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IDS Stock Market Certificate
Potential for stock market growth with safety of principal
Distributed by
American Express
Service Corporation
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To our certificate owners
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 own 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 owners 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, 1995 the
required carrying value of our outstanding certificates by more
than $129 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 minimum rate guaranteed by IDSC. 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: ___%
(This brochure is not part of the prospectus.)<PAGE>
PAGE 3
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 minimum rate guaranteed
by IDSC. 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 an interest rate guaranteed by IDSC, 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.
(This brochure is not part of the prospectus.)
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IDS Stock Market Certificate
Prospectus April 24, 1996
Potential for stock market growth with safety of principal
IDS Stock Market Certificates are issued by IDS Certificate Company
(IDSC). 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 IDSC 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 IDSC. 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 investment is backed by IDSC's investments on deposit rather
than guaranteed or insured by the government or someone else. See
"Invested and guaranteed by IDSC" and "Regulated by government"
under "How your money is used and protected."
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
IDSC by any statement not in it.
Issuer: Distributor:
IDS Certificate Company American Express
IDS Tower 10 Service Corporation
Minneapolis, MN 55440-0010 IDS Tower 10
1-800-AXP-SERV (toll free) Minneapolis, MN 55440-0010
TTY numbers:
1-800-710-5260 (toll free)
An American Express company<PAGE>
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Where to get information about IDSC
IDSC is subject to the reporting requirements of the Securities
Exchange Act of 1934. Reports and other information on IDSC 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
IDSC 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 24, 1996:
Maximum Market participation Minimum
return percentage interest
10% 100% (full) None
10% 25% (partial) Currently 3.25%
These rates may or may not be in effect when you apply to purchase
your certificate. If you choose the partial participation options
for your certificate, your minimum interest rate will be between
2.75% and 3.25%. Rates for later terms are set at the discretion
of IDSC and may also differ from the rates shown here. We reserve
the right to issue other securities with different provisions.<PAGE>
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Contents
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
Two ways to request a withdrawal p
Three ways to receive payment when you withdraw funds p
IRAs: special policies p
Transfer of ownership p
For more information p
Taxes on your earnings
Retirement accounts p
Gifts to minors p
Foreign investors p
How your money is used and protected
Invested and guaranteed by IDSC p
Regulated by government p
Backed by our investments p
Investment policies p
How your money is managed
Relationship between IDSC and American Express
Financial Corporation p
About American Express Service Corporation p
Capital structure and certificates issued p
Investment management and services p
Distribution p
Employment of other American Express affiliates p
Directors and officers p
Auditors p
Annual financial information
Summary of selected financial information
Management's discussion and analysis of
financial condition and results of operations
Report of independent auditors
Financial statements
Notes to financial statements
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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 (unless
you receive prior authorization from IDSC to invest more) 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 (unless you
receive prior authorization from IDSC to invest more).
The certificate may be used as an investment for your Individual
Retirement Account (IRA). If so used, the amount of your
contribution (investment) will be subject to limitations in
applicable federal law.
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
IDSC. It consists of the amount you actually invest plus interest
credited to your account 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 <PAGE>
PAGE 9
14-day period by providing prior written instructions to IDSC. If
you choose to receive fixed interest, subsequent terms will be up
to 12 months as described in "Fixed interest" under "Interest"
below.
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 "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 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 chose 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." <PAGE>
PAGE 10
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
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
(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 or call 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 a
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 (0.00% to 1.00%) 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 IDSC, American Express <PAGE>
PAGE 11
Financial Corporation (AEFC) 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
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 American
Express Financial Services Direct at the telephone numbers listed
on the back cover.
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 American Express Financial Services
Direct at the telephone numbers listed on the back cover.
Promotions and pricing flexibility
From time to time, IDSC 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 Service Corporation (AESC)
or its subsidiaries. These promotions will generally be for a
specified period of time.
We also may offer different rates based on your amount invested,
geographic location and whether the certificate is purchased for an
IRA or a qualified retirement account.<PAGE>
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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. 29, 1996. The values of the
S&P 500 Index are reprinted with the permission of S&P.
S&P 500 Index values - December 1983 to February 1996
400
300 Chart shows closing values of the S&P from above 100 in
1994 to end near 500 in Feb. 1996
200
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
___________________________________________________________________
1985 10 11.29%
1990 5 13.28
1994 1 34.11
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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 Index - December 1984 to February 1996
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 96
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.
S&P 500 Index - December 1984 to February 1996
20
Chart shows the distribution of all of the 12-month price
returns of the S&P 500 from 1/1/84 through 2/28/96 with a
high of just over 20 and a low between 0 and 5
15
10
5
- -15 -10 -5 0 5 10 15 20 25 30
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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.
Actual 12-Month Return 1/22/91 to 2/8/96
30%
25%
20% Chart shows actual returns of the certificate at full and
25% participation with the full participation generally
tracking the market indexes over the period and 25% level
of participation tracking at the 25% level of return.
15%
10% --- Market Index
*** Stock Market Full Participation
... Stock Market 25% Participation
5%
0%
<TABLE><CAPTION>
<S> <C>
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.
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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 10%
Minimum return 3.25%
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 3.25% 3.25% minimum interest rate
equals 5.38% Partial participation return
In both cases in the example, the return would be less than the 10%
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
Start of term 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 3.50
Jan. 17, 1996 10.00 3.25
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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 3.25%, and the maximum total return for full and
partial participation is 10%.
<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) + 325 3.25% (Minimum interest rate) x $10,000
Participation interest + 200 25% x 8% x $10,000 Participation interest
$10,800 Ending balance $10,525 Ending balance
(8% Total return) (5.25% 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 + 325 3.25% (Minimum interest rate) x $10,000
$10,000 Ending balance + 0 Participation interest
(0% Total return) $10,325 Ending balance
(3.25% 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
+ 1,000 (10% x $10,000) + 325 3.25% (Minimum interest rate) x $10,000
Maximum interest + 400 (25% x 16% x $10,000) Participation interest
$11,000 Ending balance $10,725 Ending balance
(10% Total return) (7.25% 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. IDS Certificate Company (IDSC) 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. Standard & Poor's (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's(trademark)," "S&P (trademark)," "S&P 500 (trademark),"
"Standard & Poor's 500"
and "500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by IDSC. 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
IDSC 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 IDSC or the certificate. S&P
has no obligation to take the needs of IDSC 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 IDSC, 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 withdraw your
certificate balance, if desired, and receive your principal,
without being assessed a withdrawal 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 participation selection,
o add money to your certificate,
o change your term start date,
<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 phone or send written
instructions before your current term ends. You can tell us to
start your next term on any Wednesday during the grace period
immediately following our receipt of 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
Your financial consultant 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 and we have
received your initial investment, we will send you a confirmation
showing the acceptance date, the date your term begins and the
interest selection you have made detailing your market
participation percentage and, if applicable, 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 IDSC with
your correct Taxpayer Identification Number (Social Security Number
or Employer Identification Number or a Form W-8 or approved
substitute). See "Taxes on your earnings."
<PAGE>
PAGE 19
Purchase policies:
o Investments must be received and accepted in the Minneapolis
headquarters on a business day before 3 p.m. Central time to be
included in your account that day. Otherwise your purchase will be
processed the next business day.
o If you purchase a certificate with a personal check or other non-
guaranteed funds, AEFC will wait one day for the process of
converting 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.
o IDSC has the authority to determine whether to accept an
application and sell a certificate.
A number of special policies apply to purchases, withdrawals and
exchanges within IRAs. See "IRAs: special policies."
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:
American Express Financial American Express Financial
Services Direct Corporation
P.O. Box 59196 Attn: American Express
Minneapolis, MN 55459-0196 Financial Services
Direct I12/716
733 Marquette Avenue
Minneapolis, MN
55402-2039
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 #00-30-015 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, AEFC,
IDSC, Norwest Bank Minneapolis and American Express Financial
Services Direct are open for business.
<PAGE>
PAGE 20
o Wire purchases are completed when wired payment is received
and we accept the purchase.
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 IDSC, AEFC and AESC 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 If your withdrawal request is received in the Minneapolis
headquarters on a business day before 3 p.m. Central time, it
will be processed that day and payment will be sent the next
business day. Otherwise, your request will be processed one
business day later.
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
owner or if it is for an IRA and you have reached age 70 1/2.)
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 the end of 0.00
the term)
Withdrawal of principal ( 2,000.00)
2% withdrawal penalty (40.00)
Balance after withdrawal $ 7,960.00 <PAGE>
PAGE 21
You will forfeit any accrued interest on the
withdrawal amount.
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
IRAs: In addition, you may be subject to IRS penalties for early
withdrawals if your certificate is in an IRA.
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 IDSC 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.
Two ways to request a withdrawal
1
By phone
o Call the American Express Financial Services Direct service
team at the numbers listed on the back cover.
o Maximum phone request: $50,000
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 it is.
This includes asking identifying questions and tape recording
telephone calls. So long as reasonable procedures are
followed, neither IDSC nor AEFC or its subsidiaries will be
liable for any loss resulting from fraudulent requests.
You may request that telephone withdrawals not be authorized from
your account by writing American Express Financial Services Direct.<PAGE>
PAGE 22
2
By mail
Send your name, account number and request for a withdrawal or
transfer to:
Regular mail:
American Express Financial Services Direct
P.O. Box 59196
Minneapolis, MN 55459-0196
Express mail:
American Express Financial Corporation
Attn: American Express Financial Services Direct
I12/716
733 Marquette Avenue
Minneapolis, MN 55402-2039
Written requests are required for:
o Transactions over $50,000
o Custodial accounts where the minor has reached the age at
which custodianship should terminate.
Three 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
o For express mail, you will pay a charge that will vary
depending on the courier you select. We will deduct the
courier charge from your remaining certificate balance,
provided that balance would not be less than $1,000. If the
balance would be less than $1,000, the charge is deducted from
the proceeds of the withdrawal.
2
By wire
o Minimum wire withdrawal: $1,000
o Request that money be wired to your bank
o Bank account must be in same ownership as IDSC account
o Pre-authorization required. Complete the bank wire
authorization section in the application. All registered
owners must sign.
<PAGE>
PAGE 23
o A service fee, if any, may be deducted from your balance (for
partial withdrawals) or from the proceeds of a full
withdrawal.
3
By electronic transfer
o Available only for pre-authorized scheduled partial
withdrawals and other full or partial withdrawals.
o No charge
o Deposited electronically in your bank account
o Allow two to five business days from request to deposit.
IRAs: special policies
o If the certificate is purchased for an IRA, the terms and
conditions of the certificate apply to the IRA as the owner of
this certificate. However, the terms of the IRA, as
interpreted by the trustee, will determine how a participant's
individual IRA is administered. These terms may differ from
the terms of the certificate.
o The annual custodial fee for an IRA may be deducted from your
certificate account. It may reduce the amount payable at
maturity or the amount received upon an early withdrawal.
o IRA withdrawals may be subject to withdrawal penalties or loss
of interest even if they are not subject to federal tax
penalties.
o We will waive withdrawal penalties on withdrawals for IRA
accounts of clients who have reached age 70 1/2.
o If you withdraw all funds from your last account in an IRA at
American Express Trust Company, a $25 termination fee will
apply.
o The IRA termination fee will be waived if withdrawal occurs
upon the account owner's death.
Transfer of ownership
While the certificate is not negotiable, IDSC will transfer
ownership upon written notification to American Express Financial
Services Direct. However, if you have purchased your certificate
for an IRA, you may be unable to transfer or assign the certificate
without losing the account's favorable tax status. Please consult
your tax advisor.
For more information
For information on purchases, withdrawals, exchanges, transfers of
ownership, proper instructions and other service questions <PAGE>
PAGE 24
regarding your certificate, please consult the American Express
Financial Services Direct service team at the telephone numbers
listed on the back cover.
Taxes on your earnings
Participation and minimum interest on your certificate is taxable
when credited to your account. Fixed and interim interest are
fully taxable as earned. Each calendar year we provide certificate
owners and the IRS with reports of all earnings over $10 (Form
1099). Withdrawals are reported to the certificate owner and the
IRS on Form 1099-B, Proceeds from Broker Transactions.
Revised proposed regulations: The IRS has issued revised proposed
regulations governing the tax treatment of debt instruments which
provide for variable rates of interest, including interest based on
the price of property that is actively traded or on an index of the
prices of such property. Under these revised proposed regulations,
the IDS Stock Market Certificate is likely to constitute a debt
instrument that would be treated as a variable rate debt instrument
(VRDI) rather than a contingent debt instrument (CDI). If the
Stock Market Certificate constitutes a VRDI, then the income earned
on the certificate will be treated as original issue discount and
reported when credited to the holder's account. If the certificate
is not treated as a VRDI, but rather is treated as a CDI, then the
owner may have taxable income to report, even though the account
owner has not received any cash distributions. Furthermore, the
timing and character of the income may be different from that of a
VRDI. IDSC cannot guarantee whether the revised proposed
regulations will be adopted as final in this present form or will
again be modified. As always, you should consult your tax advisor
for information regarding the tax implications of your certificate.
Retirement accounts
If you are using the certificate as an investment for an IRA,
income tax rules for your IRA apply. Generally, you will pay no
income taxes on your investment's earnings--and, in many cases, on
part or all of the investment itself--until you begin to make
withdrawals.
IDSC will withhold federal income taxes of 10% on IRA withdrawals
unless you tell us not to.
Withdrawals from retirement accounts are generally subject to a
penalty tax of 10% by the IRS if you make them before age 59 1/2,
unless you are disabled or if they are made by your beneficiary in
the event of your death. (Other exceptions may also apply.)
Consult your tax advisor to see how these rules apply to you before
you request a distribution from your IRA.
Gifts to minors
The certificate may be given to a minor under either the Uniform
Gifts or Uniform Transfers to Minors Act (UGMA/UTMA), whichever <PAGE>
PAGE 25
applies in your state. UGMAs/UTMAs are irrevocable. Generally,
under federal tax laws, income over $1,200 on property owned by
children under age 14 will be taxed at the parents' marginal tax
rate, while income on property owned by children 14 or older will
be taxed at the child's rate.
Your Taxpayer Identification Number (TIN) and backup withholding:
As with any financial account you open, you must list your current
and correct Taxpayer Identification Number (TIN)--either your
Social Security or Employer Identification Number. The TIN must be
certified under penalties of perjury on your application when you
open an account with American Express Financial Services Direct.
If you don't provide the TIN to American Express Financial Services
Direct, or the TIN you report is incorrect, you could be subject to
backup withholding of 31% of your interest earnings. You could
also be subject to further penalties, such as:
o $50 penalty for each failure to supply your correct TIN
o a civil penalty of $500 if you make a false statement that
results in no backup withholding
o criminal penalties for falsifying information.
You could also be subject to backup withholding because you failed
to report interest on your tax return as required.
To help you determine the correct TIN to use on various types of
accounts, please use this chart:
How to determine the correct TIN
Use the Social Security or
For this type of account: Employer Identification Number of:
Individual or joint The individual or individuals
listed on the account
Custodian account of a minor The minor
(Uniform Gifts/Transfers to
Minors Act)
A living trust The grantor-trustee (the person
who puts the money into the trust)
An irrevocable trust The legal entity (not the personal
or estate representative or trustee, unless
no legal entity is designated in
the account title)
Sole proprietorship The owner
Partnership The partnership
Corporate The corporation
Association, club or The organization
tax-exempt organization<PAGE>
PAGE 26
For details on TIN requirements, ask your American Express
Financial Services Direct Team for Federal Form W-9, Request for
Taxpayer Identification Number and Certification.
Foreign investors
If you are not a citizen or resident of the United States, you must
supply American Express Financial Services Direct 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. American Express Financial Services Direct 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.
It is most likely that 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 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, then, depending on the circumstances,
American Express Financial Services Direct, at a minimum, will need
a statement from persons American Express Financial Services Direct
believes are knowledgeable about your estate. The statement must
be in a form satisfactory to American Express Financial Services
Direct 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. In other cases, we generally will not take action
regarding your certificate until we receive a transfer certificate
from the IRS or evidence satisfactory to American Express Financial
Services Direct that the estate is being administered by an
executor or administrator appointed, qualified and acting within
the United States.
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 advisor about your personal situation.
<PAGE>
PAGE 27
How your money is used and protected
Invested and guaranteed by IDSC
The IDS Stock Market Certificate is issued and guaranteed by IDSC,
a wholly owned subsidiary of AEFC. We are by far the largest
issuer of face amount certificates in the United States, with total
assets of more than $3.9 billion and a net worth in excess of $250
million on Dec. 31, 1995.
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 owners
o various expenses, including taxes, fees to AEFC for advisory
and other services and distribution fees to AESC, and 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.
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, 1995, the
amortized cost of these investments exceeded the required carrying
value of our outstanding certificates by more than $129 million.
Backed by our investments
Our investments are varied and of high quality. This was the
composition of our portfolio as of Dec. 31, 1995:
<PAGE>
PAGE 28
Type of investment Net amount invested
Government agency bonds 38%
Corporate and other bonds 34
Preferred stocks 17
Mortgages 6
Municipal bonds 3
Cash and cash equivalents 2
More than 96% 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 AEFC. Copies
of our Dec. 31, 1995 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.
Investment policies
In deciding how to diversify the portfolio--among what types of
investments in what amounts--the officers and directors of IDSC 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.<PAGE>
PAGE 29
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
or more 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.
When-issued securities are subject to market fluctuations and they
may affect IDSC's investment portfolio the same as owned
securities.
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. IDSC may enter into financial transactions,
including futures and other derivatives, for the purpose of
managing the interest rate 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.
Illiquid securities-
A security is illiquid if it cannot be sold in the normal course of
business within seven days at approximately its current market
value. Some investments cannot be resold to the U.S. public
because of their terms or government regulations. All securities,
however, can be sold in private sales, and many may be sold to
other institutions and qualified buyers or on foreign markets.
IDSC's investment advisor will follow guidelines established by the
board and consider relevant factors such as the nature of the
security and the number of likely buyers when determining whether a
security is illiquid. No more than 15% of IDSC's investment
portfolio will be held in securities that are illiquid. In valuing
its investment portfolio to determine this 15% illiquid securities
limit, IDSC will use statutory accounting under an SEC order. This
means that, for this purpose, the portfolio will be valued in
accordance with applicable Minnesota law governing investments of
life insurance companies, rather than generally accepted accounting
principles.<PAGE>
PAGE 30
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 money is managed
Relationship between IDSC and American Express Financial
Corporation
IDSC 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 IDSC was created, AEFC, our parent company and organizer,
had issued similar certificates since 1894. On Jan. 1, 1995, AEFC
changed its name from IDS Financial Corporation. IDSC and AEFC
have never failed to meet their certificate payments.
During its many years in operation, AEFC has become a leading
manager of investments in mortgages and securities. As of Dec. 31,
1995, AEFC managed investments, including its own, of more than
$129 billion.
AEFC 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 businesses including:
o travel related services (including American Express(trademark)Card and
Travelers Cheque operations through American Express Travel
Related Services Company, Inc. and its subsidiaries), and
o international banking services (through American Express Bank
Ltd. and its subsidiaries).
About AESC
AESC is a wholly-owned subsidiary of American Express Travel
Related Services Inc., which in turn is a wholly-owned subsidiary
of American Express Company.
AESC is not a bank, and the securities offered by it, such as face
amount certificates issued by IDSC, are not backed or guaranteed by
any bank, nor are they insured by the FDIC.
Capital structure and certificates issued
IDSC has authorized, issued and has outstanding 150,000 shares of
common stock, par value of $10 per share. AEFC owns all of the
outstanding shares.<PAGE>
PAGE 31
As of Dec. 31, 1995, IDSC had issued (in face amount)
$13,074,792,382 of installment certificates and $14,769,642,620 of
single payment certificates.
Investment management and services
Under an Investment Advisory and Services Agreement, AEFC acts as
our investment advisor and is responsible for:
o providing investment research,
o making specific investment recommendations, and
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 AEFC requires
annual renewal by our board, including a majority of directors who
are not interested persons of AEFC or IDSC as defined in the
federal Investment Company Act of 1940.
For its services, we pay AEFC 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 IDSC 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:
Percentage of
Year Total fees included assets
1995 $16,472,458 0.50%
1994 $13,565,432 0.51
1993 $15,036,091 0.50
Estimated advisory and services fees for 1996 are $19,152,000.
Other expenses payable by IDSC: 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,<PAGE>
PAGE 32
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 AEFC,
o fees and expenses of our directors who are not officers or
employees of AEFC,
o provision for certificate reserves (interest accrued on
certificate owner accounts), and
o expenses of customer settlements not attributable to sales
function.
Distribution
Under a Distribution Agreement with AESC, for certificates sold
through American Express Financial Services Direct, we pay AESC for
the distribution of this certificate as follows:
o 1.00% of the initial investment on the first day of the
certificate's term, and
o 1.00% of the certificate's reserve at the beginning of each
subsequent term.
Under a Distribution Agreement with American Express Financial
Advisors Inc., a wholly-owned subsidiary of AEFC, we pay for the
distribution of this certificate by American Express Financial
Advisors Inc. 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 or through American Express Bank
International (AEBI) or Coutts & Co (USA) International
(Coutts) representatives.
This fee is not assessed to your certificate account.
American Express financial Services Direct is a channel for direct
marketing of financial services to American Express card members
and others.
Total distribution fees paid to American Express Financial Advisors
Inc. for all series of certificates amounted to $35,120,612 during
the year ended Dec. 31, 1995. We expect to pay American Express
Financial Advisors Inc. distribution fees amounting to $39,384,000
during 1996.
See Note 1 to financial statements regarding deferral of
distribution fee expense.
American Express Financial Advisors Inc. and AESC pay 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., AESC or IDSC,<PAGE>
PAGE 33
approved these distribution agreements.
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 additional investments made 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 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.
AEBI and Coutts are Edge Act corporations organized under the
provisions of Section 25(a) of the Federal Reserve Act. AEBI is a
wholly owned subsidiary of American Express Bank Ltd. (AEBL).
Coutts is an indirect wholly owned subsidiary of NatWest PLC. As
Edge Act corporations, AEBI and Coutts are subject to the
provisions of Section 25(a) of the Federal Reserve Act and
Regulation K of the Board of Governors of the Federal Reserve
System (the Federal Reserve). They are 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, by AEBL, by Coutts, by NatWest PLC or by any other bank,
nor is it guaranteed or insured by the FDIC or any other federal
agency. AEBI is registered where necessary as a securities broker-
dealer.<PAGE>
PAGE 34
Employment of other American Express affiliates
AEFC may employ an affiliate of American Express 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
IDSC'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 $40,000 during 1995 to directors not employed by
AEFC.
Board of directors
David R. Hubers*
Born in 1943. Director since 1987.
President and chief executive officer of AEFC since 1993. Senior
vice president and chief financial officer of AEFC from 1984 to
1993.
Charles W. Johnson
Born in 1929. Director since 1989.
Director, Communications Holdings, Inc. Former vice president and
group executive, Industrial Systems, with Honeywell, Inc. Retired
1989.
Richard W. Kling*
Born in 1940. Director since 1996.
Chairman of the board of directors since 1996. Director of IDS
Life Insurance Company since 1984; president since 1994. Executive
vice president of Marketing and Products from 1988 to 1994. Senior
vice president of AEFC since 1994. Director of IDS Life Series
Fund, Inc. and member of the board of managers of IDS Life Variable
Annuity Funds A and B.
Edward Landes
Born in 1919. Director since 1984.
Development consultant. Director of Endowment Development, YMCA of
Metropolitan Minneapolis. Former sales manager - Supplies Division
and district manager - Data Processing Division of IBM Corporation.
Retired 1983.<PAGE>
PAGE 35
John V. Luck, Ph.D.
Born in 1926. Director since 1987.
Former senior vice president - Science and Technology with General
Mills, Inc. Employed with General Mills, Inc. since 1970. Retired
1987.
James A. Mitchell*
Born in 1941. Director since 1994 .
Chairman of the board of directors from 1994 to 1996. Executive
vice president - marketing and products of AEFC since 1994. Senior
vice president - insurance operations of AEFC and president and
chief executive officer of IDS Life Insurance Company from 1986 to
1994.
Harrison Randolph
Born in 1916. Director since 1968.
Consultant.
Gordon H. Ritz
Born in 1926. Director since 1968.
Director, Mid-America Publishing and Atrix International, Inc.
Former president, Com Rad Broadcasting Corp. Former director,
Sunstar Foods.
Stuart A. Sedlacek*
Born in 1957. Director since 1994.
President since 1994. Vice president - assured assets of AEFC
since 1994. Vice president and portfolio manager from 1988 to
1994. Executive vice president - assured assets of IDS Life
Insurance Company since 1994.
*"Interested Person" of IDSC as that term is defined in Investment
Company Act of 1940.
Executive officers
Stuart A. Sedlacek
Born in 1957. President since 1994.
Morris Goodwin Jr.
Born in 1951. Vice president and treasurer since 1989.
Vice president and corporate treasurer of AEFC since 1989. Chief
financial officer and treasurer of American Express Trust Company
from 1988 to 1989.
Timothy S. Meehan
Born in 1957. Secretary since 1995.
Secretary of AEFC and American Express Financial Advisors Inc.
since 1995. Senior counsel to AEFC since 1995. Counsel from 1990
to 1995.
Lorraine R. Hart
Born in 1951. Vice president-investments since 1994.
Vice president - insurance investments of AEFC since 1989. Vice
president, investments of IDS Life Insurance Company since 1992.<PAGE>
PAGE 36
Jay C. Hatlestad
Born in 1957. Vice president and controller of IDSC since 1994.
Manager of investment accounting of IDS Life Insurance Company from
1986 to 1994.
Bruce A. Kohn
Born in 1951. Vice president and general counsel since 1993.
Counsel to AEFC since 1992. Associate counsel from 1987 to 1992.
F. Dale Simmons
Born in 1937. Vice president - Real Estate Loan Management since
1993.
Vice president of AEFC since 1992. Senior portfolio manager of
AEFC 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.
IDSC 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 owner upon request.
Ernst & Young LLP, Minneapolis, has audited the financial
statements for each of the years in the three-year period ended
Dec. 31, 1995. These statements are included in this prospectus.
Ernst & Young LLP is also the auditor for American Express Company,
the parent company of AEFC and IDSC.
<PAGE>
PAGE 37
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, 1995 1994 1993 1992 1991
($ thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Investment income $256,913 $207,975 $236,859 $294,799 $351,970
Investment expenses 62,817 58,690 65,404 69,630 63,353
Net investment income before provision for
certificate reserves and income tax benefit 194,096 149,285 171,455 225,169 288,617
Net provision for certificate reserves 176,407 107,288 123,516 178,175 258,443
Net investment income before income taxes 17,689 41,997 47,939 46,994 30,174
Income tax benefit 9,097 2,663 3,365 11,666 20,537
Net investment income 26,786 44,660 51,304 58,660 50,711
Realized gain (loss) on investments - net:
Securities of unaffiliated issuers 452 (7,514) (9,870) (9,498) (129)
Other - unaffiliated (120) 1,638 (418) (500) (1,053)
Total gain (loss) on investments 332 (5,876) (10,288) (9,998) (1,182)
Income tax benefit (expense) (117) 2,047 4,617 - 402
Net realized gain (loss) on investments 215 (3,829) (5,671) (9,998) (780)
Net income - wholly owned subsidiary 373 241 120 3 139
Net income $27,374 $41,072 $45,753 $48,665 $50,070
Dividends declared:
Cash $- $40,200 $64,500 $83,750 $74,800
In-kind(a) - - - 64,558 25,466
Balance Sheet Data:
Total assets $3,912,131 $3,040,857 $2,951,405 $3,444,985 $3,971,583
Certificate loans 51,147 58,203 67,429 77,347 88,570
Certificate reserves 3,628,574 2,887,405 2,777,451 3,256,472 3,712,570
Stockholder's equity 250,307 141,852 161,138 179,885 223,820
IDS Certificate Company (IDSC) is 100% owned by American Express Financial Corporation (Parent).
(a) Consisted of an investment security at amortized cost in 1992 and a reduction in the note receivable from
Parent in 1991.
/TABLE
<PAGE>
PAGE 38
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
rates of return on investments and the 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 1992 and 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 1992 and 1993
primarily reflected lower accrual rates declared by IDSC in those
years, which in turn, reflected lower interest rates available in
the marketplace.
During the years 1994 and 1995, 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 and the first six months of 1995, reflecting rising interest
rates in the marketplace. The increase in total assets in 1995
reflects also an increase of $81 million in net unrealized
appreciation on investment securities classified as available for
sale. 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.
1995 Compared to 1994:
Gross investment income increased 24% due primarily to a higher
average balance of invested assets and slightly higher investment
yields.
The 7.1% increase in investment expenses resulted primarily from
higher distribution fees due to higher sales of certificates that
provide for no deferral of those fees, and higher investment
advisory and services fee due to a higher asset base on which the
fee is calculated. These increases were partially offset by lower
amortization of the cost of options and interest rate caps. The
lower amortization of interest rate caps reflects the net of $1.7
million of accelerated amortization and $5.6 million higher
interest earned under the cap agreements.
Net provision for certificate reserves increased 65% reflecting a
higher average balance of certificate reserves and higher accrual
rates.
<PAGE>
PAGE 39
The increase in income tax benefit resulted primarily from a
greater portion of net investment income before income tax benefit
being attributable to tax-advantaged income.
1994 Compared to 1993:
Gross investment income decreased 12% due primarily to a lower
average balance of invested assets and slightly lower investment
yields.
The 10% decrease in investment expenses resulted primarily from
lower amortization of the cost of interest rate caps and $2.3
million of interest earned under the 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.
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 its Parent.
Certificate sales volume increased 38% in 1995, reflecting higher
accrual rates and clients' ongoing desire for safety of principal.
Sales of certificates totaled $1.5 billion compared to $1.1
billion in 1994 and $.6 billion during 1993. Certificate sales in
1995 benefitted also from a special introductory promotion of
IDSC's 11-month term Flexible Savings certificate.
The special promotion of the 11-month term Flexible Savings
certificate was offered from May 10, 1995 to July 3, 1995, and
applied only to sales of new certificate accounts during the
promotion period. Certificates sold during the promotion period
received a special interest rate of 7.0% for the 11-month term and
totaled $562 million.
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 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
intermediate-term bonds.
<PAGE>
PAGE 40
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 No.
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 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, 1995, securities classified as held to maturity and
carried at amortized cost were $1.0 billion. Securities
classified as available for sale and carried at fair value were
$2.4 billion. These securities, which comprise 90% of IDSC's total
invested assets, are well diversified. Of these securities, 97%
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.
During the year ended Dec. 31, 1995, investment securities,
primarily municipal bonds, with an amortized cost and fair value of
$112 million and $117 million, respectively, were reclassified from
held to maturity to available for sale. The reclassification was
made on Dec. 4, 1995, as a result of IDSC adopting the FASB Special
Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities". There were
no other transfers of securities during the years 1995 and 1994.
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 instruments derive their values. 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
instruments are inverse to the effects of the underlying
transactions. See note 9 to financial statements for additional
information regarding derivative financial instruments.
<PAGE>
PAGE 41
Capital contributions:
To maintain its regulatory capital requirements, IDSC received a
capital contribution from its Parent of $28.5 million in 1995.
Ratios:
The ratio of stockholder's equity, excluding net unrealized holding
gains and losses on investment securities, to total assets less
certificate loans and net unrealized holding gains and losses on
investment securities at Dec. 31, 1995 was 5.79% compared to 5.49%
in 1994. IDSC intends to manage this ratio to 5.0% in 1996, which
meets current regulatory requirements.
<PAGE>
PAGE 42
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, as of December 31, 1995 and 1994, and the related
statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1995.
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, 1995 and 1994 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, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, 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 8, 1996
<PAGE>
PAGE 43
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, a Code of Conduct, 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 44
Balance Sheets, Dec. 31,
<TABLE><CAPTION>
Assets
Qualified Assets (note 2) 1995 1994
($ thousands)
<S> <C> <C>
Investments in unaffiliated issuers (notes 3, 4 and 10):
Cash and cash equivalents $56,873 $140,128
Held-to-maturity securities 1,002,905 1,245,793
Available-for-sale securities 2,408,491 1,226,674
First mortgage loans on real estate 233,394 253,968
Certificate loans - secured by certificate reserves 51,147 58,203
Investments in and advances to affiliates 5,655 5,399
Total investments 3,758,465 2,930,165
Receivables:
Dividends and interest 49,632 42,261
Investment securities sold 42,872 7,269
Total receivables 92,504 49,530
Other (notes 9 and 10) 32,778 25,094
Total qualified assets 3,883,747 3,004,789
Other Assets
Deferred distribution fees 28,286 27,142
Deferred federal income taxes (note 8) - 8,372
Other 98 554
Total other assets 28,384 36,068
Total assets $3,912,131 $3,040,857
See notes to financial statements. <PAGE>
PAGE 45
Balance Sheets, Dec. 31,
Liabilities and Stockholder's Equity
Liabilities 1995 1994
($ thousands)
Certificate Reserves (notes 5 and 10):
Installment certificates:
Reserves to mature $330,415 $335,712
Additional credits and accrued interest 21,555 19,698
Advance payments and accrued interest 1,394 1,634
Other 55 56
Fully paid certificates:
Reserves to mature 3,127,301 2,389,198
Additional credits and accrued interest 147,468 140,766
Due to unlocated certificate holders 386 341
Total certificate reserves 3,628,574 2,887,405
Accounts Payable and Accrued Liabilities:
Due to Parent (note 7A) 1,541 1,186
Due to Parent for federal income taxes 103 -
Due to affiliates (note 7B and 7C) 2,068 2,883
Payable for investment securities purchased - 1,362
Accounts payable, accrued expenses and other (notes 9 and 10) 12,249 6,169
Total accounts payable and accrued liabilities 15,961 11,600
Deferred federal income taxes (note 8) 17,289 -
Total liabilities 3,661,824 2,899,005
Stockholder's Equity (notes 5B, 5C, and 6):
Common stock, $10 par - authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 168,844 140,344
Retained earnings:
Appropriated for predeclared additional credits/interest 18,878 18,398
Appropriated for additional interest on advance payments 50 50
Unappropriated 31,612 4,718
Unrealized holding gains (losses) on investment
securities - net (note 3A) 29,423 (23,158)
Total stockholder's equity 250,307 141,852
Total liabilities and stockholder's equity $3,912,131 $3,040,857
See notes to financial statements.
/TABLE
<PAGE>
PAGE 46
<TABLE><CAPTION>
Statements of Operations
Year ended Dec. 31, 1995 1994 1993
($ thousands)
<S> <C> <C> <C>
Investment Income:
Interest income from investments:
Bonds and notes:
Unaffiliated issuers $181,902 $125,546 $140,991
Mortgage loans on real estate:
Unaffiliated 22,171 24,006 24,071
Affiliated 56 68 78
Certificate loans 2,963 3,342 3,882
Dividends 48,614 54,170 67,115
Other 1,207 843 722
Total investment income 256,913 207,975 236,859
Investment Expenses:
Parent and affiliated company fees (note 7):
Distribution 33,977 27,007 28,477
Investment advisory and services 16,472 13,565 15,036
Depositary 242 183 201
Options (note 9) 8,038 9,854 9,419
Interest rate caps (note 9) 3,725 7,608 11,667
Other 363 473 604
Total investment expenses 62,817 58,690 65,404
Net investment income before provision
for certificate reserves and income tax benefit $194,096 $149,285 $171,455
See notes to financial statements.
<PAGE>
PAGE 47
Statements of Operations (continued)
Year ended Dec. 31, 1995 1994 1993
($ thousands)
Provision for Certificate Reserves (notes 5 and 9):
According to the terms of the certificates:
Provision for certificate reserves $11,009 $13,317 $20,555
Interest on additional credits 2,300 3,174 3,605
Interest on advance payments 73 61 90
Additional credits/interest authorized by IDSC:
On fully paid certificates 157,857 85,101 93,546
On installment certificates 6,288 6,741 6,704
Total provision before reserve recoveries 177,527 108,394 124,500
Reserve recoveries from terminations
prior to maturity (1,120) (1,106) (984)
Net provision for certificate reserves 176,407 107,288 123,516
Net investment income before income tax benefit 17,689 41,997 47,939
Income tax benefit (note 8) 9,097 2,663 3,365
Net investment income 26,786 44,660 51,304
Realized gain (loss) on investments - net:
Securities of unaffiliated issuers 452 (7,514) (9,870)
Other-unaffiliated (120) 1,638 (418)
Total gain (loss) on investments 332 (5,876) (10,288)
Income tax benefit (expense) (note 8):
Current 160 2,414 19,508
Deferred (277) (367) (14,891)
Total income tax benefit (expense) (117) 2,047 4,617
Net realized gain (loss) on investments 215 (3,829) (5,671)
Net income - wholly owned subsidiary 373 241 120
Net income $27,374 $41,072 $45,753
See notes to financial statements.
<PAGE>
PAGE 48
Statements of Stockholder's Equity
Year ended Dec. 31, 1995 1994 1993
($ 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 $140,344 $147,144 $166,144
Contribution from Parent 28,500 3,000 -
Cash dividends declared - (9,800) (19,000)
Balance at end of year $168,844 $140,344 $147,144
Retained Earnings:
Appropriated for predeclared additional credits/interest (note 5B):
Balance at beginning of year $18,398 $2,726 $2,804
Transferred from (to) unappropriated retained earnings 480 15,672 (78)
Balance at end of year $18,878 $18,398 $2,726
Appropriated for additional interest on advance payments (note 5C):
Balance at beginning of year $50 $25 $100
Transferred from (to) unappropriated retained earnings - 25 (75)
Balance at end of year $50 $50 $25
Unappropriated (note 6):
Balance at beginning of year $4,718 $9,743 $9,337
Net income 27,374 41,072 45,753
Transferred (to) from appropriated retained earnings (480) (15,697) 153
Cash dividends declared - (30,400) (45,500)
Balance at end of year $31,612 $4,718 $9,743
Unrealized holding gains and losses on investment securities -
net (notes 1 and 3A):
Balance at beginning of year ($23,158) $- $-
Adjustment due to initial application of SFAS 115 - 8,827 -
Change during year 52,581 (31,985) -
Balance at end of year $29,423 ($23,158) $-
Total stockholder's equity $250,307 $141,852 $161,138
See notes to financial statements.
<PAGE>
PAGE 49
Statements of Cash Flows
Year ended Dec. 31, 1995 1994 1993
($ thousands)
Cash flows from operating activities:
Net income $27,374 $41,072 $45,753
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of wholly owned subsidiary (373) (241) (120)
Certificate reserves 176,407 107,288 123,516
Interest income added to certificate loans (1,902) (2,133) (2,454)
Amortization of premium/discount-net 19,232 22,114 27,494
Deferred federal income taxes (2,652) 4,263 11,446
Deferred distribution fees (1,144) (7,527) 1,935
Net (gain) loss on investments (332) 5,876 10,288
(Increase) decrease in dividends and interest receivable (7,371) (1,829) 10,009
(Increase) decrease in other assets 466 (466) 967
Increase (decrease) in other liabilities (1,549) (3,210) 4,979
Net cash provided by operating activities 208,156 165,207 233,813
Cash flows from investing activities:
Maturity and redemption of investments:
Held-to-maturity securities 315,766 350,411 641,778
Available-for-sale securities 325,521 173,547 -
Other investments 46,004 35,130 21,373
Sale of investments:
Held-to-maturity securities 22,305 3,164 329,942
Available-for-sale securities 48,372 267,808 -
Other investments 21 - 5,454
Certificate loan payments 6,061 7,508 8,991
Purchase of investments:
Held-to-maturity securities (208,140) (46,080) (498,841)
Available-for-sale securities (1,397,983) (830,826) -
Other investments (17,234) (9,208) (78,816)
Certificate loan fundings (7,776) (7,603) (10,275)
Investment in subsidiary - (450) (2,000)
Net cash (used in) provided by investing activities ($867,083) ($56,599) $417,606
See notes to financial statements.
<PAGE>
PAGE 50
Statements of Cash Flows (continued)
Year ended Dec. 31, 1995 1994 1993
($ thousands)
Cash flows from financing activities:
Reserve payments by certificate holders $1,577,884 $1,185,762 $709,684
Proceeds from securities loaned to brokers - - 6,150
Proceeds from reverse repurchase agreements - - 72,800
Capital contribution from Parent 28,500 3,000 -
Certificate maturities and cash surrenders (1,030,712) (1,171,101) (1,312,260)
Payments to brokers upon return of securities loaned - - (7,793)
Payments under reverse repurchase agreements - - (72,800)
Dividends paid - (40,200) (64,500)
Net cash provided by (used in) financing activities 575,672 (22,539) (668,719)
Net increase (decrease) in cash and cash equivalents (83,255) 86,069 (17,300)
Cash and cash equivalents beginning of year 140,128 54,059 71,359
Cash and cash equivalents end of year $56,873 $140,128 $54,059
Supplemental disclosures including non-cash transactions:
Cash received for income taxes $6,854 $2,416 $26,606
Certificate maturities and surrenders through loan
reductions 10,673 11,454 13,656
</TABLE>
See notes to financial statements.
<PAGE>
PAGE 51
Notes to Financial Statements ($ in thousands unless indicated
otherwise)
1. Nature of business and summary of significant accounting
policies
Nature of business
IDS Certificate Company (IDSC) is a wholly owned subsidiary of
American Express Financial Corporation (Parent), which is a wholly
owned subsidiary of American Express Company. IDSC is registered
as an investment company under the Investment Company Act of 1940
("the 1940 Act") and is in the business of issuing face-amount
investment certificates. The certificates issued by IDSC are not
insured by any government agency. IDSC's certificates are sold
primarily by American Express Financial Advisors Inc.'s (an
affiliate) field force operating in 50 states, the District of
Columbia and Puerto Rico. IDSC's Parent acts as investment advisor
for IDSC.
IDSC currently offers eight types of certificates with specified
maturities ranging from four to twenty years. Within their
specified maturity, most certificates have interest rate terms of
one to thirty-six months. In addition, one type of certificate has
interest tied, in whole or in part, to any upward movement in a
broad-based stock market index. Except for two types of
certificates, all of the certificates are available as qualified
investments for Individual Retirement Accounts or 401(k) plans and
other qualified retirement plans.
IDSC's gross income is derived primarily from interest and
dividends generated by its investments. IDSC's net income is
determined by deducting from such gross income its provision for
certificate reserves, and other expenses, including taxes, the fee
paid to Parent for investment advisory and other services, and the
distribution fees paid to American Express Financial Advisors Inc.
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. 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.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities and the reported amounts of income and expenses during
the year then ended. Actual results could differ from those
estimates.
<PAGE>
PAGE 52
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.
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
losses on securities classified as available for sale are carried,
net of deferred income taxes, as a separate component of
stockholder's equity.
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.
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 <PAGE>
PAGE 53
to certificate reserves. The payment distribution, reserve
accumulation rates, cash surrender values, reserve values and other
matters are governed by 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
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 $3,619,188 and
$2,895,226 at Dec. 31, 1995 and 1994, respectively. IDSC had
qualified assets of $3,838,482 at Dec. 31, 1995 and $3,040,416 at
Dec. 31, 1994, excluding net unrealized appreciation on
available-for-sale securities of $45,265 at Dec. 31, 1995 and net
unrealized depreciation of $35,627 at Dec. 31, 1994.
Qualified assets are valued in accordance with such provisions of
Minnesota Statutes as are applicable to investments of life
insurance companies. Qualified assets for which no provision for
valuation is made in such statutes 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:
<PAGE>
PAGE 54
<TABLE><CAPTION>
Dec. 31, 1995
Required
Deposits deposits Excess
<S> <C> <C> <C>
Deposits to meet certificate
liability requirements:
States $414 $384 $30
Central Depositary 3,678,295 3,548,334 129,961
Total $3,678,709 $3,548,718 $129,991
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
</TABLE>
The assets on deposit at Dec. 31, 1995 and 1994 consisted of
securities having a deposit value of $3,435,074 and $2,659,676,
respectively; mortgage loans of $229,554 and $252,263,
respectively; and other assets of $14,081 and $28,016,
respectively. Mortgage loans on deposit include an affiliated
mortgage loan.
American Express Trust Company is the central depositary for IDSC.
See note 7C.
3. Investments in securities
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, 1995 and Dec. 31, 1994.
<PAGE>
PAGE 55
<TABLE><CAPTION>
Dec. 31, 1995
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government and agencies obligations $415 $427 $12 $-
Mortgage-backed securities 54,477 55,708 1,234 3
Corporate debt securities 333,861 348,860 15,029 30
Stated maturity preferred stock 614,152 643,436 30,072 788
$1,002,905 $1,048,431 $46,347 $821
AVAILABLE FOR SALE
Mortgage-backed securities $1,321,051 $1,340,956 $21,349 $1,444
State and municipal obligations 101,399 105,680 4,281 -
Corporate debt securities 918,792 939,878 22,638 1,552
Stated maturity preferred stock 21,229 21,365 192 56
Common stock 755 612 - 143
$2,363,226 $2,408,491 $48,460 $3,195
Dec. 31, 1994
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
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
</TABLE>
The amortized cost and fair value of securities held to maturity
and available for sale, by contractual maturity, at Dec. 31, 1995,
are shown below. Cash flows will differ from contractual
maturities because issuers may have the right to call or prepay
obligations.
<TABLE><CAPTION>
Amortized Fair
cost value
<S> <C> <C>
HELD TO MATURITY
Due within 1 year $94,577 $95,440
Due after 1 through 5 years 388,529 407,994
Due after 5 years through 10 years 269,579 283,685
Due after 10 years 195,743 205,604
948,428 992,723
Mortgage-backed securities 54,477 55,708
$1,002,905 $1,048,431
AVAILABLE FOR SALE
Due within 1 year $146,731 $148,072
Due after 1 through 5 years 746,470 765,480
Due after 5 years through 10 years 38,433 41,945
Due after 10 years 109,786 111,426
1,041,420 1,066,923
Mortgage-backed securities 1,321,051 1,340,956
Common stock 755 612
$2,363,226 $2,408,491
/TABLE
<PAGE>
PAGE 56
During the years ended Dec. 31, 1995 and 1994, there were no
securities classified as trading securities.
The proceeds from sales of available-for-sale securities and the
gross realized gains and gross realized losses on those sales
during the years ended Dec. 31, 1995 and 1994, were as follows:
<TABLE><CAPTION>
1995 1994
<S> <C> <C>
Proceeds $83,970 $265,008
Gross realized gains 36 363
Gross realized losses 1,854 10,140
</TABLE>
Sales of held-to-maturity securities, due to significant credit
deterioration, during the years ended Dec. 31, 1995 and 1994, were
as follows:
<TABLE><CAPTION>
1995 1994
<S> <C> <C>
Amortized cost $22,782 $3,158
Gross realized gains 2 5
Gross realized losses 479 -
</TABLE>
During the year ended Dec. 31, 1995, securities with an amortized
cost and fair value of $111,967 and $116,882, respectively, were
reclassified from held to maturity to available for sale. The
reclassification was made on Dec. 4, 1995, as a result of IDSC
adopting the FASB Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities."
B) Investments in securities with fixed maturities comprised 90%
and 84% of IDSC's total invested assets at Dec. 31, 1995 and 1994,
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:
<TABLE><CAPTION>
Rating 1995 1994
<S> <C> <C>
Aaa/AAA 44% 36%
Aa/AA 2 5
Aa/A 2 3
A/A 23 25
A/BBB 6 3
Baa/BBB 20 24
Below investment grade 3 4
100% 100%
</TABLE>
Of the securities rated Aaa/AAA, 92% at Dec. 31, 1995 and 88% at
Dec. 31, 1994 are U.S. Government Agency mortgage-backed securities
that are not rated by a public rating agency. Approximately 11% at
Dec. 31, 1995 and 17% at Dec. 31, 1994 of other securities with
fixed maturities are rated by Parent's internal analysts. At Dec. <PAGE>
PAGE 57
31, 1995 and 1994 no one issuer, other than U.S. Government Agency
mortgage-backed securities, is greater than 1% of IDSC's total
investment in securities with fixed maturities.
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.
4. Investments in first mortgage loans on real estate
As of Jan. 1, 1995, IDSC adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" (SFAS No. 114), as amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" (SFAS
No. 118). The adoption of the new rules did not have a material
impact on IDSC's results of operations or financial condition.
SFAS No. 114 applies to all loans except for smaller-balance
homogeneous loans that are collectively evaluated for impairment.
Impairment is measured as the excess of the loan's recorded
investment over its present value of expected principal and
interest payments discounted at the loan's effective interest rate,
or the fair value of collateral. The amount of the impairment is
recorded in a reserve for loss on mortgage loans.
Based on management's judgment as to the ultimate collectibility of
principal, interest payments received are either recognized as
income or applied to the recorded investment in the loan until it
has been recovered.
The reserve for loss on mortgage loans is maintained at a level
that management believes is appropriate to absorb estimated credit
losses in the mortgage loan portfolio. The level of the reserve
account is determined based on several factors, including
historical experience, expected future principal and interest
payments, estimated collateral values, and current and anticipated
economic and political conditions. Management regularly evaluates
the adequacy of the reserve for loss on mortgage loans.
At Dec. 31, 1995, IDSC's recorded investment in impaired mortgage
loans was $1,004 and the reserve for loss on that amount was $611.
<PAGE>
PAGE 58
During 1995, the average recorded investment in impaired mortgage
loans was $1,052.
IDSC recognized $53 of interest income related to impaired mortgage
loans for the year ended Dec. 31, 1995.
There were no changes in the reserve for loss on mortgage loans of
$611 during the year ended Dec. 31, 1995.
At Dec. 31, 1995 and 1994, approximately 6% and 9%, 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:
<TABLE><CAPTION>
Region 1995 1994
<S> <C> <C>
East North Central 22% 25%
South Atlantic 22 24
West North Central 19 18
Middle Atlantic 17 16
Mountain 9 6
West South Central 5 5
Pacific 3 3
New England 3 3
100% 100%
Property Type 1995 1994
Apartments 39% 41%
Retail/shopping centers 32 30
Industrial buildings 12 12
Office buildings 8 8
Retirement homes 1 1
Other 8 8
100% 100%
</TABLE>
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.
<TABLE><CAPTION>
Dec. 31, 1995 Dec. 31, 1994
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Commercial $234,005 $248,860 $254,531 $246,874
Residential - - 48 43
234,005 248,860 254,579 246,917
Reserve for losses (611) - (611) -
Net first mortgage loans on real estate $233,394 $248,860 $253,968 $246,917
</TABLE>
At Dec. 31, 1995 and 1994, 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.
<PAGE>
PAGE 59
5. 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, 1995 and 1994 were:
<TABLE><CAPTION>
1995
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 $40,232 3.50% 1.35%
Without guaranteed rates (A) 290,183 - 3.23
Additional credits and accrued interest 21,555 3.13 -
Advance payments and accrued interest (C) 1,394 3.13 1.72
Other 55 - -
Fully paid certificates:
Reserves to mature:
With guaranteed rates 210,365 3.24 1.85
Without guaranteed rates (A) and (D) 2,916,936 - 5.70
Additional credits and accrued interest 147,468 3.26 -
Due to unlocated certificate holders 386 - -
$3,628,574
1994
Average Average
Reserve gross additional
balance accumulation credit
at Dec. 31 rate rate
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 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
</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.
B) On certain series of single payment certificates, additional
interest is predeclared for periods greater than one year. At Dec.
31, 1995, $18,878 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 3.13%. IDSC has
increased the rate of accrual to 4.85% through April 30, 1997. 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.<PAGE>
PAGE 60
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, 1995 and 1994 was $211,093 and
$263,494, respectively.
E) The carrying amounts and fair values of certificate reserves
consisted of the following at Dec. 31, 1995 and 1994. 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 determined by a
discounted cash flow analysis using interest rates currently
offered for certificates with similar remaining terms, less any
applicable surrender charges.
<TABLE><CAPTION>
1995 1994
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Reserves with terms of one year or less $2,900,947 $2,899,542 $2,425,880 $2,415,970
Other 727,627 765,110 461,525 461,060
Total certificate reserves 3,628,574 3,664,652 2,887,405 2,877,030
Unapplied certificate transactions 1,545 1,545 2,671 2,671
Certificate loans and accrued interest (51,707) (51,707) (58,840) (58,840)
Total $3,578,412 $3,614,490 $2,831,236 $2,820,861
</TABLE>
6. Dividend restriction
Certain series of installment certificates outstanding provide that
cash dividends may be paid by IDSC only in calendar years for which
additional credits of at least one-half of 1% on such series of
certificates have been authorized by IDSC. This restriction has
been removed for 1996 and 1997 by action of IDSC on additional
credits in excess of this requirement.
7. Fees paid to Parent and affiliated companies ($ 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
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. (an affiliate) for distribution services
is:<PAGE>
PAGE 61
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
the 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.
C) The basis of computing depositary fees paid or payable to
American Express 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.<PAGE>
PAGE 62
D) 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:
1.25% of the reserves maintained for the certificates on an amount
from $100,000 to $249,000, 0.80% 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.
8. Income taxes
Income tax expense (benefit) as shown in the statement of
operations for the three years ended Dec. 31, consists of:
<TABLE><CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Federal:
Current ($6,285) ($8,743) ($19,777)
Deferred (2,652) 3,933 11,446
(8,937) (4,810) (8,331)
State (43) 100 349
($8,980) ($4,710) ($7,982)
</TABLE>
Income tax expense (benefit) differs from that computed by using
the U.S. Statutory rate of 35%. The principal causes of the
difference in each year are shown below:
<TABLE><CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Federal tax expense at U.S. statutory rate $6,307 $12,642 $13,178
Tax-exempt interest (3,339) (4,205) (4,929)
Dividend exclusion (12,166) (13,862) (17,326)
Change in statutory rates - - (406)
Other, net 261 615 1,152
Federal tax benefit ($8,937) ($4,810) ($8,331)
</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.
<TABLE><CAPTION>
1995 1994
Deferred tax assets:
<S> <C> <C>
Certificate reserves $10,312 $4,315
Investment unrealized losses - 12,470
Investments 348 1,390
Investment reserves 843 1,120
Purchased/written call options - 283
Total deferred tax assets $11,503 $19,578
<PAGE>
PAGE 63
1995 1994
Deferred tax liabilities:
Investment unrealized gains $15,843 $-
Deferred distribution fees 9,900 9,500
Dividends receivable 892 1,000
Return of capital dividends 305 508
Purchased/written call options 1,623 -
Other, net 229 198
Total deferred tax liabilities 28,792 11,206
Net deferred tax assets (liabilities) ($17,289) $8,372
</TABLE>
9. 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.
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 and are not
recorded on the balance sheet.
Credit exposure related to derivative financial instruments is
measured by the replacement cost of those contracts 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, 1995 and 1994.
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<TABLE><CAPTION>
1995
Notional Total
or contract Carrying Fair credit
amount value value exposure
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $970,000 $3,362 $2,128 $2,128
Purchased call options 152,406 27,138 24,161 24,161
Total $1,122,406 $30,500 $26,289 $26,289
Liabilities:
Written call options $157,951 $9,333 $10,394 $-
1994
Notional Total
or contract Carrying Fair credit
amount value value exposure
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 1996 to 1997. The options expire
in 1996.
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.
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 9%. The cost
of these caps of $3,362 at Dec. 31, 1995 is being amortized over
the terms of the agreements 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.
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PAGE 65
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, 1995
and 1994.
<TABLE><CAPTION>
1995
Face Average Index at
amount strike price Dec. 31,1995
<S> <C> <C> <C>
Purchased call options $152,406 539 616
Written call options 157,951 601 616
1994
Face Average Index at
amount strike price Dec. 31,1995
Purchased call options $191,496 460 459
Written call options 189,443 506 459
</TABLE>
10. 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. The carrying value of certain
financial instruments such as trade receivables and payables
approximates the fair value. Non-financial instruments, such as
deferred distribution fees, are excluded from required 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>
1995 1994
Carrying Fair Carrying Fair
value value value value
<S> <C> <C> <C> <C>
Financial assets
Cash equivalents (note 1) $68,943 $68,943 $152,912 $152,912
Investment securities (note 3) 3,411,396 3,456,922 2,472,467 2,479,083
First mortgage loans on real estate (note 4) 233,394 248,860 253,968 246,917
Derivative financial instruments (note 9) 30,500 26,289 22,716 33,613
Financial liabilities
Certificate reserves (note 5) 3,578,412 3,614,490 2,831,236 2,820,861
Derivative financial instruments (note 9) 9,333 10,394 2,070 1,779
</TABLE>
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PAGE 66
(back cover)
Quick telephone reference
American Express Financial Services Direct Service Team
Withdrawals, transfers, inquiries
National: 800-AXP-SERV
Financial Consultant
800-AXP-8800
TTY Service
For the hearing impaired
800-710-5260
Distributed by American Express Financial Services Direct
IDS Stock Market Certificate
IDS Tower 10
Minneapolis, MN 55440-0010
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Quick telephone reference
American Express Financial Services Direct Service Team
Withdrawals, transfers, inquiries
National: 800-AXP-SERV
Financial Consultant
800-AXP-8800
TTY Service
For the hearing impaired
800-710-5260
IDS Stock Market Certificate
IDS Tower 10
Minneapolis, MN 55440-0010
American Express Financial Services Direct
