C> <C>
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Proposed
Title of each class Proposed maximum
of securities to be Amount to be maximum offering aggregate offering Amount of
registered registered price per unit price registration fee
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N/A
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<TABLE>
<CAPTION>
IDS LIFE ACCOUNT RE
ISSUED BY
IDS LIFE INSURANCE COMPANY
Cross-Reference Sheet
Pursuant to Regulation S-K
Item 501(b)
<S> <C>
Form S-1 Item Number and Caption Location in Prospectus
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus........................................Outside Front Cover
2. Inside Front and Outside Back
Cover Pages of Prospectus.......................................Inside Front Cover
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges.........................................................Summary of Contents, Risk Factors
4. Use of Proceeds.................................................Investment Objectives of the
Account, Investment Restrictions,
Other Investment Policies
5. Determination of Offering Price.................................The Contracts- Accumulation Period
6. Dilution........................................................Not Applicable
7. Selling Security Holders........................................Not Applicable
8. Plan of Distribution............................................Distribution of Contracts
9. Description of Securities to Be
Registered......................................................The Contracts Accumulation Period,
Annuity Period
10. Interests of Named Experts and
Counsel.........................................................Not Applicable
<PAGE>
11. Information with Respect to the
Registrant......................................................IDS Life, The Account, Legal
Proceedings, Investment Objectives
of the Account, Investment
Restrictions, Other Investment
Policies, Appendix A, Appendix B,
Conflicts of Interest
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................................................See Item 14 in Part II
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PART I.
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus.
<PAGE>
Real Estate Variable Annuity
Prospectus/May 1, 1998
This prospectus describes Individual Deferred Variable Annuity Contracts (the
Contracts) offered by IDS Life Insurance Company (IDS Life), in which purchase
payments accumulate on a variable basis and pay retirement benefits to the
owner. The Contracts are available for non-qualified retirement plans only. The
Contracts are not available for Individual Retirement Annuities (IRAs), 401(k)
plans, 403(b) plans or other qualified plans.
Effective May 1, 1995, IDS Life discontinued new contract sales of the Account.
Purchase payments are allocated to IDS Life Account RE (the Account), a
segregated asset account of IDS Life. See The Account section. Contract values
of the Account and annuity payments from the Account will vary with the
performance of the investments of the Account. There is no guaranteed minimum
contract value. Owners of the Contracts bear the complete investment risk of the
Account.
IDS Life Account RE
Individual Deferred Variable
Annuity Contracts
Sold by:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
Telephone: (612) 671-3733
These securities have not been approved or disapproved by the
Securities and Exchange Commission or any state securities commission, nor has
the Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense. This prospectus should be retained for future
reference.
IDS LIFE IS NOT A FINANCIAL INSTITUTION, AND THE SECURITIES IT OFFERS ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK OR FINANCIAL
INSTITUTION NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
Since the Account has experienced substantial net contract terminations over the
past several years, the Account does not intend to acquire additional real
estate related investments. Further, the Account intends to liquidate the real
estate related investments that it currently holds when it becomes advantageous
or necessary to do so. During 1996, the Account liquidated two real estate
related investments.
<PAGE>
Although additional purchase payments may be made into existing contracts, prior
to making any additional purchase payment an existing contract owner should bear
in mind that the Account intends to liquidate its real estate related
investments. Moreover, the Account will not be acquiring any new or additional
real estate related investments with the cash flow or proceeds generated by the
operations or sales of its existing real estate related investments. Such funds,
to the extent not used to pay the Account's obligations under existing contracts
or the redemption of accumulation units purchased by IDS Life, will be invested
in short-term debt instruments and possibly intermediate-term bonds with
maturities of up to five years. Accordingly, an existing contract owner should
carefully consider these facts in light of his or her own investment objectives
before making any additional purchase payment into an existing contract.
IDS Life will furnish to each owner an annual report showing the current number
of accumulation or annuity units, the value per unit and the contract value. In
addition, IDS Life will send to each owner annual financial statements for the
Account audited by independent auditors.
The Contracts involve a substantial degree of risk, particularly due to the
illiquidity of the assets of the Account. Over the past few years the Account
has experienced substantial contract surrenders in excess of contract purchase
payments. IDS Life is purchasing accumulation units in the Account. See the
Other Investment Policies--Borrowing Policies, Risk Factors, Conflicts of
Interest-Borrowings from IDS Life; and Management's Discussion and Analysis of
Financial Condition and Results of Operations sections. The ability of an owner
of a Contract to withdraw the contract value is subject to certain restrictions
and, under certain circumstances, payments under the Contracts may be suspended.
See the Contract Charges and Deductions and the Suspension and Delay of Payments
sections. In addition, the investment and operation of the assets of the Account
involve certain conflicts of interest. See the Conflicts of Interest section.
Effective May 1, 1995, IDS Life discontinued new contract sales of the Account.
IDS Life will continue to accept and process additional purchase payments into
existing contracts in amounts specified in the Prospectus, whether by means of
previously established bank authorizations or otherwise. IDS Life also will
continue to service existing contracts and honor any surrender requests.
If you make a full surrender of your existing Contract, you will not be assessed
any surrender charge. However, you may still be subject to a 10 percent IRS
penalty on any investment earnings, in addition to the tax on the investment
earnings, if you are under age 59 1/2 when you surrender your contract. Of
course, your investment in the contract (your purchase payments) are not subject
to any tax or penalties. Please see the "Certain Federal Income Tax
Considerations" section and consult your advisor for further information.
You can make an election to surrender your Contract by sending a written request
to:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
Please include your name, Social Security Number and Contract Number with your
written request.
<PAGE>
IDS Life will purchase accumulation units in order to maintain the Account and
to increase its liquidity. IDS Life will make these payments so that no contract
holder is disadvantaged because sales of new contracts have been discontinued.
IDS Life will make additional payments into the Account for accumulation units
as needed in order to fund all of the Account's obligations under the contracts
such as paying death benefits and surrenders.
By purchasing accumulation units, IDS Life will have an ownership interest in
the Account. Since IDS Life will not actually purchase a contract, it will not
be subject to surrender charges. However, IDS Life, as holder of accumulation
units, will participate in the increase or decrease in the value of the
Account's investments just as other owners of accumulation units do. IDS Life
may realize a gain or loss on its accumulation units when redeemed.
IDS Life currently expects to hold the accumulation units it purchases until the
surrender of all outstanding contracts or until the Account's liquidity improves
(through, for example, one or more sales of real estate related investments),
thereby permitting the Account to satisfy its anticipated contract obligations.
Because IDS Life may purchase a significant amount of accumulation units, IDS
Life may be subject to certain conflicts of interest it would not otherwise have
if it had not purchased such accumulation units, including, among other things,
a conflict in approving periodic valuations of real estate related investments
made by the Investment Adviser.
Summary of Contents
This prospectus offers Individual Deferred Variable Annuity Contracts designed
primarily to allow owners to participate in the investment performance of a pool
of real estate related investments held or owned by the Account. An owner will
receive variable retirement payments depending upon his choice of annuity.
See the Definitions section for the definition of many of the terms used in this
prospectus.
The Account is a segregated asset account of IDS Life established pursuant to
the laws of the State of Minnesota. The assets of the Account are not subject to
any liabilities arising out of any other assets or business of IDS Life. Income,
gains and losses of the Account are credited to or charged against the Account
without regard to any other income, gains or losses of IDS Life. IDS Life is not
liable for any obligations of the Account. IDS Life is liable for fulfillment of
the terms of the Contracts, including the obligations to pay death benefits and
to guarantee the annuity purchase rates in the Contracts. See The Account
section.
The minimum initial purchase payment for a Contract was $5,000, or $2,000 if
concurrently the owner agreed to make additional monthly purchase payments of
not less than $100 each by means of a bank authorization. Additional purchase
payments may be made in amounts of at least $2,000 each or, if made by means of
a bank authorization, of not less than $100 per month. The maximum aggregate
additional purchase payments in any one contract year after the first may not
exceed $50,000. IDS Life, at its discretion, may permit greater maximum initial
or additional purchase payments in certain instances. No sales charge is
deducted from any purchase payment when made. See The Contract - Accumulation
Period section.
<PAGE>
During the first eight years after any purchase payment, surrender of the
Contract will be subject to assessment of a surrender charge, based upon the
number of payment years that have elapsed since the purchase payment. The
surrender charge, which is a contingent deferred sales charge, is 8 percent of
the amount surrendered during the first payment year and decreases by 1 percent
per year thereafter to 1 percent in the eighth payment year. There is no
surrender charge on amounts surrendered after the eighth payment year. See The
Contract - Accumulation Period section.
IDS Life assesses the Account a daily charge for mortality and expense risks
that amounts to an aggregate of 1 percent on an annual basis of the average
daily asset value. IDS Life assesses the Account a daily charge for an asset
management fee that amounts to an aggregate of 1.25 percent on an annual basis
of the average daily asset value of the Account, subject to increase by not more
than 0.25 percent per year in the event the Account's real property investments
exceed a certain rate of return on an annual basis. IDS Life also assesses the
Account an acquisition and mortgage placement fee that amounts to 3.75 percent
of the total cash investment to be paid or advanced by the Account in connection
with each real property investment, mortgage loan and land sale-leaseback
investment. Portions of the asset management and acquisition and mortgage
placement fees will be paid by IDS Life to the Investment Adviser, JMB Annuity
Advisers. See the Contract Charges and Deductions section.
The investment objectives of the Account previously were to provide for payment
of retirement income under the Contracts by seeking to preserve and protect the
Account's assets in real (i.e., inflation-adjusted) terms; to provide for
compounding of income through the reinvestment of cash flow from investments;
and to provide for increases in income through capital appreciation of real
property investments and, to the extent available, through participations in the
capital appreciation or gross revenues or income of the real properties subject
to mortgage loans or land sale-leaseback investments of the Account. IDS Life
previously sought to achieve these objectives by investing approximately 50
percent to 70 percent of the Account's assets in such income-producing real
property investments as office buildings, shopping centers, apartment complexes
and other real properties, and approximately 15 percent to 40 percent of the
Account's assets in mortgage loans and land sale-leaseback investments. However,
IDS Life is permitted to alter such percentages in accordance with changing
market conditions or under other circumstances. To enable the Account to meet
its needs for liquidity, certain of the Account's assets may be invested in
short-term debt instruments and intermediate-term bonds with maturities of up to
five years. See the Investment Objectives of the Account section.
There is no assurance that enough suitable investments will be found or that the
investment objectives of the Account will be achieved. Owners bear the complete
investment risk of the Contracts. Contract values will fluctuate depending upon
the investment performance of the Account, which will reflect the performance of
the Account's portfolio of investments and the charges and deductions assessed
under the Contracts.
Under present law, an owner is not taxed on the increases in contract value
until distributions occur, either through the surrender of the Contract or the
receipt of annuity payments, or until a change of ownership occurs. Under
certain circumstances, a tax penalty of 10 percent of the portion of a
distribution representing income to the owner may be assessed for distributions
made prior to age 59-1/2. See the Certain Federal Income Tax Considerations
section.
<PAGE>
Because the assets of the Account will be invested primarily in real estate
related investments, the investment performance of the Account will be subject
to all of the risks generally incident to investments in real estate, such as
the uncertainty of cash flow to meet obligations, the uncertainty in making
market valuations of properties, adverse changes in national or local economic
conditions, the cost of funds and other factors affecting real estate. See the
Risk Factors -- General Risks of Real Property Investments section. Owners will
bear all investment risk of the Account's portfolio. In addition, the real
estate related investments made by the Account are illiquid investments.
Accordingly, owners will bear the risk that benefits under the Contracts will
not be immediately payable in the event that a substantial portion of the
Account's assets is required to be used to redeem Contracts. IDS Life is
purchasing accumulation units in the Account. However, it is possible that
necessary funds for the payment of benefits under the Contracts may not be
readily obtainable by the Account either through borrowings by the Account or
through the disposition of real estate related investments on commercially
reasonable terms. In such event, payments may be suspended for up to six months.
In the event of any suspension of payments, the cash available will be used
first to pay any obligations of the Account (other than contract obligations);
second, to make annuity payments; third, to pay death benefits; and finally, to
pay any contract surrenders. See the Suspension and Delay of Payments section.
For information regarding certain other risk factors that may affect the
operation and performance of the Account and the value of its investments, see
the Risk Factors section. IDS Life, the Investment Adviser and their respective
affiliates may have potential conflicts of interest with respect to operating
the Account, including the fact that the arrangements relating to the
compensation of IDS Life under the Contracts are not the result of arm's-length
negotiations and that IDS Life, the Investment Adviser and their affiliates may
make real estate investments for their own accounts or those of other entities
and may render real estate investment services to other entities that may have
the same or substantially similar investment objectives as those of the Account.
See the Conflicts of Interest section.
Premium or other taxes that may be payable to a state or other government agency
in connection with the purchase of Contracts may be deducted from purchase
payments or from the contract value.
See page 18, where a description of the real estate related investments made for
IDS Life Account RE begins.
<PAGE>
Table of Contents Page
Summary of Contents..........................................................3
Definitions..................................................................7
IDS Life.....................................................................8
The Account..................................................................9
Description of the Investment Adviser and Affiliates.........................9
Investment Objectives of the Account.........................................12
Investment Restrictions......................................................16
Other Investment Policies....................................................17
Real Estate Related Investments..............................................18
Summary of Investments.......................................................18
Risk Factors.................................................................34
Conflicts of Interest........................................................44
The Contract -- Accumulation Period..........................................47
Contract Charges and Deductions..............................................49
Suspension and Delay of Payments.............................................52
Transfer of Ownership........................................................53
Beneficiary..................................................................53
Annuity Period...............................................................55
Certain Federal Income Tax Considerations....................................58
Valuation of Assets..........................................................59
Distribution of Contracts....................................................64
State Regulation.............................................................64
Experts......................................................................64
Registration Statement.......................................................65
Reports......................................................................65
Financial Statements.........................................................65
Legal Proceedings............................................................65
Appendix A: Directors and principal executive officers
of IDS Life.............................................................66
Appendix B: Directors, executive officers and certain
other officers of JMB Realty Corporation................................68
Summary of Selected Financial Information....................................69
Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................70
Index to Financial Statements................................................78
<PAGE>
Definitions
Some terms used in this prospectus:
Account -- IDS Life Account RE, a segregated asset account of IDS Life.
Accumulation Unit -- An accumulation unit is an accounting unit of measure. It
is used to calculate the contract value prior to settlement.
Accumulation Unit Value -- The accumulation unit value is determined by dividing
the Account's net asset value by the number of accumulation units outstanding at
the end of the valuation period.
Annuitant -- The person on whose life monthly payments depend.
Annuity Unit -- An annuity unit is an accounting unit of measure. It is used to
calculate the value of annuity payments from the Account on and after the
retirement date.
Asset Value -- The Account's asset value is determined by calculating (i) the
total value of the Account's assets less (ii) the amount of any accrued expenses
or liabilities other than any borrowings in connection with the purchase,
financing, improvement, development or refinancing of real property investments.
Beneficiary -- The beneficiary is the party entitled to receive the benefits to
be paid at the death of the annuitant or owner.
Contract -- An Individual Deferred Variable Annuity Contract offered by means of
this prospectus.
Contract Value -- The sum of the value of the accumulation units attributable to
the Contract.
Contract Year -- A period of 12 months, starting on the effective date of the
Contract and on each anniversary of the effective date.
Land Sale-Leaseback -- Land sale-leaseback means a transaction involving the
purchase of land on which improvements are constructed, are under construction
or are under contract to be constructed, and the lease of such land pursuant to
a land or ground lease generally to the owner or developer of the improvements
on the land. Such land sale-leasebacks may be subordinated to a first mortgage
and other liens or security interests (whether or not also held by the Account)
that are liens on the entire property including the land.
Mortgage Loan -- Mortgage loan means a first mortgage loan, subordinated or
junior mortgage loan or wrap-around mortgage evidenced by notes, bonds,
debentures and other evidences of indebtedness, and which is secured by a
mortgage, trust deed, deed of trust, deed to secure debt or other liens on
interests, including leasehold interests in land and/or improvements that are
constructed, are being constructed or are under contract to be constructed.
<PAGE>
Net Asset Value -- The Account's net asset value is determined by calculating
the total value of the Account's assets, less the amount of any expenses or
liabilities, including tax liabilities, mortgage indebtedness, administrative
expenses, that portion of organizational and offering expenses being amortized
and the accrued but unpaid daily charges for mortality and expense risk and
asset management fees.
Organizational and Offering Expenses -- Organizational and offering expenses
means the following expenses that are incurred in connection with the formation
and qualification of the Account, in the registration of the Contracts under
applicable Federal and state law, and in marketing the Contracts: (a)
registration fees, filing fees and taxes, (b) the costs of qualifying, printing,
amending, supplementing, mailing and distributing the registration statement and
prospectus, (c) direct expenses (including salaries and related salary expenses)
of officers and employees of IDS Life, the Investment Adviser and their
affiliates while directly engaged in organizing the Account and in registering
and qualifying the Contracts, and (d) accounting and legal fees and expenses
(including those fees and expenses of the Investment Adviser's attorneys and
accountants) incurred in connection therewith, provided, however, that
organizational and offering expenses will not include selling commissions or any
other costs or expenses relating to marketing the Contracts.
Owner -- The person or party having ownership of the annuity and who is entitled
to receive its benefits.
Purchase Payment -- Payment made to IDS Life for the annuity.
Real Property Investments -- Real property investments are equity interests in
existing real properties that are completed at the time of commitment for
purchase and, to a lesser extent, properties that are under construction or
under contract for development.
Retirement Date -- The date shown on the Contract on which annuity payments are
to begin. The date may be changed as provided in the Contract.
Surrender Charge -- A deferred sales charge is applied if the annuity is
surrendered within a certain number of years from when a purchase payment is
made.
Surrender Value -- The total value of the annuity after any applicable surrender
charge has been deducted.
Valuation Date -- A normal business day, Monday through Friday, except for the
following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Valuation Period -- The interval of time commencing at the close of business on
each valuation date and ending at the close of business on the next valuation
date.
IDS Life
IDS Life is a stock life insurance company organized in 1957 under the laws of
the State of Minnesota. IDS Life is a wholly owned subsidiary of American
Express Financial Corporation, which itself is a wholly owned subsidiary of the
American Express Company. IDS Life acts as a direct writer of life insurance
policies and annuities and as
<PAGE>
the investment manager of various investment companies. IDS Life is licensed to
write life insurance and annuity contracts in 49 states and the District of
Columbia. The headquarters of IDS Life is IDS Tower 10, Minneapolis, MN
55440-0010. For information concerning the directors and principal executive
officers of IDS Life, see Appendix A. For information concerning the financial
statements of IDS Life, see Index to Financial Statements.
The Account
The Account was established in March 1987 by a resolution of the board of
directors of IDS Life as a segregated asset account, pursuant to Minnesota law,
and commenced operations in August 1987. IDS Life purchased the initial 200,000
accumulation units of the Account. Such units were subsequently redeemed by IDS
Life at the then current accumulation unit value. The Account holds assets that
are segregated from all of IDS Life's other assets and is not chargeable with
liabilities arising out of any other business of IDS Life. The Account is not
registered as an investment company under the Investment Company Act of 1940
(the 1940 Act).
The Account is under the control and management of IDS Life. The board of
directors and officers of IDS Life are responsible for management of the
Account. The owners of the Contracts have no voting rights with respect to the
Account. For information regarding the directors and principal executive
officers of IDS Life, see Appendix A. For information concerning the financial
statements of IDS Life, see Index to Financial Statements.
IDS Life does not guarantee the investment performance of the Account and is not
responsible for the liabilities of the Account. However, IDS Life is responsible
for fulfillment of the terms of each Contract, including payment of the death
benefits and the guarantee of the minimum annuity purchase rates contained in
the Contracts.
Description of the Investment Adviser and Affiliates
IDS Life will provide services in connection with the acquisition or placement
and management of the assets of the Account. IDS Life, in turn, has contracted
with JMB Annuity Advisers (the Investment Adviser), an Illinois general
partnership, to provide investment selection, management, disposition and
consulting services with respect to the real estate related investments of the
Account. The Investment Adviser is primarily responsible for the identification,
evaluation, investigation, negotiation, selection and recommendation for
purchase or placement of any real estate related assets for the Account. IDS
Life maintains an investment committee that is responsible for approving all
real estate related investments or dispositions on behalf of the Account. A
quorum of such investment committee consists of any two members, who may act on
behalf of the committee.
The partners of the Investment Adviser are JMB Realty Corporation (JMB), which
is the managing partner of the Investment Adviser, and an affiliate of JMB. The
Investment Adviser is responsible for the day-to-day administration and
management of the real estate related investments of the Account. For
information regarding the directors and principal executive officers of JMB, see
Appendix B. JMB has been engaged principally in real estate investment,
brokerage, management and sales since December 1968.
<PAGE>
In December 1994, certain affiliates of the Investment Adviser sold
substantially all of their assets to an unaffiliated third party that acts as an
adviser to institutional investors with respect to real estate investments, and
in connection with this sale, certain management personnel of these affiliates
of the Investment Adviser became management personnel of the purchaser or its
related entities. These affiliates of the Investment Adviser included JMB
Institutional Realty Corporation and its related real estate advisory entities,
which acted as advisers or managers of qualified pension and profit-sharing
plans, tax-exempt foundations and endowments and other institutional investors,
and JMB Properties Company, which was engaged in performing property management
services for office, industrial and multi-family real properties. Prior to
December 1994, JMB Institutional Realty Corporation and its related real estate
advisory entities were advisers or managers of certain institutional investors
that have invested jointly with the Account in Northridge and Southridge Malls,
Monmouth Mall and the 1225 Connecticut office building, and JMB Properties
Company acted as property manager for one of the Account's current real property
investments, the 1225 Connecticut office building, and one of the Account's
former real property investments, the West Springfield Terrace Apartments. See
the Real Estate Related Investments section. As a result of the sale, the
institutional investors that have invested jointly with the Account are no
longer advised or managed by affiliates of the Investment Adviser. In addition,
the officers and directors of 1225 Investment Corporation, which owns the 1225
Connecticut office building, are no longer affiliated or associated with the
Investment Adviser. See the Risk Factors -- Risks of Joint Ownership and
Conflicts of Interest -- Possible Joint Venture Investments with Affiliates of
the Investment Adviser or IDS Life sections. The successor to JMB Properties
Company's assets assumed property management of the 1225 Connecticut office
building and the West Springfield Terrace Apartments on the same terms that
existed prior to sale.
The Investment Adviser is not liable for any error of investment selection,
judgment or law except for willful misfeasance, bad faith or negligence on the
part of the Investment Adviser in the performance of its obligations or duties
under the investment advisory agreement. See the Conflicts of Interest --
Limitation on Liability section.
Compensation of IDS Life, the Investment Adviser and their Affiliates in
Connection with Real Estate Related Services
IDS Life is paid an asset management fee for its services in connection with the
management of the assets of the Account. This fee is accrued on a daily basis
and deducted on a monthly basis and is equal on an annual basis to 1.25 percent
of the average daily asset value of the Account, subject to increase as
described below. A portion of the asset management fee equal to 0.95 percent of
the average daily asset value is paid by IDS Life to the Investment Adviser for
its services in connection with the management of the real estate related assets
of the Account. In the event that the Account's real property investments have
produced a rate of return for the Account (measured for each calendar year) that
exceeds the rate of return as measured for such period by the FRC Property Index
(which is released in April of each year for the preceding calendar year) by 0.5
percent per year, then the Investment Adviser shall be entitled to an additional
amount equal to 0.05 percent of the average daily asset value of the Account for
such calendar year. The Investment Adviser also will be entitled to an
additional amount equal to 0.01 percent (up to a maximum of 0.2 percent) of the
average daily asset value of the Account for each 0.1 percent by which the rate
of return of the Account's real property investments for such calendar year
exceeds the rate of return as measured for such period by such index plus 0.5
percent per year. Rate of return shall be
<PAGE>
calculated on a quarterly basis and in general shall mean the sum of all net
income from operations of the Account's real property investments (without
deducting any asset management fees or certain other expenses of the Account)
and realized and unrealized capital appreciation or depreciation on the
Account's real property investments (net of all acquisition and mortgage
placement fees) for the calendar quarter taken as a percentage of the aggregate
asset value of such investments (net of all acquisition and mortgage placement
fees) as of the beginning of such calendar quarter. Additionally, IDS Life and
the Investment Adviser will not be entitled to, and will forego, that portion of
the asset management fee, as calculated above, attributable to the use of
indebtedness in excess of 40 percent of the aggregate value of all of the
Account's real property investments.
IDS Life receives an acquisition and mortgage placement fee of 3.75 percent of
the total cash investment to be paid or advanced by the Account, including all
cash down payments, interest, points, special reserves and all other initial
cash payments in connection with each real property investment, mortgage loan
and land sale-leaseback made by the Account. The amount paid to IDS Life is
measured by the cash investment to be paid by the Account for real property
investments or land sale-leasebacks or the amount to be borrowed under a
mortgage loan by the borrower for mortgage loans. A portion of the acquisition
and mortgage placement fee equal to 3.50 percent of the total cash investment to
be paid or advanced by the Account in connection with each real property
investment, mortgage loan and land sale-leaseback made by the Account is paid to
the Investment Adviser in consideration of the services of the Investment
Adviser and its affiliates in connection with the identification, evaluation,
investigation, negotiation, selection and recommendation for purchase or
placement of real estate related investments for the Account. In addition,
certain expenses of IDS Life, the Investment Adviser and their affiliates are
reimbursed as described under the Contract Charges and Deductions section. At
its discretion, the Investment Adviser may provide any or all of its services to
the Account through affiliates, in which event fees may be payable to such
affiliates.
In some instances, some or all of the acquisition and mortgage placement fee may
be paid by the sellers of properties or borrowers. This fee will indirectly
affect the Account because the payment of the fee by the seller of property or
borrower may affect the terms on which the seller or borrower is willing to
close the transaction. To the extent that the seller or borrower pays less than
3.75 percent, the additional amount will be paid directly by the Account to IDS
Life. Fees and expenses paid to IDS Life or the Investment Adviser and its
affiliates will reduce the assets of the Account for purposes of calculating the
accumulation or annuity unit value.
Property Management, Insurance Brokerage and Mortgage Brokerage
Certain of the Account's retail properties may be managed by JMB or an affiliate
of JMB such as Urban Retail Properties Co. Under property management agreements,
the company employed to manage the property usually collects the rental income
on the property and deducts its fee and the costs of operating the property such
as insurance premiums, taxes, repairs and improvements and other costs related
to the maintenance and operation of the property. The balance of rental income
is remitted to the owner of the property.
To the extent agreements are entered into with a JMB affiliate to manage the
real property investments owned directly by the Account, such agreements are
subject to the approval of IDS Life and are expected to be on terms no less
favorable to the Account than those
<PAGE>
customarily charged for similar services in the relevant geographical area. For
real property investments in which the Account owns an interest through a joint
venture, such agreements are subject to the approval of the joint venture.
JMB Insurance Agency, Inc., which is engaged in the insurance brokerage
business, may provide insurance brokerage services in connection with certain of
the Account's investments. JMB Insurance Agency, Inc. will receive commissions
and/or fees for such services at rates that are set by the insurance companies
for the classes of coverage involved. JMB or its affiliates may provide mortgage
brokerage services in connection with the financing or refinancing of certain of
the Account's real property investments. To the extent that services are
provided, such affiliates will receive a fee equal to 1 percent of the proceeds
advanced under such financing or refinancing.
JMB or its affiliates also may provide other real estate related services to the
Account. Any such additional services and the terms thereof with respect to real
estate related investments owned directly by the Account will be subject to the
approval of IDS Life.
Investment Objectives of the Account
Since the Account has experienced substantial net contract terminations over the
past several years, the Account does not intend to acquire additional real
estate related investments. Further, the Account intends to liquidate the real
estate related investments that it currently holds when it becomes advantageous
or necessary to do so. During 1996, the Account liquidated two real estate
related investments.
The investment objectives of the Account previously were to provide for payment
of retirement income under the Contracts by seeking to: (1) preserve and protect
the Account's assets in real (i.e., inflation-adjusted) terms; (2) provide for
compounding of income through reinvestment of cash flow from investments; and
(3) provide for increases in income through capital appreciation of real
property investments and, to the extent available, through participations in the
capital appreciation, gross revenues or income of the real properties subject to
mortgage loans or land sale-leasebacks. There is no guarantee that the
investment objectives of the Account will be attained. The assets of the Account
have been invested primarily in real estate related investments. The Account
previously sought to have approximately 50 percent to 70 percent of the
Account's assets invested in such income-producing real property investments as
office buildings, shopping centers, apartment complexes and other real
properties, and approximately 15 percent to 40 percent of the Account's assets
invested in mortgage loans and land sale-leaseback investments, which could
include participation in the appreciation or the gross revenues or income of the
real properties that are the subject of the mortgage loans or land
sale-leaseback investments. However, IDS Life will have the discretion to alter
such percentages in accordance with changing market conditions or under certain
other circumstances if it deems it advisable given the Account's investment
objectives and portfolio or the liquidity considerations of the Account. Other
than the diversification requirements of Section 817(h) of the Internal Revenue
Code of 1986, as amended, there are no limits on the percentage of Account
assets that may be invested in one property. See the Certain Federal Income Tax
Considerations -- Diversification Requirements section.
<PAGE>
Real Property Investments
The Account sought to diversify its investments geographically. Some of the
Account's real property investments may be owned jointly by the Account, on one
hand, and the seller of a property (or an affiliate of the seller), on the other
hand. The Account also may have entered into joint investments with affiliates
of the Investment Adviser. Such joint ownership may take the form of joint
venture partnerships, tenancies-in-common or other legal arrangements. The
Account may have acquired existing properties that are debt-financed, thereby
assuming leverage, or may have incurred indebtedness in connection with the
acquisition of such real property investments, but it is currently anticipated
that the aggregate indebtedness on all real property investments of the Account
will not exceed 50 percent of the purchase price (i.e., total consideration paid
for properties including all liens and mortgages on the properties, but
excluding points and prepaid interest) plus other initial cash payments in
connection with the purchase of all properties. However, in connection with the
refinancing of real property investments, the aggregate indebtedness of the
Account may exceed the maximum level currently contemplated. See the Risk
Factors -- Risks of Leverage section.
Types of Real Property Investments. The Account previously expected to acquire
real property investments only of the following types: shopping centers, office
buildings, multi-use complexes and other commercial properties, apartment
complexes and buildings, mobile home parks and industrial properties. The
Account does not intend to invest in agricultural properties or single family
dwellings.
To attain the Account's stated objectives, it was necessary for the Account to
acquire properties that will generate cash in excess of that required to meet
the gross operating expenses of the Account. To do this it was anticipated that
a significant portion of the Account's assets would be invested in existing real
properties that were completed at the time of commitment for purchase or
investment. The Account also may have acquired recently constructed properties
that may in some instances have been subject to agreements with sellers (or
affiliates of sellers) providing for certain minimum levels of income or funding
of cash deficits during the early years of the Account's ownership. In the event
such agreements were negotiated, there can be no guarantee that the sellers or
other parties will be able to carry out such obligations. Upon the expiration of
or default under such agreements, there can be no assurance that the Account
will be able to maintain the level of operating income that is necessary to
produce the return it was previously experiencing or anticipated.
The property acquired by the Account generally was real estate that was ready
for occupancy. Additionally, the Account may, to a lesser extent, have invested
in developmental real estate deemed consistent with the Account's objectives,
and the Account then will be subject to the risks inherent in such properties.
Mortgage Loans
Types of Mortgage Loans. Mortgage loans made by the Account may include
conventional mortgage loans that pay fixed or variable rates of interest and, to
the extent available, mortgage loans that have a participation (as defined
below).
The properties to be subject to mortgage loans were anticipated to consist of
commercial properties (such as office buildings and shopping centers),
residential properties (such as garden apartment complexes, high-rise apartment
buildings and mobile home parks) and
<PAGE>
industrial properties. The mortgage loans generally were secured by properties
with an income producing potential based on historical or projected data.
Mortgage loans generally will not be personal obligations of the borrower and
generally will not be insured or guaranteed by governmental agencies or
otherwise. The Account will not make mortgage loans to IDS Life, the Investment
Adviser or their affiliates.
First Mortgage Loans. It was expected that the Account could make first mortgage
loans secured by mortgages on existing income-producing property. Such first
mortgage loans may provide for interest-only payments and a balloon payment at
maturity.
The yield on a traditional first mortgage loan has historically been less than
that of a wrap-around mortgage loan on the same property. However, because of
innovations involving the terms and conditions of first mortgage loans, such as
the use of variable interest rates, equity participations and similar devices,
the yield on a first mortgage loan may, in certain instances, be greater than
that of a wrap-around mortgage loan on the same property.
Wrap-around Mortgage Loans. The Account also may have made wrap-around mortgage
loans on income-producing real properties that are already subject to prior
mortgage indebtedness. A wrap-around mortgage loan is one having a principal
amount equal to the outstanding balance under the prior existing mortgage loan
plus the amount actually to be advanced by the lender under the wrap-around
mortgage loan, thereby providing the owner of a property with additional funds
without disturbing the existing loan. The terms of a wrap-around mortgage loan
made by the Account typically would require the borrower to make all principal
and interest payments on the underlying loan to the Account, which in turn would
pay the holder of the existing first mortgage loan. Because the existing first
mortgage loan is preserved, the lien of the wrap-around mortgage loan is
necessarily junior to it.
Junior Mortgage Loans. The Account also may have invested in other junior
mortgage loans. Junior mortgage loans would be secured by mortgages that are
subordinate to one or more prior liens on the real property and generally, but
not in all cases, would provide for repayment in full prior to the end of the
amortization period or maturity of the senior mortgages. Recourse on such loans
would include the real property encumbered by the Account's mortgage and
additionally may, in some instances, include other collateral or personal
guarantees by the borrower or its affiliates.
The Account generally would make junior or wrap-around mortgage loans only if
the senior mortgage or mortgages, when combined with the amount of the mortgage
loan, would not exceed the maximum amount that the Account would be willing to
commit to a first mortgage loan and only under such circumstances and on such
property as to which the Account would otherwise make a first mortgage loan.
Participations. The Account sought to make mortgage loans that, in addition to
charging a base rate of interest, would include provisions permitting the
Account to participate (a participation) in the economic benefits of the
underlying property through the receipt of additional interest in the form of a
percentage of the gross or net revenues derived from operation of the property
and/or of the increase in the value of the property realized by the borrower,
such as through sale or refinancing of the property. Such arrangements also may
have involved the grant to the Account of an option to acquire the property or
an undivided interest in the property securing the loan. To the extent that the
Account negotiated the right to receive additional interest in the form of a
percentage of the gross
<PAGE>
revenues or otherwise, the current fixed cash return to the Account from such an
investment generally will be less than would otherwise be the case. The Account
generally would be entitled to such percentage participations when the gross or
net revenues derived from operation of the property exceeded a certain base
amount, which may be subject to adjustment upon an increase in real estate taxes
or other similar operating expenses. The form and extent of such additional
interest to be received by the Account would vary with each transaction
depending on such factors as the equity investment of the owner or developer of
the property, other financing or credit obtained by the owner or developer, the
fixed base interest rate on the mortgage loan by the Account, any other security
arrangement and the cash flow and pro forma cash flow from the property. It was
intended that the Account would have utilized such additional interest as a
hedge against inflation on the assumption that as prices increased in the
economy generally, the rental prices obtained by properties, such as shopping
centers or office buildings, would increase and that there should be a
corresponding increase in the value of such properties. There can be no
assurance, however, that participations will be negotiated on behalf of the
Account or, if obtained, that, even allowing for inflation, such additional
interest or increased values will in fact be received. In that event, the
Account would be entitled to receive only the fixed portion of its return.
Standards for Mortgage Loan Investments. In making mortgage loans, the
Investment Adviser would consider, among other things, a loan-to-value ratio,
operating cash income from the property, the real estate management and
operating experience of the borrower, the financial strength of the borrower,
and expectations for the property in the market. In addition, the Investment
Adviser would analyze any available historical expenses and the projected
expenses of the property, present and expected levels of rentals and occupancy
rates, general economic conditions in the area where the property is located,
competition and potential competition from other properties in the area,
compatibility with the general investment objectives of the Account and any
other factors that the Investment Adviser believed were relevant. In general,
the amount of each mortgage loan made by the Account would not exceed, when
added to the amount of any existing indebtedness, 90 percent of the estimated or
appraised value of the property mortgaged.
Investments in Land Sale-Leasebacks
A portion of the Account's investments may have consisted of real property land
sale-leasebacks. In a transaction of this type, the Account would typically
purchase the land on which income-producing improvements are constructed and
simultaneously lease the land, generally to the seller, under a long-term lease
(sometimes known as a ground lease). The Account's land sale-leasebacks would
involve properties similar to those as to which it would make mortgage loans.
Ground leases may be for terms ranging up to 99 years and may provide for
payments from the ground leases in escalating amounts.
Generally, under the terms of a ground lease, the tenant would operate, or
provide for the operation of, the property and be responsible for the payment of
all costs, including taxes, mortgage debt service, maintenance and repair of the
improvements and insurance. Upon termination of the ground lease and any
renewals thereof, the improvements may become the property of the Account,
although the ground lease may be for a substantial period of time, and there can
be no assurance as to the value of the improvements at the end of such period.
<PAGE>
The Investment Adviser often would seek to obtain for the Account, in addition
to base rents in its land sale-leasebacks, participations in the appreciation of
the improvements or the gross revenues or income therefrom. The participations
may take such forms as a percentage of the gross revenues of the ground lessee
above a base amount (which may be subject to adjustment upon an increase in real
property taxes or upon other events), a share of the proceeds of future mortgage
financings or refinancings that are not used for construction or the reduction
of existing mortgage indebtedness, a share of the proceeds from the eventual
sale of the improvements, or other interests.
The Account may have invested in land sale-leasebacks that are subordinated to
other interests in the land or improvements, such as a first or other mortgage
or lien. In those situations, the Account's land sale-leaseback interest will be
subject to greater risks. In general, the aggregate amount of such first or
other mortgage or lien and the value of the land subject to the land
sale-leaseback will not exceed 90 percent of the estimated or appraised value of
the land and improvements thereon at the time of financing. In some cases, the
Account may have granted to the ground lessee an option to acquire the land from
the Account after a period of years. The option exercise price would generally
be based upon the fair market value of the land, considering such factors as the
increase in the gross revenues from the property, the rental payments actually
received by the Account or other objective criteria reflecting the increased
value of the property. In making investments in land sale-leasebacks, the
Investment Adviser would consider factors similar to those described under the
Standards for Mortgage Loan Investments section above.
Liquid Assets
The Account may have invested certain of its assets in short-term liquid
instruments such as U.S. government securities, securities issued or fully
guaranteed by U.S. government agencies, securities issued or fully guaranteed by
states or municipalities, certificates of deposit and time or demand deposits in
commercial banks, bankers' acceptances, savings and loan association deposits,
deposits in members of the Federal Home Loan Bank System or commercial paper.
The Account also may have invested in intermediate-term bonds with maturities of
up to five years when IDS Life determined the extension of the maturity period
for the liquid assets is warranted. (For information regarding the valuation of
the liquid asset investments, see the Valuation of Assets -- Liquid Assets
section.)
Investment Restrictions
The Account may not:
1. Purchase common stock, warrants, or other equity securities or invest in
any company for the purpose of exercising control or management (except for
joint ventures or partnerships relating to real estate related investments
as described herein or except where real property is the principal asset of
a company and its acquisition can best be effected by the acquisition of
the securities of the company).
2. Engage in underwriting of securities issued by others.
3. Purchase or sell oil, gas or other mineral exploration or development
programs.
<PAGE>
These investment restrictions may be changed only by a resolution adopted by the
board of directors of IDS Life. The Account intends to make only investments
that will not result in the Account being deemed to be an investment company
under the 1940 Act.
Other Investment Policies
Borrowing Policies
It is contemplated that the Account will incur indebtedness in connection with
the purchase, improvement, development and refinancing of properties. Generally,
the Account attempted to make real property investments in which aggregate
mortgage indebtedness of all real property investments did not exceed
approximately 50 percent of the purchase price (i.e., total consideration paid
for the properties including all liens and mortgages on the properties but
excluding points and prepaid interest) plus other initial cash payments in
connection with the purchase of all properties. There can be no assurance,
however, that such a degree of leverage was obtained, and the Account may have
acquired some properties that, when completed, are owned on an unleveraged basis
or on a basis of leverage substantially in excess of 50 percent. There is no
limit on the amount of leverage that can be used to acquire any one property.
The Account also may have acquired real property investments for which no
permanent financing has been obtained and for which the Investment Adviser,
subject to market conditions, intended to obtain permanent financing on behalf
of the Account in the future. There is no assurance that the Investment Adviser
was successful in obtaining such financing on favorable terms. The proceeds of
such financings may be invested in additional investments of the Account.
The Account also may borrow in order to meet working capital or liquidity
requirements. Some of those borrowings may be secured by mortgages or liens on
real property investments or other investments made by the Account. The Account
will not obtain permanent mortgage financing from IDS Life or its affiliates,
but may obtain short-term borrowings from IDS Life or its affiliates for working
capital, liquidity or other purposes.
Borrowing requires the Account to pay interest to the lender and thus may, in
certain instances, inhibit the Account from achieving its investment objectives
and may increase the Account's risk.
In addition, to the extent that borrowing is incurred, the Account's income may
be reduced because of the need to service any such indebtedness. Also, the
amount of fees paid to IDS Life and the Investment Adviser and its affiliates
may be increased due to the fact that certain of such fees are calculated as a
percentage of the Account's assets, including those attributable to the
Account's mortgage indebtedness. See the Conflicts of Interest -- Receipt of
Commissions, Fees and Other Compensation by IDS Life, the Investment Adviser and
Affiliates section.
Joint Venture Investments
The Account may have invested in real property investments, land sale-leaseback
transactions or mortgage loans jointly with others, including affiliates of IDS
Life or the Investment Adviser, through joint venture partnerships or otherwise.
See the Conflicts of Interest -- Possible Joint Venture Investments with
Affiliates of the Investment Adviser
<PAGE>
or IDS Life section. The Account reserves the right to participate in such joint
investments either at the initiation of investment or during the time it holds
an investment.
Real Estate Related Investments
The Account has made the real estate related investments described below. Due to
the substantial net contract terminations experienced by the Account over the
past several years, the Account does not intend to acquire additional real
estate related investments. See the Risk Factors -- Liquidity Considerations
section.
Summary of Investments
The following is a table which sets forth all real estate related investments
presently made or committed to be made by the Account as of the date of this
prospectus.
<TABLE>
<CAPTION>
Real Property Investments
Long-Term
Cash payments made Indebtedness
or to be made (a) Amount Rate
- --------------------------------------- ---------------------------- ------------------- -------------------
<S> <C> <C> <C>
Shopping Centers $5,838,000 none N/A
Northridge Mall
Milwaukee, Wis. (b) . . . . . . .
Southridge Mall 6,170,000 $2,072,700 8.35%
Greendal/Greenfield
Milwaukee, Wis. (b) . . . . . . .
Office Building 9,000,000 1,143,100 6.98%
1225 Connecticut Avenue
Washington, D.C. (b) . . . . . . .
- --------------------------------------- ---------------------------- ------------------- -------------------
- - $21,008,000 $3,215,800
</TABLE>
Mortgage Loan and Land Sale-Leaseback Investment
Cash payments made
or to be made (a)
- --------------------------------------------------------------------------
Shopping Center
Monmouth Mall
Eatontown, New Jersey (b) . . . . . $11,154,000
.
(a) Includes cash down payments, amounts funded or committed to be funded for
mortgage loans, prepayment premiums, special reserves and other cash
payments made or expected to be made out of the Account's net assets but
does not include acquisition and mortgage placement fees, mortgage
financing fees and other acquisition, placement or financing costs.
(b) The interest of the Account in this investment is owned by the Account
through a joint venture. The amount shown for the property under "Cash
payments made or to be made" includes only the cash investment of the
Account in the joint venture for this investment and does not reflect any
investment by any other joint
<PAGE>
venturers in the investment owned by the joint venture. For real property
investments in which the Account has an equity interest, the amount shown
for the investment under Long-Term Indebtedness reflects the Account's
proportionate share, based upon its percent interest in the joint venture,
of the amount of financing which is encumbering the property held by the
joint venture.
The Account's investments in Northridge Mall and Southridge Mall and in the land
sale-leaseback investment and first leasehold mortgage loan secured by Monmouth
Mall have been made through two joint venture partnerships, the other partners
of which include institutional investors. The percent interest of each partner
in these two joint ventures is determined generally based on the timing and
amount of capital contributed by all partners.
The Account made a capital contribution of approximately $12,008,000 in return
for an approximate 5.92 percent interest in N/S Associates, which owns interests
in Northridge Mall and Southridge Mall, and made an initial capital contribution
of $10,000,000 in return for an approximate 6.97 percent interest in Monmouth
Associates, which owns the underlying land subject to a ground lease of, and
holds a first leasehold mortgage on, Monmouth Mall. JMB Group Trust IV, which
had been advised by an affiliate of the Investment Adviser but is currently
advised by an unaffiliated third party, owns the majority percent interest in
each of N/S Associates and Monmouth Associates.
In May 1994, Monmouth Associates agreed to finance the cost of a renovation of
Monmouth Mall. The maximum amount of the renovation loan is $29,100,000 and
through December 31, 1997, Monmouth Associates had funded approximately
$25,905,000 of the renovation loan for Monmouth Mall. Fundings of principal on
the loan have been made from cash reserves held by Monmouth Associates, cash
flow from interest and ground rent payments received from the borrower/lessee
and capital contributions made to Monmouth Associates by its partners pro rata
based upon their respective interests. The aggregate amount of capital
contributions to finance the loan, is approximately $9,830,000. The Account's
share of these capital contributions is approximately $685,000. The aggregate
amount of the renovation loan, including accrued and deferred interest of
approximately $1,300,000, is currently expected to be no greater than
$29,100,000. Remaining fundings for the renovation loan are expected to be made
from cash flow and funds currently held by Monmouth Associates. Monmouth
Associates may also be required to make certain additional loans to pay a
portion of the costs of certain tenant improvements or other ordinary capital
expenditures. In addition, Monmouth Associates may provide additional financing
to the borrower/lessee in order to pay costs to be incurred in connection with
the replacement of a department store tenant at Monmouth Mall.
The renovation is nearing completion with tenant improvement work for one of the
larger tenants and retainage work remaining. The occupancy of mall shops and
outparcel space at the shopping center as of December 31, 1997 was approximately
85 percent. However, the mall shops and outparcel space are approximately 90
percent leased.
In general, joint venture partnership agreements for N/S Associates and Monmouth
Associates provide that decisions concerning the joint ventures and their real
estate investments are to be made by the vote or approval of the joint venture
partner or partners holding a majority of the percent interests in the
respective joint ventures.
<PAGE>
Under the respective joint venture partnership agreements, in the event that one
or more, but less than all, of the joint venture partners propose to sell the
joint venture's entire interest in a real estate related investment during a
specified period commencing generally not earlier than the end of the fourth
year after the funding of the investment and ending 10 years after such funding,
each other joint venture partner not approving such sale will have a right of
first offer to purchase such investment on the terms set forth in a notice of
the proposed sale from the joint venture partners desiring such sale. If more
than one joint venture partner elects to exercise a right of first offer, each
of the joint venture partners making such election will have the right to
purchase an interest in such investment based upon the proportion of its percent
interest in the respective joint venture to the aggregate percent interests of
all joint venture partners making such election. If no joint venture partner
elects to exercise the right of first offer, the joint venture partners
approving the sale may effect such sale on behalf of the respective joint
venture for a sales price of not less than 90 percent of the proposed sales
price and on other terms at least as favorable to the respective joint venture
as those set forth in the notice of proposed sale.
In general, each joint venture partner may sell its interest in the respective
joint venture subject to each other joint venture partner's right of first
refusal to purchase the interest, and any such sale may not be made without the
consent of all other joint venture partners unless it is to be made to an
affiliate of the selling joint venture partner or to certain institutional
investors, a "Fortune 500" corporation or an affiliate thereof, or to an entity
of similar financial standing or sophistication of the foregoing or of the
selling joint venture partner.
Northridge Mall
Milwaukee, Wisconsin
Northridge Mall, located in Milwaukee, Wisconsin, was completed in 1972. The
mall shops and four adjacent department stores comprising the shopping center
contain approximately 1,013,000 square feet of gross leasable area, of which N/S
Associates owns approximately 394,000 square feet. The remaining 619,000 square
feet of gross leasable area are occupied by four department stores, three of
which own their own stores and a portion of the parking area. These four stores
are Younkers, which leases its store from an unaffiliated third party
(approximately 165,000 square feet), J.C. Penney (approximately 153,000 square
feet), Sears (approximately 148,000 square feet) and Boston Store (approximately
153,000 square feet). Existing operating covenants for occupancy of their stores
by Younkers extend through January 1999 and by Boston Store through 2000. J.C.
Penney and Sears, whose operating covenants expired in August 1992, continue to
operate their respective stores at the shopping center.
The shopping center is located on an approximate 105-acre site, of which N/S
Associates owns approximately 32 acres, at the northwest corner of West Brown
Deer Road and North 76th Street on the north side of Milwaukee. The shopping
center is a two-level center of masonry construction and contains a large center
court atrium with a fountain and skylights. The entire parking lot contains
parking for approximately 7,800 automobiles.
Real estate taxes on the portion of the shopping center owned by N/S Associates
were approximately $1,875,000 for the 1997 tax year and are estimated to be
approximately $1,800,000 for the 1998 tax year.
<PAGE>
By contesting the real estate taxes, the manager of the property was able to
achieve a reduction in real estate taxes for 1996. In 1997, real estate taxes
decreased as a result of the removal of the public school funding from the
property tax bill.
The shopping center is subject to competition from other retail properties in
the vicinity. In the opinion of the Investment Adviser, the portion of the
shopping center owned by N/S Associates is adequately insured.
The portion of the shopping center owned by N/S Associates consists of
approximately 388,000 square feet of mall space and 11,000 square feet of
storage space. The mall space is currently approximately 75 percent leased and
occupied by 90 tenants. Tenant leases for mall space have minimum terms, not
including renewal options, ranging from one to 20 years, with current annual
base rents ranging from approximately $11 to $199 per square foot. The current
average annual base rent for mall space is approximately $18.96 per square foot.
The average annual occupancy rates (based upon occupancy at the end of each
month during the year) and approximate average annual base rents per square foot
for the mall space for the past five years are as follows:
Average Annual Occupancy Average Annual Base Rent Per
Year Rate Square Foot
- ------------------ ----------------------------- -------------------------------
1993 87% $22.30
1994 80% $22.65
1995 90% $22.78
1996 80% $19.86
1997 72% $18.96
- ------------------ ----------------------------- -------------------------------
Substantially all of the leases contain provisions pursuant to which N/S
Associates is entitled to participate in tenant gross receipts above certain
minimum amounts, and most leases entitle N/S Associates to receive tenants'
contributions for operating expenses and real estate taxes. Certain of the more
recent leases provide for N/S Associates' participation in tenant gross receipts
above certain minimum amounts without receipt by N/S Associates of any specified
annual base rent or tenant contributions for operating expenses or real estate
taxes.
N/S Associates acquired its interest in the shopping center in April 1988 for a
purchase price of approximately $89,653,000 paid in cash at closing, subject to
the existing mortgage loans with a then outstanding aggregate balance of
approximately $18,454,000. At closing, N/S Associates established a reserve of
approximately $8.9 million that has been used to pay for certain capital
improvements made at the shopping center, including certain asbestos removal,
construction of a food court and center and side court improvements.
It is expected that additional asbestos removal will be undertaken from time to
time. For 1998 N/S Associates has currently budgeted approximately $401,000 for
tenant improvements and asbestos abatement for certain tenant spaces at
Northridge Mall. Such amount is expected to be paid out of the cash flow from
the property.
In February 1995, N/S Associates repaid the two mortgage loans secured by
Northridge Mall, as well as the mortgage loan secured by Southridge Mall, out of
the proceeds of a new loan in the principal amount of $35,000,000 secured by a
mortgage on Southridge
<PAGE>
Mall. In addition, approximately $2,900,000 of the net proceeds from the new
mortgage loan was used to pay tenant improvements, asbestos abatement and other
capital costs incurred for Northridge and Southridge Malls during 1995.
The portion of the shopping center owned by N/S Associates is being managed by
an affiliate of the Investment Adviser under an agreement pursuant to which it
is obligated to manage the property and collect all receipts from operations of
the property. The affiliate of the Investment Adviser is paid an annual fee
equal to 3.75 percent of the gross receipts of the property plus reimbursement
of certain direct expenses in connection with the management of the property.
Northridge Mall has been adversely affected by a perception that it is an unsafe
place to shop. This perception has resulted in declining sales and occupancy
over the past several years. Compounding the problem of declining sales are the
high operating costs for tenants due to the high real estate taxes at the
shopping center. By contesting the real estate taxes, the manager of the
property was able to achieve a reduction in taxes in 1996 and 1995. Occupancy
has also been affected by continuing tenant bankruptcies. To counter the
negative image for Northridge Mall, N/S Associates made certain capital
improvements including parking lot lighting and improved interior lighting, and
implemented operational programs to improve the shopping center's safety and
appearance, as well as instituted certain marketing efforts to enhance its
image. In addition, N/S Associates continues to seek to increase occupancy by
aggressively marketing space for new and renewal tenants through leasing
incentives, as well as cooperating with existing tenants who need short-term
rent reductions in order to maintain occupancy of their space. Certain positive
sales trends appear to indicate a modest improvement, however, elimination of
the negative perception is expected to take some time.
The following is a schedule of expiration of leases (exclusive of storage space
and assuming no renewals or cancellations) as of Dec. 31, 1997:
Year of
Expiration Number of Square
of Leases Tenants Feet
- ---------------------- ----------------- ------------------
1998 . . . . . . . . 34 90,172
1999 . . . . . . . . 24 55,034
2000 . . . . . . . . 10 13,110
2001 . . . . . . . . 12 20,239
2002 . . . . . . . . 11 16,607
2003 . . . . . . . . 5 17,780
2004 . . . . . . . . 5 14,335
2005 . . . . . . . . 4 13,754
2006 . . . . . . . . 6 16,629
2007 . . . . . . . . 2 6,759
2008 . . . . . . . . 5 21,763
- ---------------------- ----------------- ------------------
<PAGE>
Southridge Mall
Greendale/Greenfield (Milwaukee),
Wisconsin
Southridge Mall, completed in 1970, is located in the Village of Greendale and
City of Greenfield south of Milwaukee, Wisconsin. The mall shops and five
adjacent department stores comprising the shopping center contain approximately
1,250,000 square feet of gross leasable area, of which N/S Associates owns
approximately 430,000 square feet, including the space leased to Kohl's
Department Store, one of the anchor tenants, and approximately 2,000 square feet
of storage space. The remaining approximately 820,000 square feet of gross
leasable area are occupied by four department stores, three of which own their
own stores and a portion of the parking area. These four stores are Younkers,
which leases its store from an unaffiliated third party (approximately 210,000
square feet), Boston Store (approximately 219,000 square feet), Sears
(approximately 215,000 square feet) and J.C. Penney (approximately 176,000
square feet). Existing operating covenants for occupancy of their stores by
Younkers extend through January 1999 and by Boston Store through 2000. J.C.
Penney and Sears, whose operating covenants have expired, continue to operate
their respective stores at Southridge Mall.
The shopping center is located on an approximately 105-acre site, of which N/S
Associates owns approximately 34 acres, at the intersection of West Grange
Avenue and South 76th Street in Milwaukee County. It is a two-level center of
masonry construction and contains a large center court atrium with a fountain
and skylights. The entire parking lot contains parking for approximately 7,223
automobiles.
Real estate taxes on the portion of the shopping center owned by N/S Associates
were approximately $3,502,000 for the 1997 tax year and are estimated to be
approximately $3,511,000 for the 1998 tax year. By contesting the real estate
taxes, the manager of the property was able to achieve a reduction in real
estate taxes for 1996.
The shopping center is subject to competition from other retail properties in
the vicinity. In the opinion of the Investment Adviser, the portion of the
shopping center owned by N/S Associates is adequately insured.
The portion of the shopping center owned by N/S is approximately 97 percent
leased and occupied by 99 tenants. During the third quarter of 1995 N/S
Associates and Kohl's entered into an amendment of its lease. Pursuant to the
lease amendment, the term of Kohl's lease has been extended from 2001 until 2015
and the tenant space has been increased by approximately 19,000 square feet to
approximately 85,000 square feet, exclusive of storage space. Kohl's is required
to pay annual base rent of $9.25 per square foot, as well as one-half of its pro
rata share for real estate taxes and a fixed amount for common area maintenance
expense. Kohl's is also obligated to pay as additional rent a percentage of its
gross receipts in excess of a minimum amount of annual sales which was
determined after the tenant occupied the entire leased space. N/S Associates was
responsible for paying the costs of asbestos removal for the tenant space, which
is complete as of Dec. 31, 1997. Kohl's was obligated to pay other costs
associated with the leased space, including tenant improvements and lease
buy-out and relocation costs of other tenants. The lease amendment also contains
an operating covenant pursuant to which Kohl's is obligated to operate its
retail store at Southridge Mall until 2005, subject to earlier termination under
certain circumstances. Although the lease amendment reduces Kohl's overall rent,
the expansion of its space and the extension of its lease term is expected to
stabilize the shopping center on a long-term basis by ensuring Kohl's
<PAGE>
continued occupancy and therefore its continued contribution to customer
traffic. Other tenant leases (exclusive of storage space) have minimum terms,
not including renewal options, ranging from 3 to 15 years, with current annual
base rents ranging from approximately $11.00 to $225.00 per square foot. The
current average annual base rent for mall space is approximately $20.87 per
square foot.
The average annual occupancy rates (based upon occupancy at the end of each
month during the year) and approximate average annual base rents per square foot
for tenant space (inclusive of Kohl's Department Store but exclusive of storage
space) for the past five years are as follows:
Average Annual Occupancy Average Annual Base Rent Per
Year Rate Square Foot
- ------------------ ----------------------------- -------------------------------
1993 90% $21.20
1994 91% $20.90
1995 95% $20.40
1996 90% $23.79
1997 95% $20.87
- ------------------ ----------------------------- -------------------------------
Substantially all of the leases contain provisions pursuant to which N/S
Associates is entitled to participate in tenant gross receipts above certain
minimum amounts and to receive tenants' contributions for operating expenses and
real estate taxes. N/S Associates acquired its interest in the shopping center
in April 1988 for a purchase price of approximately $96,865,000 paid in cash at
closing, subject to the existing first mortgage loan with a then outstanding
balance of approximately $18,536,000. N/S Associates established a reserve of
approximately $7,250,000 which has been used for certain capital improvements at
the shopping center including, among other things, asbestos abatement and center
and side court improvements. For 1998, N/S Associates has currently budgeted
approximately $1,309,000 for tenant improvements, asbestos abatement and capital
improvements at Southridge Mall. Such amount is expected to be paid out of the
cash flow from the property.
In February 1995, N/S Associates repaid the mortgage loan secured by Southridge
Mall, as well as the two mortgage loans secured by Northridge Mall, out of the
proceeds of a new loan in the principal amount of $35,000,000 secured by a
mortgage on Southridge Mall. In addition, approximately $2,900,000 of net
proceeds from the new mortgage loan were used to pay for tenant improvements and
other capital costs incurred for Northridge and Southridge Malls. The new
mortgage loan has a term of seven years, bears interest at 8.35 percent per
annum and requires monthly payments of interest only aggregating approximately
$2,923,000 per annum prior to maturity in February 2002, when the entire
principal amount and any accrued and unpaid interest will be due and payable.
The new mortgage loan permits only a prepayment in full, subject to the payment
of a premium of the greater of 1 percent of the outstanding principal balance of
the loan and an amount calculated pursuant to a defined yield maintenance
formula. The remedies under the new mortgage loan are generally limited to the
property securing the loan.
The portion of the shopping center owned by N/S Associates is being managed by
an affiliate of the Investment Adviser under an agreement pursuant to which it
is obligated to manage the property and collect all receipts from operations of
the property. The affiliate of the Investment Adviser is paid a fee equal to
3.75 percent of the gross receipts of the property plus reimbursement of certain
direct expenses in connection with the management of the property.
<PAGE>
The following is a schedule of expiration of leases (inclusive of Kohl's
Department Store but exclusive of storage space and assuming no renewals or
cancellations) as of Dec. 31, 1997:
Year of
Expiration Number of Square
of Leases Tenants Feet
- ---------------------- ----------------- ------------------
1998 . . . . . . . . 24 66,192
1999 . . . . . . . . 7 19,570
2000 . . . . . . . . 20 42,859
2001 . . . . . . . . 23 50,787
2002 . . . . . . . . 10 17,690
2003 . . . . . . . . 9 32,651
2004 . . . . . . . . 8 27,154
2005 . . . . . . . . 9 21,072
2006 . . . . . . . . 9 25,367
2007 . . . . . . . . 5 13,374
2008 . . . . . . . . 7 21,245
2009 . . . . . . . . 1 7,507
2015 . . . . . . . . 1 85,247
- ---------------------- ----------------- ------------------
Monmouth Mall
Eatontown, New Jersey
In October 1988 Monmouth Associates (i) acquired certain land underlying a super
regional shopping center in Eatontown, New Jersey known as Monmouth Mall, (ii)
leased the land to the owner of the shopping center pursuant to a long-term
ground lease, and (iii) made a first mortgage loan to the owner of the shopping
center secured by the leasehold estate and the improvements thereon. The
borrower under the first leasehold mortgage loan and lessee under the ground
lease (hereinafter the "borrower/lessee") is a partnership whose partners are
not affiliated with Monmouth Associates or any of its joint venture partners.
The shopping center is being reconfigured in connection with the renovation
discussed below. Upon completion of the renovation, the shopping center will
contain approximately 1,503,000 square feet of gross leasable area, of which
approximately 614,000 square feet will consist of mall shops (approximately
470,000 square feet), a fifteen screen cinema (approximately 77,000 square
feet), outparcel buildings (approximately 17,000 square feet) and storage and
basement area (approximately 50,000 square feet). The remaining gross leasable
area includes four department stores, which are Macy's (approximately 262,000
square feet), J.C. Penney (approximately 203,000 square feet), Abraham & Straus
(approximately 265,000 square feet) and Lord & Taylor (approximately 159,000
square feet). Existing operating covenants of the anchor department stores for
reimbursement of a specified amount of common area maintenance expenses and
operation of a retail business at their stores (which may be different from the
current retail business), generally extend to 1998 for Abraham & Straus, 2005
for Macy's and Lord & Taylor, and 2006 for J.C. Penney, with certain option or
renewal rights thereafter in favor of Abraham & Straus and Lord & Taylor.
<PAGE>
Federated Department Stores completed its merger with Macy's. Macy's covenant to
operate a department store (in addition its covenant to operate a retail
business) expired in 1995. Preliminary discussions with Macy's continue
regarding a possible extension of their operating covenant, but there can be no
assurance any such extension will be finalized. The Macy's store continues to
operate at Monmouth Mall.
The shopping center is located on an approximately 104-acre site located at the
intersection of Routes 35 and 36 and Wyckoff Road in Eatontown, New Jersey.
Macy's owns its own department store and approximately 2 acres of underlying
land, and J.C. Penney owns its own store and approximately 12 acres of
underlying land. The remaining approximately 90 acres of land underlying the
shopping center were acquired by Monmouth Associates subject to the right of
Stern's to acquire the land underlying its store. Stern's, which currently
leases its store and the approximately 14 acres of underlying land for nominal
base rent, has the right to acquire the underlying land at any time after 1998
and to acquire its store at any time after 2028, in each case for nominal
consideration. The shopping center is a multi-level super regional center
constructed of structural steel framing with concrete block facing. The entire
parking lot (a portion of which is owned by certain of the department stores)
contains combined surface and deck parking for approximately 8,225 automobiles.
The Lord & Taylor lease provides for annual base rent of approximately $60,000
and an initial term of 16 years ending in 2006 with six 10-year renewal options
at the same annual base rent. Each of Lord & Taylor and Stern's pays a
percentage of its gross receipts above a certain minimum amount as well as a pro
rata share of the real estate taxes as additional rent. Sony Theaters operates
the cinema under a lease that commenced in 1994 and provides for an initial term
of 21 years with a current annual base rent of approximately $711,000 with
specified periodic increases. The lease also requires the tenant to pay a
specified amount of operating expense reimbursements and a pro rata share of the
real estate taxes, as well as a percentage of its gross receipts above a certain
minimum amount as additional rent. The lease also provides for five 5-year
renewal options with specified increases in annual base rent. In addition to its
own department store, Macy's also leases approximately 36,400 square feet of
space from the borrower/lessee for its children's store at the shopping center.
Real estate taxes on the portion of the shopping center owned by the
borrower/lessee were approximately $2,356,000 for the 1997 tax year and are
budgeted to be approximately $2,426,000 for the 1998 tax year. The shopping
center is subject to competition from other retail properties in the area,
including an approximately 1,300,000 square foot shopping center that opened in
the general vicinity in August 1990. In the opinion of the Investment Adviser,
the portion of the shopping center owned by the borrower/lessee is adequately
insured.
The mall shops and outparcel space at the shopping center are currently 90
percent leased by 155 tenants with current annual base rents ranging from
approximately $2 to $225 per square foot and a current average annual base rent
of approximately $23.64 per square foot. Leases for mall shops and outparcel
space have minimum terms, not including renewal options, ranging from 5 to 15
years. Due to the renovation of the shopping center discussed below, the current
occupancy of the mall shops and outparcel space is approximately 85 percent. The
average annual occupancy rates (based upon occupancy at the end of each month
during the year) and approximate average annual base rents per square foot for
the mall shops and outparcel space for the past five years are as follows:
<PAGE>
Average Annual Occupancy Average Annual Base Rent Per
Year Rate Square Foot
- ------------------ ----------------------------- -------------------------------
1993 81% $19.95
1994 67% $21.40
1995 69% $24.76
1996 75% $24.90
1997 85% $23.64
- ------------------ ----------------------------- -------------------------------
Substantially all of the leases contain provisions pursuant to which tenants are
required to pay specified percentages of their gross receipts above certain
minimum amounts as additional rent and to pay their pro rata share of the
operating expenses and real estate taxes of the shopping center.
The Limited owns a number of apparel store tenants who have the following leases
of mall space at Monmouth Mall:
<TABLE>
<CAPTION>
Square Current Annual Base Original
Tenant Feet Rent Term
- ------------------------------------------- ----------------- ---------------------- -----------------------
<S> <C> <C> <C>
The Limited 8,470 $199,045 12 years
The Limited Too 3,952 92,872 12 years
Lerner New York 7,045 140,900 12 years
Compagnie International Express 10,957 128,745 12 years
Structure 5,849 137,451 12 years
Victoria's Secret 6,908 162,338 12 years
Lane Bryant 4,137 60,000 13 years
Mozzarellas Cafe 5,051 114,425 15 years
- ------------------------------------------- ----------------- ---------------------- -----------------------
</TABLE>
In October 1988, Monmouth Associates (i) purchased approximately 88.5 acres of
land underlying the shopping center (subject to the right of Stern's to acquire
the approximately 14 acres underlying its store) for $13,000,000 paid in cash;
(ii) leased the land back to the borrower/lessee pursuant to a long-term ground
lease; and (iii) made a first mortgage loan in the principal amount of
$128,920,000 to the borrower/lessee secured by the leasehold estate and the
improvements thereon. The ground lease, which has a term of 75 years commencing
in October 1988 (subject to earlier termination in the event of a sale of the
land as described below), provides for monthly base rent aggregating $1,170,000
annually with minimum payments of $650,000. The ground lease also provides for
contingent rent (payable quarterly out of the excess, if any, of substantially
all of the gross receipts from the operations of the shopping center received by
the borrower/lessee over certain base amounts) equal to the sum of (x) a
specified annual amount (commencing in the fourth lease year at $390,000 per
annum and increasing in the sixth lease year to $520,000 per annum), increased
until paid at the "applicable rate" of interest payable under the first
leasehold mortgage loan described below (such amount as so increased herein
called the "rent shortfall amount"), plus (y) 15 percent of the balance of such
excess gross receipts remaining after deducting the aggregate amount paid at
such time of the rent shortfall amount under the ground lease and the "interest
shortfall amount" under the first leasehold mortgage loan as described below.
<PAGE>
The first leasehold mortgage loan has a term of 15 years to October 2003, which
may be extended from time to time at the option of Monmouth Associates for up to
an additional 20 years, subject to acceleration of the loan in the event of a
joint sale of the property or a purchase by either Monmouth Associates or the
borrower/lessee of the other party's entire interest in the property.
The first leasehold mortgage loan provides for monthly payments of base interest
at a base rate of 5.98 percent per annum for the first two loan years, 7.97
percent per annum for the third loan year and 5 percent per annum for each loan
year thereafter. The first leasehold mortgage loan also provides for quarterly
payments of contingent interest (payable out of the excess, if any, of
substantially all of the gross receipts from the operations of the shopping
center received by the borrower/lessee over certain base amounts) equal to the
sum of (x) the difference between the amount of interest payable on the loan at
the "applicable rate" and that payable at the base rate described above,
increased until paid at the applicable rate (such amount as so increased herein
called the "interest shortfall amount"), plus (y) 45 percent of the balance of
such excess gross receipts remaining after deducting the aggregate amount paid
at such time of the rent shortfall amount under the ground lease and the
interest shortfall amount under the first leasehold mortgage loan. The
"applicable rate" under the loan is 5.98 percent per annum for the first two
loan years, 7.97 percent per annum for the next three loan years and 8.97
percent per annum for each loan year thereafter.
In May 1994, Monmouth Associates agreed to finance the cost of a renovation of
Monmouth Mall. The maximum amount of the renovation loan is $29,100,000 and as
of December 31, 1997 fundings of $25,905,000 have been made. Certain of the
fundings for the renovation loan have been made out of cash reserves and the
cash flow of Monmouth Associates as well as out of additional capital
contributions to Monmouth Associates made pro rata based upon the respective
interests of its joint venture partners. The Account's share of such additional
capital contributions would be approximately $727,000 based on its approximate
6.97 percent interest in Monmouth Associates of which $685,000 had been
contributed as of December 31, 1997. The renovation of the shopping center
includes, among other things, the addition of a food court and cinema and the
re-merchandising of approximately 300,000 square feet of space and was
substantially completed in December 1995.
The renovation loan will mature contemporaneously with the first leasehold
mortgage loan in October 2003, subject to (i) acceleration in the event of
default or certain other events, including a joint sale of the entire fee and
leasehold interests in Monmouth Mall, or (ii) extension of the loan maturity by
Monmouth Associates under certain circumstances for up to 20 years on the same
loan terms prior to the extension (other than the maturity date). The renovation
loan is secured by a leasehold mortgage subordinated to the leasehold mortgages
securing the first leasehold mortgage loan and certain other loans made for
tenant improvements or other ordinary capital expenditures and is
cross-defaulted with those loans as well as the ground lease. The remedies under
the renovation loan are generally limited to the property securing the
obligation. Payment of principal and accrued interest of the renovation loan is
subordinated to the payment of certain other amounts payable to Monmouth
Associates in connection with the ground lease and the first leasehold mortgage
loan.
Under the terms of the ground lease, as amended in connection with the
renovation loan, upon a joint sale or refinancing of the land and the
improvements thereon, Monmouth Associates generally will be entitled to receive
out of the proceeds of such sale or
<PAGE>
refinancing the sum of (a) any accrued and unpaid rent shortfall amount plus
$13,000,000 (and any other amounts invested in the land), plus (b) after payment
of principal and any accrued and unpaid base interest on the first leasehold
mortgage loan and the renovation loan, the return to the borrower/lessee of
payments made to cover any cost overruns in connection with the renovation, and
payment of any outstanding additional loans by Monmouth Associates and any
advances by the borrower/lessee to pay the cost of certain capital or tenant
improvements described below, together with any accrued and unpaid interest
thereon, 17.5 percent of such remaining sale or refinancing proceeds until
Monmouth Associates has received aggregate payments under the ground lease equal
to an internal rate of return of 11 percent per annum on its investment in the
land, plus (c) thereafter, 12.5 percent of any such remaining sale or
refinancing proceeds. In general, the remedies under the ground lease are
limited to the property securing such obligation.
Under the terms of the first leasehold mortgage loan, as amended in connection
with the renovation loan, upon a joint sale or refinancing of the land and the
improvements thereon, Monmouth Associates will be entitled to receive out of the
proceeds of such sale or refinancing, after deducting the accrued and unpaid
rent shortfall amount plus $13,000,000 (and any other amounts invested in the
land) payable to Monmouth Associates pursuant to the terms of the ground lease,
the sum of (a)(i) any accrued and unpaid interest shortfall amount, (ii) the
outstanding principal amount of the first leasehold mortgage loan plus any
accrued and unpaid base interest thereon, and (iii) after repayment of the
outstanding principal amount of the renovation loan, and any accrued and unpaid
interest thereon, the return to the borrower/lessee of payments made to cover
any cost overruns in connection with the renovation, and repayment of any
additional loans by Monmouth Associates and any advances by the borrower/lessee
to pay the cost of certain capital or tenant improvements described below,
together with any accrued and unpaid interest thereon, 52.5 percent of such
remaining sale or refinancing proceeds until Monmouth Associates has received
aggregate payments under the first leasehold mortgage loan equal to an internal
rate of return of 11 percent per annum on the principal amount of such loan,
plus (b) thereafter, 37.5 percent of any such remaining sale or refinancing
proceeds. In the event that the loan continues until its stated maturity date
(as it may be extended from time to time) without a joint sale of the property
or a sale of Monmouth Associates' entire interest in the property, Monmouth
Associates will be entitled to receive an amount that would provide it the same
consideration payable to it as the first leasehold mortgage lender (but not as
the ground lessor) under a joint sale of the property described above, assuming
that the property were sold for its appraised fair market value. Aggregate
interest payable may not exceed a specified simple interest rate per annum. In
general, except for a prepayment in connection with a joint sale of the property
or a sale to the borrower/lessee of Monmouth Associates' entire interest in the
property as described below, no prepayment of the first leasehold mortgage loan
may be made. In general, the remedies under the first leasehold mortgage loan
are limited to the property securing such obligation. The borrower/lessee is
obligated, at its own expense, to remove any asbestos from the portion of the
shopping center owned by the borrower/lessee under certain circumstances.
Monmouth Associates also is required to make other additional loans to finance
the cost of 60 percent of tenant improvements or other ordinary capital
expenditures that exceed the amounts reserved by the borrower/lessee for such
expenditures, provided that the borrower/lessee advances the remaining 40
percent of such expenditures. The interest payable on any such additional loans
(as well as on any advances made by the borrower/lessee) is to be at the greater
of the applicable rate under the first leasehold mortgage loan as in effect from
time to time or the market rate of interest charged by
<PAGE>
institutional lenders for similar loans. These additional loans generally
require payments of interest only until maturity of the first leasehold mortgage
loan (including any extension thereof described above), at which time the
outstanding principal and any accrued and unpaid interest under the additional
loans will be due and payable. The additional loans may be prepaid prior to
maturity without a prepayment charge. Pursuant to such requirements, Monmouth
Associates has loaned the borrower/lessee an aggregate of approximately
$3,085,000 at fixed interest rates ranging from 8.25 percent to 10.5 percent per
annum in connection with the cost of tenant improvements and ordinary capital
expenditures, including tenant lease expenditures and termination payments. In
connection with the termination of a previous department store lease, Monmouth
Associates has advanced an additional $1,250,000 as an expansion/renovation
loan, which together with accrued interest through October 1991, bears interest
at 13 percent per annum, and has permitted the borrower/lessee to defer payment
of approximately $729,000 of base interest, which also bears interest at 13
percent per annum on the deferred amount. These loan amounts have been advanced
out of interest and lease payments received under the first leasehold mortgage
loan and ground lease along with the reserves of Monmouth Associates.
The mortgage loan and renovation loan, as well as the ground lease, all
discussed above, accrue interest at a higher rate than the actual cash payments
of interest. In April 1992 Monmouth Associates put these loans on non-accrual,
based on the uncertainty as to the collectibility of such contingent interest.
During 1995, accrued interest, from the periods prior to April 1992, totaling
$3,576,000 was written off due to the uncertainty as to collectibility of these
accrued amounts.
Under the terms of the ground lease, at any time after October 2001 Monmouth
Associates has the right, and at any time after October 2002 the borrower/lessee
has the right, to cause a joint sale of the land and the portion of the shopping
center owned by the borrower/lessee, subject to the right of first refusal of
the other party to the ground lease to acquire the entire interest in the
property of the party proposing such joint sale. In the event that the first
leasehold mortgage loan continues until its stated maturity date (including any
extension of such maturity date described above), the borrower/lessee has the
option to purchase Monmouth Associates' interest in both the land and the first
leasehold mortgage loan for an aggregate amount that would provide Monmouth
Associates the same consideration payable to it as ground lessor and first
leasehold mortgage lender under a joint sale of the property described above,
assuming that the property were sold for its appraised fair market value.
In general, except for certain transfers by Monmouth Associates to an affiliate,
each of Monmouth Associates and the borrower/lessee may only transfer its entire
respective interest in the property (including its interest in the first
leasehold mortgage loan), subject to the consent of the other party and the
other party's right of first refusal to acquire such interest. In general,
neither Monmouth Associates nor the borrower/lessee may transfer a portion of
its interest in the property.
The portion of the shopping center owned by the borrower/lessee is being managed
by an affiliate of the borrower/lessee under a long-term agreement pursuant to
which it is obligated to manage the property and collect all receipts from
operations of the property for a fee equal to 3.5 percent of the base and
percentage rents from the property. In addition, the manager is entitled to
compensation for leasing and re-leasing services at the shopping center.
<PAGE>
1225 Connecticut Avenue
Washington, D.C.
In May 1990 the Account acquired an interest in a newly formed Delaware
corporation (the Corporation) owned jointly with certain other persons, as
described below. The Corporation has acquired an office building located in
Washington, D.C. known as 1225 Connecticut Avenue, N.W. (1225 Connecticut), an
eight-story reinforced concrete frame building containing 183,530 square feet of
rentable office space, 18,438 square feet of rentable retail space, 6,416 square
feet of below grade storage space and 100,024 square feet of subsurface parking
space for over 300 automobiles. The building, which was completed in 1968, is
located on an approximately 33,000 square foot site that fronts Connecticut
Avenue, 18th Street and "N" Street, N.W.
The office and retail space of 1225 Connecticut is currently 100 percent leased
and 95 percent occupied under leases having original minimum terms (not
including renewal options) which vary in duration from 5-1/2 to 12 years with
current annual base rents ranging from approximately $17.50 to $48.90 per
rentable square foot. The current average annual base rent for the office and
retail space is approximately $33.69 per square foot. The storage space is
currently 100 percent leased and occupied under leases having original minimum
terms (not including renewal options) that vary in duration from 5 to 12 years
with the current annual base rents ranging from approximately $11.05 to $15.00
per square foot. The current average annual base rent for the storage space is
approximately $11.30 per square foot. The average annual occupancy rates (based
upon occupancy at the end of each month during the year) and approximate average
annual base rents per square foot for the office and retail space for the past
five years are as follows:
Average Annual Occupancy Average Annual Base Rent Per
Year Rate Square Foot
- ------------------ ----------------------------- -------------------------------
1993 95% $28.60
1994 96% $32.60
1995 100% $30.29
1996 100% $33.69
1997 98% $35.34
- ------------------ ----------------------------- -------------------------------
Substantially all of the office and retail leases contain provisions, subject to
certain limitations, requiring tenants to pay, in addition to their annual base
rent, their pro-rata share of real estate taxes and operating expenses over
certain base amounts. In addition, leases covering a majority of the office and
retail space contain provisions, subject to certain limitations, pursuant to
which rents may be increased based upon changes in a consumer price index from a
base year.
Ernst & Young currently leases approximately 87 percent of the office space.
Effective January 1, 1995 per the terms of the Third Amendment to the Ernst and
Young lease, the lease term of the fourth floor premises consisting of 26,328
square feet was amended to expire on June 30, 2007. In addition, the amendment
modified the monthly base rent to $33.82 per average square foot for the total
leased premises of 159,664 square feet. Effective August 1, 1995, Ernst and
Young entered into a Fourth Amendment to occupy 2,023 square feet of retail
space to expire June 30, 2007. Effective March 16, 1998 Ernst
<PAGE>
and Young entered into a Fifth Amendment to occupy an additional 9,909 square
feet of space. As a result, the Ernst & Young leases generally are as follows:
<TABLE>
<CAPTION>
Square Current Annual Base Rent Expiration
Tenant Feet Date
- ----------------------------- ------------------------- -------------------------- -------------------------
<S> <C> <C> <C>
Ernst & Young: 1,676 $17.50 June 2007
Ground Floor
2nd. 4th, 5th, 6th, 177,242 34.00 June 2007
7th, & 8th floors
Retail Space 2,023 24.00 June 2007
- ----------------------------- ------------------------- -------------------------- -------------------------
</TABLE>
In connection with the extension and expansion of its leases, Ernst & Young
received certain leasing incentives, including a tenant improvement allowance
and a rent credit for its fourth floor space for a portion of the lease term
commencing in 1995. The primary lease for Ernst & Young covers approximately
177,242 square feet of space, not including the ground floor and retail space.
The real estate and vault taxes on 1225 Connecticut were approximately $859,000
for the tax year ended September 30, 1997. Such taxes are expected to be
approximately $848,000 for the tax year ended September 30, 1998. 1225
Connecticut is subject to competition from several other commercial projects in
its vicinity, including a number of office buildings owned by entities either
sponsored or advised by an affiliate of the Investment Adviser. In the opinion
of the Investment Adviser, the building is adequately insured.
The Corporation has elected to qualify as a real estate investment trust (REIT)
pursuant to sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the Code). For each taxable year that the Corporation qualifies as a
REIT, the Corporation in general will not be subject to federal corporate income
tax or the District of Columbia corporate franchise tax on its regular taxable
income and will not be taxable on long-term capital gain income to the extent
its income is distributed as dividends. If the Corporation were to fail to
qualify as a REIT, it would be taxed at rates applicable to corporations on its
taxable income, whether or not distributed. Because it is a corporation, it will
not be subject to the District of Columbia franchise tax on unincorporated
businesses, which is imposed on any trade or business conducted within the
District by an unincorporated person, including a partnership.
The Account owns approximately 16.3 percent of the outstanding shares of common
stock of the Corporation. Approximately 44 percent of the outstanding shares of
common stock of the Corporation are owned by a publicly held real estate limited
partnership affiliated with the Investment Adviser. There is no other class of
stock of the Corporation authorized or outstanding, and no other shares of
common stock may be issued without the consent of shareholders owning at least
96 percent of the then outstanding shares of common stock of the Corporation.
The major shareholders of the Corporation (including the Account) owning in
excess of 99 percent of the Corporation's outstanding stock have entered into a
shareholders' agreement which provides, among other things, that upon a proposed
sale of shares the non-selling major shareholders shall have a right of first
refusal to buy out the selling major shareholders' shares in the Corporation;
the approval of shareholders owning at least 96 percent of the outstanding
common stock of the Corporation is required to make certain major decisions;
and, in the event of a disagreement regarding a proposed sale of 1225
Connecticut, the major shareholders not desiring to sell would have a right of
first refusal to purchase the other major
<PAGE>
shareholders' shares in the Corporation and if all of such shares are not
acquired pursuant to the exercise of such right of first refusal, the
Corporation may conclude a sale of the property.
The Corporation purchased 1225 Connecticut from the seller for a purchase price
of approximately $54,125,000, consisting of $51,425,000 paid in cash and
approximately $2,700,000 of mortgage indebtedness then encumbering the property.
In connection with the acquisition of the property, the Corporation paid
approximately $2,130,000 for real estate brokerage commissions to an independent
third party and certain closing costs. The Account contributed $9,000,000 for
its interest in the Corporation.
In January 1994 the Corporation refinanced its mortgage loan, which had an
outstanding principal balance of approximately $1,667,000 at the time of
refinancing, with a new first mortgage loan in the principal amount of
$7,000,000 that bears interest at 6.98 percent per annum. The new loan requires
monthly payments of interest only aggregating $488,600 per annum until maturity
in February 2001 when the entire outstanding principal amount together with
accrued interest will be due and payable. Under certain circumstances, the
principal amount of the loan may be prepaid in whole (but not in part), subject
to a prepayment premium based upon the present value of the difference, if any,
between the remaining scheduled monthly payments on the loan at the date of
prepayment and the amount such monthly payments would be if the interest rate on
the loan were equal to the yield on a U.S. government security with a comparable
maturity date. Pursuant to the deed of trust securing the mortgage loan, the
Corporation is prohibited from modifying Ernst & Young's primary lease or from
entering into certain other tenant leases without the lender's consent. Prior to
selling the property or encumbering the property with any additional debt, the
Corporation must obtain the consent of the lender, which may be arbitrarily
withheld. However, subject to certain restrictions, the Corporation has a
one-time right to transfer title to the property together with an assumption of
the mortgage loan. The excess net proceeds from the refinancing in the amount of
approximately $5,300,000 were used to pay a substantial portion of the costs for
lobby and other common area renovation costs, a sprinkler system and certain
tenant improvement costs related to the Ernst & Young lease extension.
The property is being managed under an agreement pursuant to which the manager
is obligated to manage 1225 Connecticut, collect all of the receipts from
operations and, to the extent available from such receipts, pay all of the
expenses of the property. The manager is paid a fee equal to 2.5 percent of the
gross revenues of the property, plus reimbursement for certain direct expenses
of the manager. The property had been managed by JMB Properties Company, an
affiliate of the Investment Adviser, until December 1994, when JMB Properties
Company sold substantially all of its assets to an unaffiliated third party, and
certain management personnel of JMB Properties Company became management
personnel of the third party. As a result of sale, the successor to JMB
Properties Company's assets now acts as manager of 1225 Connecticut on the same
terms that existed prior to the sale.
1225 Connecticut leases approximately 87% of the available space of the property
to one tenant under leases, all with terms of 12 years. For the year ended
December 31, 1997 such tenant represented approximately 74% of total revenues.
<PAGE>
An unaffiliated third party leases and operates the entire parking garage
(subject to certain parking rights provided for tenants of the property) for a
term extending until November 2000. The lease provides for a fixed rent payment
of $577,560 a year and provides that the lessee shall pay the operating expenses
of the parking garage, but does not provide such lessee with an option to extend
the term of the lease.
The following is a schedule of expiration of leases for office and retail space
(assuming no renewals or cancellations) as of Dec. 31, 1997:
Year of
Expiration Number of Square
of Leases Tenants Feet
1998 2 5,666
2000 . . . . . . . . 2 17,384
2001 . . . . . . . . 1 3,026
2005 . . . . . . . . 1 5,263
2007 . . . . . . . . 9 188,929
- ---------------------- ----------------- ------------------
For a description of all types of fees and compensation payable by the Account
to IDS Life or the Investment Adviser in connection with the acquisition or
placement of real estate related investments on behalf of the Account, see
Compensation of IDS Life, the Investment Adviser and their Affiliates in
Connection with Real Estate Related Services under the Description of the
Investment Adviser and Affiliates section.
For further information regarding the Account's real estate related investments
and their operations see the Management's Discussion and Analysis of Financial
Condition and Results of Operations section.
Risk Factors
There are certain risk factors that may affect owners participating in the
Account or the Account's investments.
General Risks of Real Property Investments
The real property investments will be subject to the risks generally incident to
the ownership of real property, including the uncertainty of cash flow to meet
obligations, adverse changes in national economic conditions, changes in the
investment climate for real estate, adverse changes in local market conditions
due to changes in general or local economic conditions and neighborhood
characteristics, changes affecting rental rates and property values arising from
changes in interest rates and in the availability, cost and terms of mortgage
funds, the need for unanticipated renovations, particularly in older structures,
changes in real estate tax rates and other operating expenses, adverse changes
in governmental rules and fiscal policies, acts of God such as earthquakes or
other natural disasters or man-made events such as environmental hazards (that
may result in uninsured losses), the financial condition of the sellers and
tenants of properties and other factors that are beyond the control of the
Account. The holding of real estate is also subject to increases in the cost of
ownership. For example, unexpected increases in the cost of energy that could
not be passed through to tenants could reduce the operating income for some
properties. Currently, earthquake insurance coverage for the full value of real
properties is generally not available on economic terms. Earthquake insurance
for the Account's real property investments is generally provided under a
blanket policy that
<PAGE>
includes coverage for various properties in which the Account or entities
affiliated with, or sponsored, advised or managed by, the Investment Adviser or
its affiliates have an interest, and coverage may be diluted over time as a
result of the acquisition of additional properties. In certain areas, it is
possible that real estate taxes or other expenses will increase at more rapid
rates than in the past. Most of the Account's real property investments will be
in rental properties and are subject to the risk of inability to attract or
retain tenants, with a consequent decline in rental income, as a result of
adverse changes in local real estate markets or other factors and the risk of
inability of tenants to meet their lease obligations, whether as a result of
bankruptcy or other adverse business or economic events, with a consequent
decline in rental income, as a result of adverse conditions or events affecting
their business operations. In certain real estate markets, available space
currently exceeds the demand for such space. Consequently, Account investments
in these markets may rent-up or re-lease more slowly, and operating income for
such investments may be less than anticipated.
To the extent that the Account's rental income is based on a percentage of the
gross receipts of retail tenants, its cash flow is dependent on the retail
success achieved by such tenants.
While one of the Account's objectives is to obtain reinvestment of cash flow
from investments, there can be no guarantee that the Account's investments will
generate sufficient revenue to cover operating and other expenses of the
Account. The opportunities for sale, and the profitability of any sale, of any
particular investment by the Account will be subject to the risk of adverse
changes in real estate market conditions, which may vary by the size, location
and type of such investments.
Risks Related to the Financial Condition and Operations of Tenants and to the
Retail Industry
Certain of the Account's real estate related investments have major tenants,
including department store tenants, or department stores that own one or more of
their own stores at the properties. See the discussions of the individual
properties under the Real Estate Related Investments section. The Account's
investments could be adversely affected by a bankruptcy or insolvency, or a
downturn in the business of, any of the major tenants or department stores at
the properties, or by the failure of any major tenants or department stores to
continue, extend or renew its lease (in the case of a major tenant) or its
operating covenant (in the case of a department store). Generally, a department
store that owns its own store agrees to operate the store and pay part of common
area expenses for a specified period of time pursuant to such operating
covenants. A filing for protection from creditors under the bankruptcy laws by a
tenant or department store could result in the rejection and termination of the
tenant's lease or the department store's operating covenants. During the past
few years, leases of certain mall tenants at Northridge Mall were terminated in
connection with their filings for protection from creditors under the bankruptcy
laws while other mall tenants at the property have been granted short-term rent
reductions. There is no assurance that any tenants or department stores at the
properties in which the Account has invested will not file for bankruptcy
protection and terminate their obligations under their leases or operating
covenants. In addition, any such tenant and department store may, from time to
time, experience a downturn in its business, which may result in a reduction or
failure to make payments when due. In the event of a default by a tenant or
department store under its obligations, there may be
<PAGE>
delays in enforcing the rights against such tenant or department store and
substantial costs may be incurred associated with the protection of the
Account's investment in the affected property, including costs incurred in
renovating and re-leasing the property or obtaining a replacement department
store.
The retailing industry in recent years has been affected by consolidations among
large retail store owners. These consolidations in some instances have resulted
in store closings and other reductions in existing operations. Federated
Department Stores, which has merged with R.H. Macy and Company, the owner of
Macy's, announced that it will close its Abraham & Straus store chain and either
convert those existing stores to other units within the Federated group or sell
them. Subsequently, Macy's converted the Abraham & Straus stores to Sterns
stores. While N/S Associates has certain rights under operating covenants to
require stores to be operated through January 1999, it is possible that N/S
Associates could incur costs in the future in connection with replacement
department stores at those shopping centers. In addition, certain of the other
department stores at Northridge and Southridge Malls are not subject to an
operating covenant requiring them to operate their department stores for any
specified period of time, although they have not indicated an intention to cease
operating any of their stores. See the discussions of Northridge and Southridge
Malls under the Real Estate Related Investments Section. Consolidations or
reduced operations by department stores or other retail owners may have an
adverse effect on the retail properties in which the Account has invested
through decreased revenues and higher operating costs due to greater vacancies
and additional costs for renovation and re-leasing of properties or incentive
contributions for replacement department stores.
Mortgage Loans
All mortgage loans are subject to the risk of default by the borrowers, in which
event the Account may be required to foreclose, or pursue other remedies, on the
underlying property to protect the value of its investment. The borrower's
ability to make mortgage payments and the amount realizable by the Account upon
default depend on the risks generally associated with real estate investments as
described above under the General Risks of Real Property Investments section, as
well as under the Uninsured Losses section below.
Generally, mortgage loans will not be personal obligations of the borrower, so
the Account will generally rely solely on the value of the property as security
for the obligations of the borrower to the Account. If the Account must
foreclose, there can be no assurance as to the amount of investment that will be
recovered. Also, there may be additional delays in receiving payments during any
period of default or foreclosure.
The principal amount due under a mortgage loan typically will be payable in a
lump sum payment at the end of the loan term, and the borrower's ability to make
such repayment may, particularly in the absence of a borrower with substantial
additional assets, be dependent upon the borrower's ability to refinance the
mortgage loan with another lender. A borrower's inability to obtain such
refinancing may require a modification or extension of the existing loan made by
the Account or a foreclosure by the Account. Volatility in interest rates during
the investment period may result in a delay in the making of mortgage loans or
possibly a lower yield to the Account on its mortgage loans. Because a mortgage
loan is a long-term investment, the receipt of interest payments by the Account
<PAGE>
during the term of the loan might be below what it would otherwise be able to
receive under the then prevailing market conditions. Volatility in interest
rates after investment by the Account may result in prepayment of mortgage loans
to the extent not prohibited by the terms of such investments.
Mortgage loans made by the Account to finance an owner or developer of a
property that is newly constructed, under construction or under contract for
development will generally involve greater risks than mortgage loans made to
finance a property with an operating history. The Account's commitment to make a
mortgage loan may be permitted to be pledged to a construction lender, and the
proceeds to be disbursed under the commitment may be placed in escrow at a fixed
interest rate in connection with such pledge.
The Investment Adviser will obtain an independent appraisal of the appraised
value of the real estate subject to each mortgage loan in connection with the
placement of such loan. It should be noted, however, that appraisals are only
estimates of value, and there can be no assurance that, in the event of a
default, the Account will realize an amount equal to the amount of its mortgage
loan. In the event of a default by a borrower that requires the Account to
foreclose upon the property or otherwise pursue its remedies in order to protect
the Account's investment, the Investment Adviser may seek to obtain a purchaser
for the property upon such terms as the Investment Adviser deems reasonable.
However, there can be no assurance that the amount realized upon any such sale
of the property underlying a mortgage loan will result in financial profit or
prevent loss to the Account. In addition, because of potential adverse changes
in the real estate market for residential, commercial or industrial properties,
locally or nationally, the Account may be forced to operate the property for a
period of time to protect the value of its investment. In that event, the
Account may be required to invest additional sums to maintain and manage the
property. Under certain circumstances, the Account may retain and operate the
property on its own behalf.
Wrap-around and junior mortgage loans and subordinated land sale-leaseback
transactions of the Account, if any, will be subject to greater risks than first
mortgage loans and unsubordinated land sale-leaseback transactions because such
investments are subordinate to the liens of senior mortgages or ground leases.
All mortgage loans, including first mortgage loans, may in certain circumstances
be subordinate to mechanics', materialmen's, brokers' or government liens. The
Account may elect to make payments, if it has the legal right to do so, on a
prior lien, including a senior mortgage, in the event of a default by the
borrower, in order to prevent a default on such prior lien or to discharge it
entirely. In the event that the Account forecloses upon a junior or wrap-around
mortgage loan or subordinated land sale-leaseback after a default by the
borrower or lessee, it is possible that a "due on sale" clause contained in a
senior mortgage or ground lease, which accelerates the outstanding principal
balance under such senior mortgage or terminates a ground lease in the case of a
sale of property, may be deemed to apply, increasing the risk of an insufficient
amount of funds being available to the Account after a foreclosure sale. To the
extent that the Account invests in leasehold mortgage loans that are subordinate
to ground leases not owned by the Account, a default by the tenant in its
payments under the lease to the lessor may result in the Account losing all or
part of its investment.
The Account, as the holder of a preferred position in the event of a default,
should be entitled to foreclose a mortgage and/or terminate a lease. However,
debt moratoria and other restrictions on lenders (such as those in some
jurisdictions on "due on sale" clauses) may restrict the Account's ability to
enforce specifically the terms of the obligations of its
<PAGE>
borrowers. In addition, under some circumstances the Account might be treated as
liable, along with the owner-borrower, to third parties. Further, the amount of
interest that may be charged by the Account may be limited by state usury laws,
the violation of which may result in various remedies, including restitution of
excessive interest and unenforceability of loans. While the Investment Adviser
will use diligence in determining whether interest rates comply with applicable
laws, uncertainties may exist with respect to interest payable to the Account,
including additional interest based upon a percentage of the gross revenues,
income or sale or refinancing proceeds from the underlying property.
Land Sale-Leaseback Transactions
In land sale-leaseback transactions, land and improvements may be subject to the
lien of a first mortgage and other mortgages that may have priority over the
Account's equity interest in the land. If the ground lessee is unable to meet
its mortgage payments, the Account may be forced to make such payments to
prevent foreclosure and possible loss of investment. If the ground lessee
subleases space to subtenants, the ground lessee's ability to meet its mortgage
payments and rental obligations is subject to the risk that subtenants may be
unable to meet their sublease payments to the ground lessee. In addition,
subleases with subtenants may have shorter terms than the ground lease and the
ground lessee's ability to meet its mortgage payments and rental obligations may
be subject to its ability to obtain renewals of existing subtenant leases or to
enter into new subtenant leases. The financial stability, business judgment and
management skill of the ground lessee may provide additional risks.
As with mortgage loans, in the event of default under a ground lease the Account
may be unable to recover its investment and, additionally, there may be a delay
in receipt of payments and loss of revenues in the event of default or
subsequent exercise of default remedies. Also, because the ground lessee's
ability to repay the Account may be affected by the ground lessee's recovery of
rental payments from subtenants, the Account's ultimate ability to collect will
be affected by all normal rental risks, as set forth in the General Risks of
Real Property Investments section and by all other risks routinely inherent in
real estate investments.
Because a land sale-leaseback is a long-term investment, the receipt of payments
by the Account during the lease term might be below what it would otherwise be
able to receive under the then prevailing market conditions. However, to the
extent the Account is able to enter into participating ground leases, such risks
may be reduced.
Participations
In seeking participations as described under Mortgage Loans -- Participations in
the Investment Objectives of the Account section, the Account may accept a lower
base interest or rental rate in order to obtain such participations and the
potential benefit that could result therefrom. Such benefit could be in the form
of a participation in property appreciation or increases in rental income. The
value of any participations depends on the success of the borrower or lessee in
the leasing of the underlying property, the management and operation of such
property by the borrower or lessee, the market value of such property and the
factors generally affecting real estate investments described in the General
Risks of Real Property Investments section. As a result, there can be no
assurance as to how much may be realized by the Account from participations.
<PAGE>
Additionally, it is possible that the Account's interest through participations
in certain proceeds may result in the characterization of the Account as a
partner or a joint venturer with the borrower or lessee, and the Account could,
accordingly, lose the priority of its security interest or position as lender or
lessor that it would otherwise have and may be subject to liabilities that it
would otherwise not have as a lender or lessor. Care will be exercised in the
negotiation of participations to reduce this risk, but there may be a greater
risk in these situations than if there were no participations.
Liquidity Considerations
Real property investments, mortgage loans and land sale-leaseback investments
generally are illiquid compared to investments more commonly made by insurance
company annuity separate accounts. The investments of the Account will produce
cash flow on a periodic basis. Additionally, the liquid assets (see the
Investment Objectives of the Account -- Liquid Assets section) will provide
certain protection against illiquidity. However, there can be no assurance that
such short-term investments will be sufficient to meet the requirements of the
Account. Over the past few years the Account has experienced substantial
contract surrenders in excess of contract purchase payments. In addition,
contract charges and deductions (except for surrender charges) and funding
obligations of its joint venture investments will deplete the Account's liquid
assets, while cash flow from the Account's investments will increase the
Account's liquid assets. The Account may have to pledge its real estate related
investments for additional borrowings or dispose of those assets in order to
replenish its liquid assets. IDS Life is purchasing accumulation units in order
to increase the Account's liquidity. Therefore, IDS Life, as a holder of
accumulation units, participates in the increase or decrease in the value of the
Account's investments in the same manner as any other holder of accumulation
units. However, IDS Life does not purchase a Contract and is not subject to a
surrender charge at any time in connection with any redemption of its
accumulation units. See the Management's Discussion and Analysis of Financial
Condition and Results of Operations section.
If a disposition of assets should be required, the Account may not be able to
dispose of its investments promptly or on commercially reasonable terms. To
avoid a sale on unreasonable terms or if a sale cannot be made on a timely
basis, it may be necessary to suspend payments to be made under the Contracts.
See the Suspension and Delay of Payments section. During the period of any
suspension, the mortality and expense risk fee, the asset management fee and
other charges provided for in the Contracts will continue to accrue. Even with a
suspension of payments, it may not be possible to generate sufficient cash to
replenish the Account's liquid assets or to meet its obligations, and a forced
liquidation of assets might be necessary. A liquidation in these circumstances
could result in a realization of less than the full value of the assets so
liquidated. Therefore the Account could experience substantial losses. Because
of its liquidity situation, including the substantial net contract redemptions
over the past several years, the Account does not intend to acquire additional
real estate related investments. See the Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
section for additional information on the Account's liquidity situation.
<PAGE>
Competition in Investments
The Account's real property investments, mortgage loans and land sale-leasebacks
compete with those of numerous other entities, as well as with individuals,
corporations, real estate partnerships and other entities engaged in real estate
investment activities, including certain affiliates of the Investment Adviser
and IDS Life. See the Conflicts of Interest -- Competition by the Account with
Affiliates of the Investment Adviser and IDS Life for Real Property Investments,
Mortgage Loans and Land Sale-Leasebacks section.
Competition among private and institutional investors of real property
investments, mortgage loans and land sale-leasebacks has increased substantially
over the years, with resulting increases in the purchase price paid for real
property and consequent higher fixed costs in the case of equity investments in
real property and potentially greater credit risks assumed and reduced yields
available in connection with mortgage lending and land sale-leaseback
investments for such properties. There is no assurance regarding the Account's
success in obtaining suitable investments for the purchase payments.
Risks of Leverage
The real property investments of the Account may be leveraged, i.e., the Account
may finance a portion of the cost of the acquisition of properties by borrowing.
See the Other Investment Policies -- Borrowing Policies section.
The Account may refinance various properties, consequently increasing the
aggregate leverage of the Account's investments beyond that currently
contemplated. Such borrowing permits the acquisition of properties of greater
aggregate cost than could have been financed solely from the Account's capital,
but it also increases the Account's exposure to losses. The degree of risk
associated with leverage could increase if the Account were to purchase a
property subject to an indebtedness that had a non-fixed interest rate or a
shorter maturity with a resulting balloon payment. Mortgages requiring balloon
payments involve greater risks than mortgages in which the principal amount is
fully amortized over the term of the loan, since the ability of the Account to
repay at maturity the outstanding principal amount of the balloon loan may be
dependent upon the Account's ability to obtain adequate refinancing. This
ability will in turn be dependent upon economic conditions and the availability
of mortgage money in general and the value of the underlying properties in
particular, all of which will be beyond the control of the Account. There is no
assurance that financing will be available to refinance such balloon payments or
that any such financing available will be on favorable terms. Principal and
interest payments on such indebtedness will generally have to be made regardless
of rental income from the Account's investment. If mortgage payments are not
paid when due, the Account may sustain a loss on its investment as a result of
foreclosure by the mortgagee. See the Other Investment Policies -- Borrowing
Policies and Conflicts of Interest -- Receipt of Commissions, Fees and Other
Compensation by IDS Life, the Investment Adviser and Affiliates sections.
At the time of acquisition of real property investments, aggregate mortgage
indebtedness in connection with the purchase of all real property investments by
the Account is not expected to exceed 50 percent of the purchase price (i.e.,
total consideration paid for properties including all liens and mortgages on the
properties, but excluding points and prepaid interest) plus other initial cash
payments in connection with the purchase of all properties.
<PAGE>
Risks of Joint Ownership
Some of the Account's investments may be owned jointly by the Account and the
seller of the property (or an affiliate of the seller), and/or through
investments in which entities sponsored, advised or managed by the Investment
Adviser, IDS Life or their affiliates own an interest in the property.
The investment by the Account in joint venture partnerships or other entities
that own properties or through other forms of joint ownership, instead of
investing directly in the properties themselves, may under certain circumstances
involve risks not otherwise present, including, for example, risks associated
with the possibility that the Account's co-venturer in a property might become
bankrupt, that such co-venturer may at any time have economic or business
interests or goals that are inconsistent with the business interests or goals of
the Account, that the co-venturer may be in a position to take actions contrary
to the instructions or requests of the Account or contrary to the Account's
policies or objectives that may subject the properties and consequently the
Account to liabilities greater than those contemplated or that the joint
ownership arrangement or a co-venturer may limit the Account's ability to
transfer its interest in the joint form of ownership. In connection with such
joint ownership arrangements, the co-venturer may have the right to take certain
actions with respect to the jointly owned property, including under some
circumstances the right to determine whether and when the property will be sold.
Ownership of real estate related investments through joint ownership
arrangements may be even more illiquid than direct ownership of such
investments, and as a consequence the Account may experience difficulties or
delays in attempting to sell such joint ownership investments or may be unable
to obtain the full value of such investments in a sale when such time comes. The
Account may enter into joint ownership arrangements with entities sponsored,
advised or managed by the Investment Adviser, IDS Life or their affiliates. See
the Conflicts of Interest -- Possible Joint Venture Investments with Affiliates
of the Investment Adviser or IDS Life section.
In connection with such an investment, the joint owners may be required to
approve some or all of the major decisions concerning the investment by voting
on the basis of their respective capital contributions to, or shareholdings or
ownership interests in, the joint venture or otherwise. Thus, there exists the
possibility of an impasse in the event the joint owners disagree. The Investment
Adviser, on behalf of the Account, will attempt to negotiate a right of first
offer or refusal to enable the Account, in the event of a disagreement regarding
a proposed sale of the investment, to purchase the joint owner's interest in the
investment in the event the Account does not wish to sell the investment.
However, there is no assurance that a right of first offer or refusal can be
obtained in all cases. The exercise of any right of first offer or refusal would
be subject to the Account's having the financial resources to effect such a
purchase, and there can be no assurance that it would have such resources.
Reliance on IDS Life and the Investment Adviser
The owner of a Contract does not have a vote in determining any policy of the
Account. IDS Life, acting with the advice of the Investment Adviser with respect
to real estate related investments, will make all decisions with respect to the
management of the Account, including the determination as to what real estate
related investments to make, subject to the investment restrictions. See the
Investment Restrictions section. Owners will have no right or power to take part
in the management of the Account.
<PAGE>
Evaluation and Appraisal Risk
There are risks associated with the method of valuing the assets of the Account,
including the fact that the valuations are based substantially on appraisals to
be made by independent real estate appraisers and the application of formulae by
the Investment Adviser. Appraisals represent only the opinions of experts as to
the value of the property and may not represent the true or realizable value of
the investment. The Investment Adviser also will make certain determinations
regarding valuation of assets. There may be variations between the amount
realizable upon disposition and the stated value of assets. Owners may be
adversely affected if the valuation method results in either overvaluing or
undervaluing the Account's investments. Both the number of accumulation units
credited at purchase and the amount payable under a Contract are based on the
value of the assets of the Account. See the Valuation of Assets -- Real Property
Investments, Mortgage Loans and Land Sale-Leasebacks section.
If the Account investments are overvalued or undervalued, the fees paid to IDS
Life and the Investment Adviser and its affiliates will be greater or less than
the amount that should have been paid to them.
Continuous Offering
Effective May 1, 1995, IDS Life discontinued new contract sales of the Account.
IDS Life will continue to accept and process additional purchase payments into
existing contracts in amounts specified in the prospectus, whether by means of
previously established bank authorizations or otherwise. If there are
substantial and continuing purchase payments in excess of redemptions, the
Account will have additional funds. To the extent that additional purchase
payments are received, the Account may have greater liquidity during certain
periods and, at such times, it is less likely that either premature sale of
investments will be forced or the suspension-of-payments provision will be
invoked.
IDS Life purchases accumulation units in order to maintain the Account and to
increase its liquidity. IDS Life makes these payments so that no contract holder
is disadvantaged because sales of new contracts have been discontinued. IDS Life
will make additional payments into the Account for accumulation units as needed
in order to fund all of the Account's obligations under the contracts such as
paying death benefits and surrenders.
Size of Account
Effective May 1, 1995, IDS Life discontinued new contract sales of the Account.
If IDS Life had sold a greater amount of Contracts, the Account would be more
diversified than currently is the case, and the owners would be proportionately
less exposed to the risks of any particular investment. In such case, the risk
of loss to the Account and owners from defaults by borrowers or tenants would be
proportionately smaller than when the Account's investments are less
diversified.
A significant amount of subsequent contract surrenders has the effect of
reducing the amount available for investments and limiting diversification. Over
the past few years the Account has experienced substantial contract surrenders
in excess of contract purchase payments. As a result the Account does not expect
to acquire additional real estate related
<PAGE>
investments and the Account liquidated two real estate related investments
during 1996. See the Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources section.
Uninsured Losses
The Investment Adviser will arrange for, or require proof of, comprehensive
insurance including liability, fire and extended coverage, which is customarily
obtained by owners of similar properties for the real property investments and
properties which are security for the mortgage loans or subject to the land
sale-leaseback transactions of the Account. Generally, under the terms of the
mortgage or ground lease, such insurance will be required to be maintained at
the expense of the mortgagor or ground lessee. However, there are certain types
of losses, generally of a catastrophic nature such as earthquakes, floods, wars
or environmental hazards or accidents, which are either uninsurable or not
economically insurable. Should such a disaster occur, the Account could lose
both its invested principal and anticipated profits from investments.
Environmental and Regulatory Problems
The availability of suitable investments and the cost of construction and
operation of properties in which the Account may invest may be adversely
affected by legislative, regulatory, administrative and enforcement action at
the local, state and national levels in the areas, among others, of housing and
environmental controls. In addition to possible increasingly restrictive zoning
regulations and related land use controls, such restrictions may relate to air
and water quality standards, noise pollution and indirect environmental impacts
such as increased motor vehicle activity. In addition, the cost of, or liability
arising from, investments in properties (whether as owner, lender or lessor) may
be increased as a result of current or future environmental laws or regulations
at the national or local level, or environmental concerns, relating to, among
other matters, the use or presence of hazardous or toxic materials or waste; and
the ownership, sale, financing or refinancing of such properties, or an interest
therein held through a mortgage loan or land sale-leaseback, may be adversely
affected by such increased costs or environmental liabilities.
Federal Income Tax Matters
IDS Life believes that the Contracts will be treated as annuities under the
Code, and that an owner will not be subject to Federal income tax on any income
or earnings of the Account until distributions are made or a change of ownership
of the Contract occurs. However, an owner generally will be subject to Federal
income taxation on the portion of distributions received that represents income
to the owner and may be subject to an additional 10 percent penalty in certain
circumstances related to early withdrawals. IDS Life has not sought a ruling
from the Internal Revenue Service regarding any of the Federal income tax
consequences relevant to the ownership of the Contracts. See the Certain Federal
Income Tax Considerations section.
<PAGE>
Investment Company Act of 1940
IDS Life proposes to operate the Account so that it will not be subject to
registration under the 1940 Act. This will require monitoring the proportion of
the Account's funds to be placed in various investments so that the Account does
not become subject to the 1940 Act. As a result, the Account may forgo certain
investments that could produce a more favorable return for the Account.
Conflicts of Interest
Competition by the Account with Affiliates of the Investment Adviser and IDS
Life for Real Property Investments, Mortgage Loans and Land Sale-Leasebacks
IDS Life and the Investment Adviser will be subject to various conflicts of
interest in carrying out their responsibilities to the Account. Affiliates of
the Investment Adviser and IDS Life also may be in competition with the Account
in connection with the sale or operation of properties or the making of mortgage
loan or land sale-leaseback investments under some circumstances.
The Investment Adviser, its affiliates and affiliates of IDS Life currently
perform investment management and advisory and other services for other real
estate investment funds (e.g., pension and profit sharing trusts, corporations,
partnerships and segregated asset accounts) similar to the services to be
performed for the Account and expect to provide such services to additional real
estate investment funds in the future. Affiliates of the Investment Adviser and
IDS Life also invest in real estate for their own accounts. IDS Life, the
Investment Adviser and their affiliates may sponsor, advise or manage real
estate investment funds that have investment objectives nearly identical to the
Account's. The Investment Adviser, IDS Life or their affiliates also may make
investments meeting such investment objectives for their own accounts. The
Account and one or more entities affiliated with, or advised or managed by, the
Investment Adviser or IDS Life may be competing in certain geographical markets
for commercial tenants. There also may be similar sorts of competition for the
sale of properties in certain markets. The Investment Adviser, IDS Life and
their affiliates may provide services to, and otherwise deal or do business
with, persons who may be engaged in transactions with the Account. In addition,
the Account may borrow from, purchase goods and services from and otherwise do
business with persons who may be engaged in transactions with the Investment
Adviser, IDS Life and their affiliates.
Except as described under the Conflicts of Interest -- Possible Joint Venture
Investments with Affiliates of the Investment Adviser or IDS Life section, the
Account will not purchase from or sell to IDS Life, the Investment Adviser or
their affiliates any real estate related investments. The Account will not make
mortgage loans to IDS Life, the Investment Adviser or their affiliates and will
not obtain permanent mortgage financing from IDS Life or its affiliates. The
Account may obtain short-term financing from IDS Life for working capital,
liquidity or other purposes.
Other activities of the Investment Adviser, IDS Life and their affiliates may
utilize the time, effort, financial or other resources of the Investment Adviser
and IDS Life and their personnel that might otherwise be available to the
Account.
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The Investment Adviser, IDS Life, their affiliates and any of their employees,
directors or officers, may engage from time to time for their own account, or
for the account of others, in other business ventures of any nature, or render
services of any kind to other business ventures of any nature. No owner, by
virtue of his interest in the Account, will have any interest or be entitled to
participate in such other ventures.
Receipt of Commissions, Fees and Other Compensation by IDS Life, the Investment
Adviser and Affiliates
The Investment Adviser, its affiliates and IDS Life will receive, directly or
indirectly, acquisition and mortgage placement fees from the Account for
services and advice in connection with the identification, evaluation,
investigation, negotiation, selection and acquisition or placement of the
Account's initial investments and in connection with any reinvestment of income
and sale, financing or refinancing proceeds of real property investments and
proceeds on the principal and interest or rent payments on mortgage loans or
land sale-leaseback investments. Since the Account is a segregated asset account
of IDS Life, the agreements and arrangements relating to the compensation of IDS
Life under the Contracts are not the result of arm's-length negotiations.
Because the Investment Adviser, its affiliates and IDS Life will be entitled to
acquisition and mortgage placement fees upon reinvestment of funds in real
estate related investments, there may be conflicts of interest in determining
whether to invest in shorter-term or longer-term investments, since the shorter
the term of investment the sooner funds will be available for reinvestment.
Conflicts of interest could arise between the Investment Adviser and IDS Life,
on the one hand, and the Account, on the other, because the receipt of fees and
other compensation by the Investment Adviser, its affiliates and IDS Life may be
affected by various determinations made by IDS Life, with the advice of the
Investment Adviser, including whether to sell, finance or refinance any real
property investment and the timing of any such sale, financing or refinancing.
Certain Account properties may be managed by JMB or affiliates of JMB such as
Urban Retail Properties Co. Under property management agreements, the company
employed to manage the property usually collects the rental income on the
property and deducts from such income its fee and the costs of operating the
property such as insurance premiums, taxes, repairs and improvements and other
costs related to the maintenance and operation of the property. The balance of
rental income is remitted to the owner of the property. To the extent agreements
are entered into with a JMB affiliate to manage properties owned directly by the
Account, such agreements are subject to the approval of IDS Life and are
expected to be on terms no less favorable to the Account than those customarily
charged for similar services in the relevant geographical area. For real
property investments in which the Account owns an interest through a joint
venture, such agreements are subject to the approval of the joint venture.
JMB Insurance Agency, Inc., an affiliate of JMB engaged in the insurance
brokerage business, may provide insurance brokerage services in connection with
the Account's investments. JMB Insurance Agency, Inc. will receive commissions
and/or fees for such services at rates that are set by the insurance companies
for the classes of coverage involved.
In addition, JMB or its affiliates may provide mortgage brokerage services in
connection with the financing or refinancing of the Account's real property
investments. Since JMB or its affiliates may receive a mortgage brokerage fee,
conflicts of interest could arise in
<PAGE>
determining whether any of the Account's real property investments should be
debt-financed or whether any such property should be refinanced prior to its
sale and the amount of any such financing or refinancing.
The compensation of IDS Life and the Investment Adviser may be affected by the
timing of acquisitions, the valuation of the assets of the Account, the amount
of leverage employed in connection with the Account's investments, the timing of
the sale of properties of the Account or other factors that are subject to the
influence or determination of the Investment Adviser and IDS Life, and as to
which the interests of the Investment Adviser, its affiliates or IDS Life may
under certain circumstances be different from those of the Account.
In addition, to the extent that the investments of the Account are overvalued at
any time, the fees paid to IDS Life and the Investment Adviser (including the
incentive portion of the asset management fee) and its affiliates will be
greater than the amount that should have been paid to them.
Affiliates of JMB also may provide other real estate related services to the
Account or its investments that may result in conflicts of interest with respect
to the provision of such services.
Possible Joint Venture Investments with Affiliates of the Investment Adviser or
IDS Life
The Account may enter into joint ownership arrangements with entities sponsored,
advised or managed by IDS Life, the Investment Adviser or their affiliates,
including other segregated asset accounts established by IDS Life or its
affiliates or advised or managed by the Investment Adviser or its affiliates.
Other than as described in the preceding sentence, the Account will not enter
into joint venture investments with IDS Life, the Investment Adviser or their
affiliates investing for their own account except for investments expected to be
made on a temporary basis to facilitate the making of the joint venture
investment. IDS Life, the Investment Adviser or their respective affiliates, as
a result of their relationships with more than one joint owner, may be involved
in various conflicts of interests with respect to the acquisition, financing,
operation or sale of any such joint investment, including making decisions or
rendering advice regarding the timing of any financing, refinancing or sale of
such joint investment.
In connection with such an investment, the joint owners may be required to
approve some or all of the major decisions concerning the property by voting on
the basis of their respective capital contributions to, or shareholdings or
ownership interests in, the joint venture or otherwise. Thus, there exists the
possibility of an impasse in the event the joint owners disagree or the
possibility that a joint owner may be able to take certain actions with respect
to the jointly owned investment. Additionally, under some circumstances a joint
owner may no longer be affiliated with or advised or managed by either IDS Life
or the Investment Adviser or an affiliate thereof, as the case may be. See the
Description of the Investment Adviser and its Affiliates section for a
discussion of a transaction as a result of which certain of the joint owners
with the Account in its investments in N/S Associates, Monmouth Associates and
1225 Investment Corporation are no longer advised or managed by affiliates of
the Investment Adviser. As a result, such joint owners may in the future have
different investment policies or objectives. See the Real Estate Related
Investments section for a discussion of the relevant procedure in the event
there is a disagreement among these joint owners regarding a sale of the
investment.
<PAGE>
The Investment Adviser, on behalf of the Account, generally will attempt to
negotiate a right of first offer or refusal to enable the Account, in the event
of a disagreement regarding a proposed sale of the investment, to purchase the
joint owner's interest in the investment in the event the Account does not wish
to sell the investment. However, there is no assurance that such a right of
first offer or refusal can be obtained. The exercise of any right of first offer
or refusal would be subject to the Account having the financial resources to
effect such a purchase, and there can be no assurance that it would have such
resources.
Limitation on Liability
The Investment Advisory Agreement between IDS Life and the Investment Adviser
provides that the Investment Adviser will be liable only for willful
misfeasance, bad faith or negligence on the part of the Investment Adviser in
the performance of its obligations or duties to the Account.
In addition, IDS Life has agreed to indemnify the Investment Adviser and its
affiliates, including their officers and directors, against certain liabilities,
including liabilities under the Securities Act of 1933 (the 1933 Act). Any such
indemnification by IDS Life may be made out of the assets of the Account.
IDS Life as Distributor of the Contracts
IDS Life is the principal distributor of the Contracts, and accordingly there
will be no independent review of the structure, formation or operation of the
Account conducted by a non-affiliated broker-dealer acting as distributor.
The Contract -- Accumulation Period
The Contract accumulation period commences with the date on which the Contract
is issued and ends on the retirement date.
Purchase Payments
Although additional purchase payments may be made into existing contracts, prior
to making any additional purchase payment an existing contract owner should bear
in mind that the Account intends to liquidate its real estate related
investments. The Account liquidated two real estate related investments in 1996.
Moreover, the Account will not be acquiring any new or additional real estate
related investments with the cash flow or proceeds generated by the operations
or sales of its existing real estate related investments. Such funds, to the
extent not used to pay the Account's obligations under existing contracts or the
redemption of accumulation units purchased by IDS Life, will be invested in
short-term debt instruments and possibly intermediate-term bonds with maturities
of up to five years. Accordingly, an existing contract owner should carefully
consider these facts in light of his or her own investment objectives before
making any additional purchase payment into an existing contract.
The minimum initial purchase payment for a Contract was $5,000, or $2,000 if
concurrently the owner agreed to make additional monthly purchase payments of
not less than $100 each by means of a bank authorization. Additional purchase
payments may be made by means of a bank authorization, if not less than $100 per
month. Additional purchase payments of at least $2,000 each may be made, and the
maximum aggregate
<PAGE>
additional purchase payment in any one contract year after the first year may
not exceed $50,000. However, additional purchase payments are not required under
a Contract. IDS Life, in its discretion, may agree to permit greater maximum
aggregate additional purchase payments in certain instances.
Allocation of Purchase Payment and Contract Value
Purchase payments will be allocated to the Account at the price determined for
accumulation units as of the end of the valuation period during which IDS Life
receives each such purchase payment. When a purchase payment is allocated to the
Account, it is converted into accumulation units. The number of accumulation
units to be credited to a Contract as a result of a purchase payment is
determined by dividing that purchase payment, after deducting any applicable
premium taxes, by the accumulation unit value on the date that the purchase
payment is allocated to the Account. The contract value on any valuation date
can be determined by multiplying the number of accumulation units credited to
the Contract by the value of an accumulation unit on that valuation date.
Contract Surrender
An election to surrender a Contract may be made in writing to the home office of
IDS Life in Minneapolis, MN. If required by IDS Life, the request for surrender
must be accompanied by the Contract if a request for the full surrender value is
being made. An election to surrender a Contract can be made only while the
Contract is in force prior to the earlier of the retirement date or the death of
the first to die of the annuitant or owner. The surrender value is determined on
the basis of the accumulation unit value in effect on the next valuation date
after which a request for surrender is received by IDS Life in proper order.
A partial surrender request not exceeding $50,000 may be made by contacting IDS
Life by telephone. IDS Life has the authority to honor any telephone partial
surrender request it believes to be authentic and will use reasonable procedures
to confirm that they are. This includes asking identifying questions and tape
recording calls. As long as the procedures are followed, neither IDS Life nor
its affiliates will be liable for any loss resulting from fraudulent requests.
At times when the volume of telephone requests is unusually high, IDS Life will
take special measures to ensure your call is answered as promptly as possible. A
telephone surrender request will not be allowed within 30 days of a phoned-in
address change. You may request that telephone withdrawals not be authorized
from your account by writing IDS Life.
The surrender value will be sent within seven days after the date on which a
proper request is received by IDS Life, except that under certain circumstances
IDS Life may delay or suspend payments. See the Suspension and Delay of Payments
section. You will be charged a fee if you request express mail delivery of your
payment.
An owner may surrender all or a portion of the contract value. Any partial
surrender must be for at least $250, and no partial surrender can be made if it
would reduce the contract value after such surrender to less than $600.
Automated partial surrenders may be made through a one-time written request (or
other method acceptable to IDS Life). The minimum surrender amount from the
Contract is $50, and such surrender can be made on a monthly, quarterly,
semi-annual or annual basis. You may start or stop this service at any time, but
you must give IDS Life 30 days'
<PAGE>
notice to change any automated surrender instructions that are currently in
place. Automated partial surrenders are subject to all of the other contract
provisions and terms. Automated partial surrenders may be restricted by
applicable law. In addition, the payment of additional purchase payments, if
allowed under the Contract, while automated partial surrenders are in effect,
may not be appropriate and therefore is not permitted. Automated partial
surrenders may result in taxes and penalties being applied to all or a portion
of the amount surrendered. See the Certain Federal Income Tax Considerations
section. You should consult your tax adviser if you have any questions about the
taxation of your annuity.
No surrender can be made after the retirement date or the death of the first to
die of the annuitant or owner. Any amounts surrendered and charges that may
apply cannot be repaid. A surrender charge, which is a contingent deferred sales
charge, will be imposed for any surrender made during the first eight payment
years of any purchase payment. The surrender charge applies separately to the
initial purchase payment and to each additional purchase payment. Regardless of
when a purchase payment is made, the contract year in which a purchase payment
is made is the first payment year for that purchase payment, and succeeding
payment years continue to be measured separately for that purchase payment. For
a partial surrender, accumulation units attributable to the earliest payment
year are surrendered first. The surrender charge is 8 percent of the amount
surrendered during the first payment year and decreases by 1 percent per year
thereafter to 1 percent in the eighth payment year. There is no surrender charge
on amounts surrendered after the eighth payment year. In no event will the
aggregate surrender charges imposed exceed 8.5 percent of the aggregate purchase
payments received. IDS Life may, in its discretion, reduce or eliminate
surrender charges for certain group sales of the Contracts. See the Contract
Charges and Deductions -- Surrender Charges section. Owners should also be aware
that, under certain circumstances, a surrender before the owner has reached the
age of 59-1/2 may be subject to a penalty under the Code. See the Certain
Federal Income Tax Considerations section.
Contract Charges and Deductions
The following sets forth the deductions from purchase payments and the charges
against the Account provided for in the Contract. See the Notes to the Financial
Statements of the Account for further information concerning fees paid by the
Account to IDS Life and the Investment Adviser.
Mortality and Expense Risk Fee
This charge is applied daily to the Account. The fee equals 1 percent of the
average daily asset value of the Account on an annual basis. It covers the
mortality risk and expense risk. IDS Life estimates that approximately
two-thirds of this fee is for assumption of the mortality risk, and one-third is
for assumption of the expense risk. IDS Life will not be entitled to, and will
forgo, that portion of the mortality and expense risk fee attributable to the
use of indebtedness in excess of 40 percent of the aggregate value of all of the
Account's real property investments.
The mortality risk is IDS Life's guarantee to pay a death benefit and IDS Life's
guarantee to make retirement payments according to the terms of the Contract, no
matter how long a specific annuitant lives and no matter how long the entire
group of IDS Life annuitants live. If, as a group, IDS Life annuitants outlive
the life expectancy assumed in IDS Life's
<PAGE>
actuarial tables, then IDS Life must take money from its general assets to meet
its obligations. If, as a group, IDS Life annuitants do not live as long as
expected, IDS Life will profit from the mortality risk fee.
The expense risk portion of the mortality and expense risk fee is paid to IDS
Life for its guarantee that the mortality and expense risk fee, asset management
fee and acquisition and mortgage placement fee will not increase over the life
of the Account and that no new fees payable to IDS Life will be added to the
Account. To the extent such fee does not cover IDS Life's expenses (other than
any expenses that may be reimbursed as described under the Organizational and
Offering Expenses and Operational Expenses section below), any deficit would
have to be made up from IDS Life's general assets. IDS Life also could profit
from the expense risk fee if it is more than sufficient to meet such expenses.
Asset Management Fee
IDS Life is paid an asset management fee for its services in connection with the
management of the assets of the Account. This fee is accrued on a daily basis
and deducted on a monthly basis and is equal on an annual basis to 1.25 percent
of the average daily asset value of the investments of the Account, subject to
increase as described below. A portion of the asset management fee equal to 0.95
percent of the average daily asset value is paid by IDS Life to the Investment
Adviser for its services in connection with the management of the assets of the
Account. In the event that the Account's real property investments have produced
a rate of return for the Account (measured for each calendar year) that exceeds
the rate of return as measured for such period by the FRC Property Index (which
is released in April of each year for the preceding calendar year) by 0.5
percent per year, then the Investment Adviser shall be entitled to an additional
amount equal to 0.05 percent of the average daily asset value of the Account for
such calendar year. The Investment Adviser also will be entitled to an
additional amount equal to 0.01 percent (up to a maximum of 0.2 percent) of the
average daily asset value of the Account for each 0.1 percent by which the rate
of return of the Account's real property investments for such calendar year
exceeds the rate of return as measured for such period by such index plus 0.5
percent per annum. Rate of return will be calculated on a quarterly basis and in
general will be the sum of all net income from operations of the Account's real
property investments (without deducting any asset management fees or certain
other expenses of the Account) and realized and unrealized capital appreciation
or depreciation on the Account's real property investments (net of all
acquisition and mortgage placement fees) for the calendar quarter taken as a
percentage of the aggregate asset value of such investments (net of all
acquisition and mortgage placement fees) as of the beginning of such calendar
quarter.
IDS Life and the Investment Adviser will not be entitled to, and will forgo,
that portion of the asset management fee, as calculated above, attributable to
the use of indebtedness in excess of 40 percent of the aggregate value of all
the Account's real property investments.
The initial term of the investment advisory agreement extended through the
period ending July 1, 1993 and was renewed at the option of the Investment
Adviser for an additional five-year term. The investment advisory agreement may
be renewed at the option of the Investment Adviser for additional three-year
terms for as long as the Account's real property investments have produced a
rate of return for the Account for the 10-year period (or, in the case of the
initial term, the five-year period) ending at the end of any expiring term equal
to or in excess of 90 percent of the rate of return for such period as
<PAGE>
measured by the FRC Property Index or a successor index. IDS Life may terminate
the investment advisory agreement upon six months' prior written notice in the
event the Account's rate of return does not equal or exceed 90 percent of the
rate of the return of such index as calculated above.
The investment advisory agreement may be terminated by IDS Life in the event
there is change in control of JMB under certain circumstances or in the event
there is a determination that the Investment Adviser has acted with gross
negligence, bad faith or willful misfeasance in the performance of the duties of
the Investment Adviser under the terms of the investment advisory agreement.
Acquisition and Mortgage Placement Fee
IDS Life will receive an acquisition and mortgage placement fee of 3.75 percent
of the total cash investment to be paid or advanced by the Account in connection
with each real property investment, mortgage loan and land sale-leaseback made
by the Account. The amount paid to IDS Life is measured by the cash investment
to be paid by the Account (including all cash down payments, interest, points,
special reserves and all other cash payments) for real property investments or
land sale-leasebacks or the amount to be borrowed under a mortgage loan by the
borrower for mortgage loans. A portion of the acquisition and mortgage placement
fee equal to 3.5 percent of the total cash investment to be paid or advanced by
the Account in connection with each real property investment, mortgage loan and
land sale-leaseback will be paid to the Investment Adviser in consideration of
the Investment Adviser's services in connection with the identification,
evaluation, investigation, negotiation, selection and recommendation for
purchase or placement of real estate related investments for the Account. In
some instances, some or all of this fee may be paid by the sellers of properties
or borrowers. However, to the extent that the seller or borrower pays less than
3.75 percent, that amount will be paid directly by the Account to IDS Life.
Organizational and Offering Expenses and Operational Expenses
All organizational and offering expenses were charged to the Account. All costs
of acquisition, administration and disposition of investments are charged to the
Account. These costs include brokerage fees and commissions, appraisal fees,
attorneys' fees, accountants' fees and other similar fees and expenses (such as
travel and travel-related expenses) incurred in connection with the investment
process.
Expenses incurred by IDS Life because of the existence of the Account -- such as
regulatory fees and reports, and taxes -- also are charged to the Account. Under
current law, IDS Life does not expect to incur any tax because of the Account's
investment income, but IDS Life reserves the right to charge the Account for any
taxes IDS Life does incur. Finally, IDS Life will charge the Account for
expenses incurred in administering the assets of the Account. These expenses
include periodic valuation appraisal costs, legal, accounting and auditing fees
and expenses, interest, insurance costs, data processing costs, taxes, mortgage
servicing, mortgage brokerage, property management, travel and travel-related
expenses and litigation costs. To the extent such services are provided by
officers or employees of IDS Life, the Investment Adviser or their affiliates,
the Account will reimburse such entities for specifically identified direct
costs (including salary and salary related expenses) associated with
administering the assets of the Account.
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Operational income and expenses will be estimated periodically and credited or
deducted ratably on a daily basis in determining accumulation and annuity unit
values with periodic adjustments, if necessary, to credit or charge the
differences between actual and estimated operational income and expenses.
Premium Taxes
Certain state and local governments impose premium taxes. These taxes generally
range in an amount of up to 3.5 percent and depend on the owner's state of
residence or the state in which the Contract was sold. In some cases, the
premium taxes will be deducted from the purchase payment before it is allocated
to the Account. In other cases, the deduction will not be made until the owner
surrenders the Contract or retirement payments begin.
Surrender Charges
A surrender charge, which is a contingent deferred sales charge payable to IDS
Life, will be assessed against the Contract after the initial 10-day period of
the Contract and during the first eight years after any purchase payment. The
surrender charge is 8 percent of the amount surrendered during the first payment
year and decreases by 1 percent per year thereafter to 1 percent in the eighth
payment year. There is no surrender charge on amounts surrendered after the
eighth payment year. See the Contract Surrender section.
Suspension and Delay of Payments
IDS Life will attempt to make payments under the Contracts within seven days
whenever the Account has cash available. However, IDS Life reserves the right to
defer making any such payments under the Contracts for up to six months. This
reservation of the right to suspend payments is only intended to be utilized in
the emergency circumstances set forth in the remainder of this section. Subject
to any suspension of payments described below, IDS Life guarantees that payments
on death of the first to die of the annuitant or owner prior to the retirement
date will be made within seven days of receipt by IDS Life of its death claim
requirements after the death of the annuitant or owner, whichever occurs first.
In addition, payment of surrender values may be delayed if a check for a
purchase payment has not cleared the bank on which it was drawn.
IDS Life may suspend any payments due under the Contracts beyond the seven-day
period for up to six months when IDS Life determines that there is insufficient
cash available to meet all current surrender requests and other payment
obligations of the Account and the sale of the real estate related assets of the
Account could not be made on a timely basis on commercially reasonable terms. In
the event of any suspension of payments, the cash available will be used in the
following order of priority:
First -- to meet any obligations the Account has other than Contract
obligations. Such obligations would include those expenses necessary to continue
the operation of the Account, other than fees to IDS Life, which fees will be
deferred until ALL Contract obligations are satisfied.
Second -- to make annuity payments in full or pro rata depending on the cash
available. All annuitants will be treated as a class, including those who
annuitize during the suspension. No other payments will be made until all unpaid
annuity payments are made.
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Third -- to make payments due on the death of the annuitant or the owner that
became due and payable after the declaration of suspension. All payees of
payments on death will be treated as a class and payments may be made pro rata
depending upon the cash available.
Finally -- no payments of surrender values will be permitted during such a
suspension while any annuity payments or payments on death remain unpaid.
Depending upon the cash available, any payments of surrender values during such
suspension will be made in accordance with the order in which surrender requests
are received by IDS Life.
If a payment of a surrender or an annuity payment is deferred, the amount will
be determined as of the end of the valuation period during which the surrender
request was received or the annuity payment was due, and, with respect to such
amount, participation in the investment experience of the Account will cease. If
IDS Life defers a payment of a surrender or an annuity payment for 30 days or
more, IDS Life will credit interest on the amount of the payment at a rate of 3
percent per year or such higher rate as IDS Life, in its discretion,
establishes. If IDS Life defers payment on death for more than seven days, IDS
Life will credit interest on the amount of payment at a rate of 3 percent per
year or such higher rate as IDS Life, in its discretion, establishes or that
which is required by law.
Owners who remain in the Account will bear the investment risk that real estate
related investments of the Account will have to be sold under emergency
circumstances that could result in the realization by the Account of less than
the investment value of such investments notwithstanding any suspension or delay
in payments as permitted under the Contracts.
Transfer of Ownership
The owner may transfer ownership of the Contract, at any time while the
annuitant is living, by filing a transfer of ownership with IDS Life at its home
office. IDS Life will not be bound by any transfer of ownership until the
written transfer in form and substance acceptable to IDS Life is received by it.
IDS Life is not responsible for the validity of any transfer. A transfer will be
effective as of the date of request for the transfer, subject to any action
taken or payment made by IDS Life prior to receipt of the transfer. IDS Life is
not liable as to any payment or other settlement made by it before receipt of
the transfer.
INASMUCH AS A TRANSFER MAY BE A TAXABLE EVENT, OWNERS SHOULD CONSULT THEIR OWN
TAX ADVISERS SHOULD THEY WISH TO TRANSFER THEIR CONTRACTS.
Beneficiary
The beneficiary is the party named by the owner, in a form satisfactory to IDS
Life, to receive the benefits of the Contract if the owner or the annuitant dies
while the Contract is in force. Only those beneficiaries who are living when
death benefits become payable may share in the benefits, if any. If no
beneficiary is then living, IDS Life will pay the benefits to the owner, if
living, otherwise to the owner's estate. The owner may change the beneficiary
anytime while the annuitant is living by satisfactory written request to IDS
Life. Once the change is received by IDS Life, it will take effect as of the
date of the owner's request, subject to any action taken or payment made by IDS
Life before such receipt.
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If the annuitant or owner dies before the retirement date while the Contract is
in force, IDS Life will pay to the beneficiary:
1. the greater of the contract value or the purchase payments paid less any
amounts surrendered (if death occurred prior to the annuitant's attaining
age 75); otherwise
2. the contract value (if death occurred on or after the annuitant reached age
75).
3. if, under a Contract issued to a resident of Pennsylvania, an annuitant or
owner dies before the retirement date while the Contract is in force, IDS
Life will pay to the beneficiary the contract value only. This is true
whether or not death occurs prior to the annuitant attaining age 75 or
after the annuitant reaches age 75.
These amounts will be payable in a lump sum upon the receipt of IDS Life's death
claim requirements after the death of the annuitant or owner, whichever occurs
first.
In lieu of a lump sum payment, the beneficiary may elect to receive payment
under any annuity option available under the Contract provided:
1. the beneficiary elects the plan within 60 days after IDS Life receives due
proof of death; and
2. payments begin no later than one year after the date of death; and
3. the plan provides payments over a period which does not exceed the life of
the beneficiary or the life expectancy of the beneficiary.
In this event, the reference to annuitant in the annuity provisions shall apply
to the beneficiary. Any amounts payable or applied by IDS Life as described in
this section will be based on the contract value as of the valuation period
during which IDS Life's death claim requirements are fulfilled.
In order for the beneficiary to receive the death benefit, the beneficiary must
send, or have sent, due proof of death of the annuitant or owner to IDS Life,
IDS Tower 10, Minneapolis, MN 55440-0010. The beneficiary should clearly
indicate whether a lump sum payment is desired or if the beneficiary is
selecting one of the available annuity options under the Contract.
If the owner's death occurs prior to the retirement date, the owner's spouse, if
designated as sole beneficiary, may elect in writing to forgo receipt of the
death benefit and instead continue the Contract in force as its owner. The
election by the spouse must be made within 60 days after IDS Life receives due
proof of death.
If the annuitant dies after the retirement date, the amount payable, if any,
will be as provided in the annuity option then in effect.
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Annuity Period
Variable Annuity
A variable annuity is an annuity with payments that are not predetermined as to
dollar amount. Payments will vary according to the investment results of the
Account. Annuity payments will be made to the owner unless different
instructions are specified in writing. The owner may or may not be the
annuitant. The choice is made by the owner in the application for the Contract.
Retirement Date and Annuity Options
A retirement date is established at the time of application. An owner must give
IDS Life written instructions for paying retirement benefits at least 30 days
before the annuitant's retirement date. In the event no instructions are given,
IDS Life will make payments under Plan B described below with 120 monthly
payments guaranteed.
The retirement date may not be after the later of the annuitant's 85th birthday
or the tenth Contract anniversary. The retirement date cannot be earlier than
the fifth Contract anniversary.
Change of Retirement Date or Annuity Option
An owner may change the retirement date or the annuity option on written notice
received at IDS Life's home office at least 30 days prior to the current
retirement date.
Settlement Value of Annuity
Retirement payments generally are made to the owner, who may be the same as the
annuitant. The amount available on the retirement date is called the settlement
value. The settlement value equals the current value of your investment, called
the contract value. Before annuity payments begin, IDS Life will require
satisfactory proof that the annuitant is living. IDS Life also may require that
an owner exchange his Contract for a supplemental contract that provides for
annuity payments.
Because the investments of the Account fluctuate in value each day, IDS Life
will not guarantee that the settlement value or the total of the retirement
payments will exceed or even equal the amount of the purchase payments.
The owners will receive statements on the value of their investments and any
other required information at least annually. An owner has the right to
determine whether annuity payments are to be made on a fixed-dollar or variable
basis, or a combination of fixed and variable. A fixed annuity is one with
payments that are guaranteed by IDS Life as to dollar amount. Fixed annuity
payments after the first payment will never be less than the amount of the first
payment. At settlement, subject to the conditions then set by IDS Life as to
minimum dollar amounts and settlement rates, part or all of the contract value
may be used to provide a fixed-dollar annuity. Only variable payments are
described in the remainder of this section.
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Annuity Options
The owner of a Contract has the right to decide how retirement payments are to
be made. The owner may select one of the retirement payment plans outlined
below, or IDS Life and the owner may mutually agree on other payment
arrangements. Amounts of variable payments depend on:
` the annuity table in the Contract; ` the annuitant's age; ` the retirement
payment plan selected; and ` the investment performance of the Account.
Because the performance of the Account will fluctuate, payments will vary from
month to month. The assumed investment rate referred to in the following annuity
options is 5 percent per year.
`Plan A -- Life Annuity -- No Refund -- Monthly payments are made until the
annuitant's death. Payments end with the last monthly payment before the
annuitant's death. No further payments will be made. An owner should understand
that if the annuitant dies after even the first monthly payment, no more
payments would be made.
`Plan B -- Life Annuity with 5, ten or 15 Years Certain -- Monthly payments are
made until the annuitant's death. However, payments are guaranteed for 5, ten or
15 years, depending upon the term selected by the owner. If the annuitant dies
before those guaranteed payments have been made, then IDS Life will keep on
making payments to a designated secondary payee. If a secondary payee is not
named, or if the secondary payee dies before the annuitant, then the value of
the remaining guaranteed payments, based on the assumed investment rate, will be
paid to the annuitant's estate.
`Plan C -- Life Annuity -- Installment Refund -- Monthly payments are made until
the annuitant's death, with IDS Life's guarantee that payments will continue for
at least the number of months determined by dividing the amount of the contract
value being applied under the plan by the amount of the first monthly payment.
If the annuitant dies before those guaranteed payments have been made, IDS Life
will continue to make payments to the designated secondary payee. If a secondary
payee is not named, or if the secondary payee dies before the annuitant, then
the value of the remaining guaranteed payments, based on the assumed investment
rate, will be paid to the annuitant's estate.
`Plan D -- Joint and Last Survivor Life Annuity -- No Refund -- Monthly payments
are made while both the annuitant and a joint annuitant are living. If either
annuitant dies, monthly payments continue at the full amount until the death of
the surviving annuitant. Payments end with the death of the second annuitant,
and no further payments will be made.
Minimum Annuity Payments
Annuity payments will be made monthly. The annuity's contract value will be
calculated at the retirement date. If the calculations show that monthly
payments would be under $20, IDS Life reserves the right to pay the contract
value in one lump sum. For tax consequences of a lump sum payment, see the
Certain Federal Income Tax Considerations section.
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First Variable Annuity Payment
When retirement payments are to begin, IDS Life will compute the number of
annuity units to be credited to the owner. This is accomplished by determining
the contract value of the annuity as of the valuation date on or next preceding
the seventh calendar day before the retirement date and then deducting any
applicable premium tax.
The result is applied to the annuity table contained in the Contract or another
table at least as favorable. The lifetime variable annuity payments are then
calculated according to the retirement payment plan chosen. The annuity table
assumes an investment rate of 5 percent and shows the amount of the first
monthly payment for each $1,000 of value according to the age and, when
applicable, sex of the annuitant (unisex table of settlement rates will apply
when required by law).
These calculations give the total of the first monthly payment. This amount is
divided by the annuity unit value on the valuation date on or next preceding the
seventh calendar day before the retirement date. The result is the number of
annuity units to be credited to the owner.
Annuity Unit Value
The annuity unit value for the Account was originally set at $1. IDS Life
determines current annuity unit values by multiplying the last annuity unit
value by the product of:
` the net investment factor and
` the neutralizing factor.
The net investment factor measures the change in the Account's net asset value
from one valuation period to the next and is equal to the quotient of the net
asset value determined as of the current valuation date divided by the net asset
value on the immediately preceding valuation date. See the Valuation of Assets
section. The purpose of the neutralizing factor is to offset the effect of the
assumed investment rate built into the annuity table. With an assumed investment
rate of 5 percent, the neutralizing factor is 0.999866 for a one-day valuation
period.
The value of an annuity unit reflects the investment performance of the Account
and will vary.
Substitution of 3.5 Percent Annuity
If requested at least 30 days before the retirement date, IDS Life will
substitute an annuity table based upon an assumed 3.5 percent investment rate
for the 5 percent investment rate annuity table contained in the Contract.
The assumed investment rate affects both the amount of the first payment and the
extent to which subsequent payments increase or decrease. Using the 5 percent
table results in a higher initial payment, but later payments will increase more
slowly when annuity unit values are rising and decrease more rapidly when they
are declining.
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Subsequent Variable Annuity Payments
The method of calculation of the first monthly payment is explained in the First
Variable Annuity Payment section above. Subsequent variable payments will vary
according to the investment performance of the Account. Amounts of later monthly
payments are calculated by multiplying:
` the annuity unit value on the valuation date on or immediately preceding
the seventh calendar day before the payment is due; by
` the fixed number of annuity units credited to the owner.
Certain Federal Income Tax Considerations
The following summary is a general discussion of certain Federal income tax
consequences under present law that may involve owners. This summary does not
discuss all aspects of Federal income taxation that may be relevant. Prospective
investors should consult their own tax adviser as to the specific Federal income
tax consequences of the ownership of the Contracts, as well as the application
of other Federal, state, local and foreign income and other tax laws. IDS Life
believes that the Contracts will be treated as annuities under the Code, and,
therefore, an owner should not be subject to Federal income tax on any income or
earnings of the Account until distributions are made to such owner or a change
of ownership of the Contract occurs. IDS Life has not sought a ruling from the
Internal Revenue Service (the Service) regarding the tax status of the Account.
See the Risk Factors -- Federal Income Tax Matters section.
In addition, the qualification of the Contracts as annuities depends upon IDS
Life and the Account meeting the detailed factual and legal requirements of the
Code and regulations on a continuing basis, including the maintenance of certain
diversification requirements as discussed below. No assurance can be given that
the actual operations of IDS Life and the Account will satisfy such requirements
or that the applicable law will not change and adversely affect IDS Life, the
Account or the owners.
Taxation of the Account
The Account is not a separate taxpayer for purposes of Federal income taxation.
Although investment income derived by the Account is technically includable in
IDS Life's gross income for Federal income tax purposes, IDS Life is not
expected to have any income tax payable as a result of such investment income
provided it continues to comply with certain requirements. In the event IDS Life
does incur Federal or state income taxes attributable to the Account, IDS Life
will receive appropriate reimbursement from the Account for such taxes.
Diversification Requirements
The following diversification requirements regarding variable annuities
contained in Section 817(h) of the Code and regulations promulgated thereunder
apply to the Account: (i) no more than 55 percent of its assets may be invested
in any one investment; (ii) no more than 70 percent of its assets may be
invested in any two investments; (iii) no more than 80 percent of its assets may
be invested in any three investments; and (iv) no more than 90 percent of its
assets may be invested in any four investments. All interests in the
<PAGE>
same real property will be treated as a single investment for purposes of these
requirements. In addition, in the case of government securities, each government
agency or instrumentality shall be treated as a separate issuer for purposes of
these requirements.
As of Dec. 31, 1997 more than 80 percent of the Account's assets were invested
in the three remaining investments. For this reason, the Account no longer meets
the diversification requirements and must be liquidated. According to IDS Life's
understanding of the tax law as it applies to a real property account, the
Account must be liquidated within two years. IDS Life therefore intends to
liquidate the Account by the end of 1999. During this liquidation period, the
Contract will be treated as an annuity for Federal income tax purposes. Any
Contract owners who remain invested in the Account after the end of the
liquidation period will be subject to current Federal income taxation on any
earnings or income derived by the Account.
Taxation of Distributions
Section 72 of the Code governing distributions from annuity contracts provides
that the recipient of an annuity distribution does not include in gross income
that part of any amount received as an annuity that bears the same ratio to such
amount as the investment in the contract on the annuity starting date (as
adjusted for any refund feature) bears to the expected return under the
contract. In the event that the total amount of payments to be received under an
annuity contract varies in accordance with the investment experience of the
variable annuity account after the recipient's annuity starting date, the
recipient will not include in gross income any amount received in a taxable year
to the extent such amount does not exceed the recipient's investment in the
contract (as adjusted for any refund feature) divided by the number of years
over which the payments are anticipated to be received. Such exclusion from the
recipient's gross income, however, cannot exceed the recipient's unrecovered
investment in the contract immediately prior to the receipt of such amount. Any
amount received upon the surrender of an annuity contract (that may include the
proceeds of a loan when the annuity contract is used as collateral) generally is
included in the gross income of the recipient to the extent that the cash value
of the contract (determined without regard to any surrender charge) exceeds the
investment in the contract.
In addition, the owner of an annuity contract may be subject to an IRS penalty
equal to 10 percent of the amount of a distribution that is includable in gross
income (in addition to income taxes), unless, among other things, the
distribution (1) is made on or after the owner reaches the age 59-1/2; (2) is
made on or after the death of the owner of the contract or the primary annuitant
if the owner is not an individual; (3) is attributable to the owner becoming
disabled; or (4) is part of a series of substantially equal periodic payments
made at least annually for the life or life expectancy of the owner.
Valuation of Assets
Accumulation unit value is determined each valuation period. The accumulation
unit value for the Account was originally set at $1. The current accumulation
unit value is determined by taking the last accumulation unit value for the
Account and multiplying it by the current net investment factor. The net
investment factor measures the Account's investment performance for the
valuation period. The net investment factor is determined by first calculating
the net investment income for the period (i.e., the Account's income, net
realized and unrealized capital gains or losses on investments and expenses),
items that may be estimated periodically and credited or deducted ratably on a
daily basis with
<PAGE>
periodic adjustments to credit or charge the differences between actual and
estimated items of income, gains or losses as described below. The Account's net
investment income then is divided by the Account's net asset value at the
beginning of the valuation period to determine the net investment rate. The
Account's net asset value is determined by calculating the total gross value of
the Account's assets and reducing that amount by any expenses or liabilities,
including tax liabilities, mortgage indebtedness, administrative expenses, that
portion of organizational and offering expenses being amortized and the accrued
but unpaid daily charges for mortality and expense risk and asset management
fees. Finally, the net investment factor is calculated. The net investment
factor for any valuation period is the sum of one plus the net investment rate.
If the Account has a negative net investment rate for the period, the net
investment factor will be less than one. Because the net investment factor may
be greater or less than one, the accumulation unit value may increase or
decrease.
Accumulation unit value will vary with the value of the underlying assets in the
Account and in accordance with the charges and deductions assessed. These
charges and deductions will be assessed directly against the assets of the
Account itself rather than by liquidating accumulation units. Assessments of
premium taxes and the surrender charges are made separately for each Contract
and do not affect the accumulation unit value.
The amount of the Account's net income from its real estate and other
investments will be based upon estimates of the Account's revenues and expenses
for its real estate and other investments and the Account's operations on a
monthly basis. The value of the Account's assets will be increased on a daily
basis by a proportionate amount of the estimated net income for the month. The
Account will receive on a periodic basis reports of the actual operating results
for its real estate and other investments, and appropriate adjustments to credit
or charge the differences between actual and estimated operating results will be
made to the Account's assets. Because the daily accrual of estimated net income
is based on estimates that may not reflect the actual revenues and expenses of
the Account, owners will bear the risk that this procedure will result in an
overvaluing or undervaluing of the Account's assets.
Real Property Investments, Mortgage Loans and Land Sale-Leasebacks
The asset values of the Account's real property investments and mortgage loans
and land sale-leaseback investments initially will be their cost (including the
acquisition and mortgage placement fees, legal fees and expenses, closing costs
and other acquisition or placement expenses), unless circumstances otherwise
indicate that a different asset value should be used. Thereafter, periodically
or upon the occurrence of events that indicate a change in the asset value of a
real property investment, mortgage loan or land sale-leaseback investment held
by the Account, the Investment Adviser will determine the asset value of such
investments in accordance with the procedures described below. The Account's
asset value will take into account the current values of any notes receivable
held by the Account in connection with the previous sale of any real estate
related investments. Such values will be estimated by the application of
discount rate or rates deemed appropriate by the Investment Adviser in light of
the then current market conditions. The Account's asset value also will include
the income and expenses attributable to the real estate related assets which
will be determined or estimated periodically and credited or deducted ratably on
a daily basis with periodic adjustments to credit or charge the differences
between actual and estimated income or expenses as described above. At the time
of purchase, and at least once every two years thereafter, the Investment
Adviser shall cause each real estate related investment (other than fixed
<PAGE>
interest rate mortgage loans) owned by the Account or the real property
underlying such investment to be appraised by an independent appraiser or
appraisers or an existing appraisal to be updated. The cost of such appraisals
will be charged to the Account.
The Investment Adviser will determine the asset values of the Account's real
property investments and its mortgage loans and land sale-leaseback investments
with participation features based upon certain methodologies and various other
factors. A discounted cash flow methodology used by the Investment Adviser is
based upon various assumptions, including, but not limited to, occupancy rates,
rental rates, expense levels and capitalization rates upon sale, which are used
to make projections of each such investment's estimated cash flow (including the
fixed interest or fixed rental income from a mortgage loan or land
sale-leaseback with a participation feature) over an 11-year period. For this
purpose, it also is assumed that the real property comprising or underlying each
such investment is sold at the end of the tenth year based on the anticipated
cash flow of the real property for the eleventh year. (The use of this time
period does not mean that such investments will be held for any specific period
but was chosen as an acceptable frame of reference for estimating asset values.)
After these estimated cash flow and sale proceeds amounts are calculated, they
are discounted to their present value (using a rate or rates then deemed
appropriate by the Investment Adviser based upon the current market conditions)
in order to estimate what a buyer would be willing to pay for each such real
property on a current basis.
Given the decline in the real estate markets generally over the past few years
and the consequent difficulty in estimating, among other things, occupancy rates
and rental rates over extended periods of time, the Investment Adviser also
employs a "direct capitalization" methodology. Under this methodology, the
Investment Adviser generally determines the preliminary asset values of the
Account's real property investments and its mortgage loans and land
sale-leaseback investments with participation features by estimating the
stabilized annual Net Operating Income After Average Capital Costs for the real
property comprising or underlying each such investment and applying a current
capitalization rate (as deemed appropriate by the Investment Adviser for the
particular real property and the relevant market conditions) to such Net
Operating Income After Average Capital Costs. A preliminary asset value
determined for a particular real property as described above is reduced by the
aggregate deficiency (if any) in the estimated net operating income after
capital costs relative to the stabilized annual Net Operating Income After
Average Capital Costs of such real property for any year(s) preceding the year
in which the stabilized annual Net Operating Income After Average Capital Costs
is expected to be achieved in order to estimate what a buyer would pay for such
real property on a current basis.
In addition to using the foregoing methodologies, the Investment Adviser also
considers a number of other factors, including, among others, periodic
independent appraisals of the real properties and comparisons of existing rental
rates relative to estimated market rental rates. The relative weight to be given
a particular methodology or any other relevant factors in determining the
estimated asset value of a particular real property will depend upon the
Investment Adviser's assessment of the existing and anticipated market
conditions and property specific factors relevant to such real property. In the
case of real property investments jointly owned with other entities and mortgage
loans and land sale-leaseback investments with participation features, the asset
value of any such investment will be based on the Account's share of the current
asset value of each such real property determined by its joint ownership or
equity participation arrangement.
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The Account's fixed interest mortgage loans and fixed rental rate land
sale-leaseback investments without participation features are valued by the
Investment Adviser. The Investment Adviser determines the value by comparing the
interest rates on the Account's mortgage loans or the rentals under the
Account's ground leases with interest rates on U.S. Treasury debt instruments,
plus an additional amount determined by the Investment Adviser representing its
judgment as to the differential between the amount at which commercial lenders
would make similar mortgage loans or land sale-leaseback investments of such
duration and the rate on U.S. Treasury debt instruments. The differential is
selected by the Investment Adviser based upon the Investment Adviser's
evaluation of both the activities of commercial mortgage lenders at such time
and the features of the particular investment, including the underlying
property, its rent structure and the nature of its tenants.
A formula is applied periodically to adjust the value based upon changes in the
U.S. Treasury debt instrument rates originally used to value the investments.
The valuation resulting from the formula generally will continue in effect until
the next periodic application of the formula. The Investment Adviser will
evaluate quarterly (unless the Investment Adviser becomes aware of circumstances
that would warrant a more frequent evaluation) the interest differential at
which commercial lenders are making fixed interest rate mortgage loans or fixed
rental rate land sale-leaseback investments to determine whether an adjustment
needs to be made in the formula. The Investment Adviser will obtain information
relative to commercial lenders by surveys of lending institutions considered to
be representative, as well as from other sources.
It should be noted that the determination of the Account's asset value will not
necessarily reflect the true or realizable value of the Account's assets.
Although IDS Life and the Investment Adviser believe that the assumptions,
estimates and methodologies used in determining the asset values of the
Account's investments are reasonable, there can be no assurance that such
assumptions, estimates and methodologies will in fact prove correct or that such
values would in fact be realized. In addition, it is unlikely that all real
properties in which the Account has an interest would be sold for cash, but
rather certain properties may in fact be sold for cash and notes. Furthermore,
although at least once every two years the Investment Adviser will use
independent appraisals of the real properties in determining asset values,
appraisals are only estimates and do not necessarily reflect the true or
realizable value of an investment. Moreover, such appraisals are only one factor
that is considered by the Investment Adviser to determine the value of the real
estate related investments of the Account. In addition, the expenses that may be
borne by the Account in connection with the acquisition, placement or
disposition of a real estate related investment will not be deducted in
determining asset value by the Investment Adviser. The valuation of investments
made by the Account also may be adjusted by the Investment Adviser based upon
events that come to its attention affecting the real property investments or the
properties subject to mortgage loans or land sale-leaseback investments, which
it believes will increase or decrease realizable value, or events or market
conditions generally affecting the values of the real property investments,
mortgage loans or land sale-leaseback investments. For example, adjustments may
be made for the events that affect the property comprising a real property
investment or the surrounding area or events indicating an impairment of the
borrower's or lessee's ability to make payments with respect to a mortgage loan
or land sale-leaseback investment.
<PAGE>
There can be no assurance that the factors for which an adjustment should be
made will come to the attention of the Investment Adviser. Additionally, because
the evaluation of such factors may be subjective, there can be no assurance that
adjustments will be made in all cases in which the value of the real property
investments, mortgage loans or land sale-leaseback investments may be affected.
If the Investment Adviser believes it to be necessary, more frequent appraisals
will be conducted.
The above method of valuation may be changed by IDS Life (after consultation
with the Investment Adviser) should it determine that another method would more
accurately reflect the value of the Account's investments. Changes in the method
of valuation could result in a change in the contract value that may have an
adverse effect on either or both existing owners and new purchasers of
Contracts. As a result of a change in the valuation method, there may be
variations between the values at which owners purchase Contracts based upon a
different valuation method adopted by IDS Life. Written notice (included in this
section of the prospectus or otherwise) of any material change in the valuation
method will be mailed to all owners. Although the valuation method has been
selected because IDS Life and the Investment Adviser believe it will provide a
reasonable approximation of the value of the Account's investments, there may be
variations between the amount realizable upon disposition and the stated value
of such assets. Owners may be adversely affected if the valuation method results
in either overvaluing or undervaluing the Account's investments. Both the number
of accumulation units credited to an owner at the time a Contract is purchased
and the amount payable under the Contract are based on the value of the assets
of the Account. Should the valuation method overstate the value of the
investments, a new owner at the time of purchase will be credited with fewer
accumulation units than if the value were correctly stated and a person
receiving payments under the Contract during the time such valuation is in
effect will receive payments in excess of those to which the person was
entitled, to the detriment of other owners.
Alternatively, if the valuation method understates the value of the assets, a
new owner will be credited with more accumulation units at the time of purchase,
to the detriment of other owners, and a person receiving payments under a
Contract will receive less than the person otherwise would receive had the
assets been correctly valued. See also the Risk Factors -- Evaluation and
Appraisal Risk and the Conflicts of Interest -- Receipt of Commissions, Fees and
Other Compensation by IDS Life, the Investment Adviser and Affiliates sections.
Liquid Assets
The liquid assets of the Account, including accrued income, gains or losses on
such investments, also will be taken into account in determining the Account's
asset value. Short-term investments of the Account will be held to maturity
unless the circumstances warrant otherwise. Instruments for which market
quotations are readily available are valued at the last reported sales price on
the principal market for the instrument. Other instruments are valued at fair
market value as determined in good faith by IDS Life.
IDS Life has concluded that for short-term instruments with remaining maturities
of 60 days or less, including instruments with penalties for early withdrawal,
the fair market value shall be their amortized cost value unless the particular
circumstances of an instrument indicate otherwise. If any short-term instrument
containing early withdrawal penalties is redeemed prior to maturity, the related
expense will be recorded as incurred.
<PAGE>
Distribution of Contracts
The Contracts are offered by IDS Life. IDS Life is a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. Sales of the Contracts will be made by
registered representatives of IDS Life who are also licensed insurance agents.
IDS Life will pay from its general account commissions which may vary, but in
the aggregate are not anticipated to exceed an amount equal to 6 percent of the
purchase payments. Registered representatives of IDS Life may receive direct
sales incentive items and may participate in marketing incentive programs in
connection with the sale of the Contracts. It is possible that certain marketing
incentive programs may be based in part on the sale of Contracts and in part on
the sale of other securities. IDS Life will pay the costs (or an allocable share
of such costs) incurred for such sales incentive items and marketing incentive
programs.
State Regulation
IDS Life is subject to the laws of the State of Minnesota governing insurance
companies and to the regulations of the Department of Commerce of the State of
Minnesota. An annual statement in the prescribed form is filed with the
Department of Commerce of the State of Minnesota each year covering IDS Life's
operation for the preceding year and its financial condition at the end of such
year. Regulation by the Department of Commerce of the State of Minnesota
includes periodic examination to determine IDS Life's contract liabilities and
reserves so that the Department of Commerce of the State of Minnesota may
certify that these items are correct. IDS Life's books and accounts are subject
to review by the Department of Commerce of the State of Minnesota at all times.
A full examination of IDS Life's operations is conducted periodically by the
National Association of Insurance Commissioners. Such regulation does not,
however, involve any supervision of the Account's management or IDS Life's
investment practices or policies. In addition, IDS Life is subject to regulation
under the insurance laws of other jurisdictions in which it operates.
Experts
The financial statements of the Account as of Dec. 31, 1997 and 1996 and for
each of the years in the three-year period ended Dec. 31, 1997, were audited by
KPMG Peat Marwick LLP.
The combined financial statements of N/S Associates, Monmouth Associates and
1225 Investment Corporation (unconsolidated joint ventures of the Account) as of
Dec. 31, 1997 and 1996 and for each of the years in the three-year period ended
Dec. 31, 1997, were audited by KPMG Peat Marwick LLP.
The consolidated financial statements of IDS Life Insurance Company as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and Registration Statement were
audited by Ernst & Young LLP as set forth in their report herein.
The financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
<PAGE>
Registration Statement
A registration statement has been filed with the Securities and Exchange
Commission under the 1933 Act with respect to the Contracts. This prospectus
does not contain all information set forth in the registration statement, its
amendments and exhibits, to all of which reference is made for further
information concerning the Account, IDS Life and the Contract. Statements
contained in this prospectus as to the content of the Contract and other legal
instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
Reports
Owners will receive a confirmation of each purchase payment made with respect to
the Contracts. Additionally, IDS Life will, at least annually, mail a report
containing such information as may be required by any applicable law or
regulation and a statement showing the owner's current number of accumulation
units or annuity units, the accumulation unit value or annuity unit value and
the total contract value.
Financial Statements
The contract values under a Contract will be affected solely by the investment
results of the Account. Financial statements of IDS Life included herein should
be considered only as bearing on the ability of IDS Life to meet its obligations
under the Contract.
Legal Proceedings
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life and its subsidiaries do business involving
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. In December 1996, an action of this type
was brought against IDS Life and its parent AEFC. A second action was filed in
March 1997. The plaintiffs purport to represent a class consisting of all
persons who replaced existing IDS Life policies with new IDS Life policies from
and after January 1, 1985. The complaint puts at issue various alleged sales
practices and misrepresentations, alleged breaches of fiduciary duties and
alleged violations of consumer fraud statutes. Plaintiffs seek damages in an
unspecified amount and seek to establish a claims resolution facility for the
determination of individual issues.
IDS Life believes it has meritorious defenses to these and other actions arising
in connection with the conduct of its business activities and intends to defend
them vigorously. IDS Life believes that it is not a party to, nor are any of its
properties the subject of, any pending legal proceedings which would have a
material adverse effect on its consolidated financial condition.
<PAGE>
Appendix A
The members of the Board of Directors and the principal executive officers of
IDS Life,* together with the principal occupation of each during the last five
years, are as follows:
Directors
David R. Hubers
Born in 1943
Director since September 1989; president and chief executive officer, AEFC,
since August 1993, and director since January 1984. Senior vice president,
Finance and chief financial officer, AEFC, from January 1984 to August 1993.
Richard W. Kling
Born in 1940
Director since February 1984; president since March 1994. Executive vice
president, Marketing and Products, from January 1988 to March 1994. Senior vice
president, AEFC, since May 1994. Director of IDS Life Series Fund, Inc. and
chairman of the board of managers and president of IDS Life Variable Annuity
Funds A and B.
Paul F. Kolkman
Born in 1946
Director since May 1984; executive vice president since March 1994; vice
president, Finance, from May 1984 to March 1994; vice president, AEFC, since
January 1987.
James A. Mitchell
Born in 1941
Chairman of the board since March 1994; director since July 1984; chief
executive officer since November 1986; president from July 1984 to March 1994;
executive vice president, AEFC, since March 1994; director, AEFC, since July
1984; senior vice president, AEFC, from July 1984 to March 1994.
Barry J. Murphy
Born in 1951
Director and executive vice president, Client Service, since March 1994; senior
vice president, AEFC, since May 1994; senior vice president, Travel Related
Services (TRS), a subsidiary of American Express Company, from July 1992 to
April 1994; vice president, TRS, from November 1989 to July 1992.
Stuart A. Sedlacek
Born in 1957
Director and executive vice president, Assured Assets, since March 1994; vice
president, AEFC, since September 1988.
<PAGE>
Officers other than directors
Jeffrey S. Horton
Born in 1961
Vice president and treasurer since December 1997; vice president and corporate
treasurer, AEFC, since December 1997; controller, American Express Technologies
- - Financial Services, AEFC, from July 1997 to December 1997; controller, Risk
Management Products, AEFC, from May 1994 to July 1997; director of finance and
analysis, Corporate Treasury, AEFC, from June 1990 to May 1994.
William A. Stoltzmann
Born in 1948
Vice president, general counsel and secretary since 1989; vice president and
assistant general counsel, AEFC, since November 1985. Vice president, general
counsel and secretary, American Enterprise Life Insurance Company, American
Partners Life Insurance Company.
* The address for all of the directors and principal officers is: IDS Tower 10,
Minneapolis, MN 55440-0010.
<PAGE>
Appendix B
The directors, executive officers and certain other officers of JMB Realty
Corporation (JMB), the managing partner of the Investment Adviser, are set forth
below. Many of such persons are also officers and/or directors of numerous
affiliated companies of JMB and/or partners of certain partnerships (herein
collectively referred to as the Associate Partnerships) which are partners,
directly or indirectly, in publicly offered real estate limited partnerships
sponsored by JMB.
Judd D. Malkin, 60, is Chairman and Director of JMB, a Director of Urban
Shopping Centers, Inc., an affiliate of JMB engaged in the business of owning,
managing and developing shopping centers, an officer and/or director of various
other JMB affiliates and a partner of the Associate Partnerships. Until December
1994 he was also a trustee of JMB Group Trust I, JMB Group Trust II, JMB Group
Trust III, JMB Group Trust IV and JMB Group Trust V, which until that time had
been advised by an affiliate of the Investment Adviser. Mr. Malkin has been
associated with JMB since October 1969. He is a Certified Public Accountant.
Neil G. Bluhm, 60, is President and Director of JMB, a Director of Urban
Shopping Centers, Inc., an affiliate of JMB engaged in the business of owning,
managing and developing shopping centers, an officer and/or director of various
other JMB affiliates and a partner of the Associate Partnerships. Until December
1994 he was also a trustee of JMB Group Trust I, JMB Group Trust II, JMB Group
Trust III, JMB Group Trust IV and JMB Group Trust V, which until that time had
been advised by an affiliate of the Investment Adviser. Mr. Bluhm has been
associated with JMB since August 1970. He is a member of the Bar of the State of
Illinois and a Certified Public Accountant.
Burton E. Glazov, 59, is Director of JMB and until December 1990 served as an
Executive Vice President of JMB. Mr. Glazov has been associated with JMB since
June 1971. He is a member of the Bar of the State of Illinois and a Certified
Public Accountant.
Stuart C. Nathan, 56, is Executive Vice President and Director of JMB, an
officer and/or director of various JMB affiliates and a partner of the Associate
Partnerships. Mr. Nathan has been associated with JMB since July 1972. He is
also a director of Sportmart Inc., a retailer of sporting goods. He is a member
of the Bar of the State of Illinois.
John G. Schreiber, 51, is Director of JMB, a Director of Urban Shopping Centers,
Inc., an affiliate of JMB engaged in the business of owning, managing and
developing shopping centers, and until December 1990 served as an Executive Vice
President of JMB. Mr. Schreiber has been associated with JMB since December
1970. Mr. Schreiber is President of Schreiber Investments, Inc., a company which
is engaged in the real estate investing business. He is also a senior advisor
and partner of Blackstone Real Estate Partners, an affiliate of the Blackstone
Group, L.P. Mr. Schreiber also serves as a Trustee of Amli Residential Property
Trust, a publicly-traded real estate investment trust that invests in
multi-family properties. He is also a Director of a number of investment
companies advised or managed by T. Rowe Price Associates and its affiliates. He
holds a master's degree in business administration from the Harvard University
Graduate School of Business.
<PAGE>
A. Lee Sacks, 64, is Director of JMB, President and Director of JMB Insurance
Agency, Inc. and a partner of various Associate Partnerships. Mr. Sacks has been
associated with JMB since December 1972.
H. Rigel Barber, 49, is Chief Executive Officer and Executive Vice President of
JMB, an officer of various JMB affiliates and a partner of various Associate
Partnerships. Mr. Barber has been associated with JMB since March 1982. He holds
a law degree from the Northwestern University Law School and is a member of the
Bar of the State of Illinois.
Ira J. Schulman, 46, is Executive Vice President of JMB, an officer of various
JMB affiliates and a partner of various Associate Partnerships. Mr. Schulman has
been associated with JMB since February 1983. He holds a master's degree in
business administration from the University of Pittsburgh.
Gary Nickele, 45, is Executive Vice President and General Counsel of JMB, an
officer and/or director of various JMB affiliates and a partner of various
Associate Partnerships. Mr. Nickele has been associated with JMB since February
1984. He holds a law degree from the University of Michigan Law School and is a
member of the Bar of the State of Illinois.
Glenn E. Emig, 50, is Executive Vice President and Chief Operating Officer of
JMB, an officer of various JMB affiliates and a partner of various Associate
Partnerships. Mr. Emig has been associated with JMB since December 1979. He
holds a master's degree in business administration from the Harvard University
Graduate School of Business.
Summary of Selected Financial Information
The following selected financial information of the Account has been derived
from the audited financial statements and should be read in conjunction with
those statements and the related notes to financial statements.
<TABLE>
<CAPTION>
Years ended Dec. 31,
------------- ------------- ------------- -------------- -------------
1997 1996 1995 1994 1993
------------- ------------- ------------- -------------- -------------
- -------------------------------------
Contract Purchase Payments
<S> <C> <C> <C> <C> <C>
Terminations (net)................ $(6,923,566) $(2,207,498) $ 2,291,255 $(5,184,527) $(6,873,380)
Net Income (loss)................. $ 1,718,205 $ (153,491) $(2,378,521) $ (946,390) $ 1,816,417
Total Contract Owners' Equity*.... $28,340,115 $33,545,476 $35,906,465 $35,993,731 $42,124,648
Accumulation Units Outstanding*... 27,339,211 34,144,955 36,353,929 34,238,180 39,000,431
Accumulation Unit Value........... $ 1.04 $ .98 $ .99 $ 1.05 $ 1.08
- ------------------------------------- ------------- ------------- ------------- -------------- -------------
</TABLE>
* As of Dec. 31, 1997, IDS Life's portion of the Total Contract Owners' Equity
was $25,877,976 (91%) and IDS Life owned $24,969,872 (91%) of the Accumulation
Units Outstanding.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition and Results of Operations
For the Year Ended December 31, 1997 Compared to the Year Ended
December 31, 1996
Net assets decreased from $33,545,476 at December 31, 1996 to $28,340,115 at
December 31, 1997. During this same time period, the accumulation unit value
increased from $.98 to $1.04. The Account experienced net terminations amounting
to $6,923,566 for the year ended December 31, 1997 compared to net terminations
of $2,207,498 for the year ended December 31, 1996. IDS Life did not purchase or
sell accumulation units for the year ended December 31, 1997. For the year ended
December 31, 1996, IDS Life purchased $2,000,000 accumulation units, as
discussed more fully below.
Recorded net income for the year ended December 31, 1997 was $1,718,205 compared
to net loss of $153,491 for the year ended December 31, 1996.
Interest income for the year ended December 31, 1997, represents income earned
on the Account's investment in short-term securities. Interest income increased
to $467,504 from $385,026 for the year ended December 31, 1997 compared to the
year ended December 31, 1996. The increase for the year ended December 31, 1997,
is due primarily to an increase in the average short-term investment balance
throughout 1997 compared to the same period in 1996. This increase was due
primarily to cash received as a result of (i) the payoff of the Riverpoint
mortgage loan receivable in December 1996 and (ii) the sale of the West
Springfield apartments in September 1996. Short-term investments decreased
towards the end of 1997 due primarily to net Account terminations, as discussed
above. Interest income for the year ended December 31, 1996 primarily represents
interest income earned on the Account's investment in the participation in a
mortgage loan (Riverpoint Shopping Center). Interest income in 1996 also
includes interest earned on short term investments. The borrower of the ten year
non-recourse participating first mortgage loan on the Riverpoint Shopping Center
had notified the Lenders (IDS Life Account RE, JMB Mortgage Partners-III and JMB
Mortgage Partners IV, jointly the "Lenders"), that it was experiencing financial
difficulties and approached the Lenders regarding a loan modification. During
the third quarter of 1996, the Lenders and Borrowers finalized a loan
modification whereby they reached an agreement to defer payment of a portion of
the scheduled debt service from September 15, 1995 to July 15, 1996. In
conjunction with the loan modification agreement, the scheduled maturity date of
the loan was accelerated to December 31, 1997. Finally, the Lenders agreed to
accept at certain dates through June 30, 1997 repayment of the loan at specified
amounts. On December 24, 1996, the borrower repaid the lenders $27,400,000 (of
which the Account's share was approximately $2,800,000) in full satisfaction of
the loan as agreed upon.
For the year ended December 31, 1997, the Account's recorded equity in earnings
of its unconsolidated joint ventures (N/S Associates, Monmouth Associates and
1225 Connecticut) was $2,277,775 compared to $2,167,460 for the year ended
December 31, 1996. The increase is due primarily to an increase in interest
income earned by Monmouth Associates. The increase in earnings was partially
offset by lower rental income achieved at Southridge and Northridge Malls due to
lower effective rents.
Northridge Mall continues to be adversely affected by the perception that it is
an unsafe place to shop. This perception has resulted in declining sales and
occupancy over a three-year period. Compounding the problem of declining sales
are the high operating costs for tenants at the mall. Occupancy has also been
affected by tenant bankruptcies over the past years. As of December 31, 1997,
occupancy of the mall shops was approximately 75%, including temporary tenants
<PAGE>
under short term leases. In August 1997, a movie theater, which occupied
approximately 8% of the owned net rentable area at the property, vacated its
space upon expiration of its lease. Northridge is attempting to lease this space
to another movie theater operator, however, there can be no assurance the
Northridge Mall will be successful.
To counter the negative perception of Northridge Mall, N/S Associates
implemented certain capital improvements and operational programs to improve the
shopping center's safety and appearance, as well as instituted certain marketing
efforts to enhance its image. Certain positive sales trends appear to indicate a
modest improvement; however, elimination of the negative perception is expected
to take some time. In addition N/S Associates is seeking to increase occupancy
at the shopping center by aggressively marketing space for new and renewal
tenants through leasing incentives, as well as continuing to cooperate with
existing tenants who need short-term rent reductions in order to retain
occupancy of their space. Part of the leasing strategy includes targeting
certain well-recognized retailers as a group that would become tenants at the
shopping center. It is expected that the draw of this group of tenants would
help the shopping center gain leasing momentum and aid in future leasing
efforts.
Kohl's Department Store, a successful tenant occupying approximately 66,000
square feet of space at Southridge Mall, approached N/S Associates regarding an
expansion of its tenant space and a reduction in its overall leasing costs.
During the third quarter of 1995, N/S Associates and Kohl's entered into an
amendment of its lease. Pursuant to the lease amendment, the term of Kohl's
lease was extended from 2001 until 2015 and the tenant space was increased by
approximately 19,000 square feet to approximately 85,000 square feet, exclusive
of storage space. Kohl's is required to pay annual base rent of $9.25 per square
foot, as well as one-half of its pro rata share for real estate taxes and a
fixed amount for common area maintenance expense. Kohl's is also obligated to
pay as additional rent a percentage of its gross receipts in excess of a minimum
amount of annual sales determined after the tenant has occupied the entire
leased space. N/S Associates was responsible for paying the costs of asbestos
removal for the tenant space. Kohl's was obligated to pay other costs associated
with the leased space, including tenant improvements and lease buy-out and
relocation costs. The lease amendment also contains an operating covenant
pursuant to which Kohl's is obligated to operate its retail store at Southridge
Mall until 2005, subject to earlier termination under certain circumstances.
Although the lease amendment reduces Kohl's overall rent, the expansion of its
space and the extension of its lease term is expected to help stabilize the
shopping center on a long-term basis by ensuring Kohl's continued occupancy and
its contribution to customer traffic. As of December 31, 1997, occupancy of the
portion of Southridge Mall owned by N/S Associates was approximately 97%,
including temporary tenants under short-term leases.
For the year ended December 31, 1997, the Account recognized net unrealized
depreciation on its investment in unconsolidated joint ventures of $169,246
primarily a result of a net decrease in the value of N/S Associates (comprised
of a decrease in value of Northridge Mall off set by a slight increase in value
at Southridge Mall). In addition, Monmouth Associates and 1225 Investment
Corporation had a slight decrease in value due to a reduction of its current
assets.
The Account paid asset management and mortality expense risk fees of $783,731
and $1,011,135 for the years ended December 31, 1997 and 1996, respectively.
Distributions from unconsolidated joint ventures increased from $2,358,370
in 1997 compared to $1,729,576 in 1996. The increase was primarily due to the
Account's share of Monmouth Associates' distributions of $1,115,200. The
increase was partially offset by decreased distributions from N/S
Associates and 1225 Investment Corporation.
<PAGE>
On September 30, 1996 the Account sold land and related improvements known as
the West Springfield Terrace Apartments. The purchaser was not affiliated with
the Account and the sale price was determined by arm's-length negotiations. The
sale price for the land and improvements was $16,100,000 (before deducting
selling costs) and was paid in cash at closing. A portion of the net sale
proceeds was utilized to retire the first mortgage debt with an outstanding
balance of $7,704,000.
For the Year Ended December 31, 1996 Compared to the Year Ended
December 31, 1995-
Net assets decreased from $35,906,465 at December 31, 1995 to $33,545,476 at
December 31, 1996. During this same time period, the accumulation unit value
decreased from $.99 to $.98. The Account experienced net terminations amounting
to $2,207,498 for the year ended December 31, 1996 compared to net sales of
$2,291,255 for the year ended December 31, 1995. The net sales for the year
ended December 31, 1995 include approximately $24,700,000 for accumulation units
purchased by IDS Life, which has been used to repay principal and accrued
interest on the Account's revolving loan payable to IDS Life and to pay for
contract surrenders, as discussed more fully below.
Recorded net loss for the year ended December 31, 1996 was $153,491 compared to
$2,378,521 for the year ended December 31, 1995.
Interest income for the year ended December 31, 1996 primarily represents income
earned on the Account's investment in the participation in a mortgage loan
(Riverpoint Shopping Center). Interest income also includes interest earned on
short term investments. The borrower had notified the Lenders that it was
experiencing financial difficulties and approached the Lenders regarding a loan
modification. During the third quarter of 1996, the Lenders and Borrowers
finalized a loan modification whereby they reached an agreement to defer payment
of a portion of the scheduled debt service from September 15, 1995 to July 15,
1996. In conjunction with the loan modification agreement, the scheduled
maturity date of the loan was accelerated to December 31, 1997. Finally, the
Lenders agreed to accept at certain dates through June 30, 1997 repayment of the
loan at specified amounts. On December 24, 1996, the borrower repaid the lenders
$27,400,000 (of which the Account's share was approximately $2,800,000) in full
satisfaction of the loan as agreed upon.
For the year ended December 31, 1996, the Account's recorded equity in earnings
of its unconsolidated joint ventures (N/S Associates, Monmouth Associates and
1225 Connecticut) was $2,167,460, compared to $1,924,741 for the year ended
December 31, 1995. However, after eliminating the effect of the recognition in
the first quarter of 1995 of income attributable to certain lease termination
fees received by N/S Associates, the equity in earnings of unconsolidated joint
ventures showed an increase for 1996 of approximately 12.9 percent compared to
the recorded equity increase in earnings for 1995. The increase is due primarily
to (I) an increase in interest earned which is currently being paid from
Monmouth Associates, (ii) an increase in rental income at 1225 Connecticut due
to the property being 100 percent leased, and (iii) lower interest expense from
N/S Associates in 1996 as a result of prepayment charges incurred in the first
quarter of 1995 in connection with the repayment and refinancing of the mortgage
loans on Northridge and Southridge Malls. The increase in earnings was partially
offset by lower rental income achieved at Southridge and Northridge Malls due to
lower occupancy.
<PAGE>
For the year ended December 31, 1996, the Account recognized net unrealized
depreciation of participation in mortgage loan of $147,608 as a result of lower
effective rents achieved from the mortgage property upon releasing. The Account
recognized net realized depreciation on its investment in wholly-owned real
estate property of $2,146,691 primarily as a result of the sale of the West
Springfield Terrace apartments, as discussed below. In addition, the Account
recognized net unrealized depreciation on its investment in unconsolidated joint
ventures of $1,206,750 primarily a result of (i) a decrease in the current
assets of Monmouth Associates, which partially resulted from a $4,000,000 cash
distribution paid in 1996 in which the Account's share was $278,800, (ii) a
decrease in the estimated value of N/S Associates (Northridge Mall and
Southridge Mall); and (iii) a decrease in the value of 1225 Connecticut. These
decreases were a result of valuations of the properties which indicated the
properties fair market values. In addition, the lower values at Northridge and
Southridge can be attributable to the factors discussed above. Also, the
decrease in value at 1225 Connecticut is partially due to 80% of the building
being leased to one tenant. This increased the property's risk factor.
The Account paid asset management and mortality expense risk fees of $1,011,135
and $1,086,516 for the years ended December 31, 1996 and 1995, respectively.
Liquidity and Capital Resources
For the Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996 At December 31, 1997, the Account had cash of approximately $83,000 as
compared to approximately $103,000 at December 31, 1996. The Account financed a
portion of the contract terminations during 1996 through additional investments
made by IDS Life Insurance Company (IDS Life). The Account had experienced net
contract terminations in 6 consecutive quarters.
The liquidity requirements of the Account have generally been met by funds
provided from the Account's short-term investments, cash distributions from
unconsolidated joint ventures, operating cash flow, interest income, proceeds
from sales of contracts and purchases of accumulation units by IDS Life, as
discussed below. The primary uses of funds currently are expected to be for
property operating expenses, asset management and mortality and expense risk
fees and payments for contract terminations.
Effective May 1, 1995, new contract sales of the Account were discontinued.
Additional purchase payments continue to be accepted for existing contracts in
amounts specified in the Account's prospectus, whether by means of the
previously established bank authorizations or otherwise. Existing contracts also
continue to be serviced and surrender requests will be honored.
IDS Life continues to purchase accumulation units in order to maintain the
Account and its liquidity. IDS Life makes these payments so that no contract
holder is disadvantaged because sales of new contracts have been discontinued.
The initial payments for accumulation units that IDS Life made into the Account
in 1995 were used to pay off the amount that the Account had borrowed under its
revolving line of credit. IDS Life expects to continue to make additional
payments into the Account for accumulation units as needed in order to fund all
of the Account's obligations under the contracts such as paying death benefits
and contract terminations.
By purchasing accumulation units, IDS Life has an ownership interest in the
Account. Since IDS Life does not purchase a contract, it is not subject to
surrender charges. However, IDS Life, as holder of accumulation units,
participates in the increase or decrease in the value of the Account's
investments just as other owners of accumulation units do. IDS Life may realize
a gain or loss on its accumulation units when redeemed.
<PAGE>
IDS Life currently expects to hold the accumulation units it purchases until the
surrender of all outstanding contracts or until the Account's liquidity improves
(through, for example, one or more sales of real estate related investments)
thereby permitting the Account to satisfy its anticipated contract obligations.
Because IDS Life may purchase a significant amount of accumulation units, IDS
Life may be subject to certain conflicts of interest it would not otherwise have
if it had not purchased such accumulation units, including, among other things,
a conflict in approving periodic valuations of real estate investments made by
the Investment Adviser.
Since the Account has experienced substantial net contract terminations over the
past several years, the Account does not intend to acquire additional real
estate related investments. During 1996, the Account liquidated two real estate
related investments. Further, the Account intends to liquidate the real estate
related investments that it currently holds when it becomes advantageous or
necessary to do so. To the extent funds of the Account are not used to pay
obligations of the Account, including those under existing contracts, or the
redemption of accumulation units purchased by IDS Life, such funds will be
invested in short-term debt instruments and possibly intermediate-term bonds
with maturities of up to five years.
Through December 31, 1997, Monmouth Associates funded approximately $25,905,000
of the renovation loan for Monmouth Mall. Fundings of principal on the loan have
been made from cash reserves held by Monmouth Associates, cash flow from
interest and ground rent payments received from the borrower/lessee and capital
contributions made to Monmouth Associates by its partners pro rata based upon
their respective interests. The aggregate amount of capital contributions to
finance the loan, is approximately $9,830,000. The Account's share of these
capital contributions is approximately $685,000. The aggregate amount of the
renovation loan, including accrued and deferred interest of approximately
$1,300,000, is currently expected to be no greater than $29,100,000. Remaining
fundings for the renovation loan are expected to be made from cash flow and
funds currently held by Monmouth Associates. Monmouth Associates may also be
required to make certain additional loans to pay a portion of the costs of
certain tenant improvements or other ordinary capital expenditures. In addition,
Monmouth Associates may provide additional financing to the borrower/lessee in
order to pay costs to be incurred in connection with the replacement of a
department store tenant at Monmouth Mall. However, it is not currently expected
that this would occur during 1997.
The renovation is nearing completion with tenant improvement work for one of the
larger tenants and retainage work remaining. The occupancy of mall shops and
outparcel space at the shopping center as of December 31, 1997 was approximately
85 percent. However, the mall shops and outparcel space are approximately 90
percent leased. Leasing and occupancy at the shopping center had been adversely
affected by tenant bankruptcies occurring in 1996.
The loan had an original term of seven years and bore interest at a rate of 9.5
percent per annum. The loan required monthly payments of principal and interest
aggregating $824,000 per annum until November 1996 when the remaining principal
balance was due.
In February 1995, N/S Associates obtained a new mortgage loan secured by
Southridge Mall in the principal amount of $35,000,000. The new mortgage loan
has a term of seven years, bears interest at 8.35 percent per annum and requires
monthly payments of interest only prior to maturity. A portion of the proceeds
from the new mortgage loan was used to repay the two mortgage loans secured by
Northridge Mall as well as the mortgage loan previously secured by Southridge
Mall. Remaining net proceeds from the refinancing have been and will be used to
pay tenant improvement and other capital costs at Northridge and Southridge
Malls.
<PAGE>
N/S Associates currently expects that it will incur approximately $1,710,000 in
1998 for tenant improvement, asbestos removal and other capital items at
Northridge and Southridge Malls. Actual amounts expended in 1998 may vary
depending on a number of factors, including actual leasing activity, results of
property operations, liquidity considerations and market conditions over the
course of the year. N/S Associates undertakes asbestos removal from time to time
at portions of the Northridge and Southridge Malls as tenant spaces are vacated
and prior to occupancy by new tenants. The cost of tenant improvements, asbestos
removal and other capital items generally will be provided out of cash flows
from the properties. N/S Associates expended approximately $1,629,000 for tenant
improvements, asbestos removal and other capital projects in 1997.
At December 31, 1997, real property investments (through two unconsolidated
joint ventures, N/S Associates and 1225 Connecticut), one land sale-leaseback
investment (Monmouth Associates), and short-term investments represented 50.9
percent, 30.3 percent and 18.5 percent of total assets, respectively. At
December 31, 1996, real property investments, mortgage loan and land
sale-leaseback investments and short-term investments represented 42.4 percent,
26.9 percent and 30.7 percent of total assets, respectively.
For the Year Ended December 31, 1996 Compared to the Year Ended December 31,
1995 At December 31, 1996, the Account had cash of approximately $103,000 as
compared to approximately $587,000 at December 31, 1995. The Account financed a
portion of the contract terminations during 1996 and 1995 through additional
investments made by IDS Life Insurance Company (IDS Life). The Account had
experienced net contract terminations in 14 consecutive quarters with net sales
(including accumulation units purchased by IDS Life) in six of the last seven
quarters.
The liquidity requirements of the Account have generally been met by funds
provided from the Account's short-term investments, cash distributions from
unconsolidated joint ventures, operating cash flow, interest income, proceeds
from the sale of West Springfield Terrace apartments, the Loan repayment from
Riverpoint Shopping Center, proceeds from sales of contracts, and borrowings
under the line of credit from IDS Life and purchases of accumulation units by
IDS Life discussed below. The primary uses of funds currently are expected to be
for property operating expenses, asset management and mortality and expense risk
fees and payments for contract terminations.
In March 1994, the Account obtained a revolving line of credit for up to $10
million from IDS Life to pay for contract surrenders and other obligations under
the contracts. In June 1995, the revolving credit loan balance of $9,500,000 and
accrued interest were repaid as discussed below.
Effective May 1, 1995, new contract sales of the Account were discontinued.
Additional purchase payments continue to be accepted for existing contracts in
amounts specified in the Account's prospectus, whether by means of the
previously established bank authorizations or otherwise. Existing contracts also
continue to be serviced and surrender requests will be honored.
IDS Life continues to purchase accumulation units in order to maintain the
Account and its liquidity. IDS Life makes these payments so that no contract
holder is disadvantaged because sales of new contracts have been discontinued.
The initial payments for accumulation units that IDS Life made into the Account
were used to pay off the amount that the Account had borrowed under its
revolving line of credit. IDS Life expects to continue to make additional
payments into the Account for accumulation units as needed in order to fund all
of the Account's obligations under the contracts such as paying death benefits
and contract terminations. As of December 31, 1996, IDS Life had purchased
approximately 24,969,872 accumulation units.
<PAGE>
By purchasing accumulation units, IDS Life has an ownership interest in the
Account. Since IDS Life does not purchase a contract, it is not subject to
surrender charges. However, IDS Life, as holder of accumulation units,
participates in the increase or decrease in the value of the Account's
investments just as other owners of accumulation units do. IDS Life may realize
a gain or loss on its accumulation units when redeemed.
IDS Life currently expects to hold the accumulation units it purchases until the
surrender of all outstanding contracts or until the Account's liquidity improves
(through, for example, one or more sales of real estate related investments)
thereby permitting the Account to satisfy its anticipated contract obligations.
Because IDS Life may purchase a significant amount of accumulation units, IDS
Life may be subject to certain conflicts of interest it would not otherwise have
if it had not purchased such accumulation units, including, among other things,
a conflict in approving periodic valuations of real estate investments made by
the Investment Adviser.
Since the Account has experienced substantial net contract terminations over the
past several years, the Account does not intend to acquire additional real
estate related investments. Further, the Account intends to liquidate the real
estate related investments that it currently holds when it becomes advantageous
or necessary to do so. To the extent funds of the Account are not used to pay
obligations of the Account, including those under existing contracts, or the
redemptions of accumulation units purchased by IDS Life, such funds will be
invested in short-term debt instruments and possibly intermediate-term bonds
with maturities of up to five years.
Through December 31, 1997, Monmouth Associates funded approximately $25,905,000
of the renovation loan for Monmouth Mall. Fundings of principal on the loan have
been made from cash reserves held by Monmouth Associates, cash flow from
interest and ground rent payments received from borrower/lessee and capital
contributions made to Monmouth Associates by its partners pro rata based upon
their respective interests. The aggregate amount of capital contributions to
finance the loan, is approximately $9,830,000. The Account's share of these
capital contributions is approximately $685,000. The aggregate amount of the
renovation loan, including accrued and deferred interest of approximately
$1,300,000, is currently expected to be no greater than $29,100,000. Remaining
fundings for the renovation loan are expected to be made from cash flow and
funds currently held by Monmouth Associates. Monmouth Associates may also be
required to make certain additional loans to pay a portion of the costs of
certain tenant improvements or other ordinary capital expenditures. In addition,
Monmouth Associates may provide additional financing to the borrower/lessee in
order to pay costs to be incurred in connection with the replacement of a
department store tenant at Monmouth Mall.
The renovation is nearing completion with tenant improvement work and retainage
work remaining. The occupancy of mall shops and outparcel space at the shopping
center as of December 31, 1996 was approximately 83 percent. However, the mall
shops and outparcel space are approximately 86 percent leased. Leasing and
occupancy at the shopping center have been adversely affected by tenant
bankruptcies occurring in 1995.
The Account had a loan outstanding in the principal amount of approximately
$7,770,000, prior to its payoff in September 1996 as a result of the sale,
secured by its wholly-owned real estate investment, West Springfield Terrace
Apartments. The loan had an original term of seven years and bore interest at a
rate of 9.5 percent per annum. The loan required monthly payments of principal
and interest aggregating $824,000 per annum until November of 1996 when the
remaining principal balance was due.
<PAGE>
In February 1995, N/S Associates obtained a new mortgage loan secured by
Southridge Mall in the principal amount of $35,000,000. The new mortgage loan
has a term of seven years, bears interest at 8.35 percent per annum and requires
monthly payments of interest only prior to maturity. A portion of the proceeds
from the new mortgage loan was used to repay the two mortgage loans secured by
Northridge Mall as well as the mortgage loan previously secured by Southridge
Mall. Remaining net proceeds from the refinancing have been and will be used to
pay tenant improvement and other capital costs at Northridge and Southridge
Malls.
At December 31, 1996, real property investments (through two unconsolidated
joint ventures, N/S Associates and 1225 Connecticut) and mortgage loan and land
sale-leaseback investments (through an unconsolidated joint venture, Monmouth
Associates) and short-term investments represented 42.4 percent, 26.9 percent
and 30.7 percent of total assets, respectively.
<PAGE>
Index to Financial Statements
Page
IDS Life Account RE
Independent Auditors' Report........................................79
Balance Sheets
Dec. 31, 1997 and 1996..........................................80
Statements of Operations, years ended
Dec. 31, 1997, 1996 and 1995....................................81
Statements of Changes in Contract Owners' Equity,
years ended Dec. 31, 1997, 1996 and 1995........................82
Statements of Cash Flows, years ended
Dec. 31, 1997, 1996 and 1995....................................83
Notes to Financial Statements.......................................85
N/S Associates, Monmouth Associates & 1225 Investment Corporation
(Unconsolidated Joint Ventures of IDS Life Account RE)
Independent Auditors' Report........................................95
Combined Balance Sheets
Dec. 31, 1997 and 1996..........................................96
Combined Statements of Operations, years ended
Dec. 31, 1997, 1996 and 1995....................................97
Combined Statements of Partners' Capital Accounts,
years ended Dec. 31, 1997, 1996 and 1995........................98
Combined Statements of Cash Flows, years ended
Dec. 31, 1997, 1996 and 1995....................................99
Notes to Financial Statements.......................................100
IDS Life Insurance Company
Report of Independent Auditors......................................105
Consolidated Balance Sheets, Dec. 31, 1997 and 1996.................106
Consolidated Statements of Income, years ended
Dec. 31, 1997, 1996 and 1995....................................108
Consolidated Statements of Stockholder's Equity, years
ended Dec. 31, 1997, 1996 and 1995..............................109
Consolidated Statements of Cash Flows, years ended
Dec. 31, 1997, 1996 and 1995....................................110
Notes to Consolidated Financial Statements..........................112
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of IDS Life Insurance Company and Contract Owners of IDS
Life Account RE:
We have audited the financial statements of IDS Life Account RE as listed in the
accompanying index. In connection with our audits of the financial statements,
we also have audited the financial statement schedules as listed in the
accompanying index. These financial statements and financial statement schedules
are the responsibility of the management of IDS Life Insurance Company. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IDS Life Account RE at December
31, 1997 and 1996 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 20, 1998
<PAGE>
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
1997 1996
------------------ ----------------
Assets:
Cash $82,887 $102,737
Investments in securities, at value (Note 2)
(identified cost of $5,282,201 and $10,254,310
at December 31, 1997 and December 31, 1996,
respectively) 5,282,201 10,254,310
Investments in unconsolidated joint ventures,
at fair value (cost of $36,218,770 and
$36,299,366 at December 31, 1997 and
December 31, 1996, respectively) 23,134,763 23,384,605
Other assets -- 4,277
------------------ ----------------
Total assets
$28,499,851 $33,745,929
================== ================
Liabilities:
Payable to IDS Life for:
Operating expenses 72,008 42,340
Contract terminations 22,567 4,793
Accrued mortality and expense risk fee 28,961 32,991
Accrued asset management fee 36,200 41,239
Liabilities related to wholly-owned
real estate property (Note 5):
Accounts payable and other liabilities -- 79,090
------------------ ----------------
Total liabilities $ 159,736 $200,453
================== ================
Contract Owners' Equity:
Net assets applicable to Variable Annuity
contracts in accumulation period $28,340,115 $33,545,476
================== ================
Accumulation units outstanding 27,339,211 34,144,955
================== ================
Net asset value per accumulation unit $ 1.04 $ 0.98
================== ================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31, December 31, December 31,
1997 1996 1995
------------------ ------------------ ------------------
Income:
<S> <C> <C> <C>
Interest income $ 467,504 $ 385,026 $ 264,581
Account's equity in earnings of
unconsolidated joint ventures 2,277,775 2,167,460 1,924,741
Rental income -- 1,887,995 2,379,439
Realized loss on payoff of participation in mortgage loan -- (24,533) --
Unrealized depreciation of participation
in mortgage loan -- (147,608) (27,817)
Unrealized appreciation of investment in
wholly-owned real estate property -- -- 138,764
Unrealized depreciation of investments
in unconsolidated joint ventures (169,246) (1,206,750) (3,999,782)
Realized loss on sale of wholly-owned
real estate property -- (725,436) --
Other income 54,114 -- --
------------------ ------------------ ------------------
Total income 2,630,147 2,336,154 679,926
------------------ ------------------ ------------------
Expenses:
Asset management fee 435,406 561,742 603,620
Mortality and expense risk fee 348,325 449,393 482,896
Professional services 54,147 42,133 39,715
Amortization of deferred organizational
and borrowing costs -- 19,602 25,851
Salaries 52,055 17,562 28,218
Revolving loan interest -- -- 94,124
Other operating expenses 22,009 17,823 27,884
Operating expenses related to wholly-owned
real estate property:
Interest -- 551,434 741,811
Utilities -- 139,334 153,416
Repairs and maintenance -- 158,047 219,829
Property and other taxes -- 160,633 186,440
Salaries -- 174,075 181,540
Management fees -- 89,712 118,983
Other -- 108,155 154,120
------------------ ------------------ ------------------
Total expenses 911,942 2,489,645 3,058,447
------------------ ------------------ ------------------
Net income (loss) $ 1,718,205 $ (153,491) $ (2,378,521)
================== ================== ==================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
For the years ended
---------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31,1995
---------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $1,718,205 $ (153,491) $(2,378,521)
Contract purchase proceeds 17,038 2,049,160 24,922,267
Contract termination payments (6,940,604) (4,256,658) (22,631,012)
---------------------------------------------------------------
Decrease in net assets (5,205,361) (2,360,989) (87,266)
Contract owners' equity at
beginning of year 33,545,476 35,906,465 35,993,731
---------------------------------------------------------------
Contract owners' equity at end
of year 28,340,115 33,545,476 35,906,465
===============================================================
Accumulation Unit Activity
Units purchased with proceeds
from sale of contracts 17,026 2,063,252 23,170,080
Units redeemed for contract
terminations (6,822,770) (4,272,226) (21,054,331)
---------------------------------------------------------------
Net increase(decrease) in units (6,805,744) (2,208,974) 2,115,749
Units outstanding at beginning
of year 34,144,955 36,353,929 34,238,180
---------------------------------------------------------------
Units outstanding at end of year 27,339,211 34,144,955 36,353,929
===============================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
December 31, December 31, December 31,
1997 1996 1995
--------------- ------------------ -------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net Income (loss) $ 1,718,205 $ (153,491) $(2,378,521)
--------------- ------------------ -------------------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Account's equity in earnings of
unconsolidated joint ventures (2,277,775) (2,167,460) (1,924,741)
Change in accrued interest on
participation in mortgage loan -- (5,400) 5,400
Amortization of organizational and borrowing costs -- 19,602 25,851
Change in cumulative discount amortization
on short-term investments 9,879 (10,926) --
Change in unrealized depreciation of investments
in unconsolidated joint ventures 169,246 1,206,750 3,999,782
Change in unrealized depreciation (appreciation)
of participation in mortgage loan -- 147,608 27,817
Loss on participation of mortgage loan -- 24,533 --
Change in unrealized (appreciation)
depreciation of investment in wholly-owned real estate property -- -- (138,764)
Loss on sale of wholly-owned real estate property -- 725,436 --
Change in other assets 4,277 38,858 (8,628)
Change in payable to IDS Life for operating expenses 29,668 (34,279) 18,219
Change in accrued mortality and expense risk fees (4,030) (7,429) 284
Change in accrued asset management fees (5,039) (9,286) 354
Change in payables and other liabilities related
to wholly-owned real estate property (79,090) (165,847) 32,740
Change in payable to IDS Life for revolving
loan interest -- -- (9,224)
--------------- ------------------ -------------------
Total adjustments to net income (loss) (2,152,864) (237,840) 2,029,090
--------------- ------------------ -------------------
Net cash used in operating activities (434,659) (391,331) (349,431)
--------------- ------------------ -------------------
Cash flows from investing activities:
Net sales (purchases) of short-term securities 4,962,230 (10,243,384) --
Sale of wholly owned property -- 15,574,443 (163,781)
Distributions received from joint ventures 2,358,371 1,726,577 1,504,514
--------------- ------------------ -------------------
Net cash provided by investing activities 7,320,601 7,057,636 1,340,733
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from sales of contracts 17,038 2,349,160 24,627,492
Payments for contract terminations (6,922,830) (4,523,183) (22,369,833)
Decrease in mortgage payable -- (7,770,339) (81,940)
Change in payable to IDS Life for revolving loan -- -- (2,100,000)
Contributions to Monmouth renovation-joint venture -- -- (685,151)
Payment for participation in Mortgage Loan -- 2,794,065 --
--------------- ------------------ -------------------
Net cash used in financing activities (6,905,792) (7,150,297) (609,432)
--------------- ------------------ -------------------
Net increase (decrease) in cash (19,850) (483,992) 381,870
Balance of cash at beginning of year 102,737 586,729 204,859
--------------- ------------------ -------------------
Balance of cash at end of year $ 82,887 $ 102,737 $ 586,729
=============== ================== ===================
Supplemental cash flow disclosure:
Cash paid for mortgage and revolving
loan interest $ -- $ 551,434 $ 835,935
=============== ================== ===================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
December 31, 1997
NOTES TO FINANCIAL STATEMENTS
1. Organization
IDS Life Account RE (the Account) is a segregated asset account of IDS Life
Insurance Company (IDS Life) under Minnesota law. A registration statement under
the Securities Act of 1933 relative to the deferred variable annuity contracts
(the Contracts) issued by the Account became effective on August 6, 1987.
Effective May 1, 1995, the Account discontinued new contract sales. Although
additional purchase payments may be made into existing contracts, prior to
making any additional purchase payment an existing contract owner should bear in
mind that the Account intends to liquidate its real estate related investments
over time. The assets of the Account are held for the exclusive benefit of
contract owners and are not chargeable with liabilities arising out of any other
business conducted by IDS Life.
2. Summary of Significant Accounting Policies
The accompanying financial statements have been prepared on the accrual basis of
accounting. Significant accounting policies followed by the Account are
summarized below.
Investments in Securities
Investments in short-term securities maturing more than 60 days from the
valuation date are valued at the market price or approximate fair value based on
current interest rates; those maturing in 60 days or less are valued at
amortized cost. The Account also may invest in intermediate-term bonds with
maturities of up to five years which are valued at fair value as determined by
reference to market quotations, market indices, matrices and data from
independent brokers.
Security transactions are accounted for on the date securities are purchased or
sold. Interest income, including amortization of premium and discount, is
accrued daily.
Consolidation and Unconsolidated Joint Ventures
The Account's policy is to consolidate the underlying assets, liabilities and
operations of property investments where 50 percent or greater ownership
position is maintained. Investments in unconsolidated joint ventures with less
than 50 percent ownership interest are accounted for on the equity method of
accounting.
Investments in Real Property, Mortgage Loans and Land/Sale-Leasebacks
The Account initially values real estate related investments at their cost
(including acquisition or mortgage placement fees and other acquisition or
placement expenses) unless circumstances otherwise indicate that a different
value should be used. Subsequently, the value of these investments will be
periodically reviewed by JMB Annuity Advisers (the Investment Adviser).
Additionally, at the time of purchase and once every two years thereafter, each
real property investment and each real property underlying a participating
mortgage loan or land sale-leaseback investment will be appraised by an
<PAGE>
independent appraiser or an existing appraisal will be updated. The relative
weight to be given to a particular methodology or other relevant factors in
determining the estimated asset value of a particular real property will depend
upon an assessment of the existing and anticipated market conditions and
property specific factors relevant to such real property. There is no assurance
that the assumptions, estimates and methodologies used in valuing the Account's
real estate related investments will in fact prove accurate or that such values
would in fact be realized. Such estimates involve subjective judgments as the
actual price of real estate can only be determined between independent third
parties in sales transactions. In addition, any expenses that may be borne by
the Account in connection with the disposition of a real estate related
investment are not deducted in determining its estimated value.
Because the Account values its real property investments at estimated fair
values, no provision for depreciation expense is recorded.
Each day the Account will record estimated income and expenses attributable to
real estate related assets. Periodically, adjustments to reflect the difference
between estimated and actual income and expenses will be made.
Federal Income Taxes
IDS Life is taxed as a life insurance company. The Account is treated as part of
IDS Life for Federal income tax purposes. Under existing Federal income tax law,
no income taxes are payable with respect to any income of the Account.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the period. Actual results could
differ from those estimates.
3. Fees and Expenses
The Account pays a mortality and expense risk fee to IDS Life which is accrued
daily and is equal, on an annual basis, to 1.00 percent of the average daily
asset value, as defined, of the Account. The mortality risk is IDS Life's
guarantee to make retirement payments according to the terms of the Contract, no
matter how long annuitants live. The expense risk portion of the fee is paid to
IDS Life for its guarantee that the various fees paid by the Account to IDS Life
will not be increased in the future. For the years ended December 31, 1997, 1996
and 1995, the Account paid IDS Life a mortality and expense risk fee of
$348,325, $449,393 and $482,896, respectively.
The Account also pays IDS Life an asset management fee equal, on an annual
basis, to 1.25 percent of the average daily asset value, as defined, of the
Account. A portion of this fee, equal to 0.95 percent of the average daily asset
value, is paid by IDS Life to the Investment Adviser. The total fee may be
adjusted upward to a maximum of 1.50 percent depending upon the performance of
the Account's real property investments as measured against the The National
Council of Real Estate Investment Fiduciaries (NCREIF) Property Index. The
performance-related portion of the fee is calculated and recorded on an annual
basis when the NCREIF Property Index is released each year for the preceding
calendar year. Any performance fee adjustment will be paid to the Investment
Adviser. There were no performance fees for the years 1997, 1996 or 1995. For
the years ended December 31, 1997, 1996 and 1995, the Account paid total asset
management fees of $435,406, $561,742 and $603,620, respectively.
<PAGE>
IDS Life receives from the Account an acquisition and mortgage placement fee
equal to 3.75 percent of the total cash to be paid or advanced by the Account
(net of any borrowings in the case of real property investments) in connection
with each real property investment, mortgage loan or land sale-leaseback
investment made by the Account. A portion of this fee, equal to 3.50 percent, is
paid to the Investment Adviser in consideration for its services in connection
with the acquisition or placement of real estate related investments of the
Account. No acquisition and mortgage placement fees were paid in 1997, 1996 or
1995.
The Account pays for all operational expenses incurred on its behalf. For the
years ended December 31, 1997, 1996 and 1995, IDS Life was reimbursed $11,019,
$35,385 and $56,102, respectively, for personnel-related expenses incurred in
the administration of the Account.
The Account also pays custodian fees to American Express Trust Company, an
affiliate of American Express Financial Corporation (AEFC).
4. Investments in Unconsolidated Joint Venture Partnerships and Participation in
Mortgage Loan Joint Venture Partnership - N/S Associates
IDS Life, on behalf of the Account, entered into a joint venture partnership
called N/S Associates, which on April 4, 1988 acquired interests in two enclosed
super regional shopping malls that are described below.
The terms of N/S Associates' partnership agreement provide that its annual net
cash flows and net sales or refinancing proceeds generally will be distributed
among all of the partners in accordance with their respective percentage
ownership interests in N/S Associates. The Account contributed approximately
$12,008,000 to N/S Associates as its capital contribution. The percentage
interest of the Account in N/S Associates is 5.92 percent. In connection with
the purchase of the shopping malls, the Account paid to IDS Life and the
Investment Adviser their respective portions of the acquisition fee amounting to
approximately $450,000.
Summary of Real Estate Investments Made Through N/S Associates
Milwaukee, Wisconsin - Northridge Mall
The Account, through N/S Associates, owns an interest in an existing enclosed
super regional shopping center in Milwaukee, Wisconsin, known as Northridge
Mall. The mall shops and four adjacent department stores comprising the shopping
center contain approximately 1,053,000 square feet of gross leasable area, of
which N/S Associates owns approximately 399,000 square feet consisting of mall
shops (approximately 388,000 square feet) and storage space (approximately
11,000 square feet). The remaining 654,000 square feet of gross leasable area
are occupied by four department stores, three of which own their own stores and
a portion of the parking area. The fourth department store leases its space from
an unaffiliated third party.
N/S Associates acquired its interest in the shopping center in April 1988 for a
purchase price of approximately $108,107,000, of which $89,653,000 was paid in
cash at closing, subject to the existing mortgage loans with a then outstanding
aggregate balance of approximately $18,454,000. In addition to the purchase
price, a reserve of $8,900,000 was established, all of which had been used to
pay for certain capital improvements made at the shopping center. In February
1995, the two mortgage loans secured by the property were repaid with a portion
of the proceeds from the refinancing of the Southridge Mall mortgage loan.
<PAGE>
The shopping center is being managed by an affiliate of the Investment Adviser
under a management agreement. The affiliate of the Investment Adviser receives
an annual fee equal to 3.75 percent of the gross receipts of the property plus
reimbursement of certain direct expenses in connection with the property
management.
Greendale, Wisconsin - Southridge Mall
The Account, through N/S Associates, owns an interest in an existing enclosed
super regional shopping center in Greendale, Wisconsin, known as Southridge
Mall. The mall shops and five adjacent department stores comprising the shopping
center contain approximately 1,297,000 square feet of gross leasable area, of
which N/S Associates owns approximately 449,000 square feet, including the space
leased to one of the department stores. The remaining 860,000 square feet of
gross leasable area are occupied by four other department stores, three of which
own their own stores and a portion of the parking area. The fourth department
store leases its space from an unaffiliated third party.
N/S Associates acquired its interest in the shopping center for a purchase price
of approximately $115,401,000, of which $96,865,000 was paid in cash at closing.
In February 1995, the mortgage loan secured by the property was repaid with a
portion of the proceeds from a new mortgage loan in the principal amount of
$35,000,000. The new mortgage loan has a term of seven years, bears interest at
8.35 percent per annum and requires monthly payments of interest only prior to
maturity. Proceeds from the new mortgage loan were also used to repay the two
mortgage loans secured by Northridge Mall. The remaining net proceeds from the
new loan were used to pay approximately $2,900,000 of tenant improvement and
other capital costs incurred for Northridge and Southridge Malls.
The shopping center is being managed by an affiliate of the Investment Adviser
under a management agreement. The affiliate of the Investment Adviser receives
an annual fee equal to 3.75 percent of the gross receipts of the property plus
reimbursement of certain direct expenses in connection with the property
management.
Joint Venture Partnership - Monmouth Associates
IDS Life, on behalf of the Account, entered into a joint venture partnership
called Monmouth Associates, which on October 27, 1988 (i) acquired certain land
underlying a super regional shopping center in Eatontown, New Jersey known as
Monmouth Mall, (ii) leased the land to the owner of the shopping center pursuant
to a long-term ground lease, and (iii) executed a first leasehold mortgage loan
to the owner of the shopping center secured by the leasehold real estate and the
improvements thereon as more fully described below. The owner of the shopping
center (the Borrower/Lessee) is a partnership whose partners are not affiliated
with Monmouth Associates.
The terms of Monmouth Associates' partnership agreement provide that its annual
net cash flows and net sales or refinancing proceeds generally will be
distributed among all of the partners in accordance with their respective
percentage interests in Monmouth Associates. The Account contributed
approximately $10,000,000 to Monmouth Associates as its initial capital
contribution. The Account has made additional capital contributions of
approximately $685,000. The percentage interest of the Account in Monmouth
Associates is 6.97 percent.
In connection with the investment, the Account paid to IDS Life and the
Investment Adviser their respective portions of the acquisition and mortgage
placement fee amounting to approximately $375,000.
<PAGE>
Summary of Real Estate Investment Made Through Monmouth Associates
Eatontown, New Jersey - Monmouth Mall
The Account, through Monmouth Associates, acquired an interest in the land
underlying a shopping center in Eatontown, New Jersey known as Monmouth Mall.
The mall is located on approximately 90 acres of land, of which Monmouth
Associates owns approximately 88.5 acres, subject to the rights of one of the
department store tenants to acquire the land underlying its store and the
improvements thereon for nominal consideration. The remaining acres are owned by
2 department stores. Monmouth Associates acquired its interest in the land for a
purchase price of approximately $13,000,000.
Monmouth Associates entered into an agreement whereby the land underlying the
mall is leased back to the Borrower/Lessee under a long-term ground lease. The
long-term ground lease, which has a term of 75 years, provides for monthly base
rent aggregating $1,170,000 annually with minimum payments of $650,000. The
long-term ground lease also provides for contingent rent, payable quarterly out
of the excess, if any, of substantially all of the gross receipts from the
shopping center received by the Borrower/Lessee over certain base amounts, equal
to the sum of (x) a specified annual amount of $520,000 per annum, increased
until paid at the "applicable rate" of interest payable under the first
leasehold mortgage loan described below (such amount as so increased herein
called the "rent shortfall amount"), plus (y) 15 percent of the balance of such
excess gross receipts remaining after deducting the aggregate amount paid at
such time of the rent shortfall amount under the long-term ground lease and the
"interest shortfall amount" under the first leasehold mortgage loan as described
below.
In addition, Monmouth Associates made a first leasehold participating mortgage
loan in the original principal amount of $128,920,000 to the Borrower/Lessee
which is secured by the leasehold real estate and the improvements thereon. The
current loan amount is $127,670,000. The loan has a term of 15 years, which may
be extended from time to time at the option of Monmouth Associates for up to an
additional 20 years. The loan currently provides for monthly payments of base
interest at a base rate of approximately 5.00 percent per annum for each loan
year. The first leasehold mortgage also provides for quarterly payments of
contingent interest, payable out of the excess, if any, of substantially all of
the gross receipts from the shopping center received by the Borrower/Lessee over
certain base amounts, equal to the sum of (x) the difference between the amount
of interest payable on the loan at the "applicable rate" and that payable at the
base rate described above, increased until paid at the applicable rate (such
amount as so increased herein called the "interest shortfall amount"), plus (y)
45 percent of the balance of such excess gross receipts remaining after
deducting the aggregate amount paid at such time of the rent shortfall amount
under the ground lease and the interest shortfall amount under the first
leasehold mortgage loan. The "applicable rate" under the loan currently is 8.97
percent per annum for each loan year thereafter. In addition, upon a joint sale
or refinancing of the land and improvements or at maturity of the leasehold
mortgage loan, Monmouth Associates is entitled to receive certain participations
in the proceeds from such sale or refinancing after payment of its investment in
the land and/or repayment of the principal amount of the leasehold mortgage
loan. For financial reporting purposes, Monmouth Associates discontinued the
accrual of contingent interest on the leasehold mortgage loan in April 1992 as a
result of uncertainty as to the collectibility of such contingent interest in
light of the previous decrease in the estimated value of Monmouth Mall. In
addition, for financial reporting purposes, no contingent rent was accrued under
the ground lease for 1997, 1996 or 1995. In 1995, Monmouth Associates wrote off
the receivable balance of $3,576,000 primarily related to the accrued interest
resulting from the difference between the accrual and pay rates ("contingent
interest") recorded prior to 1992, due to the uncertainty as to the
collectibility of these amounts.
<PAGE>
Monmouth Associates is obligated to make certain additional loans to the
Borrower/Lessee under certain circumstances to finance the cost of 60 percent of
tenant improvements or other ordinary capital expenditures. In addition, in May
1994, Monmouth Associates made a loan to finance the cost of a renovation of the
shopping center, which commenced during the third quarter of 1994. The
renovation consists of, among other things, the addition of a food court and
cinema and the re-merchandising of approximately 300,000 square feet of gross
leasable area. The renovation loan from Monmouth Associates bears interest at a
fixed interest rate of 10.5 percent per annum. In addition, Monmouth Associates'
participation in certain levels of sale or refinancing proceeds from the
property will be increased until Monmouth Associates has received aggregate
payments equal to an internal rate of return of 11 percent per annum on its
investments in the land and/or the first leasehold mortgage loan. The maximum
amount of the renovation loan is $29,100,000, and the cost of the renovation is
currently estimated to be $29,100,000, including accrued and deferred interest
of approximately $1,300,000. As of December 31, 1997, Monmouth Associates had
funded approximately $25,905,000, using its cash reserves, cash flow and
additional capital contributions made pro rata based upon the respective
interests of the joint venture partners in Monmouth Associates. The renovation
loan requires monthly payments of interest only until maturity when the entire
principal amount and any accrued and unpaid interest will be due. The renovation
loan will mature contemporaneously with the first leasehold mortgage loan in
October 2003, subject to acceleration or extension of the loan by Monmouth
Associates under certain circumstances.
Joint Venture - 1225 Connecticut Avenue, N.W.
Washington, D.C. - 1225 Connecticut Avenue, N.W.
In May 1990, IDS Life, on behalf of the Account, acquired an interest in a newly
formed Delaware corporation, 1225 Investment Corporation (the Corporation) owned
jointly with certain other persons described below. The Corporation acquired an
office building located in Washington, D.C. known as 1225 Connecticut Avenue,
N.W. (1225 Connecticut).
The office building, which was completed in 1968, is an eight-story reinforced
concrete frame building containing 184,432 square feet of rentable office space,
18,498 square feet of rentable retail space, 6,416 square feet of below grade
storage space and 100,024 square feet of subsurface parking space for over 300
automobiles.
The Corporation has elected to qualify as a real estate investment trust (REIT)
pursuant to sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the Code). For each taxable year that the Corporation qualifies as a
REIT, the Corporation in general will not be subject to federal corporate income
tax or the District of Columbia corporate franchise tax on its regular taxable
income and will not be taxed on long-term capital gain income to the extent its
income is distributed as dividends. If the Corporation were to fail to qualify
as a REIT, it would be taxed at rates applicable to a corporation on its taxable
income, whether or not distributed.
The Account owns approximately 16.3 percent of the outstanding shares of common
stock of the Corporation. Certain of the outstanding shares of common stock of
the Corporation not owned by the Account are owned by an affiliate of the
Investment Adviser.
The Corporation purchased 1225 Connecticut from the seller for a purchase price
of approximately $54,125,000 (net of prorations and miscellaneous closing
costs), consisting of $51,425,000 paid in cash and assumption of approximately
$2,700,000 of mortgage indebtedness then encumbering the property. The
<PAGE>
Corporation paid approximately $2,130,000 for real estate brokerage commissions
to an independent third party and certain closing costs. The Account contributed
$9,000,000 for its interest in the Corporation. The Account has also paid
acquisition fees amounting to $337,500.
In January 1994, the Corporation refinanced its mortgage loan with a first
mortgage loan in the principal amount of $7,000,000 bearing interest at 6.98
percent per annum. The new loan requires monthly payments of interest only
aggregating $488,600 per annum until maturity in February 2001 when the
principal amount together with accrued interest will be due and payable. Under
certain circumstances, the principal amount of the loan may be prepaid in whole
(but not in part), subject to a prepayment premium. Pursuant to the deed of
trust securing the mortgage loan, the Corporation is prohibited from modifying
Ernst & Young's primary lease or from entering into certain other tenant leases
without the lender's consent. Prior to selling the property or encumbering the
property with any additional debt, the Corporation must obtain the consent of
the lender, which may be arbitrarily withheld. However, subject to certain
restrictions, the Corporation has a one-time right to transfer title to the
property together with an assumption of the mortgage loan.
The property is being managed under an agreement pursuant to which the manager
is obligated to manage 1225 Connecticut, collect all of the receipts from
operations and, to the extent available from such receipts, pay all of the
expenses of 1225 Connecticut. The manager is paid a fee equal to 2.5 percent of
the gross revenues of 1225 Connecticut, plus reimbursement for certain direct
expenses of the manager. 1225 Connecticut leases approximately 87 percent of the
available space of the property to one tenant under leases, all with terms of 12
years. For the year ended December 31, 1997, such tenant represented
approximately 74 percent of total revenues.
An unaffiliated third party leases and operates the entire parking garage
(subject to certain parking rights provided for tenants of the property) for a
term extending until November 2000. The lease provides for a fixed rent payment
of $577,560 a year and provides that the lessee shall pay the operating expenses
of the parking garage. The lease does not provide such lessee with an option to
extend the term of the lease.
Unconsolidated Joint Ventures - Summary Information
Summary information for the Account of its investments in Unconsolidated Joint
Ventures as of and for the years ended December 31, 1997 and 1996 is as follows:
As of and for As of and for
the year ended the year ended
Dec. 31, 1997 Dec. 31, 1996
Account's investment in Unconsolidated
Joint Ventures $ 23,134,763 $ 23,384,605
Account's share of net investment income from
Unconsolidated Joint Ventures $ 2,277,775 $ 2,167,460
Net depreciation in
Unconsolidated Joint Ventures $ (169,246) $ (1,206,750)
Total net investment income of Unconsolidated
Joint Ventures $27,218,000 $ 27,455,000
Total assets of Unconsolidated Joint Ventures $336,828,000 $343,717,000
Total liabilities of Unconsolidated
Joint Ventures $50,215,000 $ 52,691,000
<PAGE>
Participation in Mortgage Loan - Riverpoint Associates
Chicago, Illinois - Riverpoint Center
In August 1989, IDS Life, on behalf of the Account, participated in the initial
funding of a non-recourse participation first mortgage loan in the principal
amount of $26,000,000. The Account's share of the initial funding was $2,666,660
or 10.26 percent of this loan. The remaining portion of the loan was funded by
affiliates of the Investment Adviser (herein, the Account and said affiliates
are collectively called the Lenders). The Loan was secured by a first mortgage
on a shopping center known as Riverpoint Center in Chicago, Illinois. The
shopping center, completed in 1989, is located on approximately 17 acres and
consists of approximately 200,800 square feet of gross leasable area. The
shopping center was owned by a partnership (the Borrower) whose general partners
were not affiliated with any of the Lenders. In connection with the loan, the
Account paid to the Investment Adviser a mortgage placement fee amounting to
approximately $108,000, less $37,500 in loan origination fees paid to the
Investment Adviser by the Borrower, for a net fee paid of approximately $70,500
paid by the Account.
Additional amounts aggregating approximately $2,040,000 (of which the Account's
share was approximately $209,000) had been funded since the Initial Funding. The
Borrower did not qualify for any additional fundings above the $28,040,000 which
had been funded to date, and no additional fundings were made by the Lenders.
The ten-year loan required periodic payments of interest only and bore basic
interest at the rate of 8.84 percent per annum in the first loan year, 8.75
percent per annum during the second loan year, increasing 0.50 percent per annum
in the fourth and 0.25 percent per annum in the seventh loan year to a maximum
rate of 9.50 percent per annum, payable monthly in advance. The loan also
provided for additional annual simple accrual of interest at the rate of 2.00
percent per annum payable upon prepayment or maturity. For financial reporting
purposes, commencing in August of 1991, the Account suspended recognition of
income related to the simple accrual interest receivable (deferred until
maturity).The loan also provided for additional interest in an amount equal to a
percentage of annual gross income from the underlying property (exclusive of
tenant reimbursement of expenses) in excess of a base amount and, on sale or
repayment of the loan, an amount equal to a percentage of the subsequent
increase in the value of the underlying property in excess of a specified
amount. Such amounts of additional interest payments made by the Borrower would
have been used to offset, on a dollar-for-dollar basis, the amount of accrued
interest payable. The loan was generally non-recourse to the Borrower and its
partners.
The borrower had notified the Lenders that it was experiencing financial
difficulties and approached the Lenders regarding a loan modification. During
the third quarter of 1996, the Lenders and Borrowers finalized a loan
modification whereby they reached an agreement to defer payment of a portion of
the scheduled debt service from September 15, 1995 to July 15, 1996. In
conjunction with the loan modification agreement, the scheduled maturity date of
the loan was accelerated to December 31, 1997. Finally, the Lenders agreed to
accept at certain dates through June 30, 1997 repayment of the loan at specified
amounts. On December 24, 1996, the borrower repaid the lenders $27,400,000 (of
which the Account's share was approximately $2,800,000) in full satisfaction of
the loan as agreed upon.
<PAGE>
5. Investments in Wholly-owned Real Estate Property
Fairfax County, Virginia - West Springfield Terrace Apartments
In August 1989, IDS Life, on behalf of the Account, acquired a 244-unit garden
apartment complex known as West Springfield Terrace Apartments, which is located
in Fairfax County, Virginia.
The apartment complex, which was completed in 1978, consists of 17 separate
three and four-story buildings of wood frame with brick veneer construction
containing 52 one-bedroom units, 22 one-bedroom and den units, 118 two-bedroom
units, 22 two-bedroom and den units, and 30 three-bedroom units. The complex
contains a swimming pool, tennis court, clubhouse and approximately 380 parking
spaces.
The Account paid $15,222,278 for the apartment complex in cash at closing,
excluding closing costs and prorations. The Account also paid to IDS Life and
the Investment Adviser their respective portions of the acquisition fee
amounting to $274,834. At the time of the acquisition it was anticipated that an
additional amount of approximately $1,450,000 would be used by the Account to
pay the cost of upgrading kitchens and bathrooms and certain other upgrades and
capital improvements at the complex. The renovation project was subsequently
increased to include replacing certain carpets in units as they were renovated
and to increase the number of units that received certain upgrades. The
renovation project was completed during 1992 at an aggregate cost of
approximately $1,900,000. The Account paid IDS Life and the Investment Adviser
their respective portions of the acquisition fee amounting to $18,000 in
connection with the renovation project.
In November 1989, the Account obtained a loan from an institutional lender in
the principal amount of $8,000,000 secured by a first mortgage on the property.
The loan was repaid in September 1996 as a result of the sale of this property,
as discussed below. The loan had a term of seven years and bore interest at a
rate of 9.50 percent per annum. The loan required monthly payments of interest
only during the first three loan years and thereafter was amortizable over a
27-year schedule through monthly payments of principal and interest aggregating
$824,400 per annum until November 1996, when the remaining principal balance and
any accrued and unpaid interest was due and payable.
On September 30, 1996 the Account sold land and related improvements known as
the West Springfield Terrace Apartments. The purchaser was not affiliated with
the Account and the sale price was determined by arm's-length negotiations. The
sale price for the land and improvements was $16,100,000 (before deducting
selling costs) and was paid in cash at closing. A portion of the net sale
proceeds was utilized to retire the first mortgage debt with an outstanding
balance of $7,704,000.
The apartment complex was being managed for a fee equal to 5.00 percent of the
gross revenues from the property, plus reimbursement of certain direct expenses
of the manager.
<PAGE>
6. Liquidity Arrangements with IDS Life
The Account has experienced substantial net contract terminations over the past
several years, which have adversely affected its liquidity. In March 1994, the
Account obtained a short-term revolving line of credit for up to $10 million
from IDS Life to pay for contract surrenders and other obligations under the
Contracts. On June 2, 1995, the line of credit was terminated and the Account
repaid the outstanding balance under the line of credit with the proceeds from
accumulation units purchased by IDS Life. As of December 31, 1997, IDS Life had
cumulatively contributed $26,700,000 toward the purchase of accumulation units.
IDS Life expects to continue to make additional payments into the Account for
accumulation units in order to maintain the Account and its liquidity. As of
December 31, 1997, IDS Life's portion of the Contract Owners' Equity was
$25,877,976, which represents 91% of total Contract Owners' Equity.
7. Year 2000 Issue (Unaudited)
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Account. The Account
has no computer systems of its own but is dependent upon the systems maintained
by AEFC and certain other third parties.
A comprehensive review of AEFC's computer systems and business processes has
been conducted to identify the major systems that could be affected by the Year
2000 issue. Steps are being taken to resolve any potential problems including
modification to existing software and the purchase of new software. These
measures are scheduled to be completed and tested on a timely basis. AEFC's goal
is to complete internal remediation and testing of each system by the end of
1998 and to continue compliance efforts through 1999.
The Year 2000 readiness of unaffiliated investment managers and other third
parties whose system failures could have an impact on the Account's operations
is currently being evaluated. The potential materiality of any such impact is
not known at this time.
<PAGE>
Independent Auditors' Report
The Board of Directors of IDS Life Insurance Company and Contract Owners of IDS
Life Account RE:
We have audited the accompanying combined financial statements of N/S
Associates, Monmouth Associates and 1225 Investment Corporation, unconsolidated
joint ventures of IDS Life Account RE (Note 1), as listed in the accompanying
index. In connection with our audits of the combined financial statements, we
also have audited the combined financial statement schedules as listed in the
accompanying index. These combined financial statements and combined financial
statement schedules are the responsibility of the Investment Adviser. Our
responsibility is to express an opinion on these combined financial statements
and combined financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Investment Adviser, as well as evaluating the overall
combined financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of N/S
Associates, Monmouth Associates and 1225 Investment Corporation, as of December
31, 1997 and 1996 and the results of their combined operations and combined cash
flows for each of the years in the three year period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related combined financial statement schedules, when considered in relation
to the basic combined financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 20, 1998
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Combined Balance Sheets
December 31, 1997 and 1996
Assets
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Investments in real estate $323,264,000 $323,484,000
Cash and cash equivalents (note 1) 9,459,000 14,603,000
Rents, interest, and other receivables 2,219,000 2,966,000
Other assets 1,886,000 2,664,000
-------------- ---------
$336,828,000 $343,717,000
Liabilities and Partners' Capital Accounts
Mortgage notes payable (note 3) $42,000,000 $ 42,000,000
Accounts payable and other accrued expenses 8,215,000 10,691,000
------------ ----------
Total liabilities 50,215,000 52,691,000
---------- ----------
Commitments and contingencies (notes 2 and 4)
Partners' capital accounts (notes 1 and 2): IDS Life Account RE:
Capital contributions 32,856,000 32,856,000
Cumulative net investment income 18,228,000 15,951,000
Cumulative share of net unrealized depreciation (13,084,000) (12,915,000)
Cumulative cash distributions (14,865,000) (12,507,000)
------------ ------------
23,135,000 23,385,000
Venture partners:
Capital contributions 379,954,000 379,954,000
Cumulative net investment income 216,261,000 191,319,000
Cumulative share of net unrealized depreciation (157,694,000) (155,581,000)
Cumulative cash distributions (175,043,000) (148,051,000)
------------- -------------
263,478,000 267,641,000
Total partners' capital accounts 286,613,000 291,026,000
----------- -----------
$336,828,000 $343,717,000
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Combined Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Investment income:
<S> <C> <C> <C>
Rental income 37,824,000 38,715,000 38,008,000
Interest 9,890,000 9,827,000 7,685,000
--------- --------- ---------
47,714,000 48,542,000 45,693,000
Investment expenses:
Mortgage and other interest 3,412,000 3,412,000 4,250,000
Real estate taxes 5,919,000 6,639,000 7,401,000
Property operating expenses 11,026,000 10,934,000 13,789,000
General and administrative 139,000 102,000 183,000
------- ------- -------
20,496,000 21,087,000 25,623,000
---------- ---------- ----------
Net investment income 27,218,000 27,455,000 20,070,000
========== ========== ==========
Unrealized depreciation on investments
in real estate (note 1) (2,282,000) (8,650,000) (65,938,000)
=========== =========== ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Combined Statements of Partners' Capital Accounts
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Combined IDS Life Venture
Total Account RE Partners
<S> <C> <C> <C>
Balance at December 31, 1994 345,159,000 27,045,000 318,114,000
Net investment income 20,070,000 1,925,000 18,145,000
Cash contributions 9,830,000 685,000 9,145,000
Net unrealized depreciation on investments
in real estate (65,938,000) (4,000,000) (61,938,000)
Cash distributions and dividends (17,500,000) (1,505,000) (15,995,000)
------------ ----------- ------------
Balance at December 31, 1995 $291,621,000 24,150,000 267,471,000
Net investment income 27,455,000 2,168,000 25,287,000
Net unrealized depreciation on investments
in real estate (8,650,000) (1,207,000) (7,443,000)
Cash distributions and dividends (19,400,000) (1,726,000) (17,674,000)
------------ ----------- ------------
Balance at December 31, 1996 $291,026,000 23,385,000 267,641,000
------------ ---------- -----------
Net investment income 27,218,000 2,277,000 24,941,000
Net unrealized depreciation on investments
in real estate (2,282,000) (169,000) (2,113,000)
Cash distributions and dividends (29,349,000) (2,358,000) (26,991,000)
Balance at December 31, 1997 $286,613,000 $23,135,000 $263,478,000
------------ ----------- ------------
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Combined Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net increase (decrease) in net assets resulting
<S> <C> <C> <C>
from operations $24,937,000 $18,805,000 $(45,868,000)
Provision for uncollectible accrued interest -- -- 3,576,000
Unrealized loss on investments 2,282,000 8,650,000 65,938,000
Adjustments to reconcile net investment income to net cash provided by operating
activities represented by changes in:
Rents, interest and other receivables 747,000 (212,000) 135,000
Other assets 778,000 (253,000) (2,129,000)
Accounts payable and accrued expenses (391,000) (802,000) (1,713,000)
--------- --------- -----------
Net cash provided by operations 28,353,000 26,188,000 19,939,000
---------- ---------- ----------
Cash flows from investing activities:
Net (purchases) sales of short-term investments -- -- 7,589,000
Additions to investments in real estate, net of
related accounts payable and accrued expenses (4,147,000) (5,093,000) (16,748,000)
----------- ----------- ------------
Net cash provided by (used in)
investing activities (4,147,000) (5,093,000) (9,159,000)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on mortgages payable -- -- (30,929,000)
Cash distributions to partners (25,000,000) (14,250,000) (13,000,000)
Cash contributions -- -- 9,830,000
Proceeds from mortgage note payable -- -- 35,000,000
Cash dividends paid to shareholders (4,350,000) (5,150,000) (4,500,000)
----------- ----------- -----------
Net cash used in financing activities (29,350,000) (19,400,000) (3,599,000)
------------ ------------ -----------
Net increase in cash and cash
equivalents (5,144,000) 1,695,000 7,181,000
Cash and cash equivalents beginning
of year1 14,603,000 12,908,000 5,727,000
---------- ---------- ---------
Cash and cash equivalents end
of year 9,459,000 14,603,000 12,908,000
========= ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for mortgage and other interest 3,412,000 3,412,000 3,759,000
========= ========= =========
Non-cash investing and financing activities:
Unrealized depreciation on
investments in real estate (2,282,000) (8,650,000) (65,938,000)
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Notes to Combined Financial Statements
Years ended December 31, 1997, 1996, and 1995
(1) Organization and Basis of Accounting
The accompanying combined financial statements have been prepared for the
purpose of complying with Rule 3.09 of Regulation S-X of the Securities and
Exchange Commission. The combined financial statements include the accounts of
the unconsolidated joint ventures in which IDS Life Account RE of IDS Life
Insurance Company owns an equity interest. The unconsolidated joint ventures are
N/S Associates, Monmouth Associates and 1225 Investment Corporation.
The accompanying combined financial statements have been prepared on the market
value accrual basis of accounting.
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The ventures have implemented Statement of Accounting Standards No. 95
"Statement of Cash Flows" which classifies receipts and payments according to
whether they stem from operating, investing or financing activities. The
ventures records amounts held in U.S. Government obligations at cost, which
approximates market. For the purposes of these statements, the ventures' policy
is to consider all such amounts held with original maturities of three months or
less ($0 and $12,084,000 at December 31, 1997 and 1996, respectively) as cash
equivalents with any remaining amounts reflected as short-term investments.
Investments in real estate are stated at estimated market value. A description
of the valuation process is contained in Note 2 of Notes to Financial Statements
of the Account. Such note is incorporated herein by reference.
Market values have been estimated by the Investment Adviser. Such market values
involve subjective judgments and the actual values can only be determined by
negotiations with independent third parties.
No provision for State or Federal income taxes has been made for N/S Associates
or Monmouth Associates as the liability for such taxes, if any, is expected to
be that of the venture partners rather than the venture. 1225 Investment
Corporation has elected and qualifies to be treated as a real estate investment
trust for Federal income tax purposes. The Corporation had no Federal income tax
liabilities for taxable years ended December 31, 1997, 1996 and 1995.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Notes to Combined Financial Statements - (Continued)
Maintenance and repair expenses are charged to operations as incurred.
Significant costs of physical improvements are capitalized as part of
investments in real estate.
Fixed rental income is recorded when the obligation for the payment of rent is
incurred according to the terms of the lease agreements.
(2) Venture Agreements
A description of the venture agreements are contained in Note 4 of Notes to
Financial Statements of the Account for the year ended December 31, 1997. Such
note is incorporated herein by reference.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Notes to Combined Financial Statements - (Continued)
(3) Mortgage Notes Payable
(a) Mortgage notes payable consist of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
8.35% mortgage note, secured by Southridge Mall; payable in monthly installments
of $244,000 (interest only) until
<S> <C> <C>
maturity on February 1, 2002 (see 3 (b) below) 35,000,000 35,000,000
6.98% mortgage note, due February 1, 2001, secured by 1225
Connecticut Avenue; interest only, payable monthly 7,000,000 7,000,000
--------- ---------
Total mortgage notes payable 42,000,000 42,000,000
---------- -----------
</TABLE>
(b) Refinancing - Southridge
On February 1, 1995, the Partnership refinanced the existing mortgage note
on Southridge Mall in the amount of $35,000,000. Proceeds, net of transaction
costs, were used to repay the existing mortgage notes at Southridge and
Northridge Malls (including prepayment penalties of $155,000 and $240,000,
respectively). The remaining proceeds which were reserved for future leasing
costs, capital improvements and other related costs, have been expended.
Five year maturities of mortgage notes payable are as follows:
1998 . . . . . . . . . . $ --
1999 . . . . . . . . . . --
2000 . . . . . . . . . . --
2001 . . . . . . . . . . 7,000,000
2002 . . . . . . . . . . 35,000,000
Thereafter. . . . . . . $ --
(4) Leases - As Property Lessor
The venture has determined that all leases relating to the two retail properties
and the office building are properly classified as operating leases; therefore,
rental income is reported when earned. Leases with tenants range in term from
one to thirty-two years and provide for fixed minimum rent and partial to full
reimbursement of operating costs. In addition, substantially all retail leases
provide for additional rent based upon percentage of tenants' sale volumes over
certain specified amounts.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Notes to Combined Financial Statements - (Continued)
Minimum lease payments to be received in the future under
the above operating lease agreements, are as follows:
1998 . . . . . . . . . . $20,406,724
1999 . . . . . . . . . . 18,824,571
2000 . . . . . . . . . . 17,086,220
2001 . . . . . . . . . . 14,761,601
2002 . . . . . . . . . . 13,683,666
Thereafter . . . . . . . 59,720,462
$144,483,244
Contingent rent (based on sales by property tenants) from the retail investments
included in rental income is $748,000, $578,000 and $1,058,000 in 1997, 1996
and 1995, respectively.
Monmouth Associates entered into an agreement whereby the land underlying the
Monmouth shopping center is leased under a long-term ground lease. The long-term
ground lease, which has a term of 75 years, provides for accrual of annual base
rent of $1,170,000 with minimum payments of $650,000 per annum. However, in
April 1992, Monmouth Associates put these loans on non-accural, based on the
uncertainty as to the collectibility of such contingent interest.
(5) Related Party Transactions
N/S Associates has entered into a management agreement with Urban Retail
Properties Company, (the "Retail Manager"). The Retail Manager is entitled to
receive a fee of 3.75% of gross receipts from the operations of the Malls.
Management fees earned by the Retail Manager are included in property operating
expenses and aggregated approximately $1,057,000 and $1,132,000 for the periods
ended December 31, 1997 and 1996, respectively.
1225 Investment Corporation had entered into a management agreement with JMB
Properties Company. During December 1994, JMB Properties Company assigned the
management agreement to Heitman Washington D.C. Properties, Ltd. ("Office
Manager"). The Office Manager is entitled to receive a fee of 2.5% of gross
receipts from the operations of the Property. Management fees earned by the
Office Manager are included in property operating expenses and aggregated
approximately $197,000 and $188,000 for the years ended December 31, 1997 and
1996, respectively.
<PAGE>
IDS LIFE ACCOUNT RE
OF IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Notes to Combined Financial Statements - (Continued)
(6) Subsequent Events
(a) N/S Associates
In February 1998, the Investment Adviser authorized and paid a
cash distribution to the partners aggregating $4,000,000. Each
partner received its proportionate share based on its respective
ownership percentage.
(b) 1225 Investment Corporation
In February 1998, 1225 Investment Corporation paid a dividend of
$1,100,000 ($19.95 per share) to the shareholders of record as of
December 31, 1997.
(c) Monmouth Associates
In February 1998, the Investment Advisor authorized and paid a
cash distribution to the partners aggregating $2,500,000. Each
partner received its proportionate share based on its respective
ownership percentage.
<PAGE>
<PAGE>
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 5, 1998
<PAGE>
IDS Life Financial Information
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
Dec. 31, Dec. 31,
ASSETS 1997 1996
(thousands)
Investments:
Fixed maturities:
Held to maturity, at amortized cost (Fair value:
1997, $9,743,410; 1996, $10,521,650) $9,315,450 $10,236,379
Available for sale, at fair value (Amortized cost:
1997, $12,515,030; 199, $11,008,622) 12,876,694 11,146,845
Mortgage loans on real estate 3,618,647 3,493,364
Policy loans 498,874 459,902
Other investments 318,591 251,465
Total investments 26,628,256 25,587,955
Cash and cash equivalents 19,686 224,603
Amounts recoverable from reinsurers 205,716 157,722
Amounts due from brokers 8,400 11,047
Other accounts receivable 37,895 44,089
Accrued investment income 357,390 343,313
Deferred policy acquisition costs 2,479,577 2,330,805
Deferred income taxes, net -- 33,923
Other assets 22,700 37,364
Separate account assets 23,214,504 18,535,160
Total assets $52,974,124 $47,305,981
========= =========
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
Dec. 31, Dec. 31
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
(thousands)
Liabilities:
Future policy benefits:
Fixed annuities $22,009,747 $21,838,008
Universal life-type insurance 3,280,489 3,177,149
Traditional life insurance 213,676 209,685
Disability income and long-term care insurance 533,124 424,200
Policy claims and other policyholders' funds 68,345 83,634
Deferred income taxes, net 61,582 --
Amounts due to brokers 381,458 261,987
Other liabilities 345,383 332,078
Separate account liabilities 23,214,504 18,535,160
Total liabilities 50,108,308 44,861,901
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 290,847 283,615
Net unrealized gain on investments 226,359 86,102
Retained earnings 2,345,610 2,071,363
Total stockholder's equity 2,865,816 2,444,080
Total liabilities and stockholder's equity $52,974,124 $47,305,981
========= =========
See accompanying notes.
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended Dec. 31,
1997 1996 1995
(thousands)
<S> <C> <C> <C>
Revenues:
Premiums:
Traditional life insurance $ 52,473 $ 51,403 $ 50,193
Disability income and long-term care insurance 154,021 131,518 111,337
Total premiums 206,494 182,921 161,530
Policyholder and contractholder charges 341,726 302,999 256,454
Management and other fees 340,892 271,342 215,581
Net investment income 1,988,389 1,965,362 1,907,309
Net realized gain (loss) on investments 860 (159) (4,898)
Total revenues 2,878,361 2,722,465 2,535,976
Benefits and expenses:
Death and other benefits:
Traditional life insurance 28,951 26,919 29,528
Universal life-type insurance
and investment contracts 92,814 85,017 71,691
Disability income and
long-term care insurance 22,333 19,185 16,259
Increase (decrease) in liabilities for
future policy benefits:
Traditional life insurance 3,946 1,859 (1,315)
Disability income and
long-term care insurance 63,631 57,230 51,279
Interest credited on universal life-type
insurance and investment contracts 1,386,448 1,370,468 1,315,989
Amortization of deferred policy acquisition costs 322,731 278,605 280,121
Other insurance and operating expenses 276,596 261,468 211,642
Total benefits and expenses 2,197,450 2,100,751 1,975,194
Income before income taxes 680,911 621,714 560,782
Income taxes 206,664 207,138 195,842
Net income $ 474,247 $ 414,576 $ 364,940
======== ======== =======
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended Dec. 31, 1997
(thousands)
<TABLE>
<CAPTION>
Additional Net Unrealized
Capital Paid-In Gain (Loss) on Retained
Stock Capital on Investments Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1994 3,000 222,000 (275,708) 1,639,399 1,588,691
Net income -- -- -- 364,940 364,940
Change in net unrealized
gain (loss) on investments -- -- 505,837 -- 505,837
Capital contribution from parent -- 56,814 -- -- 56,814
Loss on reinsurance transaction
with affiliate -- -- -- (4,574) (4,574)
Cash dividends -- -- -- (180,000) (180,000)
Balance, Dec. 31, 1995 3,000 278,814 230,129 1,819,765 2,331,708
Net income -- -- -- 414,576 414,576
Change in net unrealized
gain (loss) on investments -- -- (144,027) -- (144,027)
Capital contribution from parent -- 4,801 -- -- 4,801
Other changes -- -- -- 2,022 2,022
Cash dividends -- -- -- (165,000) (165,000)
Balance, Dec. 31, 1996 $3,000 $283,615 $ 86,102 $2,071,363 $2,444,080
Net income -- -- -- 474,247 474,247
Change in net unrealized
gain (loss) on investments -- -- 140,257 -- 140,257
Capital contribution from parent -- 7,232 -- -- 7,232
Cash dividends -- -- -- (200,000) (200,000)
Balance, Dec. 31, 1997 $3,000 $290,847 $226,359 $2,345,610 $2,865,816
===== ======= ======= ========= ========
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Dec. 31,
1997 1996 1995
(thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 474,247 $ 414,576 $ 364,940
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Policy loan issuance, excluding universal
life-type insurance (54,665) (49,314) (46,011)
Policy loan repayment, excluding universal
life-type insurance 46,015 41,179 36,416
Change in amounts recoverable from reinsurers (47,994) (43,335) (34,083)
Change in other accounts receivable 6,194 (4,981) 12,231
Change in accrued investment income (14,077) 4,695 (30,498)
Change in deferred policy acquisition
costs, net (156,486) (294,755) (196,963)
Change in liabilities for future policy
benefits for traditional life,
disability income and
long-term care insurance 112,915 97,479 85,575
Change in policy claims and other
policyholders' funds (15,289) 27,311 6,255
Change in deferred income tax provision (benefit) 19,982 (65,609) (33,810)
Change in other liabilities 13,305 46,724 (6,548)
(Accretion of discount)
amortization of premium, net (5,649) (23,032) (22,528)
Net realized (gain) loss on investments (860) 159 4,898
Policyholder and contractholder
charges, non-cash (160,885) (154,286) (140,506)
Other, net 7,161 (10,816) 3,849
Net cash provided by (used in) operating
activities $ 223,914 $ (14,005) $ 3,217
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Years ended Dec. 31,
1997 1996 1995
(thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases $ (1,996) $ (43,751) $ (1,007,208)
Maturities, sinking fund payments and calls 686,503 759,248 538,219
Sales 236,761 279,506 332,154
Fixed maturities available for sale:
Purchases (3,160,133) (2,299,198) (2,452,181)
Maturities, sinking fund payments and calls 1,206,213 1,270,240 861,545
Sales 457,585 238,905 136,825
Other investments, excluding policy loans:
Purchases (524,521) (904,536) (823,131)
Sales 335,765 236,912 160,521
Change in amounts due from brokers 2,647 (11,047) 7,933
Change in amounts due to brokers 119,471 140,369 (105,119)
Net cash used in investing activities (641,705) (333,352) (2,350,442)
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 2,785,758 3,567,586 4,189,525
Surrenders and death benefits (3,736,242) (4,250,294) (3,141,404)
Interest credited to account balances 1,386,448 1,370,468 1,315,989
Universal life-type insurance policy loans:
Issuance (84,835) (86,501) (84,700)
Repayment 54,513 58,753 52,188
Capital contribution from parent 7,232 4,801 --
Dividends paid (200,000) (165,000) (180,000)
Net cash provided by financing activities 212,874 499,813 2,151,598
Net (decrease) increase in cash and
cash equivalents (204,917) 152,456 (195,627)
Cash and cash equivalents at
beginning of year 224,603 72,147 267,774
Cash and cash equivalents at
end of year $ 19,686 $ 224,603 $ 72,147
======= ======== ========
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies
------------------------------------------
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance
company organized under the laws of the State of Minnesota. The
Company is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly owned subsidiary of American
Express Company. The Company serves residents of all states except New
York. IDS Life Insurance Company of New York is a wholly owned
subsidiary of the Company and serves New York State residents. The
Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company (ACLAC), American Partners
Life Insurance Company and American Express Corporation.
The Company's principal products are deferred annuities and universal
life insurance, which are issued primarily to individuals. It offers
single premium and flexible premium deferred annuities on both a fixed
and variable dollar basis. Immediate annuities are offered as well.
The Company's insurance products include universal life (fixed and
variable), whole life, single premium life and term products (including
waiver of premium and accidental death benefits). The Company also
markets disability income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles which vary
in certain respects from reporting practices prescribed or permitted by
state insurance regulatory authorities (see Note 4).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Investments
Fixed maturities that the Company has both the positive intent and the
ability to hold to maturity are classified as held to maturity and
carried at amortized cost. All other fixed maturities and all
marketable equity securities are classified as available for sale and
carried at fair value. Unrealized gains and losses on securities
classified as available for sale are reported as a separate component
of stockholder's equity, net of deferred taxes.
<PAGE>
Realized investment gain or loss is determined on an identified cost
basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to
recognize interest income. Prepayment estimates are based on
information received from brokers who deal in mortgage-backed
securities.
Mortgage loans on real estate are carried at amortized cost less
reserves for mortgage loan losses. The estimated fair value of the
mortgage loans is determined by a discounted cash flow analysis using
mortgage interest rates currently offered for mortgages of similar
maturities.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
Impairment of mortgage loans is measured as the excess of the loan's
recorded investment over its present value of expected principal and
interest payments discounted at the loan's effective interest rate, or
the fair value of collateral. The amount of the impairment is recorded
in a reserve for mortgage loan losses. The reserve for mortgage loans
losses is maintained at a level that management believes is adequate to
absorb estimated losses in the portfolio. The level of the reserve
account is determined based on several factors, including historical
experience, expected future principal and interest payments, estimated
collateral values, and current and anticipated economic and political
conditions. Management regularly evaluates the adequacy of the reserve
for mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for
which interest payments are delinquent more than three months. Based
on management's judgment as to the ultimate collectibility of
principal, interest payments received are either recognized as income
or applied to the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment
income over the life of the contracts and payments received as a result
of these agreements are recorded as investment income when realized.
The amortized cost of interest rate caps and floors is included in
other investments. Amounts paid or received under interest rate swap
agreements are recognized as an adjustment to investment income.
During 1997, 1996 and 1995, the Company purchased and wrote index
options to protect against significant declines in fee income as a
result of a decrease in the market value of its managed assets. These
options were marked-to-market through the income statement.
During 1997, the Company purchased and wrote index options to hedge
1998 management fee and other income from separate accounts and the
underlying mutual funds. These index options are carried at market
value and are included in other investments. Gains or losses on these
instruments are deferred and recognized in management and other fees in
the same period as the hedged fee income.
Policy loans are carried at the aggregate of the unpaid loan balances
which do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in
the underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost, which
approximates fair value.
<PAGE>
Supplementary information to the consolidated statements of cash flows
for the years ended December 31 is summarized as
follows:
1997 1996 1995
---- ---- ----
Cash paid during the year for:
Income taxes $174,472 $317,283 $191,011
Interest on borrowings 8,213 4,119 5,524
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over
the lives of the contracts, using primarily the interest method.
Profits represent the excess of investment income earned from
investment of contract considerations over interest credited to
contract owners and other expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. Under this method, profits are recognized over
the lives of the policies in proportion to the estimated gross profits
expected to be realized.
Premiums on traditional life, disability income and long-term care
insurance policies are recognized as revenue when due, and related
benefits and expenses are associated with premium revenue in a manner
that results in recognition of profits over the lives of the insurance
policies. This association is accomplished by means of the provision
for future policy benefits and the deferral and subsequent amortization
of policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of
insurance charges and issue and administrative fees. These charges
also include the minimum death benefit guarantee fees received from the
variable life insurance separate accounts. Management and other fees
include investment management fees and mortality and expense risk fees
received from the variable annuity and variable life insurance separate
accounts and underlying mutual funds.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation,
policy issue costs, underwriting and certain sales expenses, have been
deferred on insurance and annuity contracts.The deferred acquisition costs
for most single premium deferred annuities and installment annuities are
amortized in relation to accumulation values and surrender charge revenue.
The costs for universal life-type insurance and certain installment
annuities are amortized as a percentage of the estimated gross profits
expected to be realized on the policies. For traditional life, disability
income and long-term care insurance policies, the costs are amortized over
an appropriate period in proportion to premium revenue.
Liabilities for future policy benefits
Liabilities for universal life-type insurance and deferred annuities
are accumulation values.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates ranging from
5% to 9.5%, depending on year of issue.
<PAGE>
Liabilities for future benefits on traditional life insurance are based
on the net level premium method, using anticipated mortality, policy
persistency and interest earning rates. Anticipated mortality rates
are based on established industry mortality tables. Anticipated policy
persistency rates vary by policy form, issue age and policy duration
with persistency on cash value plans generally anticipated to be better
than persistency on term insurance plans. Anticipated interest rates
range from 4% to 10%, depending on policy form, issue year and policy
duration.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
Liabilities for future disability income and long-term care policy
benefits include both policy reserves and claim reserves. Policy
reserves are based on the net level premium method, using anticipated
morbidity, mortality, policy persistency and interest earning rates.
Anticipated morbidity and mortality rates are based on established
industry morbidity and mortality tables. Anticipated policy
persistency rates vary by policy form, issue age, policy duration and,
for disability income policies, occupation class. Anticipated interest
rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 10% over 5
to 10 years.
Claim reserves are calculated based on claim continuance tables and
anticipated interest earnings. Anticipated claim continuance rates are
based on a national survey. Anticipated interest rates for claim
reserves for both disability income and long-term care range from 6% to
8%.
Reinsurance
The maximum amount of life insurance risk retained by the Company on
any one life is $750 of life and waiver of premium benefits plus $50 of
accidental death benefits. The maximum amount of disability income
risk retained by the Company on any one life is $6 of monthly benefit
for benefit periods longer than three years. The excesses are
reinsured with other life insurance companies on a yearly renewable
term basis. Graded premium whole life and long-term care policies are
primarily reinsured on a coinsurance basis.
Federal income taxes
The Company's taxable income is included in the consolidated federal
income tax return of American Express Company. The Company provides
for income taxes on a separate return basis, except that, under an
agreement between AEFC and American Express Company, tax benefit is
recognized for losses to the extent they can be used on the
consolidated tax return. It is the policy of AEFC and its subsidiaries
that AEFC will reimburse subsidiaries for all tax benefits.
Included in other liabilities at December 31, 1997 and 1996 are $12,061
and $33,358, respectively, receivable from American Express Financial
Corporation for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for
the exclusive benefit of the variable annuity and variable life
insurance contract owners. The Company receives investment
management fees from the proprietary mutual funds used as investment
options for variable annuities and variable life insurance. The
Company receives mortality and expense risk fees from the separate
accounts.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
The Company makes contractual mortality assurances to the variable
annuity contract owners that the net assets of the separate accounts
will not be affected by future variations in the actual life expectancy
experience of the annuitants and the beneficiaries from the mortality
assumptions implicit in the annuity contracts. The Company makes
periodic fund transfers to, or withdrawals from, the separate accounts
for such actuarial adjustments for variable annuities that are in the
benefit payment period. For variable life insurance, the Company
guarantees that the rates at which insurance charges and administrative
fees are deducted from contract funds will not exceed contractual
maximums. The Company also guarantees that the death benefit will
continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
Reclassification
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
2. Investments
-----------
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available.
Estimated values are determined by established procedures involving,
among other things, review of market indices, price levels of current
offerings of comparable issues, price estimates and market data from
independent brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair values
of investments in fixed maturities and equity securities at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government agency obligations $41,932 $ 2,950 $ -- $ 44,881
State and municipal obligations 9,684 568 -- 10,252
Corporate bonds and obligations 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities 1,983,188 25,976 7,911 2,001,253
--------- ------ ----- ---------
$9,315,450 $445,194 $17,233 $9,743,410
========= ======= ====== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 65,291 $ 4,154 $ -- $69,445
State and municipal obligations 11,045 1,348 -- 12,393
Corporate bonds and obligations 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities 7,130,565 160,478 6,879 7,284,164
--------- ------- ----- ---------
Total fixed maturities 12,515,030 398,741 37,077 12,876,694
Equity securities 3,000 361 -- 3,361
---------- ------- ------ ----------
$12,518,030 $399,102 $37,077 $12,880,055
========== ======= ====== ==========
</TABLE>
<PAGE>
2. Investments (continued)
-----------
The amortized cost, gross unrealized gains and losses and fair values
of investments in fixed maturities and equity securities at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 44,002 $ 933 $ 1,276 $ 43,659
State and municipal obligations 9,685 412 -- 10,097
Corporate bonds and obligations 8,057,997 356,687 47,639 8,367,045
Mortgage-backed securities 2,124,695 21,577 45,423 2,100,849
---------- ------- ------ ----------
$10,236,379 $379,609 $94,338 $10,521,650
========== ======= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 77,944 $ 2,607 $ 96 $ 80,455
State and municipal obligations 11,032 1,336 -- 12,368
Corporate bonds and obligations 3,701,604 122,559 24,788 3,799,375
Mortgage-backed securities 7,218,042 104,808 68,203 7,254,647
--------- ------- ------ ---------
Total fixed maturities 11,008,622 231,310 93,087 11,146,845
Equity securities 3,000 308 -- 3,308
---------- ------- ------ ----------
$11,011,622 $231,618 $93,087 $11,150,153
========== ======= ====== ==========
</TABLE>
The amortized cost and fair value of investments in fixed maturities at
December 31, 1997 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
<PAGE>
Amortized Fair
Held to maturity Cost Value
---------------- --------- --------
Due in one year or less $ 356,597 $360,956
Due from one to five years 1,536,239 1,619,875
Due from five to ten years 4,337,547 4,577,552
Due in more than ten years 1,101,879 1,183,774
Mortgage-backed securities 1,983,188 2,001,253
--------- ---------
$9,315,450 $9,743,410
========= =========
Amortized Fair
Available for sale Cost Value
--------- -----
Due in one year or less $ 162,663 $ 164,012
Due from one to five years 633,339 679,561
Due from five to ten years 2,418,162 2,517,098
Due in more than ten years 2,170,301 2,231,859
Mortgage-backed securities 7,130,565 7,284,164
---------- ----------
$12,515,030 $12,876,694
========== ==========
<PAGE>
2. Investments (continued)
-----------
During the years ended December 31, 1997, 1996 and 1995, fixed
maturities classified as held to maturity were sold with amortized cost
of $229,848, $277,527 and $333,508, respectively. Net gains and losses
on these sales were not significant. The sale of these fixed
maturities was due to significant deterioration in the issuers' credit
worthiness.
Fixed maturities available for sale were sold during 1997 with proceeds
of $457,585 and gross realized gains and losses of $6,639 and $7,518,
respectively. Fixed maturities available for sale were sold during
1996 with proceeds of $238,905 and gross realized gains and losses of
$571 and $16,084, respectively. Fixed maturities available for sale
were sold during 1995 with proceeds of $136,825 and gross realized
gains and losses of $nil and $5,781, respectively.
At December 31, 1997, bonds carried at $14,351 were on deposit with
various states as required by law.
At December 31, 1997, investments in fixed maturities comprised 83
percent of the Company's total invested assets. These securities are
rated by Moody's and Standard & Poor's (S&P), except for securities
carried at approximately $2.7 billion which are rated by American
Express Financial Corporation internal analysts using criteria similar
to Moody's and S&P. A summary of investments in fixed maturities, at
amortized cost, by rating on December 31 is as follows:
Rating 1997 1996
--------- --------- ---------
Aaa/AAA $ 9,195,619 $ 9,460,134
Aaa/AA -- 2,870
Aa/AA 232,451 241,914
Aa/A 246,792 192,631
A/A 2,787,936 2,949,895
A/BBB 1,200,345 1,034,661
Baa/BBB 5,226,616 4,531,515
Baa/BB 475,084 768,285
Below investment grade 2,465,637 2,063,096
--------- ---------
$21,830,480 $21,245,001
========== ==========
At December 31, 1997, 95 percent of the securities rated Aaa/AAA are
GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any
other issuer are greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1997, approximately 14 percent of the Company's
invested assets were mortgage loans on real estate. Summaries of
mortgage loans by region of the United States and by type of real
estate are as follows:
<PAGE>
December 31, 1997 December 31, 1996
------------------------ -----------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
------------- ---------- ------------ ---------- -----------
East North Central $ 748,372 $ 32,462 $ 777,960 $ 19,358
West North Central 456,934 14,340 389,285 29,620
South Atlantic 922,172 14,619 891,852 35,007
Middle Atlantic 545,601 15,507 553,869 17,959
New England 316,250 2,136 310,177 14,042
Pacific 184,917 3,204 190,770 4,997
West South Central 125,227 -- 105,173 11,246
East South Central 60,274 -- 75,176 --
Mountain 297,545 28,717 236,597 11,401
--------- ------- --------- -------
3,657,292 110,985 3,530,859 143,630
Less allowance for
losses 38,645 -- 37,495 --
--------- ------- --------- -------
$3,618,647 $110,985 $3,493,364 $143,630
========= ======= ========= =======
<PAGE>
2. Investments (continued)
-----------
December 31, 1997 December 31, 1996
------------------------ -------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
--------------- ---------- ----------- ---------- -----------
Department/retail
stores $1,189,203 $ 27,314 $1,154,179 $ 68,032
Apartments 1,089,127 16,576 1,119,352 23,246
Office buildings 716,729 34,546 611,395 27,653
Industrial buildings 295,889 21,200 296,944 6,716
Hotels/motels 101,052 -- 97,870 6,257
Medical buildings 99,979 9,748 67,178 8,289
Nursing/retirement
homes 72,359 -- 88,226 1,877
Mixed Use 71,007 -- 73,120 --
Other 21,947 1,601 22,595 1,560
--------- ------- --------- ------
3,657,292 110,985 3,530,859 143,630
Less allowance for
losses 38,645 -- 37,495 --
--------- ------- --------- -------
$3,618,647 $110,985 $3,493,364 $143,630
========= ======= ========= =======
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real
estate at the time of origination of the loan. The Company holds the
mortgage document, which gives it the right to take possession of the
property if the borrower fails to perform according to the terms of the
agreement. The fair value of the mortgage loans is determined by a
discounted cash flow analysis using mortgage interest rates currently
offered for mortgages of similar maturities. Commitments to purchase
mortgages are made in the ordinary course of business. The fair value
of the mortgage commitments is $nil.
At December 31, 1997 and 1996, the Company's recorded investment in
impaired loans was $45,714 and $79,441, respectively, with allowances
of $9,812 and $16,162, respectively. During 1997 and 1996, the average
recorded investment in impaired loans was $61,870 and $74,338,
respectively.
The Company recognized $2,981, $4,889 and $5,014 of interest income
related to impaired loans for the years ended December 31, 1997, 1996
and 1995 respectively.
<PAGE>
The following table presents changes in the allowance for investment
losses related to all loans:
1997 1996 1995
------ ------ ------
Balance, January 1 $37,495 $37,340 $35,252
Provision for investment losses 8,801 10,005 15,900
Loan payoffs (3,851) (4,700) (11,900)
Foreclosures (3,800) (5,150) (1,350)
Other -- -- (562)
------ ------ -------
Balance, December 31 $38,645 $37,495 $37,340
====== ====== ======
At December 31, 1997, the Company had commitments to purchase
investments other than mortgage loans for $234,485. Commitments to
purchase investments are made in the ordinary course of business. The
fair value of these commitments is $nil.
<PAGE>
2. Investments (continued)
-----------
Net investment income for the years ended December 31 is summarized as
follows:
1997 1996 1995
--------- --------- ---------
Interest on fixed maturities $1,692,481 $1,666,929 $1,656,136
Interest on mortgage loans 305,742 283,830 232,827
Other investment income 25,089 43,283 35,936
Interest on cash equivalents 5,914 5,754 5,363
--------- --------- ---------
2,029,226 1,999,796 1,930,262
Less investment expenses 40,837 34,434 22,953
--------- --------- ---------
$1,988,389 $1,965,362 $1,907,309
========= ========= =========
Net realized gain (loss) on investments for the years ended December 31
is summarized as follows:
1997 1996 1995
------ ----- -----
Fixed maturities $ 16,115 $ 8,736 $ 9,973
Mortgage loans (6,424) (8,745) (13,259)
Other investments (8,831) (150) (1,612)
------- ----- -------
$ 860 $ (159) $ (4,898)
======= ====== ======
Changes in net unrealized appreciation (depreciation) of investments
for the years ended December 31 are summarized as follows:
1997 1996 1995
------- ------- -------
Fixed maturities available
for sale $223,441 $(231,853) $811,649
Equity securities 53 (52) 3,118
3. Income taxes
------------
The Company qualifies as a life insurance company for federal income
tax purposes. As such, the Company is subject to the Internal Revenue
Code provisions applicable to life insurance companies.
The income tax expense consists of the following:
1997 1996 1995
Federal income taxes:
Current $176,879 $260,357 $218,040
Deferred 19,982 (65,609) (33,810)
------- -------- -------
196,861 194,748 184,230
State income taxes-current 9,803 12,390 11,612
------- ------- -------
Income tax expense $206,664 $207,138 $195,842
======= ======= =======
<PAGE>
3. Income taxes (continued)
------------
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ---------------
Provision Rate Provision Rate Provision Rate
--------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal income
taxes based on
the statutory rate $238,319 35.0% $217,600 35.0% $196,274 35.0%
Increases (decreases)
are attributable to:
Tax-excluded interest
and dividend income (10,294) (1.5) (9,636) (1.5) (8,524) (1.5)
State Taxes, net of federal
benefit 6,372 0.9 8,053 1.3 7,548 1.3
Low income housing
credits (20,705) (3.0) (5,090) (0.8) (861) (0.2)
Other, net (7,028) (1.0) (3,789) (0.7) 1,405 0.3
------- ----- ------- ---- ------- ----
Federal income taxes $206,664 30.4% $207,138 33.3% $195,842 34.9%
======= ==== ======= ==== ======= ====
</TABLE>
A portion of life insurance company income earned prior to 1984 was not
subject to current taxation but was accumulated, for tax purposes, in a
policyholders' surplus account. At December 31, 1997, the Company had
a policyholders' surplus account balance of $20,114. The
policyholders' surplus account is only taxable if dividends to the
stockholder exceed the stockholder's surplus account or if the Company
is liquidated. Deferred income taxes of $7,040 have not been
established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
1997 1996
---- ----
Deferred tax assets:
Policy reserves $748,204 $724,412
Life insurance guarantee
fund assessment reserve 20,101 29,854
Other 9,589 2,763
------- -------
Total deferred tax assets 777,894 757,029
------- -------
<PAGE>
Deferred tax
liabilities:
Deferred policy acquisition costs 700,032 665,685
Unrealized gain on investments 121,885 48,486
Investments, other 17,559 8,935
------- -------
Total deferred tax liabilities 839,476 723,106
------- -------
Net deferred tax (liabilities) assets $(61,582) $ 33,923
====== ======
The Company is required to establish a valuation allowance for any
portion of the deferred tax assets that management believes will not be
realized. In the opinion of management, it is more likely than not
that the Company will realize the benefit of the deferred tax assets
and, therefore, no such valuation allowance has been established.
<PAGE>
4. Stockholder's equity
--------------------
Retained earnings available for distribution as dividends to the parent
are limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory
authorities. Statutory unassigned surplus aggregated $1,468,677 as of
December 31, 1997 and $1,261,592 as of December 31, 1996 (see Note 3
with respect to the income tax effect of certain distributions). In
addition, any dividend distributions in 1998 in excess of approximately
$331,480 would require approval of the Department of Commerce of the
State of Minnesota.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
1997 1996 1995
---------- ---------- ----------
Statutory net income $ 379,615 $ 365,585 $ 326,799
Statutory capital and surplus 1,765,290 1,565,082 1,398,649
surplus
5. Related party transactions
--------------------------
The Company loans funds to American Express Financial Corporation under
a collateral loan agreement. The balance of the loan was $nil and
$11,800 at December 31, 1997 and 1996, respectively. This loan can be
increased to a maximum of $75,000 and pays interest at a rate equal to
the preceding month's effective new money rate for the Company's
permanent investments. Interest income on related party loans totaled
$103, $780 and $1,371 in 1997, 1996 and 1995, respectively.
The Company purchased a five year secured note from an affiliated
company which was redeemed in 1996. The interest rate on the note was
8.42 percent. Interest income on the above note totaled $1,637 and
$1,937 in 1996 and 1995, respectively.
The Company participates in the American Express Company Retirement
Plan which covers all permanent employees age 21 and over who have met
certain employment requirements. Employer contributions to the plan
are based on participants' age, years of service and total compensation
for the year. Funding of retirement costs for this plan complies with
the applicable minimum funding requirements specified by ERISA. The
Company's share of the total net periodic pension cost was $201, $174
and $155 in 1997, 1996 and 1995, respectively.
The Company also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a
percent of either each employee's eligible compensation or basic
contributions. Costs of these plans charged to operations in 1997,
1996 and 1995 were $1,245, $990 and $815, respectively.
<PAGE>
The Company participates in defined benefit health care plans of AEFC
that provide health care and life insurance benefits to retired
employees and retired financial advisors. The plans include
participant contributions and service related eligibility
requirements. Upon retirement, such employees are considered to have
been employees of AEFC. AEFC expenses these benefits and allocates the
expenses to its subsidiaries. Accordingly, costs of such benefits to
the Company are included in employee compensation and benefits and
cannot be identified on a separate company basis.
<PAGE>
5. Related party transactions (continued)
--------------------------
Charges by AEFC for use of joint facilities, marketing services and
other services aggregated $414,155, $397,362 and $377,139 for 1997,
1996 and 1995, respectively. Certain of these costs are included in
deferred policy acquisition costs. In addition, the Company rents its
home office space from AEFC on an annual renewable basis.
6. Commitments and contingencies
-----------------------------
At December 31, 1997 and 1996, traditional life insurance and universal
life-type insurance in force aggregated $74,730,720 and $67,274,354,
respectively, of which $4,351,904 and $3,875,921 were reinsured at the
respective year ends. The Company also reinsures a portion of the
risks assumed under disability income and long-term care policies.
Under all reinsurance agreements, premiums ceded to reinsurers amounted
to $60,495, $48,250 and $39,399 and reinsurance recovered from
reinsurers amounted to $19,042, $15,612, and $14,088 for the years
ended December 31, 1997, 1996 and 1995, respectively. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
A number of lawsuits have been filed against life and health insurers
in jurisdictions in which the Company and its subsidiaries do business
involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents, and other matters. In December 1996, an
action of this type was brought against the Company and its parent,
AEFC. A second action was filed in March, 1997. The plaintiffs
purport to represent a class consisting of all persons who replaced
existing Company policies with new Company policies from and after
January 1, 1985. The complaint puts at issue various alleged sales
practices and misrepresentations, alleged breaches of fiduciary duties
and alleged violations of consumer fraud statutes. Plaintiffs seek
damages in an unspecified amount and seek to establish a claims
resolution facility for the determination of individual issues. The
Company and its parent believe they have meritorious defenses to the
claims raised in the lawsuit. The outcome of any litigation cannot be
predicted with certainty. In the opinion of management, however, the
ultimate resolution of the above lawsuit and others filed against the
Company should not have a material adverse effect on the Company's
consolidated financial position.
The IRS routinely examines the Company's federal income tax returns,
and is currently auditing the Company's returns for the 1990 through
1992 tax years. Management does not believe there will be a material
adverse effect on the Company's consolidated financial position as a
result of this audit.
7. Lines of credit
---------------
The Company has an available line of credit with its parent aggregating
$100,000. The rate for the line of credit is the parent's cost of
funds, ranging from 20 to 45 basis points over the established index.
Borrowings outstanding under this agreement were $nil at
December 31, 1997 and 1996.
<PAGE>
8. Derivative financial instruments
--------------------------------
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk and equity
market risk, including hedging specific transactions. The Company does
not hold derivative instruments for trading purposes. The Company
manages risks associated with these instruments as described below.
<PAGE>
8. Derivative financial instruments (continued)
--------------------------------
Market risk is the possibility that the value of the derivative
financial instruments will change due to fluctuations in a factor from
which the instrument derives its value, primarily an interest rate or
equity market index. The Company is not impacted by market risk
related to derivatives held for non-trading purposes beyond that
inherent in cash market transactions. Derivatives held for purposes
other than trading are largely used to manage risk and, therefore, the
cash flow and income effects of the derivatives are inverse to the
effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill
the terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval
procedures, including setting concentration limits by counterparty, and
requiring collateral, where appropriate. A vast majority of the
Company's counterparties are rated A or better by Moody's and Standard
& Poor's.
Credit risk related to interest rate caps and floors and index options
is measured by the replacement cost of the contracts. The replacement
cost represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid
over the life of the agreement. Notional amounts are not recorded on
the balance sheet. Notional amounts far exceed the related credit risk.
The Company's holdings of derivative financial instruments are as
follows:
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
----------------- -------- -------- ----- ------------
Assets:
Interest rate caps $ 4,600,000 $ 24,963 $ 15,665 $ 15,665
Interest rate floors 1,000,000 1,561 4,551 4,551
Put index options 221,984 11,120 11,120 11,120
Liabilities:
Call index options 221,984 (8,273) (8,273) --
Off balance sheet:
Interest rate swaps 1,267,000 -- (45,799) --
--------- ------ ------ ------
$29,371 $(22,736) $31,336
====== ====== ======
Notional Carrying Fair Total Credit
December 31, 1996 Amount Amount Value Exposure
Assets:
Interest rate caps $4,000,000 $ 16,227 $ 7,439 $ 7,439
Interest rate floors 1,000,000 2,041 4,341 4,341
Off balance sheet:
Interest rate swaps 1,000,000 -- (24,715) --
--------- ------ -------- ------
$18,268 $(12,935) $11,780
====== ====== ======
<PAGE>
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps and
floors expire on various dates from 1998 to 2003. The interest rate
swaps expire on various dates from 2000 to 2003. All put and call
options expire in 1998.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect
the margin between interest rates earned on investments and the
interest rates credited to related annuity contract holders.
<PAGE>
8. Derivative financial instruments (continued)
--------------------------------
Index options are used to manage the equity market risk related to the
fee income that the Company receives from its separate accounts and the
underlying mutual funds. The amount of the fee income received is
based upon the daily market value of the separate account and mutual
fund assets. As a result, the Company's fee income could be impacted
significantly by changing economic conditions in the equity market.
The Company entered into index option collars (combination of puts and
calls) to hedge anticipated fee income for 1998 related to separate
accounts and mutual funds which invest in equity securities. Testing
has demonstrated the impact of these instruments on the income
statement closely correlates with the amount of fee income the Company
realizes. In the event that testing demonstrates that this correlation
no longer exists, or in the event the Company disposes of the index
options collars, the instruments will be marked-to-market through the
income statement. At December 31, 1997, deferred gains on purchased
put index options were $11,120 and deferred losses on written call
index options were $8,273.
9. Fair values of financial instruments
------------------------------------
The Company discloses fair value information for most on- and
off-balance sheet financial instruments for which it is practicable to
estimate that value. Fair values of life insurance obligations and all
non-financial instruments, such as deferred acquisition costs are
excluded. Off-balance sheet intangible assets, such as the value of
the field force, are also excluded. Management believes the value of
excluded assets and liabilities is significant. The fair value of the
Company, therefore, cannot be estimated by aggregating the amounts
presented.
<TABLE>
<CAPTION>
1997 1996
------------------ ---------------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
---------------- -------- ------ ------- -----
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $9,315,450 $9,743,410 $10,236,379 $10,521,650
Available for sale 12,876,694 12,876,694 11,146,845 11,146,845
Mortgage loans on
real estate (Note 2) 3,618,647 3,808,570 3,493,364 3,606,077
Other:
Equity securities (Note 2) 3,361 3,361 3,308 3,308
Derivative financial
instruments (Note 8) 37,644 31,336 18,268 11,780
Other 82,347 85,383 63,993 66,242
Cash and
cash equivalents (Note 1) 19,686 19,686 224,603 224,603
Separate account assets
(Note 1) 23,214,504 23,214,504 18,535,160 18,535,160
<PAGE>
Financial Liabilities
Future policy benefits
for fixed annuities 20,731,052 19,882,302 20,641,986 19,721,968
Derivative financial
instruments (Note 8) (8,273) (54,072) -- (24,715)
Separate account liabilities 21,488,282 20,707,620 17,358,087 16,688,519
</TABLE>
<PAGE>
9. Fair values of financial instruments (continued)
------------------------------------
At December 31, 1997 and 1996, the carrying amount and fair value of
future policy benefits for fixed annuities exclude life
insurance-related contracts carried at $1,185,155 and $1,112,155,
respectively, and policy loans of $93,540 and $83,867, respectively.
The fair value of these benefits is based on the status of the
annuities at December 31, 1997 and 1996. The fair value of deferred
annuities is estimated as the carrying amount less any applicable
surrender charges and related loans. The fair value for annuities in
non-life contingent payout status is estimated as the present value of
projected benefit payments at rates appropriate for contracts issued in
1997 and 1996.
At December 31, 1997 and 1996, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less any
applicable surrender charges and less variable insurance contracts
carried at $1,726,222 and $1,177,073, respectively.
10. Segment information
-------------------
The Company's operations consist of two business segments; first,
individual and group life insurance, disability income and long-term
care insurance, and second, annuity products designed for individuals,
pension plans, small businesses and employer-sponsored groups. The
consolidated condensed statements of income for the years ended
December 31, 1997, 1996 and 1995 and total assets at December 31, 1997,
1996 and 1995 by segment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net investment income:
Life, disability income
and long-term care insurance $ 269,874 $ 262,998 $ 256,242
Annuities 1,718,515 1,702,364 1,651,067
--------- --------- ---------
$ 1,988,389 $ 1,965,362 $ 1,907,309
========= ========= =========
Premiums, charges and fees:
Life, disability income
and long-term care insurance $ 514,838 $ 448,389 $ 384,008
Annuities 374,274 308,873 249,557
------- ------- -------
$ 889,112 $ 757,262 $ 633,565
======= ======= =======
Income before income taxes:
Life, disability income
and long-term care insurance $ 178,717 $ 161,115 $ 125,402
Annuities 501,334 460,758 440,278
Net gain (loss) on investments 860 (159) (4,898)
------- ------- -------
$ 680,911 $ 621,714 $ 560,782
======= ======= =======
<PAGE>
Total assets:
Life, disability income
and long-term care insurance $ 8,193,796 $ 7,028,906 $ 6,195,870
Annuities 44,780,328 40,277,075 36,704,208
---------- ---------- ----------
$52,974,124 $47,305,981 $42,900,078
========== ========== ==========
</TABLE>
<PAGE>
Allocations of net investment income and certain general expenses are
based on various assumptions and estimates.
Assets are not individually identifiable by segment and have been
allocated principally based on the amount of future policy benefits by
segment.
Capital expenditures and depreciation expense are not material, and
consequently, are not reported.
11. Year 2000 Issue (unaudited)
---------------
The Year 2000 issue is the result of computer programs having been
written using two digits rather than four to define a year. Any
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than 2000. This could result in the failure of
major systems or miscalculations, which could have a material impact on
the operations of the Company. All of the systems used by the Company are
maintained by AEFC and are utilized by multiple subsidiaries and
affiliates of AEFC. The Company's business is heavily dependent
upon AEFC's computer systems and has significant interactions with
systems of third parties.
A comprehensive review of AEFC's computer systems and business
processes, including those specific to the Company, has been conducted to
identify the major systems that could be affected by the Year 2000
issue. Steps are being taken to resolve any potential problems including
modification to existing software and the purchase of new software. These
measures are scheduled to be completed and tested on a timely basis.
AEFC's goal is to complete internal remediation and testing of each
system by the end of 1998 and to continue compliance efforts through
1999.
AEFC is evaluating the Year 2000 readiness of advisors and other third
parties whose system failures could have an impact on the Company's
operations. The potential materiality of any such impact is not known at
this time.
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses of the issuance and distribution of the interests in the
IDS Life Account RE of IDS Life Insurance Company to be registered, other than
commissions on sales of the Contracts, are to be borne by the registrant.
Item 14. Indemnification of Directors and Officers
Section 300.083 of Minnesota Law provides in part that a corporation
organized under such law shall have power to indemnify anyone made, or
threatened to be made, a party to a threatened, pending or completed proceeding,
whether civil or criminal, administrative or investigative, because he is or was
a director or officer of the corporation, or served as a director or officer of
another corporation at the request of the corporation. Indemnification in such a
proceeding may extend to judgments, penalties, fines and amounts paid in
settlement, as well as to reasonable expenses, including attorneys' fees and
disbursements. In a civil proceeding, there can be no indemnification under the
statute, unless it appears that the person seeking indemnification has acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation and its shareholders and unless such
person has received no improper personal benefit; in a criminal proceeding, the
person seeking indemnification must also have no reasonable cause to believe his
conduct was unlawful.
Article IX of the By-laws of the IDS Life Insurance Company requires
the IDS Life Insurance Company to indemnify directors and officers to the extent
indemnification is permitted as stated by the preceding paragraph, and contains
substantially the same language as the above-mentioned Section 300.083.
Article IX, paragraph (2), of the By-laws of the IDS Life Insurance
Company provides as follows:
"Section 2. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party, by reason of the fact that he is or
was a director, officer, employee or agent of this Corporation, or is or was
serving at the direction of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to any threatened, pending or completed action, suit or proceeding,
wherever brought, to the fullest extent permitted by the laws of the State of
Minnesota, as now existing or hereafter amended, provided that this Article
shall not indemnify or protect any such director, officer, employee or agent
against any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of his duties or by reason of his reckless
disregard of his obligations and duties."
The parent company of IDS Life Insurance Company maintains an insurance
policy which affords liability coverage to directors and officers of the IDS
Life Insurance Company while acting in that capacity. IDS Life Insurance Company
pays its proportionate share of the premiums for the policy.
<PAGE>
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.
Item 15. Recent Sales of Unregistered Securities
None
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company,
dated July 24, 1957, filed electronically as Exhibit No. 3.0 to
Registrant's Post-Effective Amendment No. 12 to Registration Statement
No. 33-13375, is incorporated herein by reference.
3.2 Copy of Amended By-laws of IDS Life Insurance Company, filed
electronically as Exhibit No. 3.1 to Registrant's Post-Effective
Amendment No. 12 to Registration Statement No. 33-13375, is
incorporated herein by reference.
3.3 Certified Copy of Resolution of the Board of Directors of IDS Life
Insurance Company, dated March 18, 1987, establishing IDS Life Account
RE, filed electronically as Exhibit No. 3.2 to Registrant's
Post-Effective Amendment No. 12 to Registration Statement No.
33-13375, is incorporated herein by reference.
4.1 Form of Deferred Variable Annuity Contract, as previously filed.
4.2 Copy of Deed of Trust Note together with certain documents relating to
mortgage loan secured by West Springfield Terrace Apartments, as
previously filed.
4.3 Copy of Line of Credit Agreement, dated March 30, 1994, between IDS
Life Account RE and IDS Life Insurance Company (including a copy of
the executed promissory note, dated March 30, 1994), filed
electronically as Exhibit No. 4.2 to Registrant's Post-Effective
Amendment No. 12 to Registration Statement No. 33-13375, is
incorporated herein by reference.
<PAGE>
5. Copy of Opinion of counsel regarding legality of contracts, as
previously filed.
10.1 Copy of Investment Advisory Agreement between JMB Annuity Associates
and IDS Life Insurance Company respecting the IDS Life Account RE, as
previously filed.
10.2 Copy of Agreement together with certain documents relating to the
purchase of an interest in Northridge Mall, as previously filed.
10.3 Copy of Management Agreement with respect to management of Northridge
Mall, Second Amended and Restated Articles of Partnership of N/S
Associates and Amendment to Operating Agreement, as previously filed.
10.4 Copy of Agreement together with certain documents relating to the
purchase of an interest in Southridge Mall, as previously filed.
10.5 Copy of Management Agreement with respect to management of Southridge
Mall and Amendment to Operating Agreement, as previously filed.
10.6 Copy of Commitment Letter relating to the funding of a participating
mortgage loan secured by Riverpoint Center, as previously filed.
10.7 Copy of Commitment and Agreement for Sale/Leaseback and Leasehold Loan
with respect to Monmouth Mall, as previously filed.
10.8 Copy of Investment Advisory Agreement and Articles of Partnership of
Monmouth Associates, as previously filed.
10.9 Copy of Amended and Restated Articles of Partnership of Monmouth
Associates, as previously filed.
10.10Copy of Agreement together with certain documents relating to
purchase of West Springfield Terrace Apartments, as previously filed.
10.11Copy of Agreement together with certain documents relating to
purchase of an interest in 1225 Connecticut Avenue, as previously
filed.
21. List of subsidiaries of IDS Life Insurance Company:
o American Centurion Life Assurance Company
o American Enterprise Life Insurance Company
o American Partners Life Insurance Company
o IDS Life Insurance Company of New York
23.1 Consent of Independent Auditors (KPMG Peat Marwick LLP), filed
electronically herewith.
<PAGE>
23.2 Consent of Independent Auditors (Ernst & Young LLP), filed
electronically herewith.
24. Directors Power of Attorney, dated March 12, 1997, filed
electronically as Exhibit No. 24 to Registrant's Post-Effective
Amendment No. 16 is incorporated by reference.
24.2 IDS Life Insurance Company Power of Attorney dated April 9, 1998 is
filed electronically herewith as Exhibit 24.2.
(b) Financial Statement Schedules
Financial Statement Schedules and Reports of Independent Auditors, filed
electronically herewith.
Financial Statement Schedules
IDS Life Account RE
Independent Auditors' Report on Schedules, dated March 31, 1998.
Schedule III - Participation in Mortgage Loan on Real Estate and
Interest Earned on Participation in Mortgage
Schedule IV - Real Estate Owned and Rental Income
N/S Associates, Monmouth Associates & 1225 Investment Corporation,
Unconsolidated Joint Ventures of IDS Life Account RE Independent
Auditors' Report, dated March 20, 1998.
Schedule III - Participation in Mortgage Loan on Real Estate and
Interest Earned on Participation in Mortgage
Schedule IV - Real Estate Owned and Rental Income
IDS Life Insurance Company Report of Independent Auditors, dated
February 5, 1998.
Schedule I - Consolidated Summary of Investments Other than
Investments in Related Parties
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts
All other schedules to the consolidated financial statements required
by Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
<PAGE>
Item 17. Undertaking
Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, IDS Life Insurance
Company has duly caused this Registration Statement to be signed on behalf of
the Registrant by the undersigned, thereunto duly authorized in this City of
Minneapolis, and State of Minnesota on the 16th day of April, 1998.
IDS Life Account RE of IDS Life Insurance Company
(Registrant)
By IDS Life Insurance Company
By /s/ Richard W. Kling*
Richard W. Kling
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 16th day of April, 1998.
Signature Title
/s/ James A. Mitchell* Chairman of the Board
James A. Mitchell and Chief Executive Officer
/s/ Richard W. Kling* Director and President
Richard W. Kling
/s/ Jeffrey S. Horton** Vice President and Treasurer
Jeffrey S. Horton
/s/ David R. Hubers* Director
David R. Hubers
/s/ Paul F. Kolkman* Director and Executive Vice
Paul F. Kolkman President
/s/ Barry J. Murphy* Director and Executive Vice
Barry J. Murphy President, Client Service
/s/ Stuart A. Sedlacek* Director and Executive Vice
Stuart A. Sedlacek President, Assured Assets
/s/ Philip C. Wentzel** Vice President and Controller
Philip C. Wentzel
<PAGE>
*Signed pursuant to Power of Attorney dated March 12, 1997, filed electronically
as Exhibit No. 24 to Registrant's Post-Effective Amendment No. 16:
**Signed pursuant to Power of Attorney dated April 9, 1998, filed electronically
herewith as Exhibit 24.2 for IDS Life Insurance Company (IDS Life Account RE).
By:
- ---------------------------
Mary Ellyn Minenko
<PAGE>
Independent Auditors' Report on Schedules
The Board of Directors of
IDS Life Insurance Company and
Contract Owners of IDS Life Account RE:
The audits referred to in our report dated March 20, 1998 on the financial
statements of IDS Life Account RE included the related financial statement
schedules as of December 31, 1997, included in the Registration Statement. These
financial statement schedules are the responsibility of the management of IDS
Life Insurance Company. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 20, 1998
<PAGE>
Schedule III
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
Participation in Mortgage Loan on Real Estate and
Interest Earned on Participation in Mortgage
December 31, 1997
Part 1 - Participation in Mortgage Part 2 - Interest Earned on
Loan on Real Estate at Close of Year Participation in
Mortgage
<TABLE>
<CAPTION>
Liens on Shopping Center:
Principal unpaid Amount of Interest due
Riverpoint Center Carrying at close mortgage being & accrued at Interest
Chicago, Illinois Amount (A) of period foreclosed end of period Income Earned
<S> <C> <C> <C> <C> <C> <C>
1997 $ -- $ -- $ -- $ -- $ --
============== ============= ======= ============== ==============
1996 $ -- $ -- $ -- $ -- $ 256,843
============== ============== ======== ============== ============
1995 $2,966,206 $2,875,853 $ -- $ (5,400) $ 264,581
========== ========== ======= ============= ============
</TABLE>
(A) - Reconciliation of the carrying value of the participation in the mortgage
loan:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at the beginning of year........... $ -- $2,966,206 $2,994,023
Changes during year:
Unrealized depreciation.................. -- (147,608) (27,817)
Loan repayment........................... -- (2,794,065) --
Realized loss............................ -- (24,533) --
-------- -------- -----
Balance at end of year..................... -- -- 2,966,206
------- ------- ---------
</TABLE>
<PAGE>
Schedule IV
IDS LIFE ACCOUNT RE
of
IDS LIFE INSURANCE COMPANY
Real Estate Owned and Rental Income
December 31, 1997
Part 1 - Real Estate Owned at End of Year (A)
Apartment Complex:
<TABLE>
<CAPTION>
West Springfield Amount at Amount at
Terrace Apartments which carried Cost of Carrying value which carried
Fairfax County, Amount of at beginning improvements, Unrealized of real estate at close of
Virginia encumbrances of period (A) etc. Appreciation sold period (B)
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $ -- $ -- $ -- $ --$ --$ --
============== ================ ========== ============================================
1996 $ -- $16,295,602 $136,544 $ -- $(16,432,146)$ --
============== =========== ======== =========== ============================
1995 $7,770,339 $15,993,057 $163,781 $138,764$ -- $16,295,602
========== =========== ======== ========================== ===========
Part 2 - Rental Income
Rents due Total rental Expended for
and accrued income interest taxes, Net income
at end of applicable repairs, and applicable
period to period expenses to period
1997 $ -- $ -- $ -- $ --
======= ============== ============= ==========
1996 $ -- $1,760,141 $1,381,391 $378,750
======= ========== ========== ========
1995 $4,016 $2,379,439 $1,756,139 $623,300
====== ========== ========== ========
</TABLE>
(A) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at the beginning of period.......... $ -- $ 16,295,602 $15,993,057
Additions (deductions) during the year:
Improvements, etc......................... -- 136,544 163,781
Unrealized appreciation................... -- -- 138,764
Carrying value of real estate sold........ -- (16,432,146) --
----- ------------ -----
Balance at end of year...................... $ -- $ -- $16,295,602
====== ================ ===========
</TABLE>
(B) Reserve for depreciation is not applicable as real estate owned is stated at
estimated fair market value.
<PAGE>
Independent Auditors' Report
The Board of Directors of IDS Life
Insurance Company and Contract
Owners of IDS Life Account RE:
Under date of March 20, 1998 we reported on the combined financial statements of
N/S Associates, Monmouth Associates and 1225 Investment Corporation,
unconsolidated joint ventures of IDS Life Account RE, as of December 31, 1997
and 1996, and the related combined statements of operations, partners' capital
and cash flows for each of the years in the three-year period ended December 31,
1997, as contained in the annual report on Form 10-K of IDS Life Insurance
Company for the year 1997. In connection with our audits of the aforementioned
combined financial statements, we also audited the related combined financial
statement schedules as listed in the accompanying index. These combined
financial statement schedules are the responsibility of the Investment Adviser.
Our responsibility is to express an opinion on these combined financial
statement schedules based on our audits.
In our opinion, such combined financial statement schedules, when considered in
relation to the basic combined financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
March 20, 1998
<PAGE>
Schedule III
IDS LIFE ACCOUNT RE of
IDS LIFE INSURANCE COMPANY
Monmouth Associates
Unconsolidated Joint Venture of IDS Life Account RE
Participation in Mortgage Loan on Real Estate and
Interest Earned on Participation in Mortgage
December 31, 1997
Part 1 -Participation in Mortgage
Part 2 - Interest Earned on
Loan on Real Estate at Close of Year on Participation in
Mortgage
Liens on Shopping Center:
<TABLE>
<CAPTION>
Principal unpaid Amount of Interest due
Monmouth Mall Carrying at close mortgage being & accrued at Interest
Eatontown, New Jersey Amount (A) of period foreclosed end of period Income Earned
<S> <C> <C> <C> <C> <C> <C>
1997 $ 109,556,000 $ 160,033,000 $ -- $ 785,000 $ 9,354,000
1996 $ 109,556,000 $ 160,033,000 $ -- $ 772,000 $ 9,159,000
1995 $ 108,000,000 $ 158,373,000 $ -- $ 742,000 $ 6,994,000
</TABLE>
(A) - Reconciliation of the carrying value of the participation in the mortgage
loan:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at the beginning of year...........$109,556,000 $ 108,000,000 $ 119,154,000
Changes during year:
Additional fundings...................... -- 1,556,000 17,317,000
Unrealized depreciation.................. -- -- (28,471,000)
---------- ------- ------------
Balance at end of year.....................$109,556,000 $ 109,556,000 $ 108,000,000
============ ============= =============
</TABLE>
<PAGE>
Schedule IV
IDS LIFE ACCOUNT RE of
IDS LIFE INSURANCE COMPANY
N/S Associates, Monmouth Associates and 1225 Investment Corporation
Unconsolidated Joint Ventures of IDS Life Account RE
Combined Real Estate Owned and Rental Income
December 31, 1997
Part 1 - Real Estate Owned at End of Year (C)
<TABLE>
<CAPTION>
Amount at
Cost of which carried
Amount of improvements, Unrealized at close of
encumbrances Initial Cost etc. Depreciation period (A)
Retail properties:
Northridge Mall,
<S> <C> <C> <C> <C> <C>
Milwaukee, WI $ -- $108,107,000 $ 16,242,000 $(87,149,000) $ 37,200,000
Southridge Mall,
Greendale, WI $ 35,000,000 $115,401,000 $ 17,483,000 $(21,884,000) $111,000,000
Office Building:
1225 Connecticut Ave.,
Washington, D.C. $ 7,000,000 $ 54,775,000 $ 8,146,000 $ (10,413,000) $ 52,508,000
Ground Lease:
Monmouth Mall,
Eatontown, NJ $ -- $ 13,000,000 $ -- $ -- $ 13,000,000
----------- ------------ ----------- ----------- ------------
$ 42,000,000 $291,283,000 $ 41,871,000 $(119,446,000) $213,708,000
============ ============ ============ ============== ============
</TABLE>
Part 2 - Rental Income
Rents due
and accrued
at end of
period
Retail Properties:
Northridge Mall,
Milwaukee, WI $ 74,000
Southridge Mall,
Greendale, WI $ 185,000
Office Building:
1225 Connecticut Ave.,
Washington, D.C. $ --
$ 259,000
(A) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- ----
<S> <C> <C> <C>
Balance at the beginning of period..........$213,928,000 $220,270,000 $254,500,000
Additions (deductions), including
unrealized depreciation................... (220,000) (6,342,000) (34,230,000)
--------- ----------- ------------
Balance at end of year......................$213,708,000 $213,928,000 $220,270,000
============ ============ ============
</TABLE>
(B) - Reconciliation for depreciation is not applicable as real estate owned is
stated at estimated market value.
<PAGE>
<PAGE>
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the consolidated financial statements of IDS Life Insurance
Company as of December 31, 1997 and 1996, and for each of the three years in the
period ended December 31, 1997, and have issued our report thereon dated
February 5, 1998 (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedules listed in the index to financial
statement schedules of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Ernst & Young LLP
Minneapolis, Minnesota
February 5, 1998
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
SCHEDULE I - CONSOLIDATED SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES ($ thousands)
AS OF DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
Type of Investment Cost Value Amount at which
shown in the
balance sheet
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held to maturity:
United States Government and
government agencies and
authorities (a) $ 1,829,112 $ 1,846,833 $ 1,829,112
States, municipalities and
political subdivisions 9,684 10,252 9,684
All other corporate bonds (b) 7,476,654 7,886,325 7,476,654
------------ ---------- ----------
Total held to maturity 9,315,450 9,743,410 9,315,450
Available for sale:
United States Government and
government agencies and
authorities (c) 6,798,425 6,944,942 6,944,942
States, municipalities and
political subdivisions 11,045 12,393 12,393
All other corporate bonds (d) 5,705,560 5,919,359 5,919,359
------------ ---------- ----------
Total available for sale 12,515,030 12,876,694 12,876,694
Mortgage loans on real estate 3,618,647 XXXXXXXXX 3,618,647
Policy loans 498,874 XXXXXXXXX 498,874
Other investments 318,591 XXXXXXXXX 318,591
------------ ----------
Total investments $ 26,266,592 $ XXXXXXXXX $ 26,628,256
============ ========== ==========
(a) - Includes mortgage-backed securities with a cost and market value of $1,787,180 and $1,801,952,
respectively.
(b) - Includes mortgage-backed securities with a cost and market value of $196,008 and $199,301,
respectively.
(c) - Includes mortgage-backed securities with a cost and market value of $6,733,134 and $6,875,498,
respectively.
(d) - Includes mortgage-backed securities with a cost and market value of $397,431 and $408,667,
respectively.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ($
thousands)
FOR THE YEAR ENDED DECEMBER 31, 1997
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Segment Deferred Future Unearned Other policy Premium Net Benefits, Amortization Other Premiums
policy policy premiums claims and revenue investment claims, of deferred operating written
acquisition benefits, benefits income losses and policy expenses*
cost losses, payable settlement acquisition
claims and expenses costs
loss
expenses
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annuities $ 1,453,441 $ 22,009,747 $ - $ 35,007 $ - $1,718,515 $ 1,720 $229,729 $262,680 N/A
Life, DI, and
Long-term Care
Insurance 1,026,136 4,027,289 - 33,338 206,494 269,874 209,955 93,002 13,916 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,479,577 $ 26,037,036 $ - $ 68,345 $ 206,494 $ 1,988,389 $ 211,675 $322,731 $276,596 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
*Allocations of net investment income and other operating expenses are based on various assumptions and estimates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ($ thousands)
FOR THE YEAR ENDED DECEMBER 31, 1996
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Segment Deferred Future Unearned Other policy Premium Net Benefits, Amortization Other Premiums
policy policy premiums claims and revenue investment claims, of deferred operating written
acquisition benefits, benefits income losses and policy expenses*
cost losses, payable settlement acquisition
claims and expenses costs
loss
expenses
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annuities $ 1,398,025 $ 21,838,008 $ - $ 50,137 $ - $1,702,364 $ 2,724 $ 189,645 $ 180,942 N/A
Life, DI, and
Long-term
Care Insurance 932,780 3,811,034 - 33,497 182,921 262,998 187,486 88,960 80,526 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,330,805 $ 25,649,042 $ - $ 83,634 $ 182,921 $1,965,362 $ 190,210 $ 278,605 $ 261,468 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
*Allocations of net investment income and other operating expenses are based on various assumptions and estimates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ($ thousands)
FOR THE YEAR ENDED DECEMBER 31, 1995
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Segment Deferred Future Unearned Other policy Premium Net Benefits, Amortization Other Premiums
policy policy premiums claims and revenue investment claims, of deferred operating written
acquisition benefits, benefits income losses and policy expenses*
cost losses, payable settlement acquisition
claims and expenses costs
loss
expenses
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annuities $ 1,227,169 $ 21,404,836 $ - $ 28,191 $ - $1,651,067 $ 2,693 $ 189,626 $ 166,191 N/A
Life, DI,
and Long-term
Care Insurance 798,556 3,613,253 - 28,132 161,530 256,242 164,749 90,495 45,451 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,025,725 $ 25,018,089 $ - $ 56,323 $ 161,530 $1,907,309 $ 167,442 $ 280,121 $ 211,642 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
*Allocations of net investment income and other operating expenses are based on various assumptions and estimates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
SCHEDULE IV - REINSURANCE ($ thousands)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
Gross amount Ceded to other Assumed from Net % of amount
companies other companies Amount assumed to net
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997
Life insurance in force $ 73,119,122 $ 4,351,904 $ 1,611,596 $ 70,378,814 2.29%
- -------------------------------------------------------------------------------------------
Premiums:
Life insurance $ 55,094 $ 3,124 $ 503 $ 52,473 0.96%
DI & LTC insurance 196,799 42,778 -- 154,021 0.00%
- -------------------------------------------------------------------------------------------
Total premiums $ 251,893 $ 45,902 $ 503 $ 206,494 0.24%
- -------------------------------------------------------------------------------------------
For the year ended
December 31, 1996
Life insurance in force $ 65,571,173 $ 3,875,921 $ 1,703,181 $ 63,398,433 2.69%
- -------------------------------------------------------------------------------------------
Premiums:
Life insurance $ 54,111 $ 3,253 $ 545 $ 51,403 1.06%
DI & LTC insurance 164,561 33,043 -- 131,518 0.00%
- -------------------------------------------------------------------------------------------
Total premiums $ 218,672 $ 36,296 $ 545 $ 182,921 0.30%
- -------------------------------------------------------------------------------------------
For the year ended
December 31, 1995
Life insurance in force $ 57,895,180 $ 3,771,204 $ 1,788,352 $ 55,912,328 3.20%
- -------------------------------------------------------------------------------------------
Premiums:
Life insurance $ 53,089 $ 2,648 $ (248) $ 50,193 -0.49%
DI & LTC insurance 137,016 25,679 -- 111,337 0.00%
- -------------------------------------------------------------------------------------------
Total premiums $ 190,105 $ 28,327 $ (248) $ 161,530 -0.15%
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS ($ thousands)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
---------
Balance at Charged to
Description Beginning Charged to Other Accounts- Deductions- Balance at End
of Period Costs & Expenses Describe Describe * of Period
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997
- ----------------------------
Reserve for Mortgage Loans $37,495 $8,801 $0 $7,651 $38,645
Reserve for Other Investments $3,963 $2,100 $0 $0 $6,063
For the year ended
December 31, 1996
- ----------------------------
Reserve for Mortgage Loans $37,340 $10,005 $0 $9,850 $37,495
Reserve for Other Investments $4,713 ($750) $0 $0 $3,963
For the year ended
December 31, 1995
- ----------------------------
Reserve for Mortgage Loans $35,252 $15,900 $0 $13,812 $37,340
Reserve for Other Investments $7,515 ($2,802) $0 $0 $4,713
* 1997, 1996 and 1995 amounts represent $7,651, $9,850, and $13,812, respectively, for loan
payoffs and foreclosures.
</TABLE>
IDS LIFE ACCOUNT RE (REVA)
Registration Number 33-13375
EXHIBIT INDEX
23.1 Consent of Independent Auditors (KPMG Peat Marwick LLP)
23.2 Consent of Independent Auditors (Ernst & Young LLP)
24.2 IDS Life Insurance Company Power of Attorney
Independent Auditors' Consent
The Board of Directors
IDS Life Insurance Company:
We consent to the use of our report incorporated herein and to the reference to
our firm under the heading "EXPERTS" in the prospectus.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 16, 1998
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 5, 1998 with respect to the consolidated
financial statements and schedules of IDS Life Insurance Company in
Post-Effective Amendment No. 17 to the Registration Statement (Form S-1, No.
33-13375) and related Prospectus of IDS Life Account RE for the registration of
interests in variable annuity contracts to be offered by IDS Life Insurance
Company.
Ernst & Young LLP
Minneapolis, Minnesota
April 13, 1998
IDS LIFE INSURANCE COMPANY
POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned, as principal financial officer and controller,
respectively, of IDS Life Insurance Company on behalf of the below listed
registrants that previously have filed registration statements and amendments
thereto pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 with the Securities and Exchange Commission:
<TABLE>
<CAPTION>
1933 Act 1940 Act
Reg. Number Reg. Number
IDS Life Variable Account 10
<S> <C> <C> <C>
IDS Life Flexible Portfolio Annuity 33-62407 811-07355
IDS Life Accounts F, IZ, JZ, G, H, N, KZ, LZ and MZ
IDS Life Flexible Annuity 33-4173 811-3217
IDS Life Accounts F, IZ, JZ, G, H, N, KZ, LZ and MZ
IDS Life Variable Retirement and Combination
Retirement Annuities 2-73114 811-3217
IDS Life Accounts F, IZ, JZ, G, H, N, KZ, LZ and MZ
IDS Life Employee Benefit Annuity 33-52518 811-3217
IDS Life Accounts F, IZ, JZ, G, H, N, KZ, LZ and MZ
IDS Life Group Variable Annuity Contract 33-47302 811-3217
IDS Life Insurance Company
IDS Life Group Variable Annuity Contract (Fixed Account) 33-48701 N/A
IDS Life Insurance Company
IDS Life Guaranteed Term Annuity 33-28976 N/A
IDS Life Insurance Company
IDS Life Flexible Payment Market Value Annuity 33-50968 N/A
IDS Life Insurance Company
Portfolio Guaranteed Term Annuity 333-42793 N/A
IDS Life Variable Life Separate Account
Flexible Premium Variable Life Insurance Policy 33-11165 811-4298
IDS Life Variable Life Separate Account
Flexible Premium Survivorship Variable Life
Insurance Policy 33-62457 811-4298
IDS Life Variable Life Separate Account
Single Premium Variable Life Insurance Policy 2-97637 811-4298
IDS Life Variable Account for Smith Barney
Single Premium Variable Life Insurance Policy 33-5210 811-4652
IDS Life Account SBS
Symphony Annuity 33-40779 812-7731
IDS Life Account RE
Real Estate Variable Annuity 33-13375 N/A
IDS Life Variable Annuity Fund A 2-29081 811-1653
IDS Life Variable Annuity Fund B 2-47430 811-1674
</TABLE>
hereby constitutes and appoints William A. Stoltzmann, Mary Ellyn Minenko,
Eileen J. Newhouse, Sherilyn K. Beck, Colin Lancaster, Bruce Kohn and Timothy S.
Meehan or any one of them, as his attorney-in-fact and agent, to sign for him in
his name, place and stead any and all filings, applications (including
applications for exemptive relief), periodic reports, registration statements
for existing or future products of existing separate accounts (with all exhibits
and other documents required or desirable in connection therewith), other
documents, and amendments thereto and to file such filings, applications,
periodic reports, registration statements, other documents, and amendments
thereto with the Securities and Exchange Commission, and any necessary states,
and grants to any or all of them the full power and authority to do and perform
each and every act required or necessary in connection therewith.
<PAGE>
Dated the 9th day of April, 1998.
/s/ Jeffrey S. Horton April 8, 1998
- ------------------------------------
Jeffrey S. Horton
Vice President, Treasurer
and Assistant Secretary
/s/ Philip C. Wentzel April 9, 1998
- ------------------------------------
Philip C. Wentzel
Vice President and Controller
