<PAGE>
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I represent that this English language IDS Stock Market Certificate
prospectus represents a fair and accurate translation of a Spanish
language IDS Stock Market Certificate prospectus.
________________________
Bruce A. Kohn
Vice President and General Counsel
IDS Certificate Company
<PAGE>
PAGE 2
IDS Stock Market Certificate
[icon of a globe]
Potential for stock market growth with safety of principal
Distributed by American Express Financial Advisors Inc.<PAGE>
PAGE 3
To our certificate holders
Earn interest tied to stock market growth and maintain safety of
principal with...
The IDS Stock Market Certificate
Guaranteed principal
IDS Certificate Company (IDSC) guarantees that if you hold your
certificate until term end, you will get back every penny you put
in your certificate. Fluctuations in the S&P 500 Index will never
affect your principal.
A century of safety and stability
IDSC and its parent, American Express Financial Corporation, have
never missed a payment to certificate holders since they opened for
business in 1894.
The backing of quality investments
Though IDS certificates are not insured by the FDIC as bank
deposits are, federal law requires that we back our certificates
dollar for dollar with cash and qualified investments. In fact,
the amortized cost of our investments exceeded at Dec. 31, 1994,
the required carrying value of our outstanding certificates by more
than $121 million.
Choose how your money works for you
At the time you purchase an IDS Stock Market Certificate, you have
the opportunity to choose to earn interest in one of two ways: 1)
stock market full participation, or 2) stock market partial
participation plus a guaranteed minimum rate. Your stock market
participation interest earnings are tied to the movement of the S&P
500 Index. They will be equal to a portion of any percentage
increase in the Index as measured on the beginning and ending date
of each 12-month term.
Current rates on , 19 .
Partial participation minimum interest rate: %
Interim interest rate: %
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PAGE 4
With stock market full participation, if the S&P 500 Index doesn't
increase during the term of your certificate, your principal will
be secure but you'll earn no participation interest. If you want a
return regardless of market performance, you may want to choose
stock market partial participation plus a guaranteed minimum rate.
That way you'll be assured of some return in addition to what you
might earn with stock market participation.
The two types of interest add flexibility to your financial plan.
You have the potential to earn higher than average interest or the
option of a guaranteed interest rate, plus safety of principal.
Your maximum return over each 12-month term will be limited to a
specific percentage as described in the prospectus.
After your first term, you may choose to earn a fixed rate with no
stock market participation. And you can change from your fixed
interest selection to again participate in the movement of the S&P
500 Index.
If an emergency arises, your money is available.
You can withdraw from your certificate, in part or in full, during
the term, if your financial needs change. Withdrawal of principal
during the term will be assessed a 2% penalty. You will also
forfeit any interest earned on the amount you withdraw. However,
if you select a fixed rate with no stock market participation after
your first term, you can keep the interest earned on the amount you
withdraw.
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Notes<PAGE>
PAGE 6
IDS Stock Market Certificate
Prospectus April 26, 1995
Potential for stock market growth with safety of principal
IDS Stock Market Certificates are issued by IDS Certificate Company
(IDSC) (the Issuer). You can purchase this certificate with a
single investment of at least $1,000 but not more than $1 million
(unless you receive prior authorization from the Issuer to invest
more). As long as you stay within this limit, you can make
additional investments at the end of a term. Your principal is
guaranteed by the Issuer. You can participate in any increase of
the stock market based on the S&P 500 Index while protecting your
principal. In addition, you decide whether part of your return
will be guaranteed by IDSC or whether all of it will be tied to the
market. You can keep your certificate for up to 14 terms.
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 describes terms and conditions of your IDS Stock
Market Certificate. It contains facts that can help you decide if
the certificate is the right investment for you. Read the
prospectus before you invest and keep it for future reference. No
one has the authority to change the terms and conditions of the IDS
Stock Market Certificate as described in the prospectus, or to bind
the Issuer by any statement not in it.
THE CERTIFICATE IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER ENTITY, AND IS NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.
Issuer: Distributor:
IDS Certificate Company American Express
IDS Tower 10 Financial Advisors Inc.
Minneapolis, MN 55440-0010 IDS Tower 10
1-800-437-3133 (toll free) or Minneapolis, MN 55440-0010
(612) 671-3800 (Minneapolis/
St. Paul area)
Selling Agents:
American Express
TTY numbers: Bank International
1-800-846-4293 (toll free) or American Express Tower
(612) 671-1630 (Minneapolis/ World Financial Center
St. Paul area) New York, NY 10285-2300
Coutts & Co (USA) International
421 North Rodeo Drive
Penthouse 1
Beverly Hills, CA 90210-4539
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PAGE 7
Where to get information about the Issuer
The Issuer is subject to the reporting requirements of the
Securities Exchange Act of 1934. Reports and other information on
the Issuer are filed with the Securities and Exchange Commission
(SEC). Copies can be obtained from the Public Reference Section of
the SEC, 450 5th St., N.W., Washington, D.C. 20549, at prescribed
rates. Or you can inspect and copy information in person at the
SEC's Public Reference Section and at the following regional
offices:
Northeast Regional Office
7 World Trade Center, Suite 1300
New York, NY 10048
Midwest Regional Office
Northwestern Atrium Center
500 West Madison St., Suite 1400
Chicago, IL 60611
Pacific Regional Office
5670 Wilshire Blvd., 11th Floor
Los Angeles, CA 90036
Initial interest and participation rates
The Issuer guarantees return of your principal. The interest on
your certificate is linked to stock market performance as measured
by the Standard & Poor's 500 Stock Index (S&P 500 Index) as
explained under "About the certificate," below.
Here are the interest rates and market participation percentages in
effect on the date of this prospectus, April 26, 1995:
Maximum return Market participation percentage Minimum interest
12% 100% (full) None
12% 25% (partial) Currently 3.75%
These rates may or may not be in effect when you apply to purchase
your certificate. For your first term, if you choose the partial
participation option for your certificate, your minimum interest
rate will be between 2.75% and 3.75%. Rates for later terms are
set at the discretion of the Issuer and may differ from the rates
shown here. We reserve the right to issue other securities with
different provisions.<PAGE>
PAGE 8
Table of contents
About the certificate
Investment amounts p
Face amount and principal p
Certificate term p
Value at maturity p
Receiving cash before end of the term p
Interest p
Promotions and pricing flexibility p
Historical data on the S&P 500 Index p
Calculation of return p
About the S&P 500 Index p
Opportunities at the end of a term p
How to invest and withdraw funds
Buying your certificate p
Full and partial withdrawals p
Other full and partial withdrawal policies p
Transfers to other accounts p
Transfer of ownership p
For more information p
Taxes on your earnings
Foreign investors p
How your money is used and protected
Invested and guaranteed by the Issuer p
Regulated by government p
Backed by our investments p
Investment policies p
How your money is managed
Relationship between the Issuer
and American Express Financial Corporation p
Capital structure and certificates issued p
Investment management and services p
Distribution p
About American Express Bank International and Coutts p
Employment of other American Express affiliates p
Directors and officers p
Auditors p
Annual Financial information
Summary of selected financial information p
Management's discussion and analysis of financial
condition and results of operations p
Report of independent auditors p
Financial statements p
Notes to financial statements p
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About the certificate
Investment amounts
You may purchase the IDS Stock Market Certificate with a single
investment of at least $1,000 but not more than $1 million payable
in U.S. currency. You may also make additional lump-sum
investments in any amount at the end of any term as long as your
total amount paid in is not more than the $1 million.
Face amount and principal
The face amount of your certificate is the amount of your initial
investment. Your principal is the value of your certificate at the
beginning of each subsequent term. Your principal is guaranteed by
the Issuer. It consists of the amount you actually invest plus
interest and any additional investment you make less withdrawals,
penalties and any interest paid to you in cash.
For example: Assume your initial investment (face amount) of
$10,000 has earned a return of 7.25%. Interest is credited to your
account at the end of the term. You have not taken any interest as
cash, or made any withdrawals. You have invested an additional
$2,500 prior to the beginning of the next term. Your principal for
the next term will equal:
$10,000.00 Face Amount (initial investment)
plus 725.00 Interest credited to your account at the
end of the term
plus 5.00 Interim interest (See "Interim interest")
minus ($0.00) Interest paid to you in cash
plus 2,500.00 Additional investment to your certificate
minus ($0.00) Withdrawals and applicable penalties
$13,230.00 Principal at the beginning of the next
term.
Certificate term
Your first certificate term is a 12-month period that begins on the
Wednesday after your application is accepted and ends the Tuesday
before the one-year anniversary of its acceptance. For example, if
your application is accepted on a Wednesday, your first term would
begin the next Wednesday. Your certificate will earn interest at
the interim interest rate then in effect until the term begins. It
will not earn any participation interest until the term begins. If
you choose to continue to receive participation interest,
subsequent terms are 12-month periods that begin on the Wednesday
following the 14-day grace period at the end of the prior 12-month
term. You may begin your next term on any Wednesday during the 14-
day period by providing prior written instructions to the Issuer.
If you choose to receive fixed interest, subsequent terms will be
up to 12 months as described in "Fixed interest" under "Interest"
below.<PAGE>
PAGE 10
Value at maturity
Your certificate matures after 14 terms, and you will receive a
check for its value. At maturity, the value of your certificate
will be the total of your actual investments, plus credited
interest not paid to you in cash, less any withdrawals and
withdrawal penalties. Certain other fees may apply.
Receiving cash before end of the term
If you need money before your certificate term ends, you may
withdraw part or all of its value at any time, less any penalties
that apply. Procedures for withdrawing money, as well as
conditions under which penalties apply, are described in "Full and
partial withdrawals" under "How to invest and withdraw funds."
Interest
You may select from two types of participation interest for your
first term. The two types are 1) full participation, or 2) partial
participation together with minimum interest. Both of these
options have an upper limit which is the maximum annual return
explained below. After your first term, you may choose not to
participate in any market movement and receive a fixed rate of
interest.
Full participation interest: With this option you participate 100%
in any percentage increase in the S&P 500 Index up to the maximum
return. You earn interest only if the value of the S&P 500 Index
is higher on the last day of your term than it was on the first day
of your term. Thus, your return is linked to stock market
performance. The S&P 500 Index is frequently used to measure the
relative performance of the stock market. For a more detailed
discussion of the S&P 500 Index, see "About the S&P 500 Index."
Partial participation and minimum interest: This option allows you
to participate in a certain part (market participation rate) of any
increase in the S&P 500 Index together with a rate of interest
guaranteed by IDSC in advance for each term (minimum interest).
Your return is composed of two parts:
1. A percentage of any increase in the S&P 500 Index, and
2. A rate of interest guaranteed by IDSC in advance for each
term.
Together, they cannot exceed the maximum return.
If you choose the partial participation option for your first term,
the minimum interest paid on your certificate will be between 2.75%
and 3.75%
The market participation rate and the minimum interest rate on the
date of this prospectus are listed on the inside cover under
"Initial interest and participation rates."
Fixed interest: After your first term, this option allows you to
stop participating in the market entirely for one or more terms.
You may choose to receive a fixed rate of interest for any term
after the first term. During the term when you are receiving fixed<PAGE>
PAGE 11
interest, you can change from your fixed interest selection to
again participate in the market. If you make the change from fixed
interest to participation interest, your next term would begin on
the Wednesday following our receipt of notice of your new
selection. In this way, you may have a term (during which you
would earn fixed interest) that is less than 12 months. You may
not change from participation interest to fixed interest during a
term.
Maximum annual return: This is the cap, or upper limit, of your
return. Your total return including both participation and minimum
interest for a term for which you have chosen participation
interest will be limited to this maximum return percentage.
Determining the S&P 500 Index value: The stock market closes at 3
p.m. Central time and the S&P 500 Index value is available at
approximately 4:30 p.m. This is the value we currently use to
determine participation interest. Occasionally, Standard & Poor's
Corporation (S&P) makes minor adjustments to the closing value
after 4:30 p.m. and the value we use may not be exactly the one
that is published the next business day. In the future, we may use
a later time cut-off if it becomes feasible to do so. If the stock
market is not open or the S&P 500 Index is unavailable as of the
last day of your term, the preceding business day for which a value
is available will be used instead. Each Tuesday's closing value of
the S&P 500 Index is used for establishing the term start and the
term end values each week.
Interim interest: When we accept your application, we pay interim
interest to your account for the time before your first term
begins. We also pay interim interest for the 14-day period between
terms unless you write to ask us to begin your next term earlier.
You may withdraw this interest in cash at any time before it
becomes part of your certificate's principal without withdrawal
penalty. If it is not withdrawn, the interest will become part of
your certificate's principal at the start of the next succeeding
term. For example, the interest you earn between the end of the
first and the beginning of the second term will become part of the
principal at the start of your third term. Interim interest rates
for the time before your first term begins will be within a range 0
to 100 basis points (0% to 1%) above the average interest rate
published for 12-month certificates of deposit in the BANK RATE
MONITOR Top 25 Market AverageTM (the BRM Average), North Palm
Beach, FL 33408. If the BRM Average is no longer publicly
available or feasible to use, IDSC may use another, similar index
as a guide for setting rates.
The BANK RATE MONITOR is a weekly magazine published in North Palm
Beach, FL 33408 by Advertising News Service Inc., an independent
national news organization that collects and disseminates
information about bank products and interest rates. Advertising
News Service has no connection with the Issuer, American Express
Financial Corporation or any of their affiliates.
The BRM Average is an index of rates and annual effective yields
offered on various length certificates of deposit by large banks
and thrifts in 25 metropolitan areas. The frequency of compounding<PAGE>
PAGE 12
varies among the banks and thrifts. Certificates of deposit in the
BRM Average are government insured fixed-rate time deposits.
The BANK RATE MONITOR may be available in your local library. To
obtain information or current BRM Average rates, call the Client
Service Organization at 1-800-437-3133 (TTY: 1-800-846-4293).
Earning interest: Participation interest is calculated, credited
and compounded at the end of your certificate term. Minimum
interest accrues daily and is credited and compounded at the end of
your certificate term. Fixed interest accrues and is credited
daily and compounds at the end of your term. Both minimum and
fixed interest are calculated on a 30-day month and 360-day year
basis. Interim interest accrues and is credited daily and
compounds at the end of your term immediately following the period
in which interim interest is credited.
Rates for future periods: After the initial term, the maximum
return, market participation percentage or minimum interest rate on
your certificate may be greater or less than those shown on the
front of this prospectus. In setting future interest rates, a
primary consideration will be the prevailing investment climate.
Rates are reviewed weekly, and we have complete discretion as to
what interest rate will be declared.
To find out what your certificate's new maximum return, market
participation percentage and minimum interest rate will be for your
next term, please consult:
o Your American Express Bank International (AEBI) relationship
manager.
o Your Coutts & Co (USA) International (Coutts) relationship
officer.
o The Issuer's Client Service Organization at 1-800-437-3133
(TTY: 1-800-846-4293).
Promotions and pricing flexibility
From time to time, the Issuer may sponsor or participate in
promotions involving one or more of the certificates and their
respective terms. For example, we may offer different rates to new
clients, to existing clients, or to individuals who purchase or use
products or services offered by American Express Financial Advisors
Inc. or its affiliates. These promotions will generally be for a
specified period of time. We also may offer different rates based
on your amount invested, maturity selected, geographic location and
whether the certificate is purchased for an IRA or a qualified
retirement account.
Historical Data on the S&P 500 Index
The following chart illustrates the month-end closing values of the
index from Dec. 31, 1983 through Feb. 28, 1995. The values of the
S&P 500 Index are reprinted with the permission of S&P.<PAGE>
PAGE 13
S&P 500 Index values - December 1983 to February 1995
400
300 Chart shows closing values of the S&P from above 100 in
1984 to end near 500 in Feb. 1995
200
____S&P 500
100
84 85 86 87 88 89 90 91 92 93 94 95
S&P 500 Index Average Annual Return
Beginning date Period held Average annual
Dec. 31, in years return
___________________________________________________________________
1984 10 10.63%
1989 5 5.38
1993 1 -1.55
The next chart illustrates, on a moving 12-month basis, the price
return of the S&P 500 Index measured for every 12-month period
beginning with the period ended Dec. 31, 1984. The price return is
the percentage return for each period using month-end closing
prices of the S&P 500 Index. Dividends and other distributions on
the securities comprising the S&P 500 Index are not included in
calculating the price return.
S&P 500 Index - December 1984 to February 1995
40%
Chart shows 12-month Moving Price Return of the
S&P from a high of 40% to a low of -20%
20%
0%
- -20%
85 86 87 88 89 90 91 92 93 94 95
Using the same data on price returns described above, the next
graph expands on the information in the preceding chart by
illustrating the distribution of all of the 12-month price returns
of the S&P 500 Index beginning with the 12-month period ending Dec.
31, 1984. The graph also shows the number of times these price
returns fell within certain ranges.<PAGE>
PAGE 14
S&P 500 Index - December 1984 to February 1995
20
Chart shows the distribution of all of the 12-month
price returns of the S&P 500 from 12/1/84 through
15 2/28/95 with a high of just over 20 and a low between
0 and 5
10
5
- -15% -10 -5 0 5 10 15 20 25 30
The last chart illustrates, on a moving weekly basis, the actual
12-month return of the IDS Stock Market Certificate at full and
partial participation compared to the price return of the NYSE
Composite IndexR through October 1992 and the S&P 500 Index after
October 1992. For non-guaranteed funds received before Nov. 3,
1992, and guaranteed funds received before Nov. 4, 1992, IDS Stock
Market Certificate participation interest was based on the NYSE
Composite IndexR rather than the S&P 500 Index.
<TABLE><CAPTION>
Actual 12-month return 1/22/91 to 2/8/95
<S> <C>
30%
25%
20% Chart shows actual returns of the certificate at full
and 25% participation with the full participation
15% generally tracking the market indexes over the period
and 25% level of participation tracking at the 25%
10% level of return.
5% ----Market Index
****Stock Market Full Participation
0% ....Stock Market 25% Participation
1/91 4/91 7/91 10/91 1/92 4/92 7/92 10/92 1/93 4/93 7/93 10/93 2/94 4/94 7/94 10/94 2/95
</TABLE>
The NYSE Composite IndexR is a registered service mark of the New
York Stock Exchange, Inc. (NYSE) and is a composite covering price
movements of all common stocks listed on the NYSE. Because the IDS
Stock Market Certificate was first available on Jan. 24, 1990, the
performance reflects the returns on the one-year anniversary date,
falling on a Wednesday, of each of the weeks shown.
The recent historical experience of an index should not be taken as
an indication of future performance of the stock market or the
certificate. No assurance can be given that an index will not
decline or that certificate holders will receive interest on their
accounts beyond any minimum interest or fixed interest selected.<PAGE>
PAGE 15
Calculation of return
The increase or decrease in the S&P 500 Index, as well as the
actual return paid to you, is calculated as follows:
Rate of return on S&P 500 Index
Term ending value of S&P 500 Index minus
Term beginning value of S&P 500 Index divided by
Term beginning value of S&P 500 Index equals
Rate of return on S&P 500 Index
The actual return paid to you will depend on your interest
participation selection.
For example, assume:
Term ending value of S&P 500 Index 458
Term beginning value of S&P 500 Index 422
Maximum return 12%
Minimum return 3.75%
Partial participation rate 25%
458 Term ending value of S&P 500 Index
minus 422 Term beginning value of S&P 500 Index
equals 36 Difference between beginning and ending values
36 Difference between beginning and ending values
divided by 422 Term beginning value of S&P 500 Index
equals 8.53% Percent increase - full participation return
8.53% Percent increase or decrease
times 25.00% Partial participation rate
equals 2.13%
plus 3.75% 3.75% minimum interest rate
equals 5.88% Partial participation return
In both cases in the example, the return would be less than the 12%
maximum.
Maximum Return and Partial Participation Minimum Rate History - The
following table illustrates the maximum annual returns and partial
participation minimum rates that have been in effect since the
Stock Market Certificate was introduced.
Partial
Maximum participation
Purchase date annual return minimum rate
Jan. 24, 1990 18.00% 5.00%
Feb. 5, 1992 18.00 4.00
May 13, 1992 15.00 4.00
Sept. 9, 1992 12.00 3.00
Nov. 11, 1992 10.00 2.50
Nov. 2, 1994 10.00 2.75
April 26, 1995 12.00 3.75
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PAGE 16
Examples: To help you understand the way this certificate works,
here are some hypothetical examples. The following are three
different examples of market scenarios and how they affect the
certificate's return. Assume for all examples that you purchased
the certificate with a $10,000 original investment. Also assume
that the partial participation rate is 25%, the minimum interest
rate for partial participation is 3.75%, and the maximum total
return for full and partial participation is 12%.
<TABLE><CAPTION>
- ------------------------------------------------------------------------------------------
1. If the Market and the S&P 500 Index value rise
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 425 8% increase in the S&P 500 Index Index 459
<S> <C>
Full participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 800 (8% x $10,000) + 375 3.75% (minimum interest rate) x $10,000
Participation interest + 200 25% x (8% x $10,000) participation interest
$10,800 Ending balance $10,575 Ending balance
(8% total return) (5.75% total return)
- ------------------------------------------------------------------------------------------
2. If the Market and the S&P 500 Index value fall
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 425 4% decrease in the S&P 500 Index Index 408
Full participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 0 Participation interest + 375 3.75% (Minimum interest rate) x $10,000
$10,000 Ending balance + 0 Participation interest
(0% total return) $10,375 Ending balance
(3.75% total return)
- ----------------------------------------------------------------------------------------
3. If the Market and the S&P 500 Index value rise above maximum return
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 425 16% increase in the S&P 500 Index Index 493
Full Participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 1,200 (12% x $10,000) + 375 3.75% (Minimum interest rate) x $10,000
Maximum interest + 400 (25% x 16% x $10,000) Participation interest
$11,200 Ending balance $10,775 Ending balance
(12% Total return) (7.75% total return)
</TABLE>
About the S&P 500 Index
The description in this prospectus of the S&P 500 Index including
its make-up, method of calculation and changes in its components
are derived from publicly available information regarding the S&P
500 Index. The Issuer does not assume any responsibility for the
accuracy or completeness of such information.
The S&P 500 Index is composed of 500 common stocks, most of which
are listed on the New York Stock Exchange. The S&P 500 Index is
published by S&P and is intended to provide an indication of the
pattern of common stock movement. S&P chooses the 500 stocks to be
included in the S&P 500 Index with the aim of achieving a
distribution by broad industry groupings that approximates the
distribution of these groupings in the common stock population of
the New York Stock Exchange. Changes in the S&P 500 Index are
reported daily in the financial pages of many major newspapers.
<PAGE>
PAGE 17
"Standard & Poor'sR", "S&PR", "S&P 500R", "Standard & Poor's 500",
and "500" are trademarks of McGraw-Hill, Inc. and have been
licensed for use by the Issuer. The certificate is not sponsored,
endorsed, sold or promoted by S&P. S&P makes no representation or
warranty, express or implied, to the owners of the certificate or
any member of the public regarding the advisability of investing in
securities generally or in the certificate particularly or the
ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the Issuer is the
licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined, composed and calculated by S&P
without regard to the Issuer or the certificate. S&P has no
obligation to take the needs of the Issuer or the owners of the
certificate into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has
not participated in the determination of the timing of, prices at,
or quantities of the certificate to be issued or in the
determination or calculation of the equation by which the
certificate is to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or
trading of the certificate.
S&P does not guarantee the accuracy and/or the completeness of the
S&P 500 Index or any data included therein and S&P shall have no
liability for any errors, omissions, or interruptions therein. S&P
makes no warranty, express or implied, as to the results to be
obtained by the Issuer, owners of the certificate, or any person or
entity from the use of the S&P 500 Index or any data included
therein. S&P makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the S&P 500 Index or any
data included therein. Without limiting any of the foregoing, in
no event shall S&P have any liability for any special, punitive,
indirect, or consequential damages (including lost profits), even
if notified of the possibility of such damages.
If for any reason the S&P 500 Index were to become unavailable or
not reasonably feasible to use, we would use a comparable stock
market index for determining participation interest. If this were
to occur, you would be sent a notice indicating the comparable
index that will be used and be given the option to surrender your
certificate, if desired, and receive your principal, without being
assessed a surrender charge.
Opportunities at the end of a term
Grace period: When your certificate term ends, you have 14 days
before a new term automatically begins. During this 14-day grace
period you can:
o change your interest selection,
o add money to your certificate,
<PAGE>
PAGE 18
o withdraw part or all of your money without a withdrawal
penalty or loss of interest, or
o receive your interest in cash.
Fixed interest only: The grace period does not apply if you made
the change from fixed interest back to participation interest
during a term as discussed in "Fixed interest" under "Interest"
above. Instead, your new 12-month term will begin on the Wednesday
following our receipt of your notice of your new interest
selection.
New term: If you do not make changes, your certificate will
continue with your current selections when the new term begins 14
days later. You will earn interim interest during this 14-day
grace period. If you don't want to wait 14 days before starting
your next market participation term, you must give us written
instructions before your current term ends. Or, you may phone in
your instructions and follow up the call with written verification.
You can tell us to start your next term on any Wednesday during the
grace period following the date on which we receive your notice.
Your notice may also tell us to change your interest selection, add
to your certificate or withdraw part of your money. Term end
notification cannot be sent in advance because indexing information
and interest (if any) are included. Any additional payments
received during the current term will be applied at the end of the
current term. By starting your new term early and waiving the 14-
day grace period, you are choosing to start your next term without
knowing the ending value of your current term.
How to invest and withdraw funds
Buying your certificate
An AEBI relationship manager or Coutts client relationship officer
will help you fill out and submit an application to open an account
with us and purchase a certificate. We will process the
application at our corporate offices in Minneapolis. When your
application is accepted, you will receive a confirmation showing
the acceptance date, the date your term begins and the interest
selection you have made detailing your market participation
percentage and/or the guaranteed minimum interest rate for your
first term. After your term begins, we will send you notice of the
value of the S&P 500 Index on the day your term began. The rates
in effect on the date we accept your application are the rates that
apply to your certificate. See "Purchase policies" below.
IMPORTANT: When opening an account, you must provide the Issuer
with a Form W-8 or approved substitute. See "Taxes on your
earnings."
<PAGE>
PAGE 19
Purchase policies:
o If you purchase a certificate with a personal check or other
non-guaranteed funds, American Express Financial Corporation
must convert your check to federal funds (e.g., monies of
member banks within the Federal Reserve Bank) before your
purchase will be accepted and you begin earning interest.
This could take up to two business days.
o The Issuer has the authority to determine whether to accept an
application and sell a certificate.
Two ways to make additional investments at term end
1
By mail
Send your check along with your name and account number to:
Regular mail: Express mail:
IDS Certificate Company IDS Certificate Company
Client Service Organization Client Service Organization
IDS Tower 10 733 Marquette Ave.
Minneapolis, MN 55440-0010 Minneapolis, MN 55402
2
By wire
If you have an established account, you may wire money to:
Norwest Bank Minneapolis
Routing No. 091000019
Minneapolis, MN
Attn: Domestic Wire Dept.
Give these instructions: Credit IDS Account #00-29-882 for
personal account # (your account number) for (your name).
If this information is not included, the order may be rejected and
all money received less any costs IDSC incurs will be returned
promptly.
o Minimum amount you may wire: $1,000
o Wire orders can be accepted only on days when your bank,
American Express Financial Corporation, IDSC and Norwest Bank
Minneapolis are open for business.
o Purchases made by wire are accepted by American Express
Financial Corporation only from banks located in the United
States.
o Wire purchases are completed when wired payment is received
and we accept the purchase.
o Wire purchases are not sent until the next business day.<PAGE>
PAGE 20
o Wire investments must be received and accepted in the
Minneapolis headquarters on a business day before 3 p.m.
Central time to be credited that day. Otherwise your purchase
will be processed the next business day.
o The Issuer, American Express Financial Corporation, its
subsidiaries, AEBI, and Coutts are not responsible for any
delays that occur in wiring funds, including delays in
processing by the bank.
o You must pay any fee the bank charges for wiring.
Full and partial withdrawals
You may withdraw your certificate for its full value or make a
partial withdrawal of $100 or more at any time. However:
o Full and partial withdrawals of principal during a term are
subject to penalties, described below.
o You may not make a partial withdrawal if it would reduce your
certificate balance to less than $1,000. If you request such
a withdrawal, we will contact you for revised instructions.
Penalties for withdrawal during a term: If you withdraw money
during a term, you will pay a penalty of 2% of the principal
withdrawn. (The 2% penalty is waived upon death of the certificate
holder.)
When you request a full or partial withdrawal during a term, we pay
you from the principal of your certificate.
Loss of interest: If you make a withdrawal at any time other than
at the end of the term, you will lose interest accrued on the
withdrawal amount since minimum and participation interest is
credited only at the end of a term. However, accrued fixed and
interim interest will be paid to the date of the withdrawal.
Following are examples describing a $2,000 withdrawal during a term
for participation and fixed interest:
Participation interest
Account balance $10,000.00
Interest (interest is credited at 0.00
the end of the term)
Withdrawal of principal ( 2,000.00)
2% withdrawal penalty (40.00)
Balance after withdrawal. $ 7,960.00
You will forfeit any accrued
interest on the withdrawal amount.
<PAGE>
PAGE 21
Fixed interest
Account balance $10,000.00
Interest credited to date 100.00
Withdrawal of credited interest (100.00)
Withdrawal of principal (1,900.00)
2% withdrawal penalty (on $1,900 (38.00)
principal withdrawn)
Balance after withdrawal. $ 8,062.00
Other full and partial withdrawal policies:
o If you request a partial or full withdrawal of a certificate
recently purchased or added to by a check or money order that
is not guaranteed, we will wait for your check to clear.
Please expect a minimum of 10 days from the date of your
payment before the Issuer mails a check to you. (A check may
be mailed earlier if your bank provides evidence that your
check has cleared.)
o If your certificate is pledged as collateral, any withdrawal
will be delayed until we get approval from the secured party.
o Any payments to you may be delayed under applicable rules,
regulations or orders of the SEC.
Transfers to other accounts
You may transfer part or all of your certificate to any other IDSC
certificate or into another existing American Express Financial
Advisors Inc. account (subject to any terms and conditions that may
apply).
Two ways to request a withdrawal or transfer
1
By phone
Your AEBI relationship manager or Coutts client relationship
officer will assist you with this transaction. You may also call
the Client Service Organization between 8 a.m. and 6 p.m. your
local time at:
1-800-437-3133 (toll free) or
(612) 671-3800 (Minneapolis/St. Paul area)
TTY numbers:
1-800-846-4293 (toll free) or
(612) 671-1630 (Minneapolis/St. Paul area)
o Maximum phone request: $50,000
o Transfers into an American Express Financial Advisors Inc.
account with the same ownership.
<PAGE>
PAGE 22
o A telephone withdrawal request will not be allowed within 30
days of a phoned-in address change.
o We will honor any telephone request believed to be authentic
and will use reasonable procedures to confirm that they are,
such as asking identifying questions. As long as the
procedures are followed, neither the Issuer nor American
Express Financial Corporation will be liable for any loss
resulting from fraudulent requests.
You may request that telephone withdrawals not be authorized from
your account by writing the Client Service Organization.
2
By mail
Your AEBI relationship manager or Coutts client relationship
officer will assist you with this transaction. You may also send
your name, account number and request for a withdrawal or transfer
to:
Regular mail:
IDS Certificate Company
Client Service Organization
IDS Tower 10
Minneapolis, MN 55440-0010
Express mail:
IDS Certificate Company
Client Service Organization
733 Marquette Ave.
Minneapolis, MN 55402
Written requests are required for:
o Transactions over $50,000
o Transfers to another American Express Financial Advisors Inc.
account with different ownership. (All current registered
owners must sign the request.)
Two ways to receive payment when you withdraw funds
1
By regular or express mail
o Mailed to address on record; please allow seven days for
mailing
o Payable to name(s) you requested
<PAGE>
PAGE 23
o For express mail, you will pay charges that vary depending on
the courier you select. For a partial withdrawal leaving a
remaining balance of more than $1,000, these charges will be
deducted from the remaining balance. If the remaining balance
is less than $1,000, or if it is a full withdrawal, charges
are deducted from proceeds of the withdrawal.
2
By wire
o Minimum wire withdrawal: $500
o Request that money be wired to your bank
o Bank account must be in same ownership as the Issuer's account
o Pre-authorization required. Complete the bank wire
authorization section in the application or use a form
supplied by your AEBI relationship manager or Coutts client
relationship officer. All registered owners must sign.
o A service fee, if any, may be deducted from your balance (for
partial withdrawals) or from the proceeds of a full
withdrawal.
Transfer of ownership
While the certificate is not negotiable, the Issuer will transfer
ownership upon written notification to the Client Service
Organization.
For more information
For information on purchases, withdrawals, exchanges, transfers of
ownership, proper instructions and other service questions
regarding your certificate, please consult your AEBI relationship
manager or Coutts client relationship officer, or call the Issuer's
toll free client service number:
1-800-437-3133 or
TTY: 1-800-846-4293.
Taxes on your earnings
Foreign investors
If you are not a citizen or resident of the United States, you must
supply the Issuer with Form W-8, Certificate of Foreign Status when
you purchase your certificate, and you must resupply it every three
years. You must also supply both a current mailing address and an
address of foreign residency, if different. The Issuer will not
accept purchases of certificates by nonresident aliens without an
appropriately certified Form W-8 (or approved substitute). Also,
if you do not supply Form W-8 you will be subject to backup
withholding on interest payments and withdrawals.
<PAGE>
PAGE 24
It is most likely that the interest on the certificate is
"portfolio interest" as defined in U.S. Internal Revenue Code
Section 871(h) if earned by a nonresident alien. However, if the
certificate is treated as a contingent debt instrument (CDI), part
of the earned income may be treated as capital gain instead of
portfolio interest. Even though your interest income or capital
gain is not taxed by the U.S. government, it will be reported at
year end to you and to the U.S. government on a Form 1042S, Foreign
Person's U.S. Source Income Subject to Withholding. The United
States participates in various tax treaties with foreign countries,
which provide for sharing of tax information.
Estate tax: If you are a nonresident alien and you die while
owning a certificate, the Issuer will need a statement from persons
the Issuer believes are knowledgeable about your estate. The
statement must be in a form satisfactory to the Issuer and must
tell us that, on your date of death, your estate did not include
any property in the United States for U.S. estate tax purposes. If
we do not receive the statement, we generally will not take action
regarding your certificate until we receive a transfer certificate
from the IRS. In general, a transfer certificate requires the
opening of an estate in the United States and provides assurance
that the IRS will not claim your IDS certificate to satisfy estate
taxes.
IMPORTANT: This information is a brief and selective summary of
certain federal tax rules that apply to this certificate. Tax
matters are highly individual and complex, and you should consult a
qualified tax adviser about your personal situation.
How your money is used and protected
Invested and guaranteed by the Issuer
The IDS Stock Market Certificate is issued and guaranteed by the
Issuer, a wholly owned subsidiary of American Express Financial
Corporation. We are by far the largest issuer of face amount
certificates in the United States, with total assets of more than
$3.0 billion and a net worth in excess of $141 million on Dec. 31,
1994.
We back our certificates by investing the money received and
keeping the invested assets on deposit. Our investments generate
interest and dividends, out of which we pay:
o interest to certificate holders
o various expenses, including taxes, fees to American Express
Financial Corporation for advisory and other services and
distribution fees to American Express Financial Advisors Inc.
For a review of significant events relating to our business, see
"Management's discussion and analysis of financial condition and
results of operations." Our certificates are not rated by a
national rating agency.
<PAGE>
PAGE 25
Most banks and thrifts offer investments known as certificates of
deposit (CDs) that are similar to our certificates in many ways.
Early withdrawal of bank CDs often results in penalties. Banks and
thrifts generally have federal deposit insurance for their deposits
and lend much of the money deposited to individuals, businesses and
other enterprises. Other financial institutions and some insurance
companies may offer investments with comparable combinations of
safety and return on investment.
Regulated by government
Because the IDS Stock Market Certificate is a security, its offer
and sale are subject to regulation under federal and state
securities laws. (It is a face-amount certificate--not a bank
product, an equity investment, a form of life insurance or an
investment trust.)
The federal Investment Company Act of 1940 requires us to keep
investments on deposit in a segregated custodial account to protect
all of our outstanding certificates. These investments back the
entire value of your certificate account. Their amortized cost
must exceed the required carrying value of the outstanding
certificates by at least $250,000. As of Dec. 31, 1994, the
amortized cost of these investments exceeded the required carrying
value of our outstanding certificates by more than $121 million.
Backed by our investments
Our investments are varied and of high quality. This was the
composition of our portfolio as of Dec. 31, 1994:
Type of investment Net amount invested
Corporate and other bonds 31%
Government agency bonds 27
Preferred stocks 23
Mortgages 9
Municipal bonds 5
Cash and cash equivalents 5
More than 95% of our securities portfolio (bonds and preferred
stocks) is rated investment grade. For additional information
regarding securities ratings, please refer to Note 3B in the
financial statements.
Most of our investments are on deposit with American Express Trust
Company (formerly IDS Trust Company), Minneapolis, although we also
maintain separate deposits as required by certain states. American
Express Trust Company is a wholly owned subsidiary of American
Express Financial Corporation. Copies of our Dec. 31, 1994
schedule of Investments in Securities of Unaffiliated Issuers are
available upon request. For comments regarding the valuation,
carrying values and unrealized appreciation (depreciation) of
investment securities, see Notes 1, 2 and 3 to the financial
statements.
<PAGE>
PAGE 26
Investment policies
In deciding how to diversify the portfolio-- among what types of
investments in what amounts--the officers and directors of the
Issuer use their best judgment, subject to applicable law. The
following policies currently govern our investment decisions:
Purchasing securities on margin: We will not purchase any
securities on margin or participate on a joint basis or a joint-
and-several basis in any trading account in securities.
Commodities: We have not and do not intend to purchase or sell
commodities or commodity contracts.
Underwriting: We do not intend to engage in the public
distribution of securities issued by others. However, if we
purchase unregistered securities and later resell them, we may be
considered an underwriter under federal securities laws.
Borrowing money: From time to time we have established a line of
credit if management believed borrowing was necessary or desirable.
While a line of credit does not currently exist, it may be
established again in the future. We may pledge some of our assets
as security. We may occasionally use repurchase agreements as a
way to borrow money. Under these agreements, we sell debt
securities to our lender, and repurchase them at the sales price
plus an agreed-upon interest rate within a specified period of
time.
Real estate: We may invest directly in real estate, though we have
not generally done so in the past. We do invest in mortgage loans.
Lending securities: We may lend some of our securities to broker-
dealers and receive cash equal to the market value of the
securities as collateral. We invest this cash in short-term
securities. If the market value of the securities goes up, the
borrower pays us additional cash. During the course of the loan,
the borrower makes cash payments to us equal to all interest,
dividends and other distributions paid on the loaned securities.
We will try to vote these securities if a major event affecting our
investment is under consideration.
When-issued securities: Most of our investments are in debt
securities, some of which are purchased on a when-issued basis. It
may take as long as 45 days before these securities are issued and
delivered to us. We generally do not pay for these securities or
start earning on them until delivery. We have established
procedures to ensure that sufficient cash is available to meet
when-issued commitments.
Financial Transactions: We buy or sell various types of options
contracts for hedging purposes or as a trading technique to
facilitate securities purchases or sales. We buy interest rate
caps for hedging purposes. These pay us a return if interest rates
rise above a specified level. If approved by the SEC, IDSC may
enter into other financial transactions, including futures and
other derivatives, for the purpose of managing the interest rate
<PAGE>
PAGE 27
exposures associated with IDSC's assets or liabilities.
Derivatives are financial instruments whose performance is derived,
at least in part, from the performance of an underlying asset,
security or index. A small change in the value of the underlying
asset, security or index may cause a sizable gain or loss in the
fair value of the derivative.
Restrictions: There are no restrictions on concentration of
investments in any particular industry or group of industries or on
rates of portfolio turnover.
How your certificate is managed
Relationship between the Issuer and American Express Financial
Corporation
The Issuer was originally organized as Investors Syndicate of
America, Inc., a Minnesota corporation, on Oct. 15, 1940, and began
business as an issuer of face amount investment certificates on
Jan. 1, 1941. The company became a Delaware corporation on Dec.
31, 1977, and changed its name to IDS Certificate Company on April
2, 1984.
Before the Issuer was created, American Express Financial
Corporation (formerly known as IDS Financial Corporation) had
issued similar certificates since 1894. On Jan. 1, 1995, IDS
Financial Corporation became American Express Financial
Corporation. IDSC and American Express Financial Corporation have
never failed to meet their certificate payments.
During its many years in operation, American Express Financial
Corporation has become a leading manager of investments in
mortgages and securities. As of Dec. 31, 1994, American Express
Financial Corporation managed investments, including its own, of
more than $105 billion. American Express Financial Advisors Inc.,
a wholly owned subsidiary of American Express Financial
Corporation, provides a broad range of financial planning services
for individuals and businesses through its nationwide network of
more than 175 offices and more than 7,800 personal financial
advisors. American Express Financial Advisors Inc. financial
planning services are comprehensive, beginning with a detailed
written analysis that's tailored to your needs. Your analysis may
address one or all of these six essential areas: financial
position, protection planning, investment planning, income tax
planning, retirement planning, and estate planning.
American Express Financial Corporation itself is a wholly owned
subsidiary of American Express Company, a financial services
company with executive offices at American Express Tower, World
Financial Center, New York, NY 10285. American Express Company is
a financial services company engaged through subsidiaries in other
business including:
o travel related services (including American ExpressR Card and
Travelers Cheque operations through American Express Travel
Related Services Company, Inc. and its subsidiaries), and
<PAGE>
PAGE 28
o international banking services (through American Express Bank
Ltd. and its subsidiaries).
American Express Financial Advisors Inc. is not a bank, and the
securities offered by it, such as face amount certificates issued
by the Issuer, are not backed or guaranteed by any bank, nor are
they insured by the FDIC.
Capital structure and certificates issued
The Issuer has authorized, issued and has outstanding 150,000
shares of common stock, par value of $10 per share. American
Express Financial Corporation owns all of the outstanding shares.
As of Dec. 31, 1994, the Issuer had issued (in face amount)
$12,727,756,065 of installment certificates and $13,016,532,575 of
single payment certificates.
Investment management and services
Under an Investment Advisory and Services Agreement, American
Express Financial Corporation acts as our investment advisor and is
responsible for:
o providing investment research,
o making specific investment recommendations
o executing purchase and sale orders according to our policy of
obtaining the best price and execution.
All these activities are subject to direction and control by our
board of directors and officers. Our agreement with American
Express Financial Corporation requires annual renewal by our board,
including a majority of directors who are not interested persons of
American Express Financial Corporation or the Issuer as defined in
the federal Investment Company Act of 1940.
For its services, we pay American Express Financial Corporation a
monthly fee, equal on an annual basis to a percentage of the total
book value of certain assets (included assets):
Advisory and Services Fee Computation:
Included Assets Percentage of Total Book Value
First $250 million 0.75%
Next 250 million 0.65
Next 250 million 0.55
Next 250 million 0.50
Any amount over $1 billion 0.45
Included assets are all assets of the Issuer except mortgage loans,
real estate, and any other asset on which we pay an advisory or
service fee.
Advisory and services fees for the past three years were:
<PAGE>
PAGE 29
Percentage of
Year Total fees included assets
1994 $13,565,432 0.51%
1993 $15,036,091 0.50%
1992 $17,851,271 0.50%
Estimated advisory and services fees for 1995 are $15,074,000.
Other expenses payable by the Issuer: The Investment Advisory and
Services Agreement provides that we will pay:
o costs incurred by us in connection with real estate and
mortgages,
o taxes,
o depository and custodian fees,
o brokerage commissions,
o fees and expenses for services not covered by other agreements
and provided to us at our request, or by requirement, by
attorneys, auditors, examiners and professional consultants
who are not officers or employees of American Express
Financial Corporation,
o fees and expenses of our directors who are not officers or
employees of American Express Financial Corporation,
o provision for certificate reserves (interest accrued on
certificate holder accounts), and
o expenses of customer settlements not attributable to sales
function.
Distribution
Under a Distribution Agreement with American Express Financial
Advisors Inc., we pay for the distribution of this certificate as
follows:
o 1.25% of the initial investment on the first day of the
certificate's term, and
o 1.25% of the certificate's reserve at the beginning of each
subsequent term,
for certificates sold through American Express Financial Advisors
Inc. or through AEBI or Coutts.
For certificates sold through American Express Financial Services
Direct, we pay American Express Financial Advisors Inc. the
following:
o 1.00% of the initial investment on the first day or the
certificate's term, and
o 1.00% of the certificate's reserve at the beginning of each
subsequent term.
This fee is not assessed to your certificate account.
<PAGE>
PAGE 30
Total distribution fees paid to American Express Financial Advisors
Inc. for all series of certificates amounted to $34,534,747 during
the year ended Dec. 31, 1994. We expect to pay American Express
Financial Advisors Inc. distribution fees amounting to $33,700,000
during 1995.
See Note 1 to financial statements regarding deferral of
distribution fee expense.
American Express Financial Advisors Inc. pays commissions to its
financial advisors and pays other selling expenses in connection
with services to us. Our board of directors, including a majority
of directors who are not interested persons of American Express
Financial Advisors Inc. or the Issuer, approved this distribution
agreement.
Selling Agent Agreements with AEBI and Coutts: In turn, under
Selling Agent Agreements with AEBI and Coutts, American Express
Financial Advisors Inc. compensates each for their services as
Selling Agents of this certificate as follows:
o AEBI is paid a fee equal to 1.0% per term of the principal
amount of each certificate for which AEBI is the selling
agent.
o Coutts is paid a fee equal to 0.80% per term of the principal
amount of each certificate for which Coutts is the selling
agent.
Coutts is compensated on certificates owned by its clients who are
former clients of AEBI. These clients must have continuously owned
a certificate since Nov. 10, 1994. Coutts is also compensated on
additional investments and exchanges made by such clients to other
certificates only to the extent that a client has the right to make
additional investments or exchanges.
American Express Financial Advisors Inc. has entered into a
consulting agreement with AEBI under which AEBI provides consulting
services related to any selling agent agreements between American
Express Financial Advisors Inc. and other Edge Act corporations.
For these services, American Express Financial Advisors Inc. pays
AEBI a fee for this certificate equal to 0.20% per term of the
principal amount of each certificate for which another Edge Act
corporation is the selling agent.
Such payments will be made quarterly in arrears.
These fees are not assessed to your certificate account.
About AEBI and Coutts
AEBI is an Edge Act corporation organized under the provisions of
Section 25(a) of the Federal Reserve Act. It is a wholly owned
subsidiary of American Express Bank Ltd. (AEBL). As an Edge Act
corporation, AEBI is subject to the provisions of Section 25(a) of <PAGE>
PAGE 31
the Federal Reserve Act and Regulation K of the Board of Governors
of the Federal Reserve System (the Federal Reserve). It is
supervised and regulated by the Federal Reserve.
AEBI has an extensive international high net-worth client base that
is served by a marketing staff in New York and Florida. The
banking and financial products offered by AEBI include checking,
money-market and time deposits, credit services, check collection
services, foreign exchange, funds transfer, investment advisory
services and securities brokerage services. As of Dec. 31, 1994,
AEBI had total assets of $404 million and total equity of $136
million.
Coutts is an Edge Act corporation organized under the provisions of
Section 25(a) of the Federal Reserve Act. It is an indirect wholly
owned subsidiary of NatWest PLC. As an Edge Act corporation,
Coutts is subject to the provisions of Section 25(a) if the Federal
Reserve Act and Regulation K of the Board of Governors of the
Federal Reserve. Coutts is supervised and regulated by the Federal
Reserve.
Although AEBI and Coutts are banking entities, the Stock Market
Certificate is not a bank product, nor is it backed or guaranteed
by AEBI or Coutts, by AEBL, by NatWest PLC or by any other bank, or
is it guaranteed or insured by the FDIC or any other federal
agency. AEBI is registered where necessary as a securities broker-
dealer.
Employment of other American Express Affiliates
American Express Financial Corporation may employ an affiliate of
American Express Company as executing broker for our portfolio
transactions only if:
o we receive prices and executions at least as favorable as
those offered by qualified independent brokers performing
similar services;
o the affiliate charges us commissions consistent with those
charged to comparable unaffiliated customers for similar
transactions; and
o the affiliate's employment is consistent with the terms of the
current Investment Advisory and Services Agreement and federal
securities laws.
Directors and officers
The Issuer's directors, chairman, president and controller are
elected annually for a term of one year. The other executive
officers are appointed by the president.
We paid a total of $37,000 during 1994 to directors not employed by
American Express Financial Corporation.
Board of directors
<PAGE>
PAGE 32
David R. Hubers*
Age 52
Director since April 1987
President and chief executive officer of American Express Financial
Corporation since 1993. Senior vice president and chief financial
officer of American Express Financial Corporation from 1984 to
1993.
Charles W. Johnson
Age 65
Director since August 1989
Former vice president and group executive, Industrial Systems, with
Honeywell Inc. Retired 1989.
Edward Landes
Age 75
Director since May 1984
Development consultant. Former sales manager - Supplies Division
and district manager - Data Processing Division of IBM Corporation.
Retired 1983.
John V. Luck Ph.D.
Age 69
Director since April 1987
Former senior vice president - Science and Technology with General
Mills, Inc. Employed with General Mills Inc. since 1970. Retired
1987.
James A. Mitchell*
Age 54
Director since January 1994
Chairman of the board of directors since February, 1994. Executive
vice president - marketing and products of American Express
Financial Corporation since February 1994. Senior vice president -
insurance operations of American Express Financial Corporation and
president and chief executive officer of IDS Life Insurance Company
from 1986 to 1994.
Harrison Randolph
Age 79
Director since 1968
Gordon H. Ritz
Age 67
Director since 1968
President, Con Rad Broadcasting Corp. Director, Sunstar Foods and
Mid-America Publishing.
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PAGE 33
Stuart A. Sedlacek*
Age 37
Director since January 1994
President since February 1994. Vice president - assured assets of
American Express Financial Corporation since March 1994. Vice
president and portfolio manager from 1988 to 1994. Executive vice
president - assured assets of IDS Life Insurance Company since
March 1994.
*"Interested Person" of IDSC as that term is defined in Investment
Company Act of 1940.
Executive officers
Stuart A. Sedlacek
Age 37
President since February 1994
Louis C. Fornetti
Age 45
Vice president since January 1990
Chief financial officer of American Express Financial Corporation
since 1993 and senior vice president, corporate controller and
director of American Express Financial Corporation since 1988.
Morris Goodwin Jr.
Age 43
Vice president and treasurer since 1989.
Vice president and corporate treasurer of American Express
Financial Corporation since 1989. Chief financial officer and
treasurer of American Express Trust Company from 1988 to 1989.
Colleen Curran
Age 42
Secretary since 1990
Secretary and assistant vice president of American Express
Financial Corporation since 1990. Senior counsel to American
Express Financial Corporation since 1990. Counsel from 1985 to
1990.
Lorraine R. Hart
Age 43
Vice president-investments since February 1994.
Vice President - insurance investments of American Express
Financial Corporation since 1989. Vice president, investments of
IDS Life Insurance Company since 1992.
<PAGE>
PAGE 34
Jay C. Hatlestad
Age 37
Vice president and controller of IDS Certificate Company since
1994.
Manager of investment accounting of IDS Life Insurance Company from
1986 to 1994.
Bruce A. Kohn
Age 44
Vice president and general counsel since 1993
Counsel to American Express Financial Corporation since 1992.
Associate counsel from 1987 to 1992.
F. Dale Simmons
Age 57
Vice president - Real Estate Loan Management since 1993
Vice president of American Express Financial Corporation since
1992. Senior portfolio manager of American Express Financial
Corporation since 1989. Assistant vice president from 1987 to
1992.
The Officers and Directors as a group beneficially own less than 1%
of the common stock of American Express Company.
The Issuer has provisions in its bylaws relating to the
indemnification of its officers and directors against liability, as
permitted by law. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, the registrant has been informed that
in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
Auditors
A firm of independent auditors audits our financial statements at
the close of each fiscal year (Dec. 31). Copies of our annual
financial statements (audited) and semiannual financial statements
(unaudited) are available to any certificate holder upon request.
Ernst & Young LLP, Minneapolis, has audited the financial
statements for each of the years in the three-year period ended
Dec. 31, 1994. These statements are included in this prospectus.
Ernst & Young LLP is also the auditor for American Express Company,
the parent company of American Express Financial Corporation and
IDSC.
<PAGE>
PAGE 35
Summary of selected financial information
The following selected financial information has been derived from
the audited financial statements and should be read in conjunction
with those statements and the related notes to financial
statements. Also see Management's Discussion and Analysis of
Financial Condition and Results of Operations for additional
comments.
<TABLE><CAPTION>
Year Ended Dec. 31, 1994 1993 1992 1991 1990
($ thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Investment income $207,975 $236,859 $294,799 $351,970 $331,521
Investment expenses 58,690 65,404 69,630 63,353 55,176
Net investment income before provisions
for certificate reserves and income taxes 149,285 171,455 225,169 288,617 276,345
Net provision for certificate reserves 107,288 123,516 178,175 258,443 271,267
Net investment income before income taxes 41,997 47,939 46,994 30,174 5,078
Income tax benefit 2,663 3,365 11,666 20,537 28,588
Net investment income 44,660 51,304 58,660 50,711 33,666
Realized gain (loss) on investments - net:
Securities of unaffiliated issuers (7,514) (9,870) (9,498) (129) 2,178
Other - unaffiliated 1,638 (418) (500) (1,053) (851)
Total gain (loss) on investments (5,876) (10,288) (9,998) (1,182) 1,327
Income tax benefit (expense) 2,047 4,617 3,399 402 (451)
Net realized gain (loss) on investments (3,829) (5,671) (6,599) (780) 876
Net income - wholly owned subsidiary 241 120 3 139 286
Net income $41,072 $45,753 $52,064 $50,070 $34,828
Dividends declared:
Cash $40,200 $64,500 $83,750 $74,800 $47,000
In-kind(a) - - 64,558 25,466 -
Balance Sheet Data:
Total assets $3,040,857 $2,951,405 $3,444,985 $3,971,583 $4,168,586
Certificate loans 58,203 67,429 77,347 88,570 99,192
Certificate reserves 2,887,405 2,777,451 3,256,472 3,712,570 3,859,530
Stockholder's equity 141,852 161,138 179,885 223,820 273,600
</TABLE>
IDS Certificate Company (IDSC) is 100% owned by American Express
Financial Corporation (Parent) formerly IDS Financial Corporation.
(a) Consisted of an investment security at amortized cost in 1992
and a reduction in the note receivable from Parent in 1991.
<PAGE>
PAGE 36
Management's discussion and analysis of financial condition and
results of operations
Results of operations:
IDS Certificate Company's (IDSC) earnings are derived primarily
from the after-tax yield on invested assets less investment
expenses and interest credited on certificate reserve liabilities.
Changes in earnings' trends occur largely due to changes in the
margin between rates of return on investments and rates of interest
credited to certificate holder accounts and also, the mix of fully
taxable and tax-advantaged investments in the IDSC portfolio.
During the years 1991 through 1993, total assets and certificate
reserve liabilities decreased due to certificate maturities and
surrenders exceeding certificate sales. The excess of certificate
maturities and surrenders over certificate sales in 1993, 1992 and
1991 primarily reflected lower accrual rates declared by IDSC in
those years, which in turn, reflected lower interest rates
available in the marketplace.
During 1994, total assets and certificate reserves increased due to
certificate sales exceeding certificate maturities and surrenders.
The excess of certificate sales over certificate maturities and
surrenders resulted primarily from higher accrual rates declared by
IDSC during the last six months of 1994, reflecting rising interest
rates in the marketplace. The increase in total assets in 1994 was
tempered by $23 million of net unrealized depreciation on
investment securities classified as available for sale, net of
deferred taxes of $13 million.
1994 Compared to 1993:
Gross investment income decreased 12% due primarily to a lower
average balance of invested assets.
The 10% decrease in investment expenses resulted primarily from
lower amortization of the cost of interest rate caps and $2.3
million of reimbursement under cap agreements in 1994. Lower
amortization of deferred distribution fees, and lower investment
advisory and services fees due to a lower average asset base on
which the fee is calculated contributed also, to the decrease in
investment expenses.
Net provision for certificate reserves decreased 13% reflecting
lower accrual rates during the first six months of the year and a
lower average balance of certificate reserves.
The decrease in income tax benefit resulted primarily from lower
tax-advantaged income.
1993 Compared to 1992:
Gross investment income decreased 20% due to a lower average
balance of invested assets and lower investment yields.
<PAGE>
PAGE 37
The 6.1% decrease in investment expenses resulted primarily from
lower amortization of deferred distribution fees, and lower
investment advisory and services fee due to a lower average asset
base on which the fee is calculated. These decreases were
partially offset by higher amortization of the cost of interest
rate caps. The higher amortization reflects additional purchases
and accelerated amortization of certain interest rate caps in 1993.
Net provision for certificate reserves decreased 31% reflecting
lower accrual rates and a lower average balance of certificate
reserves.
The $7.1 million decrease in income tax benefit resulted primarily
from lower tax-advantaged income in 1993. The impact of the change
in Federal statutory income tax rate in 1993 was an increase in
income tax benefit of $.6 million of which $.4 million reflects the
increase in rate on the Dec. 31, 1992 balance of temporary
differences.
Liquidity and cash flow:
IDSC's principal sources of cash are reserve payments from sales of
face-amount certificates and cash flows from investments. In turn,
IDSC's principal uses of cash are payments to certificate holders
for matured and surrendered certificates, purchase of investments
and payments of dividends to the Parent.
Certificate sales volume increased 86% in 1994, reflecting higher
accrual rates and clients' ongoing desire for safety of principal.
Sales of certificates totaled $1.1 billion compared to $.6 billion
in 1993 and $.7 billion during 1992.
IDSC, as an issuer of face-amount certificates, is affected
whenever there is a significant change in interest rates. In view
of the uncertainty in the investment markets and due to the
short-term repricing nature of certificate reserve liabilities,
IDSC continues to invest in securities with relatively short
maturities and in securities that provide for more immediate,
periodic interest/principal payments, resulting in improved
liquidity. To accomplish this, IDSC continues to invest much of
its cash flow in mortgage-backed securities and in intermediate-
term bonds.
IDSC's investment program is designed to maintain an investment
portfolio that will produce the highest possible after-tax yield
within acceptable risk standards with additional emphasis on
liquidity. The program considers investment securities as
investments acquired to meet anticipated certificate holder
obligations.
Effective Jan.1, 1994, IDSC adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under the SFAS 115,
debt securities that IDSC has both the positive intent and ability
to hold to maturity are carried at amortized cost. Debt securities
IDSC does not have the positive intent to hold to maturity, as well
as all marketable equity securities, are classified as available
for sale and carried at fair value. The available-for-sale
classification does not mean that IDSC expects to sell these <PAGE>
PAGE 38
securities, but that under SFAS No. 115 positive intent criteria,
these securities are available to meet possible liquidity needs
should there be significant changes in market interest rates or
certificate holder demand. See notes 1 and 3 to the financial
statements for additional information relating to SFAS No. 115.
At Dec. 31, 1994, securities classified as held to maturity and
securities classified as available for sale were $1.3 billion and
$1.2 billion, respectively. These securities, which comprise 84%
of IDSC's total invested assets, are well diversified. Of these
securities, 96% are of investment grade and, other than U.S.
Government Agency mortgage-backed securities, no one issuer
represents more than 1% of these securities. See note 3 to
financial statements for additional information on ratings and
diversification.
In 1994, in reaction to the rising interest rate environment, IDSC
continued to restructure a portion of its investment security
portfolio by selling $275 million of available-for sale securities.
Gross gains of $.4 million and gross losses of $10.1 million were
realized on the sales.
During 1992, IDSC charged earnings with $23.7 million of
write-downs in the value of certain interest-only, mortgage-backed
securities that resulted from high prepayments due to refinancing
and additional payment activity on the underlying pool of mortgages
due to declining interest rates. At Dec. 31, 1992, the carrying
value of these securities was $30.2 million. During 1993,
additional write-downs of $.6 million were recorded and all of
these securities with a carrying value of $27.4 million were sold
for $14.3 million. At Dec. 31, 1994, IDSC held no investments in
interest-only or principal-only mortgage-backed securities.
During 1994, IDSC's reserve for possible losses on its below
investment grade securities was reduced from $2.0 million at Dec.
31, 1993, to $1.0 million. The reduction reflects sales and
exchanges of certain of these issues in 1994. IDSC does not
generally invest in below investment grade securities and is
limited by regulation as to the amount of such securities it can
hold. IDSC's holdings in these securities result principally from
the downgrading of the securities subsequent to purchase by IDSC.
Management reviews these securities on a case-by-case basis to
determine whether it is appropriate to hold them in IDSC's
portfolio. Management believes that reserves for possible losses
on securities owned at Dec. 31, 1994, are adequate, however, future
economic factors could impact the ratings of securities owned and
additional reserves for losses may need to be recognized.
Derivative financial instruments:
IDSC enters into transactions involving interest rate caps, and
purchased and written call options to manage its exposure to rising
interest rates. IDSC does not enter into such transactions for
trading purposes. There is a possibility that the value of these
instruments will change due to fluctuations in a factor from which
the instrument derives its value. IDSC is not subject to this
market risk because these instruments are largely used to hedge
such risks, and therefore, the cash flow and income effects of the <PAGE>
PAGE 39
instruments are inverse to the effects of of the underlying
transactions. See note 8 to financial statements for additional
information regarding derivative financial instruments.
Impact of new accounting standards:
The Financial Accounting Standards Board's SFAS No. 114 "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures", are effective Jan. 1, 1995. These
statements apply to collateralized and uncollateralized loans
except for large groups of homogeneous loans. A loan is considered
impaired if, based on current information, it is probable that
principal and interest due under the loan agreement will not be
collected. The amount of impairment is the excess of the loan's
carrying value over the present value of expected future cash flows
discounted at the loan's effective rate, or if more practical, the
loan's observable market price, or the fair value of collateral if
the loan is collateral dependent. The new rules are not expected
to have a material impact on IDSC's results of operations or
financial condition.
Capital Contributions:
To manage its regulatory capital requirements, IDSC received a
capital contribution from the Parent of $3.0 million in 1994.
Due to the decrease in IDSC's assets in 1992, IDSC felt its holding
in Fund America Companies, Inc. preferred stock was too large an
exposure to a single credit risk, resulting in IDSC's dividend-
in-kind of the issue to Parent. Parent subsequently contributed
capital to IDSC of $52 million. The contribution was necessary to
manage IDSC's regulatory capital requirements.
Ratios:
The ratio of stockholder's equity, excluding net unrealized holding
gains and losses on investment securities, to total assets less
certificate loans at Dec. 31, 1994, was 5.54%, compared to 5.59%
in 1993. IDSC intends to maintain a ratio of at least 5.0% in
1995, which meets current regulatory requirements.
<PAGE>
PAGE 40
Annual Financial Information
Report of Independent Auditors
The Board of Directors and Security Holders
IDS Certificate Company:
We have audited the accompanying balance sheets of IDS Certificate
Company, a wholly owned subsidiary of American Express Financial
Corporation (formerly IDS Financial Corporation), as of December
31, 1994 and 1993, and the related statements of operations,
stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are
the responsibility of the management of IDS Certificate Company.
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. Our
procedures included confirmation of investments owned as of
December 31, 1994 and 1993 by correspondence with custodians and
brokers. 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
Certificate Company at December 31, 1994 and 1993, and the results
of its operations and its cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the financial statements, IDS Certificate
Company changed its method of accounting for certain investments in
debt and equity securities in 1994.
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 2, 1995
<PAGE>
PAGE 41
IDS Certificate Company
Responsibility for Preparation of Financial Statements
The management of IDS Certificate Company (IDSC) is responsible for
the preparation and fair presentation of its financial statements.
The financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the
circumstances, and include amounts based on the best judgment of
management. IDSC's management is also responsible for the accuracy
and consistency of other financial information included in the
prospectus.
In recognition of its responsibility for the integrity and
objectivity of data in the financial statements, IDSC maintains a
system of internal control over financial reporting. The system is
designed to provide reasonable, but not absolute, assurance with
respect to the reliability of IDSC's financial statements. The
concept of reasonable assurance is based on the notion that the
cost of the internal control system should not exceed the benefits
derived.
The internal control system is founded on an ethical climate and
includes an organizational structure with clearly defined lines of
responsibility, policies and procedures, and the careful selection
and training of employees. Internal auditors monitor and assess
the effectiveness of the internal control system and report their
findings to management throughout the year. IDSC's independent
auditors are engaged to express an opinion on the year-end
financial statements and, with the coordinated support of the
internal auditors, review the financial records and related data
and test the internal control system over financial reporting.
<PAGE>
PAGE 42
Balance Sheets, Dec. 31,
<TABLE><CAPTION>
Assets
Qualified Assets (note 2) 1994 1993
<S> <C> <C>
($ thousands)
Investments in unaffiliated issuers (notes 3 and 9):
Cash and cash equivalents $140,128 $54,059
Securities at amortized cost or the lower of cost or market - 2,431,919
Held-to-maturity securities 1,245,793 -
Available-for-sale securities 1,226,674 -
First mortgage loans on real estate 253,968 281,865
Certificate loans - secured by certificate reserves 58,203 67,429
Investments in and advances to affiliates 5,399 4,812
Total investments 2,930,165 2,840,084
Receivables:
Dividends and interest 42,261 40,432
Investment securities sold 7,269 10,068
Total receivables 49,530 50,500
Other (notes 8 and 9) 25,094 41,153
Total qualified assets 3,004,789 2,931,737
Other Assets
Deferred distribution fees 27,142 19,615
Deferred federal income taxes (note 7) 8,372 -
Other 554 53
Total other assets 36,068 19,668
Total assets $3,040,857 $2,951,405
See notes to financial statements.
<PAGE>
PAGE 43
Balance Sheets, Dec. 31,
Liabilities and Stockholder's Equity
Liabilities 1994 1993
($ thousands)
Certificate Reserves (notes 4 and 9):
Installment certificates:
Reserves to mature $335,712 $352,649
Additional credits and accrued interest 19,698 18,555
Advance payments and accrued interest 1,634 1,943
Other 56 54
Fully paid certificates:
Reserves to mature 2,389,198 2,243,416
Additional credits and accrued interest 140,766 160,440
Due to unlocated certificate holders 341 394
Total certificate reserves 2,887,405 2,777,451
Accounts Payable and Accrued Liabilities:
Due to Parent (note 6A) 1,186 1,182
Due to Parent for federal income taxes - 5,862
Due to affiliates (note 6B and 6C) 2,883 1,457
Payable for investment securities purchased 1,362 -
Accounts payable, accrued expenses and other (notes 8 and 9) 6,169 4,150
Total accounts payable and accrued liabilities 11,600 12,651
Deferred federal income taxes (note 7) - 165
Total liabilities 2,899,005 2,790,267
Stockholder's Equity (notes 4B, 4C, and 5):
Common stock, $10 par - authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 140,344 147,144
Retained earnings:
Appropriated for predeclared additional credits/interest 18,398 2,726
Appropriated for additional interest on advance payments 50 25
Unappropriated 4,718 9,743
Unrealized holding gains and losses on investment
securities - net (note 3A) (23,158) -
Total stockholder's equity 141,852 161,138
Total liabilities and stockholder's equity $3,040,857 $2,951,405
See notes to financial statements.
<PAGE>
PAGE 44
Statements of Operations
Year ended Dec. 31, 1994 1993 1992
($ thousands)
Investment Income:
Interest income from investments:
Bonds and notes:
Unaffiliated issuers $125,546 $140,991 $178,071
Mortgage loans on real estate:
Unaffiliated 24,006 24,071 18,430
Affiliated 68 78 88
Certificate loans 3,342 3,882 4,479
Dividends 54,170 67,115 92,599
Other 843 722 1,132
Total investment income 207,975 236,859 294,799
Investment Expenses:
Parent and affiliated company fees (note 6):
Distribution 27,007 28,477 32,752
Investment advisory and services 13,565 15,036 17,851
Depositary 183 201 225
Transfer agent - - 7
Options (note 8) 9,854 9,419 10,323
Interest rate caps (note 8) 7,608 11,667 7,649
Other 473 604 823
Total investment expenses 58,690 65,404 69,630
Net investment income before provisions
for certificate reserves and income taxes $149,285 $171,455 $225,169
See notes to financial statements.
<PAGE>
PAGE 45
Statements of Operations (continued)
Year ended Dec. 31, 1994 1993 1992
($ thousands)
Provision for Certificate Reserves (notes 4 and 8):
According to the terms of the certificates:
Provision for certificate reserves $13,317 $20,555 $28,685
Interest on additional credits 3,174 3,605 3,904
Interest on advance payments 61 90 68
Additional credits/interest authorized by IDSC:
On fully paid certificates 85,101 93,546 141,197
On installment certificates 6,741 6,704 5,270
On advance payments - - 89
Total provision before reserve recoveries 108,394 124,500 179,213
Reserve recoveries from terminations
prior to maturity (1,106) (984) (1,038)
Net provision for certificate reserves 107,288 123,516 178,175
Net investment income before income taxes 41,997 47,939 46,994
Income tax benefit (note 7) 2,663 3,365 11,666
Net investment income 44,660 51,304 58,660
Realized gain (loss) on investments - net:
Securities of unaffiliated issuers (7,514) (9,870) (9,498)
Other-unaffiliated 1,638 (418) (500)
Total loss on investments (5,876) (10,288) (9,998)
Income tax benefit (expense) (note 7):
Current 2,414 19,508 (6,121)
Deferred (367) (14,891) 9,520
Total income tax benefit 2,047 4,617 3,399
Net realized loss on investments (3,829) (5,671) (6,599)
Net income - wholly owned subsidiary 241 120 3
Net income $41,072 $45,753 $52,064
See notes to financial statements.
<PAGE>
PAGE 46
Statements of Stockholder's Equity
Year ended Dec. 31, 1994 1993 1992
($ thousands)
Common Stock:
Balance at beginning and end of year $1,500 $1,500 $1,500
Additional Paid-in Capital:
Balance at beginning of year $147,144 $166,144 $206,393
Contribution from Parent 3,000 - 52,309
Dividends declared:
Cash (9,800) (19,000) (28,000)
Investment security - - (64,558)
Balance at end of year $140,344 $147,144 $166,144
Retained Earnings:
Appropriated for predeclared additional credits/interest (note 4B):
Balance at beginning of year $2,726 $2,804 $4,247
Transferred from (to) unappropriated retained earnings 15,672 (78) (1,443)
Balance at end of year $18,398 $2,726 $2,804
Appropriated for additional interest on advance payments (note 4C):
Balance at beginning of year $25 $100 $100
Transferred from (to) unappropriated retained earnings 25 (75) -
Balance at end of year $50 $25 $100
Unappropriated (note 5):
Balance at beginning of year $9,743 $9,337 $11,580
Net income 41,072 45,753 52,064
Transferred (to) from appropriated retained earnings (15,697) 153 1,443
Cash dividends declared (30,400) (45,500) (55,750)
Balance at end of year $4,718 $9,743 $9,337
Unrealized holding gains and losses on investment securities -
net (notes 1 and 3A):
Balance at beginning of year $- $- $-
Adjustment due to initial application of SFAS 115 8,827 - -
Decrease during year (31,985) - -
Balance at end of year ($23,158) $- $-
Total stockholder's equity $141,852 $161,138 $179,885
See notes to financial statements.
<PAGE>
PAGE 47
Statements of Cash Flows
Year ended Dec. 31, 1994 1993 1992
($ thousands)
Cash flows from operating activities:
Net income $41,072 $45,753 $52,064
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of wholly owned subsidiary (241) (120) (3)
Certificate reserves 107,288 123,516 178,175
Interest income added to certificate loans (2,133) (2,454) (2,743)
Amortization of premium/discount-net 22,114 27,494 30,136
Deferred federal income taxes 4,263 11,446 (13,501)
Deferred distribution fees (7,527) 1,935 1,277
Net loss on investments 5,876 10,288 9,998
(Increase) decrease in dividends and interest receivable - (1,829) 10,009 10,946
(Increase) decrease in other assets (466) 967 2,277
Increase (decrease) in other liabilities (3,210) 4,979 (2,934)
Net cash provided by operating activities 165,207 233,813 265,692
Cash flows from investing activities:
Maturity and redemption of investments:
Held-to-maturity securities 350,411 641,778 951,155
Available-for-sale securities 173,547 - -
Other investments 35,130 21,373 17,492
Sale of investments:
Held-to-maturity securities 3,164 329,942 616,628
Available-for-sale securities 267,808 - -
Other investments - 5,454 -
Certificate loan payments 7,508 8,991 10,505
Purchase of investments:
Held-to-maturity securities (46,080) (498,841) (1,025,097)
Available-for-sale securities (830,826) - -
Other investments (9,208) (78,816) (122,465)
Certificate loan fundings (7,603) (10,275) (12,610)
Investment in subsidiary (450) (2,000) -
Net cash (used in) provided by investing activities ($56,599) $417,606 $435,608
See notes to financial statements.
<PAGE>
PAGE 48
Statements of Cash Flows (continued)
Year ended Dec. 31, 1994 1993 1992
($ thousands)
Cash flows from financing activities:
Reserve payments by certificate holders $1,613,820 $1,103,391 $1,380,376
Proceeds from securities loaned to brokers - 6,150 52,721
Proceeds from reverse repurchase agreements - 72,800 215,475
Capital contribution from Parent 3,000 - 52,309
Certificate maturities and cash surrenders (1,599,159) (1,705,967) (2,007,880)
Payments to brokers upon return of securities loaned - (7,793) (53,550)
Payments under reverse repurchase agreements - (72,800) (215,475)
Dividends paid (40,200) (64,500) (83,750)
Net cash used in financing activities (22,539) (668,719) (659,774)
Net increase (decrease) in cash and cash equivalents 86,069 (17,300) 41,526
Cash and cash equivalents beginning of year 54,059 71,359 29,833
Cash and cash equivalents end of year $140,128 $54,059 $71,359
Supplemental disclosures including non-cash transactions:
Cash received for income taxes $2,416 $26,606 $3,847
Certificate maturities and surrenders through loan reductions 11,454 13,656 16,071
Dividend-in-kind of preferred stock including related
deferred income tax of $516 - - 64,558
See notes to financial statements.
</TABLE>
<PAGE>
PAGE 49
Notes to Financial Statements ($ in thousands unless indicated
otherwise)
1. Summary of significant accounting policies
IDS Certificate Company (IDSC) is a wholly owned subsidiary of
American Express Financial Corporation (Parent) (formerly IDS
Financial Corporation), which is a wholly owned subsidiary of
American Express Company.
IDSC is in the business of issuing face-amount investment
certificates.
Described below are certain accounting policies that are important
to an understanding of the accompanying financial statements.
Basis of financial statement presentation
The accompanying financial statements are presented in accordance
with generally accepted accounting principles, except only the
accounts of IDSC are included. IDSC uses the equity method of
accounting for its wholly owned unconsolidated subsidiary, which is
the method prescribed by the Securities and Exchange Commission
(SEC) for issuers of face-amount certificates. Certain amounts
from prior years have been reclassified to conform to the current
year presentation.
Fair values of financial instruments
The fair values of financial instruments disclosed in the notes to
financial statements are estimates based upon current market
conditions and perceived risks, and require varying degrees of
management judgment.
Preferred stock dividend income
IDSC recognizes dividend income from cumulative redeemable
preferred stocks with fixed maturity amounts on an accrual basis
similar to that used for recognizing interest income on debt
securities.
Securities
Cash equivalents are carried at amortized cost, which approximates
fair value. IDSC has defined cash and cash equivalents as cash in
banks and highly liquid investments with a maturity of three months
or less at acquisition and are not interest rate sensitive.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
which IDSC adopted as of Jan. 1, 1994. Under the new rules, debt
securities that IDSC has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities
IDSC does not have the positive intent to hold to maturity, as well
as all marketable equity securities, are classified as available
for sale and carried at fair value. Unrealized holding gains and <PAGE>
PAGE 50
Notes to Financial Statements (continued)
losses on securities classified as available for sale are carried,
net of deferred income taxes, as a separate component of
stockholder's equity. The opening balance of stockholder's equity
was increased by $8,827 (net of $4,752 in deferred income taxes) to
reflect the net unrealized holding gains on securities classified
as available for sale previously carried at amortized cost or the
lower of cost or market.
The basis for determining cost in computing realized gains and
losses on securities is specific identification. When there is a
decline in value that is other than temporary, the securities are
carried at estimated realizable value with the amount of adjustment
included in income.
First mortgage loans on real estate
Mortgage loans are carried at amortized cost, less reserves for
losses, which is the basis for determining any realized gains or
losses. When economic evaluations of the underlying real estate
indicate a loss on a loan is likely to occur, an allowance for loss
is recorded. IDSC generally stops accruing interest on loans for
which interest is delinquent more than three months.
Certificates
Investment certificates may be purchased either with a lump-sum
payment or by installment payments. Certificate holders are
entitled to receive at maturity a definite sum of money. Payments
from certificate holders are credited to investment certificate
reserves. Investment certificate reserves accumulate at specified
percentage rates. Reserves also are maintained for advance
payments made by certificate holders, accrued interest thereon, and
for additional credits and accrued interest thereon. On
certificates allowing for the deduction of a surrender charge, the
cash surrender values may be less than accumulated investment
certificate reserves prior to maturity dates. Cash surrender
values on certificates allowing for no surrender charge are equal
to certificate reserves. The payment distribution, reserve
accumulation rates, cash surrender values, reserve values and other
matters are governed by the Investment Company Act of 1940 ("the
1940 Act").
Deferred distribution fee expense
On certain series of certificates, distribution fees are deferred
and amortized over the estimated lives of the related certificates,
which is approximately 10 years. Upon surrender, unamortized
deferred distribution fees are charged against income.
Federal income taxes
IDSC's taxable income or loss is included in the consolidated
federal income tax return of American Express Company. IDSC
provides for income taxes on a separate return basis, except that,
under an agreement between Parent and American Express Company, tax
<PAGE>
PAGE 51
Notes to Financial Statements (continued)
benefits are recognized for losses to the extent they can be used
in the consolidated return. It is the policy of Parent and its
subsidiaries that Parent will reimburse a subsidiary for any tax
benefits recorded.
2. Deposit of assets and maintenance of qualified assets
A) Under the provisions of its certificates and the 1940 Act,
IDSC was required to have qualified assets (as that term is defined
in Section 28(b) of the 1940 Act) in the amount of $2,895,226 and
$2,767,057 at Dec. 31, 1994 and 1993, respectively. IDSC had
qualified assets of $3,040,416 at Dec. 31, 1994 and $2,931,737 at
Dec. 31, 1993, excluding net unrealized depreciation on
available-for-sale securities of $35,627 at Dec. 31, 1994.
Qualified assets are valued in accordance with such provisions of
the Code of the District of Columbia as are applicable to life
insurance companies. Qualified assets for which no provision for
valuation is made in such code are valued in accordance with rules,
regulations or orders prescribed by the SEC. These values are the
same as financial statement carrying values, except for debt
securities classified as available for sale and all marketable
equity securities, which are carried at fair value in the financial
statements but are valued at amortized cost for qualified asset and
deposit maintenance purposes.
B) Pursuant to provisions of the certificates, the 1940 Act, the
central depositary agreement and to requirements of various states,
qualified assets of IDSC were deposited as follows:
Dec. 31, 1994
Required
Deposits deposits Excess
Deposits to meet certificate
liability requirements:
States $417 $388 $29
Central Depositary 2,939,538 2,817,716 121,822
Total $2,939,955 $2,818,104 $121,851
Dec. 31, 1993
Required
Deposits deposits Excess
Deposits to meet certificate
liability requirements:
States $421 $393 $28
Central Depositary 2,814,553 2,695,884 118,669
Total $2,814,974 $2,696,277 $118,697
<PAGE>
PAGE 52
Notes to Financial Statements (continued)
The assets on deposit at Dec. 31, 1994 and 1993 consisted of
securities having a deposit value of $2,659,676 and $2,500,790,
respectively; mortgage loans of $252,263 and $276,711,
respectively; and other assets of $28,016 and $37,473,
respectively. Mortgage loans on deposit include an affiliated
mortgage loan.
American Express Trust Company (formerly IDS Trust Company) is the
central depositary for IDSC. See note 6C.
3. Investments
A) Fair values of investments in securities represent market
prices and estimated fair values when quoted prices are not
available. Estimated fair values are determined by IDSC using
established procedures, involving review of market indexes, price
levels of current offerings and comparable issues, price estimates
and market data from independent brokers and financial files. The
procedures are reviewed annually. IDSC's vice president -
investments reports to the board of directors on an annual basis
regarding such pricing sources and procedures to provide assurance
that fair value is being achieved.
The following is a summary of securities held to maturity and
securities available for sale at Dec. 31, 1994 and securities
carried at amortized cost at Dec. 31, 1993.
<TABLE>
<CAPTION>
Dec. 31, 1994
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government and agencies obligations $417 $417 $1 $1
Mortgage-backed securities 65,101 66,329 1,251 23
State and municipal obligations 145,205 150,856 5,659 8
Corporate debt securities 405,716 408,087 5,683 3,312
Foreign government bonds and obligations 10,048 10,065 17 -
Stated maturity preferred stock 619,306 616,655 10,201 12,852
$1,245,793 $1,252,409 $22,812 $16,196
AVAILABLE FOR SALE
Mortgage-backed securities $745,513 $724,276 $1,079 $22,316
Corporate debt securities 487,799 473,865 460 14,394
Stated maturity preferred stock 28,234 27,894 50 390
Common stock 755 639 - 116
$1,262,301 $1,226,674 $1,589 $37,216
Dec. 31, 1993
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
CARRIED AT AMORTIZED COST
U.S. Government and agencies obligations $421 $443 $22 $-
Mortgage-backed securities 750,719 765,238 16,934 2,415
State and municipal obligations 179,394 195,081 15,687 -
Corporate debt securities 702,123 746,331 45,608 1,400
Stated maturity preferred stock 797,044 835,320 40,933 2,657
Common stock 2,218 2,357 139 -
$2,431,919 $2,544,770 $119,323 $6,472
</TABLE>
<PAGE>
PAGE 53
Notes to Financial Statements (continued)
The amortized cost and fair value of securities held to maturity
and available for sale, by contractual maturity, at Dec. 31, 1994,
are shown below. Cash flows will differ from contractual
maturities because issuers may have the right to call or prepay
obligations.
Amortized Fair
cost value
HELD TO MATURITY
Due within 1 year $142,206 $144,388
Due after 1 through 5 years 491,017 497,199
Due after 5 years through 10 years 384,200 383,699
Due after 10 years 163,269 160,794
1,180,692 1,186,080
Mortgage-backed securities 65,101 66,329
$1,245,793 $1,252,409
AVAILABLE FOR SALE
Due within 1 year $78,018 $77,683
Due after 1 through 5 years 315,279 306,508
Due after 5 years through 10 years 70,698 65,590
Due after 10 years 52,038 51,978
516,033 501,759
Mortgage-backed securities 745,513 724,276
Common stock 755 639
$1,262,301 $1,226,674
During the year ended Dec. 31, 1994, there were no securities
classified as trading securities.
During the year ended Dec. 31, 1994, securities classified as
available for sale were sold with proceeds of $265,008 and gross
realized gains on such sales of $363 and gross realized losses on
such sales of $10,140.
During the year ended Dec. 31, 1994, a held-to-maturity security
was sold with an amortized cost of $3,158. A gain of $5 was
realized on the sale. The security was sold due to deterioration
in the issuer's creditworthiness.
There were no transfers from securities classified as held to
maturity during the year ended Dec. 31, 1994.
B) Investments in securities with fixed maturities comprised 84%
and 85% of IDSC's total invested assets at Dec. 31, 1994 and 1993,
respectively. Securities are rated by Moody's and Standard & Poors
(S&P), or by Parent's internal analysts, using criteria similar to
Moody's and S&P, when a public rating does not exist. A summary of
investments in securities with fixed maturities by rating of
investment is as follows:
Rating 1994 1993
Aaa/AAA 36% 35%
Aa/AA 5 4
Aa/A 3 1
A/A 25 22 <PAGE>
PAGE 54
A/BBB 3 3
Baa/BBB 24 31
Below investment grade 4 4
100% 100%
Of the securities rated Aaa/AAA, 88% at Dec. 31, 1994 and 87% at
Dec. 31, 1993, are U.S. Government Agency mortgage-backed
securities that are not rated by a public rating agency.
Approximately 17% at Dec. 31, 1994 and 23% at Dec. 31, 1993 of
other securities with fixed maturities are rated by Parent's
internal analysts. No investment in any one issuer at Dec. 31,
1994 and 1993, is greater than 1% and 2%, respectively, of IDSC's
total investment in securities with fixed maturities.
At Dec. 31, 1994 and 1993, approximately 9% and 10%, respectively,
of IDSC's invested assets were first mortgage loans on real estate.
A summary of first mortgage loans by region and by type of real
estate is as follows:
Region 1994 1993
East North Central 25% 23%
South Atlantic 24 23
West North Central 18 21
Middle Atlantic 16 14
Mountain 6 6
West South Central 5 8
Pacific 3 3
New England 3 2
100% 100%
Property Type 1994 1993
Apartments 41% 40%
Retail/shopping centers 30 28
Industrial buildings 12 13
Office buildings 8 10
Retirement homes 1 1
Hotels/motels - 1
Other 8 7
100% 100%
The carrying amounts and fair values of first mortgage loans on
real estate are as follows at Dec. 31. The fair values are
estimated using discounted cash flow analysis, using market
interest rates currently being offered for loans with similar terms
to borrowers of similar credit quality.
<PAGE>
PAGE 55
Dec. 31, 1994 Dec. 31, 1993
Carrying Fair Carrying Fair
amount value amount value
Residential $48 $43 $53 $59
Commercial 254,531 246,874 282,773 289,726
254,579 246,917 282,826 289,785
Reserve for losses (611) - (961) -
Net first mortgage
loans on real estate $253,968 $246,917 $281,865 $289,785
At Dec. 31, 1994 and 1993, there were no commitments for fundings
of first mortgage loans. If there were any commitments, IDSC
employs policies and procedures to ensure the creditworthiness
of the borrowers and that funds will be available on the funding
date. IDSC's first mortgage loan fundings are restricted to 75% or
less of the market value of the real estate at the time of the loan
funding.
C) IDSC reserves freedom of action with respect to its acquisition
of restricted securities that offer advantageous and desirable
investment opportunities. In a private negotiation, IDSC may
purchase for its portfolio all or part of an issue of restricted
securities. Since IDSC would intend to purchase such securities
for investment and not for distribution, it would not be "acting as
a distributor" if such securities are resold by IDSC at a later
date.
The fair values of restricted securities are determined by the
board of directors using the procedures and factors described in
paragraph A of note 3.
In the event IDSC were to be deemed to be a distributor of the
restricted securities, it is possible that IDSC would be required
to bear the costs of registering those securities under the
Securities Act of 1933, although in most cases such costs would be
borne by the issuer of the restricted securities.
<PAGE>
PAGE 56
4. Certificate reserves
Reserves maintained on outstanding certificates have been computed
in accordance with the provisions of the certificates and Section
28 of the 1940 Act. The average rates of accumulation on
certificate reserves at Dec. 31, 1994 and 1993 were:
<TABLE>
<CAPTION>
1994
Average Average
Reserve gross additional
balance accumulation credit
at Dec.31 rate rate
<S> <C> <C> <C>
Installment certificates:
Reserves to mature:
With guaranteed rates $49,278 3.49% 1.51%
Without guaranteed rates (A) 286,434 - 2.97
Additional credits and accrued interest 19,698 3.11 -
Advance payments and accrued interest (C) 1,634 3.08 1.92
Other 56 - -
Fully paid certificates:
Reserves to mature:
With guaranteed rates 234,822 3.25 1.09
Without guaranteed rates (A) and (D) 2,154,376 - 4.81
Additional credits and accrued interest 140,766 3.35 -
Due to unlocated certificate holders 341 - -
$2,887,405
1993
Average Average
Reserve gross additional
balance accumulation credit
at Dec.31 rate rate
Installment certificates:
Reserves to mature:
With guaranteed rates $57,958 3.49% 1.01%
Without guaranteed rates (A) 294,691 - 2.74
Additional credits and accrued interest 18,555 3.09 -
Advance payments and accrued interest 1,943 3.05 1.45
Other 54 - -
Fully paid certificates:
Reserves to mature:
With guaranteed rates 291,923 3.30 1.07
Without guaranteed rates (A) and (D) 1,951,493 - 3.56
Additional credits and accrued interest 160,440 3.37 -
Due to unlocated certificate holders 394 - -
$2,777,451
</TABLE>
A) There is no minimum rate of accrual on these reserves. Interest
is declared periodically, quarterly or annually, in accordance with
the terms of the separate series of certificates.
<PAGE>
PAGE 57
B) On certain series of single payment certificates, additional
interest is predeclared for periods greater than one year. At Dec.
31, 1994, $18,398 of retained earnings had been appropriated for
the predeclared additional interest, which represents the
difference between certificate reserves on these series, calculated
on a statutory basis, and the reserves maintained per books.
C) Certain series of installment certificates guarantee accrual of
interest on advance payments at an average of 3.08%. IDSC has
increased the rate of accrual to 5.00% through April 30, 1996. An
appropriation of retained earnings amounting to $50 has been made,
which represents the estimated additional accrual that will result
from the increase granted by IDSC.
D) IDS Stock Market Certificate enables the certificate holder to
participate in any relative rise in a major stock market index
without risking loss of principal. Generally the certificate has a
term of 12 months and may continue for up to 14 successive terms.
The reserve balance at Dec. 31, 1994 and 1993 was $263,494 and
$402,801, respectively.
E) The carrying amounts and fair values of certificate reserves
consisted of the following at Dec. 31, 1994 and 1993. Fair values
of certificate reserves with interest rate terms of one year or
less approximated the carrying values less any applicable surrender
charges. The fair values for other certificate reserves are a
discounted cash flow analysis using interest rates currently
offered for certificates with similar remaining terms, less any
applicable surrender charges.
<TABLE><CAPTION>
1994 1993
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Reserves with terms of one year or less $2,425,880 $2,415,970 $2,409,668 $2,402,972
Other 461,525 461,060 367,783 384,484
Total certificate reserves 2,887,405 2,877,030 2,777,451 2,787,456
Unapplied certificate transactions 2,671 2,671 1,064 1,064
Certificate loans and accrued interest (58,840) (58,840) (68,174) (68,174)
Total $2,831,236 $2,820,861 $2,710,341 $2,720,346
</TABLE>
5. Dividend restriction
Certain series of installment certificates outstanding provide that
cash dividends may be paid by IDSC only in calendar years for which
additional credits of at least one-half of 1% on such series of
certificates have been authorized by IDSC. This restriction has
been removed for 1995 and 1996 by action of IDSC on additional
credits in excess of this requirement.
6. Fees paid to Parent and affiliated companies ($ not in
thousands)
A) The basis of computing fees paid or payable to Parent for
investment advisory and services is:
The investment advisory and services agreement with Parent provides
for a graduated scale of fees equal on an annual basis to 0.75% on<PAGE>
PAGE 58
the first $250 million of total book value of assets of IDSC, 0.65%
on the next $250 million, 0.55% on the next $250 million, 0.50% on
the next $250 million and 0.45% on the amount in excess of $1
billion. The fee is payable monthly in an amount equal to
one-twelfth of each of the percentages set forth above. Excluded
from assets for purposes of this computation are first-mortgage
loans, real estate and any other asset on which IDSC pays a service
fee.
B) The basis of computing fees paid or payable to American Express
Financial Advisors Inc. (formerly IDS Financial Services Inc.) (an
affiliate) for distribution services is:
Fees payable to American Express Financial Advisors Inc. on sales
of IDSC's certificates are based upon terms of agreements giving
American Express Financial Advisors Inc. the exclusive right to
distribute the certificates covered under the agreements. The
agreements provide for payment of fees over a period of time. The
aggregate fees payable under the agreements per $1,000 face amount
of installment certificates and $1,000 purchase price of single
payments, and a summary of the periods over which the fees are
payable, shown by series are:
<TABLE><CAPTION>
Number of
certificate
years over
Aggregate fees payable which
subsequent
First Subsequent years' fees
Total year years are payable
<S> <C> <C> <C> <C>
Installment certificates(a) $30.00 $6.00 $24.00 4
Single-payment certificates 60.00 60.00 - -
Future Value certificates 50.00 50.00 - -
</TABLE>
Fees on Cash Reserve and Flexible Savings (formerly Variable Term)
certificates are paid at a rate of 0.25% of the purchase price at
time of issuance and 0.25% of the reserves maintained for these
certificates at the beginning of the second and subsequent quarters
from issue date.
Fees on the Investors Certificate are paid at an annualized rate of
1% of the reserves maintained for the certificates. Fees are paid
at the end of each term on certificates with a one, two or
three-month term. Fees are paid each quarter from date of issuance
on certificates with a six, 12, 24 or 36-month term.
Fees on the Stock Market Certificate are paid at a rate of 1.25% of
the purchase price on the first day of the certificate's term and
1.25% of the reserves maintained for these certificates at the
beginning of each subsequent term.
(a) At the end of the sixth through the 10th year, an additional
fee is payable of 0.5% of the daily average balance of the
certificate reserve maintained during the sixth through the 10th
year, respectively.
<PAGE>
PAGE 59
C) The basis of computing depositary fees paid or payable to
American Express Trust Company (formerly IDS Trust Company) (an
affiliate) is:
<TABLE><CAPTION>
<S> <C>
Maintenance charge per account 5 cents per $1,000 of assets on deposit
Transaction charge $20 per transaction
Security loan activity:
Depositary Trust Company
receive/deliver $20 per transaction
Physical receive/deliver 25 per transaction
Exchange collateral 15 per transaction
</TABLE>
A transaction consists of the receipt or withdrawal of securities
and commercial paper and/or a change in the security position. The
charges are payable quarterly except for maintenance, which is an
annual fee.
D) The basis for computing fees paid or payable to American
Express Service Corporation (an affiliate) in connection with the
American Express Savings Certificate was:
Distribution Fees - Fees were paid at a rate of 0.25% of the
reserves maintained at the end of the first and subsequent calendar
quarters.
Transfer Agent Fees - Fees of $3.50 per certificate account were
paid each month.
E) The basis for computing fees paid or payable to American
Express Bank Ltd. (an affiliate) for the distribution of the IDS
Special Deposits certificate on an annualized basis is:
0.80% of the reserves maintained for the certificates on an amount
from $250,000 to $499,000, 0.65% on an amount from $500,000 to
$999,000 and 0.50% on an amount $1,000,000 or more. Fees are paid
at the end of each term on certificates with a one, two or
three-month term. Fees are paid at the end of each quarter from
date of issuance on certificates with a six, 12, 24 or 36-month
term.
7. Income taxes
Income tax expense (benefit) as shown in the statement of
operations for the three years ended Dec. 31, consists of:
1994 1993 1992
Federal:
Current ($8,743) ($19,777) ($1,571)
Deferred 3,933 11,446 (13,501)
(4,810) (8,331) (15,072)
State 100 349 7
($4,710) ($7,982) ($15,065)
<PAGE>
PAGE 60
Income tax expense (benefit) differs from that computed by using
the U.S. Statutory rate of 35% for 1994 and 1993 and 34% for 1992.
The principal causes of the difference in each year are shown
below:
<TABLE><CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Federal tax expense (benefit) at U.S. statutory rate $12,642 $13,178 $12,579
Tax-exempt interest (4,205) (4,929) (6,212)
Dividend exclusion (13,862) (17,326) (22,317)
Change in statutory rates - (406) -
Other, net 615 1,152 878
Federal tax benefit ($4,810) ($8,331) ($15,072)
</TABLE>
Deferred income taxes result from the net tax effects of temporary
differences. Temporary differences are differences between the tax
bases of assets and liabilities and their reported amounts in the
financial statements that will result in differences between income
for tax purposes and income for financial statement purposes in
future years. Principal components of IDSC's deferred tax assets
and liabilities as of Dec. 31, are as follows.
1994 1993
Deferred tax assets:
Investment unrealized losses $12,470 $-
Certificate reserves 4,315 6,127
Investments 1,390 1,225
Investment reserves 1,120 1,487
Purchased/written call options 283 -
Total deferred tax assets 19,578 8,839
Deferred tax liabilities:
Deferred distribution fees 9,500 6,865
Dividends receivable 1,000 1,255
Return of capital dividends 508 463
Purchased/written call options - 254
Other, net 198 167
Total deferred tax liabilities 11,206 9,004
Net deferred tax assets (liabilities) $8,372 ($165)
8. Derivative financial instruments
IDSC enters into transactions involving derivative financial
instruments as an end user (nontrading). IDSC uses these
instruments to manage its exposure to interest rate risk, including
hedging specific transactions. IDSC manages risks associated with
these instruments as described below.
<PAGE>
PAGE 61
Market risk is the possibility that the value of the derivative
financial instrument will change due to fluctuations in a factor
from which the instrument derives its value, primarily an interest
rate or a major market index. IDSC is not impacted by market risk
related to derivatives held because derivatives are largely used to
manage risk and, therefore, the cash flows and income effects of
the derivatives are inverse to the effects of the underlying hedged
transactions.
Credit exposure is the possibility that the counterparty will not
fulfill the terms of the contract. IDSC monitors credit exposure
related to derivative financial instruments through established
approval procedures, including setting concentration limits by
counterparty, reviewing credit ratings and requiring collateral
where appropriate. The majority of IDSC's counterparties to the
interest rate caps are rated A or better by nationally recognized
rating agencies. The counterparties to the call options are five
major broker/dealers.
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
do not represent market risk or credit exposure.
Credit exposure related to derivative financial instruments is
measured by the carrying amount, if higher, or the replacement cost
of those contracts in a gain position at the balance sheet date.
The replacement cost represents the fair value of the instrument,
and is determined by market values, dealer quotes or pricing
models.
IDSC's holdings of derivative financial instruments were as follows
at Dec. 31, 1994.
<TABLE><CAPTION>
Notional Total
or contract Carrying Fair credit
amount value value exposure
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $1,020,000 $14,946 $24,727 $24,727
Purchased call options 191,496 7,770 8,886 8,886
Total $1,211,496 $22,716 $33,613 $33,613
Liabilities:
Written call options $189,443 $2,070 $1,779 $-
</TABLE>
The fair values of derivative financial instruments are based on
market values, dealer quotes or pricing models. The interest rate
caps expire on various dates from 1995 to 1997. The options expire
in 1995.
Interest rate caps and options are used to manage IDSC's exposure
to rising interest rates. These instruments are used primarily to
protect the margin between the interest rate earned on investments
and the interest rate accrued to related investment certificate
holders.
<PAGE>
PAGE 62
The interest rate caps are quarterly reset caps and IDSC earns
interest on the notional amount to the extent the London Interbank
Offering Rate exceeds the reference rates specified in the cap
agreements. These reference rates range from 4% to 13%. The cost
of these caps of $14,946 at Dec. 31, 1994, is being amortized over
the terms of the agreements (three to seven years) on a straight
line basis and is included in other qualified assets. The
amortization, net of any interest earned, is included in investment
expenses.
IDSC offers a series of certificates which pay interest based upon
the relative change in a major stock market index between the
beginning and end of the certificates' term. The certificate
holders have the option of participating in the full amount of
increase in the index during the term (subject to a specified
maximum) or a lesser percentage of the increase plus a guaranteed
minimum rate of interest. As a means of hedging its obligations
under the provisions of these certificates, IDSC purchases and
writes call options on the major market index. The options are
cash settlement options, that is, there is no underlying security
to deliver at the time the contract is closed out.
The option contracts are less than one year in term. The premiums
paid or received on these index options are reported in other
qualified assets or other liabilities, as appropriate, and are
amortized into investment expenses over the life of the option.
The intrinsic value of these index options is also reported in
other qualified assets or other liabilities, as appropriate. The
unrealized gains and losses related to the changes in the intrinsic
value of these options are recognized currently in provision for
certificate reserves.
Following is a summary of open option contracts at Dec. 31, 1994
and 1993.
<TABLE><CAPTION>
1994
Face Average Index at
amount strike price Dec.31,1994
<S> <C> <C> <C>
Purchased call options $191,496 460 459
Written call options 189,443 506 459
1993
Face Average Index at
amount strike price Dec.31,1993
Purchased call options $221,389 452 466
Written call options 207,540 497 466
</TABLE>
9. Fair values of financial instruments
IDSC is required to disclose fair value information for most on-
and off-balance sheet financial instruments for which it is
practical to estimate that value. Certain financial instruments
such as trade receivables and payables (when the carrying value
approximates the fair value), and all non-financial instruments,
such as deferred distribution fees, are excluded from required <PAGE>
PAGE 63
disclosure. IDSC's off-balance sheet intangible assets, such as
IDSC's name and future earnings of the core business are also
excluded. IDSC's management believes the value of these excluded
assets is significant. The fair value of IDSC, therefore, cannot
be estimated by aggregating the amounts presented.
A summary of fair values of financial instruments as of Dec. 31, is
as follows:
<TABLE><CAPTION>
1994 1993
Carrying Fair Carrying Fair
value value value value
<S> <C> <C> <C> <C>
Financial assets
Cash equivalents (note 1) $152,912 $152,912 $68,871 $68,871
Investment securities (note 3) 2,472,467 2,479,083 2,431,919 2,544,770
First mortgage loans on real estate (note 3) 253,968 246,917 281,865 289,785
Derivative financial instruments (note 8) 22,716 33,613 38,424 21,425
Financial liabilities
Certificate reserves (note 4) 2,831,236 2,820,861 2,710,341 2,720,346
Derivative financial instruments (note 8) 2,070 1,779 1,640 2,992
</TABLE>
<PAGE>
PAGE 64
Quick telephone reference
Selling Agent
American Express Bank International
Region Offices
101 East 52nd Street
29th Floor
New York, NY 10022
(212) 415-9500
1221 Brickell Avenue
8th Floor
Miami, FL 33131
(305) 350-7750
Selling Agent
Coutts & Co. (USA) International
421 North Rodeo Drive
Penthouse 1
Beverly Hills, CA 90210
(310) 858-2924
American Express Financial Advisors
IDS Stock Market Certificate
IDS Tower 10
Minneapolis, MN 55440-0010
