<PAGE>
I represent that this English language IDS Stock Market Certificate
prospectus represents a fair and accurate translation of a Spanish
language IDS Stock Market Certificate prospectus.
Bruce A. Kohn
Vice President and General Counsel
IDS Certificate Company
<PAGE>
April 29, 1998
American Express Stock Market Certificate
Potential for stock market growth with safety of principal.
Distributor: American Express Financial Advisors Logo
<PAGE>
To our certificate owners
Earn interest tied to stock market growth and maintain safety of principal with
...
The American Express 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 the 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, valued at amortized cost. In fact, at December 31,
1997 the carrying value of our investments exceeded the required carrying value
of our outstanding certificates by more than $176 million.
Choose how your money works for you
At the time you purchase an American Express 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.
(This brochure is not part of the prospectus.)
<PAGE>
Current rates on _______, 199_.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Client may select one of the Minimum S&P 500 participation Max. ann.
following: rate return
1) Full participation 0% 100% 10%
2) Partial participation __% 25% 10%
Interim interest rate: __%
</TABLE>
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 a minimum
interest rate, plus safety of principal. Your maximum return over each 12-month
term will be limited to a specific percentage as described in the prospectus.
After your first term, you may choose to earn a fixed rate with no stock market
participation. And you can change from your fixed interest selection to again
participate in the movement of the S&P 500 Index.
(This brochure is not part of the prospectus.)
<PAGE>
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "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.
If an emergency arises, your money is available
You can withdraw from your certificate, in part or in full, at any time after
making your fixed interest selection, 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.)
<PAGE>
Form W-8
Certificate of Foreign Status
(Rev. November 1992)
Department of the Treasury
Internal Revenue Service
Please print or type
Name of Owner (See Specific instructions.)(if joint account, also give joint
owner's name) U.S. taxpayer identification number (if any) Permanent Address
(See Specific instructions)(include apt. or suite no.)
City, province or state, postal code and country
Current Mailing Address, if different from permanent address (Include apt. or
suite no., or P.O. box if mail is not delivered to street address.)
City, town, or post office, state, and ZIP code (if foreign address, enter city,
province or state, postal code and country.)
List account information here (Optional, see Specific Instructions.) Account
number(s) Account type
Notice of Change in Status. - To notify the payer, mortgage interest recipient,
broker or barter exchange that you no longer qualify for exemption,
check here.............................................................___
If you check this box, reporting will begin on the account(s) listed.
Please Sign Here
Certification. - (Check applicable box(es)). Under penalties of perjury, I
certify that:
For INTEREST PAYMENTS, I am not a U.S. citizen or resident (or I am filing for a
foreign corporation, partnership, estate, or trust); AND
For DIVIDENDS, I am not a U.S. citizen or resident (or I am filing for a foreign
corporation, partnership, estate, or trust).
For BROKER TRANSACTIONS or BARTER EXCHANGES, I am an exempt foreign person as
defined in the instructions below.
Signature Date
<PAGE>
American Express Stock Market Certificate
Prospectus
April 29, 1998
Potential for stock market growth with safety of principal.
American Express Stock Market Certificates are issued by IDS Certificate Company
(the Issuer or 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 the Issuer to invest more). As long as you stay within this
limit, you can make additional investments at the end of a term. Your principal
is guaranteed by the Issuer. You can participate in any increase of the stock
market based on the S&P 500 Index while protecting your principal. In addition,
you decide whether part of your return will be guaranteed by IDSC or whether all
of it will be tied to the market. You can keep your certificate for up to 14
terms.
AS IS THE CASE WITH OTHER INVESTMENT COMPANIES, THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus describes terms and conditions of your American Express 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 American Express Stock Market Certificate as
described in the prospectus, or to bind the Issuer by any statement not in it.
IDS CERTIFICATE COMPANY IS NOT A BANK OR FINANCIAL INSTITUTION, AND THE
SECURITIES IT OFFERS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR BACKED OR GUARANTEED
OR ENDORSED BY, ANY BANK OR FINANCIAL INSTITUTION, NOR ARE THEY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY.
Issuer:
IDS Certificate Company
Unit 557
IDS Tower 10
Minneapolis, MN 55440-0010
Distributor
American Express Financial Advisors Inc.
IDS Tower 10
Minneapolis, MN 55440-0010
Selling Agents:
American Express Bank International
American Express Tower
World Financial Center
New York, NY 10285-2300
Coutts & Co (USA) International
701 Brickell Avenue
23rd Floor
Miami, FL 33131
<PAGE>
Where to get information about the Issuer
The Issuer is subject to the reporting requirements of the Securities Exchange
Act of 1934. Reports and other information on the Issuer are filed with the
Securities and Exchange Commission (SEC) and are available on the SEC Internet
web site (http://www.sec.gov). Copies can be obtained from the Public Reference
Section of the SEC, 450 5th St., N.W., Room 1024, 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
500 West Madison St.
Suite 1400
Chicago, IL 60661
Pacific Regional Office
5670 Wilshire Blvd.
11th Floor
Los Angeles, CA 90036
Initial interest and participation rates
The Issuer guarantees return of your principal. The interest on your certificate
is linked to stock market performance as measured by the Standard & Poor's 500
Stock Index (S&P 500 Index) as explained under "About the certificate" below.
Here are the interest rates and market participation percentages in effect on
the date of this prospectus, April 29, 1998:
<PAGE>
Maximum Market participation Minimum
return percentage interest
- ------------------ ------------------------------ ------------------------------
10% 100% (full) None
- ------------------ ------------------------------ ------------------------------
10% 25% (partial) Currently 2.50%
- ------------------ ------------------------------ ------------------------------
These rates may or may not be in effect when you apply to purchase your
certificate. For your first term, if you choose the partial participation option
for your certificate, your minimum interest rate will be between 2.00% and
3.00%. Rates for later terms are set at the discretion of the Issuer and may
differ from the rates shown here.
<PAGE>
Contents
Table of contents
About the certificate p
Investment amounts p
Face amount and principal p
Certificate term p
Value at maturity p
Receiving cash before end of 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 p
Buying your certificate p
How to make investments at term end p
Full and partial withdrawals p
Other full and partial withdrawal policies p
Transfers to other accounts p
Two ways to request a withdrawal or transfer p
Two ways to receive payment when you withdraw funds p
Transfer of ownership p
For more information p
Taxes on your earnings p
Foreign investors p
Trusts p
How your money is used and protected p
Invested and guaranteed by the Issuer p
Regulated by government p
Backed by our investments p
Investment policies p
<PAGE>
How your money is managed p
Relationship between the Issuer and American
Express Financial Corporation p
Capital structure and certificates issued p
Investment management and services p
Distribution p
Selling Agreement with AEBI and Coutts p
About American Express Bank International and Coutts p
About American Express Service Corporation p
Transfer agent p
Employment of other American Express affiliates p
Directors and officers p
Independent auditors p
Appendix p
Annual financial information p
Summary of selected financial information p
Management's discussion and analysis of financial
condition and results of operations p
Report of independent auditors p
Financial statements p
Notes to financial statements p
<PAGE>
About the certificate
Investment amounts
You may purchase the American Express 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).
Face amount and principal
The face amount of your certificate is the amount of your initial investment.
Your principal is the value of your certificate at the beginning of each
subsequent term. Your principal is guaranteed by the Issuer. It consists of the
amount you actually invest plus interest 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
<PAGE>
are 12-month periods that begin on the Wednesday following the 14-day grace
period at the end of the prior 12-month term. You may begin your next term on
any Wednesday during the 14-day period by providing prior written instructions
to the Issuer. If you choose to receive fixed interest, subsequent terms will be
up to 12 months as described in "Fixed interest" under "Interest" below.
Value at maturity
Your certificate matures after 14 terms and you will receive a distribution for
its value. Participation terms are always 12 months. Fixed interest terms may be
less than 12 months if you convert to participation before the 12-month period.
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 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. Interest earned under both of these options has an upper limit
which is the maximum annual return explained below. After your first term, you
may choose full or partial participation or you may choose not to participate in
any market movement and receive a fixed rate of interest.
Full participation interest: With this option you participate 100% in any
percentage increase in the S&P 500 Index up to the maximum return. You earn
interest only if the value of the S&P 500 Index is higher on the last day of
your term than it was on the first day of your term. Thus, your return is linked
to stock market performance. The S&P 500 Index is frequently used to measure the
relative performance of the stock market. For a more detailed discussion of the
S&P 500 Index, see "About the S&P 500 Index."
Partial participation and minimum interest: This option allows you to
participate in a certain part (market participation rate) of any increase in the
S&P 500 Index together with a rate of interest guaranteed by IDSC in advance for
each term (minimum interest).
Your return is composed of two parts:
<PAGE>
1. A percentage of any increase in the S&P 500 Index, and
2. A rate of interest guaranteed by IDSC in advance for each term.
Together, they cannot exceed the maximum return.
If you choose the partial participation option for your first term, the minimum
interest paid on your certificate will be between 2.00% and 3.00%.
The market participation rate and the minimum interest rate on the date of this
prospectus are listed on the inside cover under "Initial interest and
participation rates."
Fixed interest: After your first term, this fixed interest option allows you to
stop participating in the market entirely for some period of time. A fixed
interest term is 12 months unless you choose to start a new participation term
before your 12 month term ends. 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 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.
<PAGE>
Interim interest rates for the time before your first term begins will be within
a range zero to 100 basis points (0% to 1%) above the average interest rate
published for 12-month certificates of deposit in the BANK RATE MONITOR Top 25
Market AverageTM (the BRM Average), North Palm Beach, FL 33408. If the BRM
Average is no longer publicly available or feasible to use, IDSC may use
another, similar index as a guide for setting rates.
The BANK RATE MONITOR is a weekly magazine published in North Palm Beach, FL
33408, by Advertising News Service Inc., an independent national news
organization that collects and disseminates information about bank products and
interest rates. Advertising News Service has no connection with the Issuer,
American Express Financial Corporation (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 the Client Service Organization
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, markets
participation percentage or minimum interest rate on your certificate may be
greater or less than those shown on the front of this prospectus. 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:
Your American Express Bank International (AEBI) relationship manager.
Your Coutts & Co (USA) International (Coutts) relationship officer.
<PAGE>
The Issuer's Client Service Organization at the telephone numbers listed on
the back cover.
Promotions and pricing flexibility
From time to time, the Issuer may sponsor or participate in promotions involving
one or more of the certificates and their respective terms. For example, we may
offer different rates to new clients, to existing clients, or to individuals who
purchase or use products or services offered by American Express Company, Coutts
& Co. (USA) International or their affiliates. These promotions will generally
be for a specified period of time. We also may offer different rates based on
your amount invested.
Historical Data on the S&P 500 Index
The following chart illustrates the month-end closing values of the index from
Dec. 31, 1983 through Feb. 28, 1998. The values of the S&P 500 Index are
reprinted with the permission of S&P.
<TABLE>
<CAPTION>
S&P 500 Index values -- December 1983 to February 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1000
900
800 Chart shows closing values of the S&P from above 100 in Dec.
1984 to near 800 in Feb. 1998.
700
600
500
400
300
200
100
`84 `85 `86 `87 `88 `89 `90 `91 `92 `93 `94 `95 `96 `97 `98
</TABLE>
<PAGE>
S&P 500 Index Average Annual Return
Beginning date Period held Average annual
Dec. 31, in Years return
- ------------------ ------------------------------ ------------------------------
1987 10 14.66%
- ------------------ ------------------------------ ------------------------------
1992 5 17.37
- ------------------ ------------------------------ ------------------------------
1996 1 31.01
- ------------------ ------------------------------ ------------------------------
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.
<TABLE>
<CAPTION>
S&P 500 Index - December 1984 to February 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50%
40% Chart shows 12-month Moving Price Return of the S&P from
a high of 40% to a low of -20%
30%
Label of "Y" axis reads: 12-month return
20%
10%
0%
- -10%
- -20%
`85 `86 `87 `88 `89 `90 `91 `92 `93 `94 `95 `96 `97 `98
</TABLE>
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
the 12-month price returns of the S&P 500 Index beginning with the 12-month
period ending Dec. 31, 1984. The graph also shows the number of times these
price returns fell within certain ranges.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 Index - December 1985 to February 1998
25 Chart shows the distribution of all of the 12-month price returns of
the S&P 500 from 1/1/84 through 2/28/97 with a high of just over
20 and a low between 0 and 5.
20
15 Label of "Y" axis reads: Observations
10
5
-15 -10 -5 0 5 10 15 20 25 29.9 >=30
</TABLE>
The last chart illustrates, on a moving weekly basis, the actual 12-month return
of the American Express Stock Market Certificate at full and partial
participation compared to the price return of the NYSE Composite Index(R)
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, American Express Stock Market Certificate participation
interest was based on the NYSE Composite Index(R) rather than the S&P 500 Index.
The chart reflects the returns payable each week by IDSC on any participation
terms ending that week. There may be weeks in which no investor actually ends a
participation term.
<TABLE>
<CAPTION>
Actual 12-month return 1/22/91 to 2/17/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40%
30% Chart shows actual returns of the certificate at full and 25%
participation with the full participation generally tracking the
market indexes over the 30% period and 25% level of participation
tracking at the 25% level of return.
20%
10%
0%
1/92 7/92 1/93 1/94 1/95 7/95 1/96 7/96 1/97 7/97 1/98
</TABLE>
Your interest earnings are tied to the movement of the Index. They will be based
on any increase in the Index as measured on the beginning and ending date of
each 12-month term. Of course, if the Index is not higher on the last day of
your term than it was on the first day, your principal will be secure but you
will earn no participation interest.
<PAGE>
The NYSE Composite Index(R) 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 American Express 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 owners
will receive interest on their accounts beyond any minimum interest or fixed
interest selected.
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 968
Term beginning value of S&P 500 Index 890
Maximum return 10%
Minimum return 2.50%
Partial participation rate 25%
968 Term ending value of S&P 500 Index
minus 890 Term beginning value of S&P 500 Index
---
equals 78 Difference between beginning and ending values
78 Difference between beginning and ending values
divided by 890 Term beginning value of S&P 500 Index
equals 8.76% Percent increase - full participation return
<PAGE>
8.76% Percent increase or decrease
times 25.00% Partial participation rate
equals 2.19%
plus 2.50% 3.00% minimum interest rate
equals 4.69% 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Partial participation
Start of Term Maximum annual return minimum rate
- ------------------------------- ------------------------------ ------------------------------
Jan. 24, 1990 18.00% 5.00%
- ------------------------------- ------------------------------ ------------------------------
Feb. 5, 1992 18.00 4.00
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
May 13, 1992 15.00 4.00
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
Sept. 9, 1992 12.00 3.00
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
Nov. 11, 1992 10.00 2.50
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
Nov. 2, 1994 10.00 2.75
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
April 26, 1995 12.00 3.75
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
Jan. 17, 1996 10.00 3.25
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
Feb. 26, 1997 10.00 3.00
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
May 7, 1997 10.00 2.75
- ------------------------------- ------------------------------ ------------------------------
- ------------------------------- ------------------------------ ------------------------------
Oct. 8, 1997 10.00 2.50
- ------------------------------- ------------------------------ ------------------------------
</TABLE>
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 2.50%, and the maximum total return for full and
partial participation is 10%.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1. If the S&P 500 Index value rises
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 425 8% increase in the S&P 500 Index Index 459
- --------------------------------------------------------------------------------------------------------------
Full participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 800 8% x $10,000 + 250 2.50% (Minimum interest rate) x $10,000
Participation interest + 200 25% x 8% x $10,000 Participation interest
- -------- --------
$10,800 Ending balance $10,450 Ending balance
(8% Total return) (4.50% 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 + 250 2.50% (Minimum interest rate) x $10,000
- --------
$10,000 Ending balance + 0 Participation interest
- - --------
(0% Total return) $10,250 Ending balance
(2.50% Total return)
3. If the Market and the S&P 500 Index value rise above the 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 + 250 2.50% (Minimum interest rate) x $10,000
Maximum interest + 400 25% x 16% x $10,000 Participation interest
- -------- --------
$11,000 Ending balance $10,650 Ending balance
(10% Total return) (6.50% Total return)
</TABLE>
About the S&P 500 Index
The description in this prospectus of the S&P 500 Index including its make-up,
method of calculation and changes in its components are derived from publicly
available information regarding the S&P 500 Index. The Issuer does not assume
any responsibility for the accuracy or completeness of such information.
<PAGE>
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 U.S. common stock
population. Changes in the S&P 500 Index are reported daily in the financial
pages of many major newspapers. The index used for American Express Stock Market
Certificate excludes dividends on the 500 stocks.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500" and
"500" are trademarks of The McGraw-Hill Companies Inc. and have been licensed
for use by the Issuer. The certificate is not sponsored, endorsed, sold or
promoted by S&P. S&P makes no representation or warranty, express or implied, to
the owners of the certificate or any member of the public regarding the
advisability of investing in securities generally or in the certificate
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the Issuer is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index, which is determined,
composed and calculated by S&P without regard to the Issuer or the certificate.
S&P has no obligation to take the needs of the Issuer or the owners of the
certificate into consideration in determining, composing or calculating the S&P
500 Index. S&P is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the certificate to
be issued or in the determination or calculation of the equation by which the
certificate is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the certificate.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to the results to be obtained by the Issuer, owners of the certificate, or
any person or entity from the use of the S&P 500 Index or any data included
therein. S&P makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein. Without limiting any
of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
If for any reason the S&P 500 Index were to become unavailable or not reasonably
feasible to use, we would use a comparable stock market index for determining
participation interest. If this were to occur, you would be sent a notice
indicating the comparable index that will be used and be given the option to
surrender your certificate, if desired, and receive your principal, without
being assessed a surrender charge.
<PAGE>
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:
change your interest selection;
add money to your certificate;
change your term start date;
withdraw part or all of your money without a withdrawal penalty or loss of
interest;
or
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 that is during the grace period and immediately
following the date on which we receive your notice. Your notice may also tell us
to change your interest selection, add to your certificate or withdraw part of
your money. The notification that we send you at the end of the term cannot be
sent before the term ends because indexing information and interest (if any) are
included in the notice and are not known until the term ends. 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 AEBI relationship manager or Coutts client relationship officer will help
you fill out and submit an application to open an account with us and purchase a
certificate. We will process the application at our corporate offices in
Minneapolis. When your application is accepted and we have received your initial
<PAGE>
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/or the 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 a Form W-8 or approved
substitute. See "Taxes on your earnings."
Purchase policies:
The Issuer has complete discretion to determine whether to accept an application
and sell a certificate.
How to make investments at term end
By wire
If you have an established account, you may wire money to:
Norwest Bank Minneapolis
Routing No. 091000019
Minneapolis, MN
Attn: Domestic Wire Dept.
Give these instructions: Credit IDS Account #00-29-882 for personal account #
(your account number) for (your name).
If this information is not included, the order may be rejected and all money
received less any costs IDSC incurs will be returned promptly.
Minimum amount you may wire: $1,000.
Wire orders can be accepted only on days when your bank, AEFC, IDSC and
Norwest Bank Minneapolis are open for business.
Purchases made by wire are accepted by AEFC only from banks located in the
United States.
<PAGE>
Wire purchases are completed when wired payment is received and we accept
the purchase.
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.
The Issuer, AEFC, its subsidiaries, AEBI, and Coutts are not responsible
for any delays that occur in wiring funds, including delays in processing by
the bank.
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:
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.
Full and partial withdrawals of principal during a term are subject to
penalties, described below.
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. We will also waive withdrawal penalties on
withdrawals for IRA certificate accounts for your required distributions.
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, if any, 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.
<PAGE>
Following are examples describing a $2,000 withdrawal during a term for
participation and fixed interest:
<TABLE>
<CAPTION>
<S> <C>
Participation interest:
Account balance $ 10,000.00
Interest (interest is credited at the end of the term) 0.00
Withdrawal of principal (2,000.00)
2% withdrawal penalty (40.00)
============
Balance after withdrawal $ 7,960.00
You will forfeit any accrued interest on the withdrawal amount.
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 principal withdrawn) (38.00)
============
Balance after withdrawal $ 8,062.00
</TABLE>
Other full and partial withdrawal policies:
If you request a partial or full withdrawal of a certificate recently
purchased or added to by a check or money order that is not guaranteed, we
will wait for your check to clear. Please expect a minimum of 10 days from
the date of your payment before the Issuer mails a check to you. A check may
be mailed earlier if the bank provides evidence that your check has cleared.
If your certificate is pledged as collateral, any withdrawal will be
delayed until we get approval from the secured party.
Any payments to you may be delayed under applicable rules, regulations or
orders of the SEC.
Transfers to other accounts
You may transfer part or all of your certificate to other IDS certificates
available through AEBI or Coutts.
<PAGE>
Two ways to request a withdrawal or transfer
1
By phone
Your AEBI relationship manager or Coutts client relationship officer will handle
this transaction for you. You may also call the Client Service Organization
between 8 a.m. and 6 p.m. Minneapolis time at the telephone numbers listed on
the back cover.
Maximum phone request: $50,000.
A telephone withdrawal request will not be allowed within 30 days of a
phoned-in address change.
We will honor any telephone requests believed to be authentic and will use
reasonable procedures to confirm that it is. This includes asking
identifying questions and tape recording telephone calls. If reasonable
procedures are followed, IDSC or AEFC will not be liable for any loss
resulting from fraudulent requests. We can decline the telephone request if
we do not have enough information to confirm the request is authentic.
You may request that telephone withdrawals not be authorized from your account
by writing the Client Service Organization.
2
By mail
Your AEBI relationship manager or Coutts client relationship officer will handle
this transaction for you. You may also send your name, account number and
request for a withdrawal or transfer to:
Regular mail:
American Express Financial Advisors Inc.
Client Service Organization
Unit 557
IDS Tower 10
Minneapolis, MN 55440-0010
<PAGE>
Express mail:
American Express Financial Advisors Inc.
Client Service Organization
Unit 557
733 Marquette Ave.
Minneapolis, MN 55440-0010
Written requests are required for:
Transactions over $50,000.
Transfers to another certificate with different ownership and marketed
through AEBI or Coutts (all current registered owners must sign the
request).
Two ways to receive payment when you withdraw funds
1
By regular or express mail
Mailed to address on record; please allow seven days for mailing
Payable to name(s) you requested
You will be charged a fee if you request express mail delivery. For a
partial withdrawal leaving a remaining balance of more than $1,000, the fee
will be deducted from the remaining balance. If the remaining balance is
less than $1,000, or if it is a full withdrawal, the fee is deducted from
proceeds of the withdrawal.
2
By wire
Minimum wire withdrawal: $1,000
Request that money be wired to your bank
Bank account must be in same ownership as the Issuer's account
<PAGE>
Pre-authorization required. Complete the bank wire authorization section in
the application or use a form supplied by your AEBI relationship manager or
Coutts client relationship officer. All registered owners must sign.
A service fee, if any, may be deducted from your balance (for partial
withdrawals) or from the proceeds of a full withdrawal.
Transfer of ownership
While this certificate is not a negotiable instrument, it may be transferred or
assigned on the Issuer's records if proper written notice is received by the
Issuer. Ownership may be assigned or transferred to individuals or an entity
who, for U.S. tax purposes, is considered to be neither a citizen nor resident
of the United States. You may also pledge the certificate to AEBI or another
American Express Company affiliate or to Coutts as collateral security. Your
AEBI or Coutts representative can help you transfer ownership.
For more information
For information on purchases, withdrawals, exchanges, transfers of ownership,
proper instructions and other service questions regarding your certificate,
please consult your AEBI relationship manager or Coutts client relationship
officer, or call the Issuer's toll free client service number listed on the back
cover.
Taxes on your earnings
Foreign investors
If you are not a citizen or resident of the United States, you must supply the
Issuer with Form W-8, Certificate of Foreign Status when you purchase your
certificate, and you must resupply it every three years. You must also supply
both a current mailing address and an address of foreign residency, if
different. The Issuer will not accept purchases of certificates by nonresident
aliens without an appropriately certified Form W-8 (or approved substitute).
Also, if you do not supply Form W-8 you will be subject to backup withholding on
interest payments and withdrawals.
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 contingent debt instrument
(CDI), part of the earned income may be treated as capital gain instead of
portfolio interest. Even though your interest income or capital gain is not
taxed by the U.S. government, it will be reported at year end to you and to the
U.S. government on a Form 1042S, Foreign Person's U.S. Source Income Subject to
Withholding. The United States participates in various tax treaties with foreign
countries, which provide for sharing of tax information.
<PAGE>
Estate tax: If you are a nonresident alien and you die while owning a
certificate, then, depending on the circumstances, the Issuer generally will not
act on instructions with regard to the certificate unless the Issuer first
receives, at a minimum, a statement from persons the Issuer believes are
knowledgeable about your estate. The statement must be in a form satisfactory to
the Issuer and must tell us that, on your date of death, your estate did not
include any property in the United States for U.S. estate tax purposes. 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 the
Issuer 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 certificate to satisfy estate taxes.
Important: The information in this prospectus is a brief and selective summary
of certain federal tax rules that apply to this certificate and is given on the
basis of current law and practice. Tax matters are highly individual and
complex. Investors should consult a qualified tax advisor regarding their own
position.
Trusts
If the investor is a trust, the policies and procedures described above will
apply with regard to each grantor who is a nonresident alien.
How your money is used and protected
Invested and guaranteed by the Issuer
The American Express Stock Market Certificate is issued and guaranteed by the
Issuer, 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
$4.0 billion and a net worth in excess of $239 million on Dec. 31, 1997.
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:
interest to certificate owners; and
various expenses, including taxes, fees to AEFC for advisory and other
services and distribution fees to American Express Financial Advisors Inc.
and American Express Service Corporation (AESC).
<PAGE>
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 withdrawals of bank CDs
often result 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 American Express 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, 1997, the
amortized cost of these investments exceeded the required carrying value of our
outstanding certificates by more than $176 million.
Backed by our investments
The Issuer's investments are varied and of high quality. This was the
composition of our portfolio as of Dec. 31, 1997:
Type of investment Net amount invested
Corporate and other bonds 43%
Government agency bonds 34
Preferred stocks 17
Mortgages 5
Municipal bonds 1
As of Dec. 31, 1997 about 91% of our securities portfolio (including bonds and
preferred stocks) is rated investment grade. For additional information
regarding securities ratings, please refer to Note 3B in the financial
statements.
<PAGE>
Most of our investments are on deposit with American Express 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, 1997 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 the Issuer use their best
judgment, subject to applicable law. The following policies currently govern our
investment decisions:
Debt securities-
Most of our investments are in debt securities as referenced in the table in
"Backed by our investments" under "How your money is used and protected."
The price of bonds generally falls as interest rates increase, and rises as
interest rates decrease. The price of a bond also fluctuates if its credit
rating is upgraded or downgraded. The price of bonds below investment grade may
react more to the ability of a company to pay interest and principal when due
than to changes in interest rates. They have greater price fluctuations, are
more likely to experience a default, and sometimes are referred to as junk
bonds. Reduced market liquidity for these bonds may occasionally make it more
difficult to value them. In valuing bonds, IDSC relies both on independent
rating agencies and the investment manager's credit analysis. Under normal
circumstances, at least 85% of the securities in IDSC's portfolio will be rated
investment grade, or in the opinion of IDSC's investment advisor will be the
equivalent of investment grade. Under normal circumstances, IDSC will not
purchase any security rated below B- by Moody's Investors Service, Inc. or
Standard & Poor's Corporation. Securities that are subsequently downgraded in
quality may continue to be held by IDSC and will be sold only when IDSC believes
it is advantageous to do so.
As of Dec. 31, 1997, IDSC held about 9% of its investment portfolio (including
bonds, preferred stocks, and mortgages) in investments rated below investment
grade.
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.
<PAGE>
Commodities -
We have not and do not intend to purchase or sell commodities or commodity
contracts except to the extent that transactions described in "Financial
transactions including hedges" in this section may be considered 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. We may pledge some of our assets as
security. We may occasionally use repurchase agreements as a way to borrow
money. Under these agreements, we sell debt securities to our lender, and
repurchase them at the sales price plus an agreed-upon interest rate within a
specified period of time.
Real estate -
We may invest in limited partnership interests in limited partnerships that
either directly, or indirectly through other limited partnerships, invest in
real estate. We may invest directly in real estate. We also invest in mortgage
loans. We expect that investments in real estate, either directly or through a
subsidiary of IDSC, will be less than five percent of IDSC's assets.
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. We
expect that outstanding securities loans will not exceed 10 percent of IDSC's
assets.
When-issued securities-
Some of our investments in debt securities are purchased on a when-issued or
similar 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.
<PAGE>
Financial transactions including hedges-
We buy or sell various types of options contracts for hedging purposes or as a
trading technique to facilitate securities purchases or sales. We may buy
interest rate caps for hedging purposes. These pay us a return if interest rates
rise above a specified level. If interest rates do not rise above a specified
level, the interest rate caps do not pay us a return. The Issuer may enter into
other financial transactions, including futures and other derivatives, for the
purpose of managing the interest rate exposures associated with the Issuer'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.
We do not use derivatives for speculative purposes.
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% 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.
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 the Issuer and American Express Financial Corporation
The Issuer was originally organized as Investors Syndicate of America, Inc., a
Minnesota corporation, on Oct. 15, 1940, and began business as an issuer of face
amount investment certificates on Jan. 1, 1941. The company became a Delaware
corporation on Dec. 31, 1977, and changed its name to IDS Certificate Company on
April 2, 1984.
Before the Issuer was created, AEFC (formerly known as IDS Financial
Corporation), our parent company, had issued similar certificates since 1894. As
of Jan. 1, 1995, IDS Financial Corporation changed its name to AEFC. The Issuer
and AEFC have never failed to meet their certificate payments.
<PAGE>
During its many years in operation, AEFC has become a leading manager of
investments in mortgages and securities. As of Dec. 31, 1997, AEFC managed
investments, including its own, of more than $173 billion. American Express
Financial Advisors Inc., a wholly owned subsidiary of AEFC, provides a broad
range of financial planning services for individuals and businesses through its
nationwide network of more than 175 offices and more than 8,500 financial
advisors. American Express Financial Advisors' financial planning services are
comprehensive, beginning with a detailed written analysis that's tailored to
your needs. Your analysis may address one or all of these six essential areas:
financial position, protection planning, investment planning, income tax
planning, retirement planning and estate planning.
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:
travel related services (including American Express(R) Card and Travelers
Cheque operations through American Express Travel Related Services Company,
Inc. and its subsidiaries); and
international banking services (through American Express Bank Ltd. and its
subsidiaries including American Express Bank International).
Capital structure and certificates issued
The Issuer has authorized, issued and has outstanding 150,000 shares of common
stock, par value of $10 per share. AEFC owns all of the outstanding shares.
As of the fiscal year ended Dec. 31, 1997, the Issuer had issued (in face
amount) $165,818,152 of installment certificates and $1,470,915,530 of single
payment certificates. As of Dec. 31, 1997, the Issuer had issued (in face
amount) $13,493,767,867 of installment certificates and $17,259,360,607 of
single payment certificates since its inception in 1941.
Investment management and services
Under an Investment Advisory and Services Agreement, AEFC acts as our investment
advisor and is responsible for:
providing investment research;
<PAGE>
making specific investment recommendations; and
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 the Issuer 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).
Effective Jan. 1, 1998, the fee on any amount over $1 billion will be 0.107%.
Advisory and services fee computation:
Included assets Percentage of total book value
First $250 million 0.750%
Next 250 million 0.650
Next 250 million 0.550
Next 250 million 0.500
Any amount over 1 billion 0.107
Included assets are all assets of the Issuer except mortgage loans, real estate,
and any other asset on which we pay an outside advisory or service fee.
Advisory and services fee for the past three years:
Percentage of
Year Total fees included assets
1997 $17,232,602 0.50%
1996 16,989,093 0.50
1995 16,472,458 0.50
Estimated advisory and services fees for 1998 are $9,361,000.
Other expenses payable by the Issuer: The Investment Advisory and Services
Agreement provides that we will pay:
costs incurred by us in connection with real estate and mortgages;
taxes;
<PAGE>
depository and custodian fees;
brokerage commissions;
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;
fees and expenses of our directors who are not officers or employees of
AEFC;
provision for certificate reserves (interest accrued on certificate owner
accounts);
and
expenses of customer settlements not attributable to sales function.
Distribution
Under a Distribution Agreement with American Express Financial Advisors Inc., we
pay for the distribution of this certificate by American Express Financial
Advisors Inc. as described below:
For certificates sold through American Express Financial Advisors Inc. or
through AEBI and Coutts & Co. (USA) International (Coutts) we pay distribution
fees as follows:
0.70% of the initial investment on the first day of the certificate's term;
and
0.70% of the certificate's reserve at the beginning of each subsequent
term, for certificates sold through American Express Financial Advisors Inc.
or through AEBI or Coutts.
Under a Distribution Agreement with AESC, for certificates sold through American
Express Financial Direct, we pay AESC the following:
1.00% of the initial investment on the first day of the certificate's term;
and
1.00% of the certificate's reserve at the beginning of each subsequent
term.
This fee is not assessed to your certificate account.
American Express Financial Direct is a channel for direct marketing of financial
services to American Express card members and others.
<PAGE>
Total distribution fees paid to American Express Financial Advisors Inc. for all
series of certificates amounted to $30,072,811 during the year ended Dec. 31,
1997. We expect to pay American Express Financial Advisors Inc. distribution
fees amounting to $27,916,000 during 1998.
See Note 1 to Financial statements regarding deferral of distribution fee
expense.
American Express Financial Advisors Inc. and AESC pay 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 the Issuer, 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:
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.
Coutts is paid a fee equal to 0.80% per term of the principal amount of
each certificate for which Coutts is the selling agent.
Coutts is compensated on certificates owned by its clients who are former
clients of AEBI. These clients must have continuously owned a certificate since
Nov. 10, 1994. Coutts is also compensated on additional investments and
exchanges made by such clients to other certificates only to the extent that a
client has the right to make additional investments or exchanges.
American Express Financial Advisors Inc. has entered into a consulting agreement
with AEBI under which AEBI provides consulting services related to any selling
agent agreements between American Express Financial Advisors Inc. and other Edge
Act corporations. For these services, American Express Financial Advisors Inc.
pays AEBI a fee for this certificate equal to 0.20% per term of the principal
amount of each certificate for which another Edge Act corporation is the selling
agent.
Such payments will be made quarterly in arrears.
These fees are not assessed to your certificate account.
<PAGE>
About AEBI and Coutts
AEBI is an Edge Act corporation organized under the provisions of Section 25(a)
of the Federal Reserve Act. It is a wholly owned subsidiary of American Express
Bank Ltd. (AEBL). As an Edge Act corporation, AEBI is subject to the provisions
of Section 25(a) of the Federal Reserve Act and Regulation K of the Board of
Governors of the Federal Reserve System (the Federal Reserve). It is supervised
and regulated by the Federal Reserve.
AEBI has an extensive international high net-worth client base that is serviced
by a marketing staff in New York and Florida. The banking and financial products
offered by AEBI include checking, money market and time deposits, credit
services, check collection services, foreign exchange, funds transfer,
investment advisory services and securities brokerage services. As of Dec. 31,
1997, AEBI had total assets of $608 million and total equity of $162 million.
Coutts is an Edge Act corporation organized under the provisions of Section
25(a) of the Federal Reserve Act. It is an indirect wholly owned subsidiary of
National Westminster Bank PLC. As an Edge Act corporation, Coutts is 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). It
is supervised and regulated by the Federal Reserve.
Although AEBI and Coutts are banking entities, the American Express Stock Market
Certificate is not a bank product, nor is it backed or guaranteed by AEBI or
Coutts, by AEBL, by NatWest PLC or by any other bank, nor is it guaranteed or
insured by the FDIC or any other federal agency. AEBI is registered where
necessary as a securities broker-dealer.
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.
Transfer agent
Under a Transfer Agency Agreement, American Express Client Service Corporation
(AECSC), a wholly-owned subsidiary of AEFC, maintains certificate owner accounts
and records. IDSC pays AECSC a monthly fee of one-twelfth of $10.353 per
certificate owner account for this service.
<PAGE>
Employment of other American Express affiliates
AEFC may employ an affiliate of American Express Company as executing broker for
our portfolio transactions only if:
we receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar services;
the affiliate charges us commissions consistent with those charged to
comparable unaffiliated customers for similar transactions; and
the affiliate's employment is consistent with the terms of the current
Investment Advisory and Services Agreement and federal securities laws.
Directors and officers
The Issuer's directors, chairman, president and controller are elected annually
for a term of one year. The other executive officers are appointed by the
president.
We paid a total of $38,000 during 1997 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 of AEFC 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.
<PAGE>
Edward Landes
Born in 1919. Director since 1984.
Development consultant. Director of IDS Life Insurance Company of New York.
Director of Endowment Development, YMCA of Metropolitan Minneapolis. Vice
president for Financial Development, YMCA of Metropolitan Minneapolis from 1985
through 1995. Former sales manager - Supplies Division and district manager -
Data Processing Division of IBM Corporation. Retired 1983.
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 1968. Retired 1988.
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.
Engineering, manufacturing and management consultant since 1978.
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 1993. 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.
<PAGE>
Executive officers
Stuart A. Sedlacek
Born in 1957. President since 1994.
Jeffrey S. Horton
Born in 1961. Vice president and treasurer since December 1997. Vice president
and corporate treasurer of AEFC since December 1997. Controller, American
Express Technologies - Financial Servies of AEFC from July 1997 to December
1997. Controller, Risk Management Products of AEFC from May 1994 to July 1997.
Director of finance and analysis, Corporate Treasury of AEFC from June 1990 to
May 1994.
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.
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. Senior counsel to
AEFC since 1996. Counsel to AEFC from 1992 to 1996. 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.
The Issuer has provisions in its bylaws relating to the indemnification of its
officers and directors against liability, as permitted by law. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, the registrant has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
<PAGE>
Independent 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, 1997. 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>
Appendix
Description of corporate bond ratings
Bond ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's rating
may change which could affect its price. Ratings by Moody's Investors Service,
Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by Standard & Poor's
Corporation are AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
Aaa/AAA - Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
Aa/AA - Judged to be high-grade although margins of protection for interest and
principal may not be quite as good as Aaa or AAA rated securities.
A - Considered upper-medium grade. Protection for interest and principal is
deemed adequate but may be susceptible to future impairment.
Baa/BBB - Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations may have
certain speculative characteristics.
Ba/BB - Considered to have speculative elements. The protection of interest and
principal payments may be very moderate.
B - Lack characteristics of more desirable investments. There may be small
assurance over any long period of time of the payment of interest and principal.
Caa/CCC - Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
Ca/CC - Represent obligations that are highly speculative. Such issues are often
in default or have other marked shortcomings.
C - Are obligations with a higher degree of speculation. These securities have
major risk exposures to default.
D - Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
Non-rated securities will be considered for investment. When assessing each
non-rated security, IDSC will consider the financial condition of the issuer or
the protection afforded by the terms of the security.
<PAGE>
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, 1997 1996 1995 1994 1993
($ thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Investment income $258,232 $251,481 $256,913 $207,975 $236,859
Investment expenses 70,137 62,851 62,817 58,690 65,404
Net investment income before provision for
certificate reserves and income tax benefit 188,095 188,630 194,096 149,285 171,455
Net provision for certificate reserves 165,136 171,968 176,407 107,288 123,516
Net investment income before income
tax benefit 22,959 16,662 17,689 41,997 47,939
Income tax benefit 3,682 6,537 9,097 2,663 3,365
Net investment income 26,641 23,199 26,786 44,660 51,304
Realized gain (loss) on investments - net:
Securities of unaffiliated issuers 980 (444) 452 (7,514) (9,870)
Other - unaffiliated - 101 (120) 1,638 (418)
Net realized gain (loss) on investments
before income taxes 980 (343) 332 (5,876) (10,288)
Income tax (expense) benefit (343) 120 (117) 2,047 4,617
Net realized gain (loss) on investments 637 (223) 215 (3,829) (5,671)
Net income - wholly owned subsidiary 328 1,251 373 241 120
Net income $27,606 $24,227 $27,374 $41,072 $45,753
Cash dividends declared $- $65,000 $- $40,200 $64,500
Balance Sheet Data:
Total assets $4,053,648 $3,563,234 $3,912,131 $3,040,857 $2,951,405
Certificate loans 37,098 43,509 51,147 58,203 67,429
Certificate reserves 3,724,978 3,283,191 3,628,574 2,887,405 2,777,451
Stockholder's equity 239,510 194,550 250,307 141,852 161,138
IDS Certificate Company (IDSC) is 100% owned by American Express Financial Corporation (Parent).
</TABLE>
<PAGE>
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 owner accounts and also, the mix of fully
taxable and tax-advantaged investments in the IDSC portfolio.
During the year 1997, total assets and certificate reserves increased due
to certificate sales exceeding certificate maturities and surrenders. The excess
of certificate sales over maturities and surrenders resulted primarily from a
special introductory offer of the 7- and 13-month term Flexible Savings
certificate. The increase in total assets in 1997 reflects also, an increase of
$27 million in net unrealized appreciation on investment securities classified
as available for sale.
During the year 1996, total assets and certificate reserves decreased due
primarily to certificate maturities and surrenders exceeding certificate sales.
The excess of certificate maturities and surrenders over certificate sales
resulted primarily from lower accrual rates declared by IDSC during the year.
The decrease in total assets in 1996 reflects also, a decrease in unrealized
appreciation on investment securities classified as available for sale of $23
million and cash dividends paid to Parent of $65 million. The decrease in total
assets in 1996 was tempered by an increase in payable for securities purchased
of $62 million that settled in early 1997.
1997 Compared to 1996:
Gross investment income increased 2.7% due primarily to a higher average
balance of invested assets.
Investment expenses increased 12% in 1997. The increase resulted primarily
from higher amortization of premiums paid for index options of $4.4 million,
higher distribution fees of $1.8 million and $3.2 million of interest expense on
reverse repurchase and interest rate swap agreements entered into in 1997. These
higher expenses were partially offset by $2.3 million lower amortization of
premiums paid for interest rate caps, corridors and floors due primarily to the
expiration of the cap and corridor agreements in 1996 and early 1997.
Net provision for certificate reserves decreased 4.0% due primarily to the
net of lower accrual rates and a higher average balance of certificate reserves
during 1997.
The decrease in income tax benefit resulted primarily from a lesser portion
of net investment income before income tax benefit being attributable to
tax-advantaged income.
<PAGE>
1996 Compared to 1995:
Gross investment income decreased 2.1% due primarily to lower investment yields.
Investment expenses increased slightly in 1996. The increase resulted
primarily from higher amortization of premiums paid for index options of $2.1
million and higher investment advisory and services fee of $.5 million due to a
slightly higher average asset base on which the fee is calculated. These
increases were offset by lower distribution fees of $1.2 million due to lower
certificate sales, and lower amortization of premiums paid for interest rate
caps/corridors of $1.4 million. The lower amortization of interest rate
caps/corridors reflects the net of $8.2 million lower amortization and $6.8
million less interest earned under the cap/corridor agreements.
Net provision for certificate reserves decreased 2.5% due primarily to the
net of lower accrual rates and a slightly higher average balance of certificate
reserves during 1996.
The decrease in income tax benefit resulted primarily from a lesser portion
of net investment income before income tax benefit being attributable to
tax-advantaged income.
Liquidity and cash flow:
IDSC's principal sources of cash are payments from sales of face-amount
certificates and cash flows from investments. In turn, IDSC's principal uses of
cash are payments to certificate owners for matured and surrendered
certificates, purchase of investments and payments of dividends to its Parent.
Certificate sales remained strong in 1997 reflecting clients' ongoing
desire for safety of principal. Sales of certificates totaled $1.5 billion in
1997 compared to $1.0 billion in 1996 and $1.8 billion in 1995. The higher
certificate sales in 1997 over 1996 resulted primarily from a special
introductory promotion of IDSC's 7- and 13-month term Flexible Savings
certificate which produced sales of $238 million. Certificate sales in 1997
benefited also, from higher sales of the Preferred Investors certificate of $113
million and sales of the Special Deposits certificate of $85 million. The
Preferred Investors certificate was first offered for sale early in the last
quarter of 1996. The Special Deposits certificate was first offered for sale to
private banking clients of American Express Bank Ltd. in Hong Kong late in the
third quarter of 1997. Certificate sales in 1995 benefited from a special
introductory promotion of IDSC's 11-month term Flexible Savings certificate
which produced sales of $562 million.
The special promotion of the 7- and 13-month term Flexible Savings
certificate was offered from Sept. 10, 1997 to Nov. 25, 1997, and applied only
to sales of new certificate accounts during the promotion period. Certificates
sold during the promotion period received a special interest rate, determined on
a weekly basis, of one percentage point above the Bank Rate Monitor Top 25
Market Average(TM) of comparable length certificates of deposit.
<PAGE>
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.
Certificate maturities and surrenders totaled $1.3 billion during 1997
compared to $1.7 billion in 1996 and $1.0 billion in 1995. The higher
certificate maturities and surrenders in 1996 resulted primarily from $461
million of surrenders of the 11-month Flexible Savings certificate. The
surrenders of the 11-month Flexible Savings certificate resulted primarily from
lower accrual rates declared by IDSC at term renewal, reflecting interest rates
available in the marketplace.
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.
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
owner obligations.
Under Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", 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 owner demand. See
notes 1 and 3 to the financial statements for additional information relating to
SFAS No. 115.
At Dec. 31, 1997, securities classified as held to maturity and carried at
amortized cost were $.8 billion. Securities classified as available for sale and
carried at fair value were $2.9 billion. These securities, which comprise 92% of
IDSC's total invested assets, are well diversified. Of these securities, 98%
have fixed maturities of which 91% are of investment grade. Other than U.S.
Government Agency mortgage-backed securities, no one issuer represents more than
1% of total securities. See note 3 to financial statements for additional
information on ratings and diversification.
<PAGE>
During the year ended Dec. 31, 1997, IDSC sold held-to-maturity securities with
an amortized cost and fair value of $33.0 million and $33.9 million,
respectively. The securities were sold due to significant deterioration in the
issuers' creditworthiness. During the same period in 1997, securities classified
as available for sale were sold with an amortized cost and fair value of $161
million. The securities were sold in general management of the investment
portfolio.
There were no transfers of available-for-sale or held-to-maturity
securities during the years ended Dec. 31, 1997 and 1996. 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".
Market risk and derivative financial instruments:
The sensitivity analysis of two different tests of market risk discussed
below estimate the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing one year's earnings. The market
changes, assumed to occur as of Dec. 31, 1997, are a 100 basis point increase in
market interest rates and a 10% decline in a major stock market index.
Computation of the prospective effects of hypothetical interest rate and major
stock market index changes are based on numerous assumptions, including relative
levels of market interest rates and the major stock market index level, as well
as the levels of assets and liabilities. The hypothetical changes and
assumptions will be different than what actually occurs in the future.
Furthermore, the computations do not anticipate actions that may be taken by
management if the hypothetical market changes actually occurred over time. As a
result, actual earnings affects in the future will differ from those quantified
below.
IDSC primarily invests in intermediate-term and long-term fixed income
securities to provide its certificate owners with a competitive rate of return
on their certificates while managing risk. These investment securities provide
IDSC with a historically dependable and targeted margin between the interest
rate earned on investments and the interest rate credited to certificate owners'
accounts. IDSC does not invest in securities to generate trading profits for its
own account.
IDSC's Investment Committee, which comprises senior business managers,
meets regularly to review models projecting different interest rate scenarios
and their impact on IDSC's profitability. The committee's objective is to
structure IDSC's portfolio of investment securities based upon the type and
behavior of the certificates in the certificate reserve liabilities, to achieve
targeted levels of profitability and meet certificate contractual obligations
Rates credited to certificate owners' accounts are generally reset at
shorter intervals than the maturity of underlying investments. Therefore, IDSC's
margins may be negatively impacted by increases in the general level of interest
rates. Part of the committee's strategies include the purchase of derivatives,
such as interest rate caps, corridors, floors and swaps, for hedging purposes.
On a certain series of certificates, interest is credited to the certificate
owners' accounts based upon the relative change in a major stock market index
<PAGE>
between the beginning and end of the certificates' term. As a means of
hedging its obligations under the provisions of these certificates, the
committee purchases and writes call options on the major stock market index. See
note 9 to the financial statements for additional information regarding
derivative financial instruments.
The negative impact on IDSC's earnings of the 100 basis point increase in
interest rates described above would be approximately $5.9 million pretax. It
assumes repricings and customer behavior based on the application of proprietary
models to the book of business at Dec. 31, 1997. The 10% decrease in a major
stock market index level would have a minimal impact on IDSC's earnings because
the income effect is a decrease in option income and a corresponding decrease in
interest credited to the Stock Market certificate owners' accounts.
Year 2000 Issue:
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of IDSC. All of the systems
used by IDSC are maintained by its Parent and are utilized by multiple
subsidiaries and affiliates of the Parent. IDSC's business is heavily dependent
upon the Parent's computer systems, and has significant interactions with
systems of third parties.
A comprehensive review of the Parent's computer systems and business
processes, including those specific to IDSC, has been conducted to identify the
major systems that could be affected by the Year 2000 issue. Steps are being
taken to resolve any potential problems including modification to existing
software and the purchase of new software. These measures are scheduled to be
completed and tested on a timely basis. The Parent's goal is to complete
internal remediation and testing of each system by the end of 1998 and to
continue compliance efforts through 1999.
The Parent is evaluating the Year 2000 readiness of advisors and other
third parties whose system failures could have an impact on IDSC's operations.
The potential materiality of any such impact is not known at this time.
Ratios:
The ratio of stockholder's equity, excluding net unrealized holding gains
on investment securities, to total assets less certificate loans and net
unrealized holding gains on investment securities at Dec. 31, 1997 and 1996 was
5.2%. IDSC's current regulatory requirement is a ratio of 5.0%.
<PAGE>
Annual Financial Information
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>
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, 1997 and 1996, and the related statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the 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, 1997 and 1996 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 5, 1998
<PAGE>
<TABLE><CAPTION>
Balance Sheets, Dec. 31,
Assets
<S> <C> <C>
Qualified Assets (note 2) 1997 1996
($ thousands)
Investments in unaffiliated issuers (notes 3, 4 and 10):
Cash and cash equivalents $- $111,331
Held-to-maturity securities 758,143 863,921
Available-for-sale securities 2,911,524 2,212,968
First mortgage loans on real estate 212,433 218,697
Certificate loans - secured by certificate reserves 37,098 43,509
Investments in and advances to affiliates 6,772 6,444
Total investments 3,925,970 3,456,870
Receivables:
Dividends and interest 48,817 44,013
Investment securities sold 1,635 654
Total receivables 50,452 44,667
Other (notes 9 and 10) 56,127 36,164
Total qualified assets 4,032,549 3,537,701
Other Assets
Deferred distribution fees and other 21,099 25,533
Total assets $4,053,648 $3,563,234
See notes to financial statements.
<PAGE>
Balance Sheets, Dec. 31, (continued)
Liabilities and Stockholder's Equity
Liabilities 1997 1996
($ thousands)
Certificate Reserves (notes 5 and 10):
Installment certificates:
Reserves to mature $343,219 $344,344
Additional credits and accrued interest 19,554 21,931
Advance payments and accrued interest 968 1,198
Other 56 55
Fully paid certificates:
Reserves to mature 3,186,191 2,747,690
Additional credits and accrued interest 174,699 167,673
Due to unlocated certificate holders 291 300
Total certificate reserves 3,724,978 3,283,191
Accounts Payable and Accrued Liabilities:
Due to Parent (note 7A) 1,639 1,424
Due to Parent for federal income taxes 495 1,737
Due to affiliates (note 7B, 7C and 7D) 331 279
Reverse repurchase agreements 22,000 -
Payable for investment securities purchased 19,601 61,979
Accounts payable, accrued expenses and other (notes 9 and 10) 29,919 11,977
Total accounts payable and accrued liabilities 73,985 77,396
Deferred federal income taxes (note 8) 15,175 8,097
Total liabilities 3,814,138 3,368,684
Commitments (note 4)
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 143,844 143,844
Retained earnings:
Appropriated for predeclared additional credits/interest 6,375 11,989
Appropriated for additional interest on advance payments 50 50
Unappropriated 55,948 22,728
Unrealized holding gains on investment
securities - net (note 3A) 31,793 14,439
Total stockholder's equity 239,510 194,550
Total liabilities and stockholder's equity $4,053,648 $3,563,234
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE><CAPTION>
Statements of Operations
Year ended Dec. 31, 1997 1996 1995
($ thousands)
<S> <C> <C> <C>
Investment Income:
Interest income from investments:
Bonds and notes:
Unaffiliated issuers $191,190 $184,653 $181,902
Mortgage loans on real estate:
Unaffiliated 18,053 19,583 22,171
Affiliated - 36 56
Certificate loans 2,200 2,533 2,963
Dividends 44,543 44,100 48,614
Other 2,246 576 1,207
Total investment income 258,232 251,481 256,913
Investment Expenses:
Parent and affiliated company fees (note 7):
Distribution 34,507 32,732 33,977
Investment advisory and services 17,233 16,989 16,472
Depositary 238 228 242
Options (note 9) 14,597 10,156 8,038
Interest rate caps, corridors and floors (note 9) 35 2,351 3,725
Reverse repurchase agreements 1,217 - -
Interest rate swap agreements (note 9) 1,956 - -
Other 354 395 363
Total investment expenses 70,137 62,851 62,817
Net investment income before provision
for certificate reserves and income tax benefit $188,095 $188,630 $194,096
See notes to financial statements.
<PAGE>
Statements of Operations (continued)
Year ended Dec. 31, 1997 1996 1995
($ thousands)
Provision for Certificate Reserves (notes 5 and 9):
According to the terms of the certificates:
Provision for certificate reserves $9,796 $10,445 $11,009
Interest on additional credits 1,244 1,487 2,300
Interest on advance payments 50 61 73
Additional credits/interest authorized by IDSC:
On fully paid certificates 150,752 155,411 157,857
On installment certificates 4,323 5,637 6,288
Total provision for certificate reserves before reserve
recoveries 166,165 173,041 177,527
Reserve recoveries from terminations
prior to maturity (1,029) (1,073) (1,120)
Net provision for certificate reserves 165,136 171,968 176,407
Net investment income before income tax benefit 22,959 16,662 17,689
Income tax benefit (note 8) 3,682 6,537 9,097
Net investment income 26,641 23,199 26,786
Realized gain (loss) on investments - net:
Securities of unaffiliated issuers 980 (444) 452
Other-unaffiliated - 101 (120)
Net realized gain (loss) on investments before income taxes 980 (343) 332
Income tax (expense) benefit (note 8):
Current (304) 772 160
Deferred (39) (652) (277)
Total income tax (expense) benefit (343) 120 (117)
Net realized gain (loss) on investments 637 (223) 215
Net income - wholly owned subsidiary 328 1,251 373
Net income $27,606 $24,227 $27,374
See notes to financial statements.
<PAGE>
Statements of Stockholder's Equity
Year ended Dec. 31, 1997 1996 1995
($ 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 $143,844 $168,844 $140,344
Contribution from Parent - - 28,500
Cash dividends declared - (25,000) -
Balance at end of year $143,844 $143,844 $168,844
Retained Earnings:
Appropriated for predeclared additional credits/interest (note 5B):
Balance at beginning of year $11,989 $18,878 $18,398
Transferred (to) from unappropriated retained earnings (5,614) (6,889) 480
Balance at end of year $6,375 $11,989 $18,878
Appropriated for additional interest on advance payments (note 5C):
Balance at beginning and end of year $50 $50 $50
Unappropriated (note 6):
Balance at beginning of year $22,728 $31,612 $4,718
Net income 27,606 24,227 27,374
Transferred from (to) appropriated retained earnings 5,614 6,889 (480)
Cash dividends declared - (40,000) -
Balance at end of year $55,948 $22,728 $31,612
Unrealized holding gains and losses on investment securities net (notes 1 and
3A):
Balance at beginning of year $14,439 $29,423 ($23,158)
Change during year 17,354 (14,984) 52,581
Balance at end of year $31,793 $14,439 $29,423
Total stockholder's equity $239,510 $194,550 $250,307
See notes to financial statements.
<PAGE>
Statements of Cash Flows
Year ended Dec. 31, 1997 1996 1995
($ thousands)
Cash flows from operating activities:
Net income $27,606 $24,227 $27,374
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of wholly owned subsidiary (328) (1,251) (373)
Net provision for certificate reserves 165,136 171,968 176,407
Interest income added to certificate loans (1,414) (1,631) (1,902)
Amortization of premiums/discounts-net 15,484 14,039 19,232
Provision for deferred federal income taxes (2,266) (1,124) (2,652)
Net realized (gain) loss on investments before income taxes (980) 343 (332)
(Increase) decrease in dividends and interest receivable (4,804) 5,619 (7,371)
Decrease (increase) in deferred distribution fees 4,434 2,761 (1,144)
Decrease in other assets - - 466
Increase (decrease) in other liabilities 443 (679) (1,549)
Net cash provided by operating activities 203,311 214,272 208,156
Cash flows from investing activities:
Maturity and redemption of investments:
Held-to-maturity securities 76,678 163,066 315,766
Available-for-sale securities 408,019 537,565 325,521
Other investments 79,929 52,189 46,004
Sale of investments:
Held-to-maturity securities 33,910 24,984 22,305
Available-for-sale securities 160,207 356,194 48,372
Other investments - 385 21
Certificate loan payments 4,814 6,003 6,061
Purchase of investments:
Held-to-maturity securities (4,565) (49,984) (208,140)
Available-for-sale securities (1,283,620) (617,138) (1,397,983)
Other investments (62,831) (28,617) (17,234)
Certificate loan fundings (5,021) (5,288) (7,776)
Net cash (used in) provided by investing activities ($592,480) $439,359 ($867,083)
See notes to financial statements.
<PAGE>
Statements of Cash Flows (continued)
Year ended Dec. 31, 1997 1996 1995
($ thousands)
Cash flows from financing activities:
Payments from certificate owners $1,580,013 $1,129,023 $1,577,884
Capital contribution from Parent - - 28,500
Proceeds from reverse repurchase agreements 433,000 - -
Certificate maturities and cash surrenders (1,324,175) (1,663,196) (1,030,712)
Payments under reverse repurchase agreements (411,000) - -
Dividends paid - (65,000) -
Net cash provided by (used in) financing activities 277,838 (599,173) 575,672
Net (decrease) increase in cash and cash equivalents (111,331) 54,458 (83,255)
Cash and cash equivalents beginning of year 111,331 56,873 140,128
Cash and cash equivalents end of year $- $111,331 $56,873
Supplemental disclosures including non-cash transactions:
Cash (paid) received for income taxes ($104) $7,195 $6,854
Certificate maturities and surrenders through
loan reductions 8,032 8,554 10,673
See notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements ($ 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 ten 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 non-investment
company subsidiaries of 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.
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.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
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. Dividend income from perpetual
preferred stock is recognized on an ex-dividend basis.
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. The estimated
fair value of the mortgage loans is determined by a discounted cash flow
analysis using mortgage interest rates currently offered for mortgages of
similar maturities.
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 mortgage loan losses.
The reserve for mortgage loan losses is maintained at a level that
management believes is adequate to absorb estimated losses in the portfolio. The
level of the reserve account is determined based on several factors, including
historical experience, expected future principal and interest payments,
estimated collateral values, and current and anticipated economic and political
conditions. Management regularly evaluates the adequacy of the reserve for
mortgage loan losses.
IDSC generally stops accruing interest on mortgage loans for which interest
payments are delinquent more than three months. Based on Management's judgment
as to the ultimate collectibility of principal, interest payments received are
either recognized as income or applied to the recorded investment in the loan.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
Certificates
Investment certificates may be purchased either with a lump-sum payment or
by installment payments. Certificate owners are entitled to receive at maturity
a definite sum of money. Payments from certificate owners are credited to
investment certificate reserves. Investment certificate reserves accumulate at
specified percentage rates as declared by IDSC. Reserves also are maintained for
advance payments made by certificate owners, accrued interest thereon, and for
additional credits in excess of minimum guaranteed rates and accrued interest
thereon. On certificates allowing for the deduction of a surrender charge, the
cash surrender values may be less than accumulated investment certificate
reserves prior to maturity dates. Cash surrender values on certificates allowing
for no surrender charge are equal to certificate reserves. The payment
distribution, reserve accumulation rates, cash surrender values, reserve values
and other matters are governed by the 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 prior to maturity, unamortized deferred
distribution fees are recognized in expense and any related surrender charges
are recognized as a reduction in provision for certificate reserves.
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 $3,694,204 and $3,259,260 at Dec. 31, 1997 and
1996, respectively. IDSC had qualified assets of $3,964,036 at Dec. 31, 1997 and
$3,453,508 at Dec. 31, 1996, excluding net unrealized appreciation on
available-for-sale securities of $48,912 and $22,214 at Dec. 31, 1997 and 1996,
respectively and payable for securities purchased of $19,601 and $61,979 at Dec.
31, 1997 and 1996, respectively.
Qualified assets are valued in accordance with such provisions of Minnesota
Statutes as are applicable to investments of life insurance companies. Qualified
assets for which no provision for valuation is made in such statutes are valued
in accordance with rules, regulations or orders prescribed by the SEC. These
values are the same as financial statement carrying values, except for debt
securities classified as available for sale and all marketable equity
securities, which are carried at fair value in the financial statements but are
valued at amortized cost for qualified asset and deposit maintenance purposes.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
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:
<TABLE><CAPTION>
Dec. 31, 1997
Required
Deposits deposits Excess
<S> <C> <C> <C>
Deposits to meet certificate
liability requirements:
States $363 $328 $35
Central Depositary 3,826,505 3,650,121 176,384
Total $3,826,868 $3,650,449 $176,419
Dec. 31, 1996
Required
Deposits deposits Excess
Deposits to meet certificate
liability requirements:
States $362 $330 $32
Central Depositary 3,355,041 3,203,076 151,965
Total $3,355,403 $3,203,406 $151,997
</TABLE>
The assets on deposit at Dec. 31, 1997 and 1996 consisted of securities
having a deposit value of $3,580,866 and $3,117,715, respectively; mortgage
loans of $212,433 and $218,697, respectively; and other assets of $33,569 and
$18,991, respectively.
American Express Trust Company is the central depositary for IDSC. See note 7C.
3. Investments in securities
A) Fair values of investments in securities represent market prices or
estimated fair values when quoted prices are not available. Estimated fair
values are determined by IDSC using established procedures, involving review of
market indexes, price levels of current offerings and comparable issues, price
estimates and market data from independent brokers and financial files. The
procedures are reviewed annually. IDSC's vice president - investments reports to
the board of directors on an annual basis regarding such pricing sources and
procedures to provide assurance that fair value is being achieved.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
The following is a summary of securities held to maturity and securities
available for sale at Dec. 31, 1997 and Dec. 31, 1996.
<TABLE><CAPTION>
Dec. 31, 1997
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government and
agencies obligations $363 $369 $6 $-
Mortgage-backed securities 29,340 29,969 629 -
Corporate debt securities 242,050 248,455 6,493 88
Stated maturity preferred stock 486,390 505,522 19,332 200
$758,143 $784,315 $26,460 $288
AVAILABLE FOR SALE
Mortgage-backed securities $1,251,283 $1,274,417 $23,336 $202
State and municipal obligations 41,116 42,526 1,410 -
Corporate debt securities 1,417,668 1,438,640 22,636 1,664
Stated maturity preferred stock 63,214 64,444 1,284 54
Perpetual preferred stock 88,726 91,497 2,771 -
Common stock 605 - - 605
$2,862,612 $2,911,524 $51,437 $2,525
Dec. 31, 1996
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
HELD TO MATURITY
U.S. Government and
agencies obligations $362 $365 $4 $1
Mortgage-backed securities 38,435 38,834 743 344
Corporate debt securities 266,642 274,235 8,447 854
Stated maturity preferred stock 558,482 576,603 19,513 1,392
$863,921 $890,037 $28,707 $2,591
AVAILABLE FOR SALE
Mortgage-backed securities $1,009,738 $1,021,603 $14,164 $2,299
State and municipal obligations 55,876 57,726 1,850 -
Corporate debt securities 1,000,316 1,008,077 10,808 3,047
Stated maturity preferred stock 52,458 52,139 109 428
Perpetual preferred stock 68,000 68,282 317 35
Common stock 4,366 5,141 775 -
$2,190,754 $2,212,968 $28,023 $5,809
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
The amortized cost and fair value of securities held to maturity and
available for sale, by contractual maturity, at Dec. 31, 1997, 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 $78,343 $78,991
Due after 1 through 5 years 381,844 393,317
Due after 5 years through 10 years 168,247 175,540
Due after 10 years 100,369 106,498
728,803 754,346
Mortgage-backed securities 29,340 29,969
$758,143 $784,315
AVAILABLE FOR SALE
Due within 1 year $53,744 $54,074
Due after 1 through 5 years 785,191 794,535
Due after 5 years through 10 years 469,792 480,813
Due after 10 years 213,271 216,188
1,521,998 1,545,610
Mortgage-backed securities 1,251,283 1,274,417
Perpetual preferred stock 88,726 91,497
Common stock 605 -
$2,862,612 $2,911,524
</TABLE>
During the years ended Dec. 31, 1997 and 1996, 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, 1997, 1996 and 1995, were as follows:
<TABLE><CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Proceeds $161,188 $313,976 $83,970
Gross realized gains 1,292 456 36
Gross realized losses 1,637 5,836 1,854
</TABLE>
Sales of held-to-maturity securities, due to significant credit
deterioration, during the years ended Dec. 31, 1997, 1996 and 1995, were as
follows:
<TABLE><CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Amortized cost $32,969 $22,297 $22,782
Gross realized gains 1,621 3,200 2
Gross realized losses 680 513 479
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
During the years ended Dec. 31, 1997 and 1996, no securities were
reclassified from held to maturity to available for sale. 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 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 89% and 85% of
IDSC's total invested assets at Dec. 31, 1997 and 1996, respectively. Securities
are rated by Moody's and Standard & Poors (S&P), or by Parent's internal
analysts, using criteria similar to Moody's and S&P, when a public rating does
not exist. A summary of investments in securities with fixed maturities by
rating of investment is as follows:
Rating 1997 1996
Aaa/AAA 44% 41%
Aa/AA 1 1
Aa/A 1 1
A/A 14 20
A/BBB 6 6
Baa/BBB 25 24
Below investment grade 9 7
100% 100%
Of the securities rated Aaa/AAA, 83% at Dec. 31, 1997 and 87% at Dec. 31,
1996 are U.S. Government Agency mortgage-backed securities that are not rated by
a public rating agency. Approximately 9% at Dec. 31, 1997 and 11% at Dec. 31,
1996 of other securities with fixed maturities are rated by Parent's internal
analysts. At Dec. 31, 1997 and 1996 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 note 3A.
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 incurred by the issuer of the restricted securities.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
4. Investments in first mortgage loans on real estate
At Dec. 31, 1997 and 1996, IDSC's recorded investment in impaired mortgage
loans was $363 and $847, respectively, and the reserve for loss on those amounts
was $261 and $611, respectively. During 1997, 1996 and 1995, the average
recorded investment in impaired mortgage loans was $743, $925 and $1,052,
respectively.
IDSC recognized $37, $88 and $53 of interest income related to impaired
mortgage loans for the years ended Dec. 31, 1997, 1996 and 1995, respectively.
During the years ended Dec. 31, 1997, 1996 and 1995, there were no changes
in the reserve for loss on mortgage loans of $611.
At Dec. 31, 1997 and 1996, approximately 5% and 6%, respectively, of IDSC's
invested assets were first mortgage loans on real estate. A summary of first
mortgage loans by region and type of real estate is as follows:
Region 1997 1996
South Atlantic 23% 22%
West North Central 21 17
East North Central 18 21
Mountain 13 15
Middle Atlantic 11 14
West South Central 6 5
New England 5 3
Pacific 3 3
100% 100%
Property Type 1997 1996
Retail/shopping centers 31% 36%
Apartments 23 33
Office buildings 20 9
Industrial buildings 17 13
Other 9 9
100% 100%
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
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 maturities.
Dec. 31, 1997 Dec. 31, 1996
Carrying Fair Carrying Fair
amount value amount value
First mortgage loans on real estate $213,044 $216,951 $219,308 $221,253
Reserve for losses (611) - (611) -
Net first mortgage loans on
real estate $212,433 $216,951 $218,697 $221,253
At Dec. 31, 1997 and 1996, commitments for fundings of first mortgage
loans, at market interest rates, aggregated $9,375 and $9,300, respectively.
IDSC employs policies and procedures to ensure the creditworthiness of the
borrowers and that funds will be available on the funding date. IDSC's loan
fundings are restricted to 80% or less of the market value of the real estate at
the time of the loan funding. Management believes there is no fair value for
these commitments.
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, 1997
and 1996 were:
1997
Average Average
Reserve gross additional
balance accumulation credit
rate rate
Installment certificates:
Reserves to mature:
With guaranteed rates $24,316 3.50 1.35%
Without guaranteed rates (A) 318,903 - 2.96
Additional credits and accrued interest 19,554 3.17 -
Advance payments and accrued interest (C) 968 3.17 1.68
Other 56 -
Fully paid certificates:
Reserves to mature:
With guaranteed rates 165,258 3.21 1.83
Without guaranteed rates (A) and (D) 3,020,933 - 5.03
Additional credits and accrued interest 174,699 3.21 -
Due to unlocated certificate holders 291 - -
$3,724,978
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
1996
Average Average
Reserve gross additional
balance accumulation credit
rate rate
Installment certificates:
Reserves to mature:
With guaranteed rates $32,512 3.50 1.35%
Without guaranteed rates (A) 311,832 - 2.97
Additional credits and accrued interest 21,931 3.14 -
Advance payments and accrued interest 1,198 3.15 1.70
Other 55 - -
Fully paid certificates:
Reserves to mature:
With guaranteed rates 187,272 3.23 1.79
Without guaranteed rates (A) and (D) 2,560,418 - 5.03
Additional credits and accrued interest 167,673 3.23 -
Due to unlocated certificate holders 300 - -
$3,283,191
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, 1997, $6,375 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 3.17%. IDSC has increased the rate of
accrual to 4.85% through April 30, 1999. An appropriation of retained earnings
amounting to $50 has been made, which represents the estimated additional
accrual that will result from the increase granted by IDSC.
D) IDS Stock Market Certificate enables the certificate owner 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, 1997 and
1996 was $416,485 and $309,570, respectively.
E) The carrying amounts and fair values of certificate reserves consisted
of the following at Dec. 31, 1997 and 1996. Fair values of certificate reserves
with interest rate terms of one year or less approximated the carrying values
less any applicable surrender charges.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
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>
1997 1996
Carrying Fair Carrying Fair
amount value amount value
<S> <C> <C> <C> <C>
Reserves with terms of one year or less $3,186,971 $3,185,396 $2,637,144 $2,635,835
Other 538,007 551,988 646,047 673,772
Total certificate reserves 3,724,978 3,737,384 3,283,191 3,309,607
Unapplied certificate transactions 868 868 1,217 1,217
Certificate loans and accrued interest (37,495) (37,495) (43,980) (43,980)
Total $3,688,351 $3,700,757 $3,240,428 $3,266,844
</TABLE>
6. Dividend restriction
Certain series of installment certificates outstanding provide that cash
dividends may be paid by IDSC only in calendar years for which additional
credits of at least one-half of 1% on such series of certificates have been
authorized by IDSC. This restriction has been removed for 1998 and 1999 by
IDSC's declaration of additional credits in excess of this requirement.
7. Fees paid to Parent and affiliated companies ($ not in thousands)
A) The basis of computing fees paid or payable to Parent for investment
advisory and other general and administrative services is:
The investment advisory and services agreement with Parent provides for a
graduated scale of fees equal on an annual basis to 0.750% on the first $250
million of total book value of assets of IDSC, 0.650% on the next $250 million,
0.550% on the next $250 million, 0.500% on the next $250 million and 0.107% on
the amount in excess of $1 billion. Effective Jan. 1, 1998, the fee on the
amount in excess of $1 billion was changed from 0.450% to 0.107%. The fee is
payable monthly in an amount equal to one-twelfth of each of the percentages set
forth above. Excluded from assets for purposes of this computation are first
mortgage loans, real estate and any other asset on which IDSC pays an outside
service fee.
B) The basis of computing fees paid or payable to American Express
Financial Advisors Inc. (an affiliate) for distribution services is:
Fees payable to American Express Financial Advisors Inc. on sales of IDSC's
certificates are based upon terms of agreements giving American Express
Financial Advisors Inc. the exclusive right to distribute the certificates
covered under the agreements. The agreements provide for payment of fees over a
period of time.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
From time to time, IDSC may sponsor or participate in sales promotions
involving one or more of the certificates and their respective terms. These
promotions may offer a special interest rate to attract new clients or retain
existing clients. To cover the cost of these promotions, distribution fees paid
to American Express Financial Advisors may be lowered. For the promotion of
IDSC's 7-month and 13-month term Flexible Savings certificate which occurred
Sept. 10, 1997 to Nov. 25, 1997, the distribution fee for sales of these
certificates was lowered to 0.067%.
The aggregate fees payable under the agreements per $1,000 face amount of
installment certificates and a summary of the periods over which the fees are
payable 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>
On sales effective April 30, 1997 $25.00 $ 2.50 $22.50 9
On sales prior to April 30, 1997(a) 30.00 6.00 24.00 4
</TABLE>
(a) At the end of the sixth through the 10th year, an additional fee of
0.5% is payable on the daily average balance of the certificate reserve
maintained during the sixth through the 10th year, respectively.
Effective April 30, 1997, fees on Cash Reserve and Flexible Savings
Certificates are paid at a rate of 0.20% of the purchase price at the time of
issuance and 0.20% of the reserves maintained for these certificates at the
beginning of the second and subsequent quarters from issue date. For
certificates sold prior to April 30, 1997, fees were paid at a rate of 0.25% of
the purchase price at the time of issuance and are paid at the rate of 0.25% of
the reserves maintained for these certificates at the beginning of the second
and subsequent quarters from issue date.
Fees on the Future Value Certificate were paid at the rate of 5% of the
purchase price at time of issuance. Effective May 1, 1997, the Future Value
Certificate is no longer being offered for sale.
Fees on the Investors Certificate are paid at an annualized rate of 1% of
the reserves maintained for the certificates. Fees are paid at the end of each
term on certificates with a one, two or three-month term. Fees are paid each
quarter from date of issuance on certificates with a six, 12, 24 or 36-month
term.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
Fees on the Preferred Investors Certificate are paid at an annualized rate
of 0.66% 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.
Effective April 30, 1997, fees on the IDS and American Express Stock Market
Certificates are paid at the rate of 0.70% of the purchase price on the first
day of the certificate's term and 0.70% of the reserves maintained for these
certificates at the beginning of each subsequent term. For certificates sold
prior to April 30, 1997, fees were paid at a rate of 1.25% of the purchase price
on the first day of the certificate's term and are paid at a rate of 1.25% of
the reserves maintained for these certificates at the beginning of each
subsequent term.
C) The basis of computing depositary fees paid or payable to American Express
Trust Company (an affiliate) is:
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
A transaction consists of the receipt or withdrawal of securities and
commercial paper and/or a change in the security position. The charges are
payable quarterly except for maintenance, which is an annual fee.
D) The basis for computing fees paid or payable to American Express Bank Ltd.
(an affiliate) for the distribution of the American Express 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.
E) The basis of computing transfer agent fees paid or payable to American
Express Client Service Corporation (AECSC) (an affiliate) is:
Under a Transfer Agency Agreement effective Jan. 1, 1998, AECSC will
maintain certificate owner accounts and records. IDSC will pay AECSC a monthly
fee of one-twelfth of $10.353 per certificate owner account.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
8. Income taxes
Income tax benefit (expense) as shown in the statement of operations for
the three years ended Dec. 31, consists of:
1997 1996 1995
Federal:
Current $1,138 $5,560 $6,285
Deferred 2,266 1,124 2,652
3,404 6,684 8,937
State (65) (27) 43
Total income tax benefit $3,339 $6,657 $8,980
Income tax benefit (expense) 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:
1997 1996 1995
Federal tax expense at U.S. statutory rate ($8,378) ($5,711) ($6,307)
Tax-exempt interest 724 1,517 3,339
Dividend exclusion 11,044 10,865 12,166
Other, net 14 13 (261)
Federal tax benefit $3,404 $6,684 $8,937
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.
Deferred tax assets: 1997 1996
Certificate reserves $13,488 $13,028
Investment reserves 502 540
Other, net 19 19
Total deferred tax assets $14,009 $13,587
Deferred tax liabilities: 1997 1996
Deferred distribution fees $7,382 $8,934
Investment unrealized gains 17,119 7,775
Purchased/written call options 3,557 3,429
Dividends receivable 654 745
Investments 429 714
Return of capital dividends 43 87
Total deferred tax liabilities $29,184 $21,684
Net deferred tax liabilities $15,175 $8,097
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
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 and equity price 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 risk is the possibility that the counterparty will not fulfill the
terms of the contract. IDSC monitors credit risk related to derivative financial
instruments through established approval procedures, including setting
concentration limits by counterparty, reviewing credit ratings and requiring
collateral where appropriate. At Dec. 31, 1997, IDSC's counterparties to the
interest rate floors and swaps are rated A or better by nationally recognized
rating agencies. The counterparties to the purchased call options are seven
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 or credit risk
and are not recorded on the balance sheet.
Credit risk 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, 1997 and 1996.
1997
Notional Total
or contract Carrying Fair credit
amount value value risk
Assets:
Interest rate floors $500,000 $205 $251 $251
Purchased call options 389 55,922 54,609 54,609
Total $500,389 $56,127 $54,860 $54,860
Liabilities:
Interest rate swaps $1,000,000 $416 $2,138 $-
Written call options 376 24,739 32,990 -
Total $1,000,376 $25,155 $35,128 $-
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
1996
Notional Total
or contract Carrying Fair credit
amount value value risk
Assets:
Interest rate caps and corridors $200,000 $- $188 $188
Purchased call options 362 36,164 34,987 34,987
Total $200,362 $36,164 $35,175 $35,175
Liabilities:
Written call options $337 $9,552 $17,571 $-
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate floors expire in
April of 1999 and $500,000 notional amount of the interest rate swaps expires in
May of 1998 and $500,000 expire in April of 1999. The options expire throughout
1998.
Interest rate caps, corridors, floors and swaps, and options are used to
manage IDSC's exposure to rising interest rates. These instruments are used
primarily to protect the margin between the interest earned on investments and
the interest rate credited to related investment certificate owners.
The interest rate floors are reset monthly and IDSC earns interest on the
notional amount to the extent the U.S. Treasury securities at "constant
maturity" for a period of one year exceed the reference rates specified in the
floor agreements. These reference rates range from 4.6% to 4.7%. The cost of
interest rate floors is amortized over the terms of the agreements on a straight
line basis and is included in other qualified assets. The amortization, net of
any interest earned, is included in investment expenses.
The interest rate caps and corridors were reset quarterly and IDSC earned
interest on the notional amount to the extent the London Interbank Offering Rate
exceeded the reference rates specified in the cap and corridor agreements. These
reference rates ranged from 4% to 9%. The cost of interest rate caps and
corridors is amortized over the terms of the agreements on a straight line basis
and is included in other qualified assets. The amortization, net of any interest
earned, is included in investment expenses.
The interest rate swaps are reset monthly. IDSC pays a fixed rate on the
notional amount ranging from 5.46% to 6.72% and receives a floating rate on the
notional amount tied to the U.S. Treasury securities at "constant maturity" for
a period of one year. There is no cost carried on the balance sheet. The
carrying amount shown above represents the net interest receivable/payable under
the swap agreements. Interest earned and interest expensed under the agreements
is shown net in investment expenses.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
IDSC offers a series of certificates which pays interest based upon the
relative change in a major stock market index between the beginning and end of
the certificates' term. The certificate owners 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.
Each purchased (written) call option contract confers upon the holder the
right (obligation) to receive (pay) an amount equal to one hundred dollars times
the difference between the level of the major stock market index on the date the
call option is exercised and the strike price of the option.
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 expense 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, 1997 and 1996.
1997
Contract Average Index at
amount strike price Dec.31,1997
Purchased call options $389 876 970
Written call options 376 969 970
1996
Contract Average Index at
amount strike price Dec.31,1996
Purchased call options $362 669 741
Written call options 337 736 741
10. Fair values of financial instruments
IDSC discloses fair value information for most on- and off-balance sheet
financial instruments for which it is practicable to estimate that value. The
fair value of the financial instruments presented may not be indicative of their
future fair values. The estimated fair value of certain financial instruments
such as cash and cash equivalents, receivables for dividends and interest,
investment securities sold and other trade receivables, accounts payable due to
Parent and affiliates, payable for investment securities purchased and other
accounts payable and accrued expenses are approximated to be the carrying
amounts disclosed in the balance sheets. Non-financial instruments, such as
deferred distribution fees, are excluded from required disclosure. IDSC's
off-balance sheet intangible assets, such as IDSC's name and future earnings of
the core business are also excluded. IDSC's management believes the value of
these excluded assets is significant. The fair value of IDSC, therefore, cannot
be estimated by aggregating the amounts presented.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
A summary of fair values of financial instruments as of Dec. 31, is as follows:
<TABLE><CAPTION>
1997 1996
Carrying Fair Carrying Fair
value value value value
<S> <C> <C> <C> <C>
Financial assets:
Assets for which carrying values
approximate fair values $49,940 $49,940 $155,396 $155,396
Investment securities (note 3) 3,669,667 3,695,839 3,076,889 3,103,005
First mortgage loans on real estate (note 4) 212,433 216,951 218,697 221,253
Derivative financial instruments (note 9) 56,127 54,860 36,164 35,175
Financial liabilities:
Liabilities for which carrying values
approximate fair values 48,255 48,255 76,040 76,040
Certificate reserves (note 5) 3,688,351 3,700,757 3,240,428 3,266,844
Derivative financial instruments (note 9) 25,155 35,128 9,552 17,571
</TABLE>
11. Year 2000 issue (Unaudited)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of IDSC. All of the systems
used by IDSC are maintained by its Parent and are utilized by multiple
subsidiaries and affiliates of the Parent. IDSC's business is heavily dependent
upon the Parent's computer systems, and has significant interactions with
systems of third parties.
A comprehensive review of the Parent's computer systems and business
processes, including those specific to IDSC, has been conducted to identify the
major systems that could be affected by the Year 2000 issue. Steps are being
taken to resolve any potential problems including modification to existing
software and the purchase of new software. These measures are scheduled to be
completed and tested on a timely basis. The Parent's goal is to complete
internal remediation and testing of each system by the end of 1998 and to
continue compliance efforts through 1999.
The Parent is evaluating the Year 2000 readiness of advisors and other
third parties whose system failures could have an impact on IDSC's operations.
The potential materiality of any such impact is not known at this time.
<PAGE>
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<PAGE>
(Back cover)
Quick telephone reference
Selling Agent
American Express Bank International
Region Offices
101 East 52nd Street
29th Floor
New York, NY 10022
(212) 415-9500
1221 Brickell Avenue
8th Floor
Miami, FL 33131
(305) 350-2502
Selling Agent
Coutts & Co. (USA) International
701 Brickell Avenue
23rd Floor
Miami, FL 33131
(305) 789-3700
American Express Stock Market Certificate
IDS Tower 10
Minneapolis, MN 55440-0010
Distributed by American Express Financial Advisors Inc.
<PAGE>
Form W-8
Form W-8 (Rev. 11-92)
General Instructions
(Section references are to the Internal Revenue Code unless otherwise noted.)
Purpose - Use Form W-8 or a substitute form containing a substantially similar
statement to tell the payer, mortgage interest recipient, middleman, broker, or
barter exchange that you are a nonresident alien individual, foreign entity, or
exempt foreign person not subject to certain U.S. information return reporting
or backup withholding rules.
Caution: Form W-8 does not exempt the payee from the 30% (or lower treaty)
nonresident withholding rates.
<PAGE>
Nonresident Alien Individual - For income tax purposes, "nonresident alien
individual" means an individual who is neither a U.S. citizen nor resident.
Generally, an alien is considered to be a U.S.
resident if:
oThe individual was a lawful permanent resident of the United States at any time
during the calendar year, that is, the alien held an immigrant visa (a "green
card"), or
oThe individual was physically present in the United States on:
(1) at least 31 days during the calendar year, and
(2) 183 days or more during the current year and the 2 preceding calendar
years (counting all the days of physical presence in the current year,
one-third the number of days of presence in the first preceding year, and
only one-sixth of the number of days in the second preceding year).
See Pub. 519, U.S. Tax Guide for Aliens, for more information on resident and
nonresident alien status.
Note: If you are a nonresident alien individual married to a U.S. citizen or
resident and have made an election under section 6013(g) or (h), you are treated
as a U.S. resident and may not use Form W-8.
Exempt Foreign Person. - For purposes of this form, you are an "exempt foreign
person" for a calendar year in which:
1. You are a nonresident alien individual or a foreign corporation, partnership,
estate or trust,
2. You are an individual who has not been, and plans not to be, present in the
United States for a total of 183 days or more during the calendar year and,
3. You are neither engaged, nor plan to be engaged during the year, in a U.S.
trade or business that has effectively connected gains from transactions with a
broker or barter exchange.
If you do not meet the requirements of 2 or 3 above, you may instead certify on
Form 1001, Ownership, Exemption, or Reduced Rate Certificate, that your country
has a tax treaty with the United States that exempts your transactions from U.S.
tax.
Filing Instructions
When To File. - File Form W-8 or substitute form before a payment is made.
Otherwise, the payer may have to withhold and send part of the payment to the
Internal Revenue Service (see Backup Withholding below). This certificate
generally remains in effect for three calendar years. However, the payer may
require you to file a new certificate each time a payment is made to you.
Where To File. - File this form with the payer of the qualifying income who is
the withholding agent (see Withholding Agent on page 2). Keep a copy for your
own records.
<PAGE>
Backup Withholding. - A U.S. taxpayer identification number or Form W-8 or
substitute form must be given to the payers of certain income. If a taxpayer
identification number or Form W-8 or substitute form is not provided or the
wrong taxpayer identification number is provided, these payers may have to
withhold 20% of each payment or transaction. This is called backup withholding.
Note: On January 1, 1993, the backup withholding rate increases from 20% to 31%.
Reportable payments subject to backup withholding rules are:
oInterest payments under section 6049(a).
oDividend payments under sections 6042(a) and 6044.
oOther payments (i.e., royalties and payments from broker and barter exchanges)
under sections 6041, 6041A(a), 6045, 6050A and 6050N.
If backup withholding occurs, an exempt foreign person who is a nonresident
alien individual may get a refund by filing Form 1040NR, U.S. Nonresident Alien
Income Tax Return, with the Internal Revenue Service Center, Philadelphia, PA
19255, even if filing the return is not otherwise required.
U.S. Taxpayer Identification Number
The Internal Revenue law requires that certain income be reported to the
Internal Revenue Service using a U.S. taxpayer identification number (TIN). This
number can be a social security number assigned to individuals by the Social
Security Administration or an employer identification number assigned to
businesses and other entities by the Internal Revenue Service.
Payments to account holders who are foreign persons (nonresident alien
individuals, foreign corporations, partnerships, estates or trusts) generally
are not subject to U.S. reporting requirements. Also, foreign persons are not
generally required to have a TIN, nor are they subject to any backup withholding
because they do not furnish a TIN to a payer or broker.
However, foreign persons with income effectively connected with a trade or
business in the United States (income subject to regular (graduated) income
tax), must have a TIN. To apply for a TIN, use Form SS-4, Application for
Employer Identification Number, available from local Internal Revenue Service
offices, or Form SS-5, Application for a Social Security Card, available from
Social Security Administration offices.
Special Rules
Mortgage Interest. - For purposes of the reporting rules, mortgage interest is
interest paid on a mortgage to a person engaged in a trade or business
originating mortgages in the course of that trade or business. A mortgage
interest recipient is one who receives interest on a mortgage that was acquired
in the course of a trade or business.
Mortgage interest is not subject to backup withholding rules, but is subject to
reporting requirements under section 6050H. Generally, however, the reporting
requirements do not apply if the payer of record is a nonresident alien
individual who pays interest on a mortgage not secured by real property in the
United States.
<PAGE>
Use Form W-8 or substitute form to notify the mortgage interest recipient that
the payer is a nonresident alien individual.
Portfolio Interest. - Generally, portfolio interest paid to a nonresident alien
individual or foreign partnership, estate or trust is not subject to backup
withholding rules. However, if interest is paid on portfolio investments to a
beneficial owner that is neither a financial institution nor a member of a
clearing organization, Form W-8 or substitute form is required.
Registered obligations not targeted to foreign markets qualify as portfolio
interest not subject to 30% withholding but require the filing of Form W-8 or
substitute form. See Instructions to Withholding Agents on this page for
reporting rules.
See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations,
for registered obligations targeted to foreign markets and when Form W-8 or
substitute form is not required on these payments.
Bearer Obligations. - The interest from bearer obligations targeted to foreign
markets is treated as portfolio interest and is not subject to 30% withholding.
Form W-8 or substitute form is not required.
Dividends. - Any distribution or payment of dividends by a U.S. corporation sent
to a foreign address is subject to the 30% (or lower treaty) withholding rate,
but is not subject to backup withholding. Also, there is no backup withholding
on dividend payments made to a foreign person by a foreign corporation. However,
the 30% withholding (or lower treaty) rate applies to dividend payments made to
a foreign person by a foreign corporation if:
o 25% or more of the foreign corporation's gross income for the three preceding
taxable years was effectively connected with a U.S. trade or business, and
o The corporation was not subject to the branch profits tax because of an income
tax treaty (see section 884(e)).
If a foreign corporation makes payments to another foreign corporation, the
recipient must be a qualified resident of its country of residence to benefit
from that country's tax treaty.
Broker or Barter Exchanges. - Income from transactions with a broker or barter
exchanges is subject to reporting rules and backup withholding unless Form W-8
or substitute form is filed to notify the broker or barter exchange that you are
an exempt foreign person as defined on page 1.
<PAGE>
Specific Instructions
Name of Owner. - If Form W-8 is being filed for portfolio interest, enter the
name of the beneficial owner.
U.S. Taxpayer Identification Number. - If you have a U.S. taxpayer
identification number, enter your number in this space (see the discussion
earlier).
Permanent Address. - Enter your complete address in the country where you reside
permanently for income tax purposes.
If you are: Show the address of:
An individual........................................Your permanent residence
A partnership or corporation.........................Principal office
An estate or trust...................................Permanent residence or
principal office of any
fiduciary
Also show your current mailing address if it differs from your permanent
address.
Account Information (optional). - If you have more than one account (savings,
certificate of deposit, pension, IRA, etc.) with the same payer, list all
account numbers and types on one Form W-8 or substitute form unless your payer
requires you to file a separate certificate for each account.
If you have more than one payer, file a separate Form W-8 with each payer.
Signature. - If only one foreign person owns the account(s) listed on this form,
that foreign person should sign the Form W-8.
If each owner of a joint account is a foreign person, each should sign a
separate Form W-8.
Notice of Change in Status. - If you become a U.S. citizen or resident after you
have filed Form W-8 or substitute form, or you cease to be an exempt foreign
person, you must notify the payer in writing within 30 days of your change in
status.
To notify the payer, you may check the box in the space provided on this form or
use the method prescribed by the payer.
Reporting will then begin on the account(s) listed and backup withholding may
also begin unless you certify to the payer that: (1) The U.S. taxpayer
identification number you have given is correct, and (2) The Internal Revenue
Service has not notified you that you are subject to backup withholding because
you failed to report certain income.
You may use Form W-9, Request for Taxpayer Identification Number and
Certification, to make these certifications.
If an account is no longer active, you do not have to notify a payer of your
change in status unless you also have another account with the same payer that
is still active.
<PAGE>
False Certificate. - If you file a false certificate when you are not entitled
to the exemption from withholding or reporting, you may be subject to fines
and/or imprisonment under U.S. perjury laws.
Instructions to Withholding Agents
Withholding Agent. - Generally, the person responsible for payment of the items
discussed above to a nonresident alien individual or foreign entity is the
withholding agent (see Pub. 515).
Retention of Statement. - Keep Form W-8 or substitute statement in your records
for at least four years following the end of the last calendar year during which
the payment is paid or collected.
Portfolio Interest. - Although registered obligations not targeted to foreign
markets are not subject to 30% withholding, you must file Form 1042S, Foreign
Person's U.S. Source Income Subject to Withholding, to report the interest
payment. Both Form 1042S and a copy of Form W-8 or substitute form must be
attached to Form 1042, Annual Withholding Tax Return for U.S. Source Income of
Foreign Persons.
<PAGE>
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<PAGE>
Quick telephone reference
Selling Agent
American Express
Bank International
Region Offices
101 East 52nd Street
29th Floor
New York, NY 10022
(212) 415-9500
1221 Brickell Avenue
8th Floor
Miami, FL 33131
(305) 350-2502
Selling Agent
Coutts & Co. (USA) International
421 North Rodeo Drive Penthouse 1
Beverely Hills, CA 90210-4539
(213) 613-2244
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IDS Tower 10
Minneapolis, MN 55440-0010
American Express Financial Advisors Inc.
