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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM S-1
AMERICAN EXPRESS INVESTORS CERTIFICATE
POST-EFFECTIVE AMENDMENT NO. 18 TO
REGISTRATION STATEMENT NO. 33-26844
UNDER
THE SECURITIES ACT OF 1933
IDS CERTIFICATE COMPANY
(Exact name of registrant as specified in charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
6725
(Primary Standard Industrial Classification Code Number)
41-6009975
(I.R.S. Employer Identification No.)
IDS Tower 10, Minneapolis, MN 55440, (612) 671-3131
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Bruce A. Kohn IDS Tower 10, Minneapolis, MN 55440-0010, (612) 671-2221
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 18 TO REGISTRATION STATEMENT NO.
33-26844
Cover Page
Prospectus
Part II Information
Signatures
Exhibits
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Prospectus April 28, 1999
American Express Investors Certificate
Provides high fixed rates with capital preservation.
IDS Certificate Company (the Issuer or IDSC), a subsidiary of American Express
Financial Corporation, issues American Express Investors Certificates. You can:
o Purchase this certificate in any amount from $100,000 through $5 million.
o Select a term of one, two, three, six, 12, 24 or 36 months.
o Invest in successive terms up to a total of 20 years from the issue
date of the certificate.
This certificate is available in New York and Florida to persons who are neither
citizens nor residents of the United States and to certain U.S. trusts.
Like all investment companies, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
This certificate is backed solely by the assets of the Issuer. See "Risk
factors" on page 2p.
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.
The distributor and selling agent are not required to sell any specific amount
of certificates.
Issuer:
IDS Certificate Company
Unit 557
IDS Tower 10
Minneapolis, MN 55440-0010
800-437-3133
612-671-3131
Distributor:
American Express Financial Advisors Inc.
Selling Agent:
American Express Bank International
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Initial interest rates
The Issuer guarantees a fixed rate of interest for each term. For the initial
term, the rate will be within a specified range of certain average interest
rates generally referred to as the London Interbank Offered Rates (LIBOR). See
"About the certificate" for more explanation.
Here are the interest rates in effect
April 28, 1999*:
Actual
Simple Compound Effective
Interest Yield for Annualized
Term Rate* the Term** Yield***
1 month 3.426% 3.426% 3.480%
2 month 3.421 3.426 3.475
3 month 3.490 3.500 3.546
6 month 3.513 3.539 3.570
12 month 3.652 3.714 3.714
24 month 3.774 3.840 3.840
36 month 3.774 3.840 3.840
* These are the rates for investments of $100,000. Rates may depend on factors
described in "Rates for new purchases" under "About the certificate."
** Assuming monthly compounding for the number of months in the term and a
$100,000 purchase.
*** Assuming monthly compounding for 12 months and a $100,000 purchase.
These rates may or may not have changed when you apply to purchase your
certificate. Rates for future terms are set at the discretion of the Issuer and
may also differ from the rates shown here.
Risk factors
You should consider the following when investing in this certificate.
This certificate is backed solely by the assets of the Issuer. Most of our
assets are debt securities whose price generally falls as interest rates
increase, and rises as interest rates decrease. Credit ratings of the issuers of
securities in our portfolio vary. See "Invested and guaranteed by the Issuer,"
"Regulated by government," "Backed by our investments" and "Investment policies"
under "How your money is used and protected."
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American Express Financial Corporation (AEFC), the parent company of IDSC,
maintains the major computer systems used by the Issuer. The Year 2000 (Y2K)
issue is the result of computer programs that may recognize a date using "00" as
the year 1900 rather than 2000. This could result in the failure of major
systems. AEFC and its parent company, American Express Company, began addressing
the Y2K issue in 1995 and have established a plan for resolution. See
"Management's discussion and analysis of financial condition and results of
operation."
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Table of contents
Initial interest rates 2p
Risk factors 2p
About the certificate 6p
Read and keep this prospectus 6p
Investment amounts and terms 6p
Face amount and principal 7p
Value at maturity 8p
Receiving cash during the term 8p
Interest 9p
Promotions and pricing flexibility 9p
Rates for new purchases 10p
Rates for future terms 14p
Additional investments 15p
Earning interest 16p
How to invest and withdraw funds 17p
Buying your certificate 17p
How to make investments at term end 19p
Full and partial withdrawals 20p
When your certificate term ends 23p
Transfers to other accounts 24p
Transfer of ownership 24p
For more information 24p
Giving instructions and written notification 24p
Purchases by bank wire 26p
Tax treatment of your investment 27p
Withholding taxes 28p
Trusts 28p
How your money is used and protected 29p
Invested and guaranteed by the Issuer 29p
Regulated by government 30p
Backed by our investments 31p
Investment policies 32p
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How your money is managed 37p
Relationship between the Issuer and American
Express Financial Corporation 37p
Capital structure and certificates issued 39p
Investment management and services 39p
Distribution 41p
Selling Agent Agreement with AEBI 42p
Other selling agents 42p
About American Express Service Corporation 43p
About American Express Bank International 43p
Transfer agent 44p
Employment of other American Express affiliates 45p
Directors and officers 46p
Independent auditors 48p
Appendix 49p
Annual financial information 51p
Summary of selected financial information 51p
Management's discussion and analysis of financial
condition and results of operations 52p
Report of independent auditors 67p
Financial statements 68p
Notes to financial statements 76p
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About the certificate
Read and keep this prospectus
This prospectus describes terms and conditions of your American Express
Investors 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 Investors Certificate as described
in the prospectus, or to bind the Issuer by any statement not in it.
This prospectus describes American Express Investors Certificate distributed by
American Express Financial Advisors Inc. American Express Bank International
(AEBI) has an arrangement with American Express Financial Advisors Inc. under
which the certificate is offered to AEBI's clients who are neither citizens nor
residents of the United States and to certain U.S. trusts. The certificate is
currently available through AEBI offices located in Florida and New York. This
certificate also may be available through other selling agents.
Investment amounts and terms
You may purchase the American Express Investors Certificate in any amount from
$100,000 payable in U.S. currency. The American Express Investors Certificate is
a security purchased with a single investment. Unless you receive prior
approval, your total amount paid in any one or more certificates, in the
aggregate over the life of the certificates, less withdrawals, cannot exceed $5
million.
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After determining the amount you wish to invest, you select a term of one, two,
three, six, 12, 24 or 36 months for which the Issuer will guarantee a specific
interest rate. The Issuer guarantees the principal of and interest on your
certificate. At the end of the term, you may have interest earned on the
certificate during its term credited to your certificate or paid to you.
Investments in the certificate may continue for successive terms up to a total
of 20 years from the issue date of the certificate. Generally, you will be able
to select any of the terms offered. But if your certificate is nearing its
20-year maturity, you will not be allowed to select a term that would carry the
certificate past its maturity date.
Face amount and principal
The face amount of the certificate is the amount of your initial investment, and
will remain the same over the life of the certificate. Any investment or
withdrawal within 15 days of the end of a term will be added on or deducted to
determine principal for the new term. A withdrawal at any other time is taken
first from interest credited to your investment during that term. The principal
is the amount that is reinvested at the beginning of each subsequent term, and
is calculated as follows:
Principal equals Face amount (initial investment)
===============================================================================
plus At the end of a term, interest credited to your account
during the term
minus Any interest paid to you in cash
plus Any additional investments to your certificate
minus Any withdrawals, fees and applicable penalties
Principal may change during a term as described in "Full and partial
withdrawals."
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For example: Assume your initial investment (face amount) of $500,000 earned
$7,500 of interest during the term. You have not taken any interest as cash or
made any withdrawals. You have invested an additional $250,000 prior to the
beginning of the next term. Your principal for the next term will equal:
$500,000 Face amount (initial investment)
plus 7,500 Interest credited to your account
minus (0) Interest paid to you in cash
plus 250,000 Additional investment to your certificate
minus (0) Withdrawals and applicable penalties or fees
$757,500 Principal at the beginning of the next term.
Value at maturity
You may continue to invest for successive terms for up to a total of 20 years
from the issue date of the certificate. Your certificate matures at 20 years
from its issue date. At maturity, you will receive a distribution for the value
of your certificate, which will be the total of your purchase price, plus
additional investments and any credited interest not paid to you in cash, less
any withdrawals and penalties. Some fees may apply as described in "How to
invest and withdraw funds."
Receiving cash during the term
If you need your 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."
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Interest
Your investments earn interest from the date they are credited to your account.
Interest is compounded and credited at the end of each certificate month (on the
monthly anniversary of the issue date). Interest may be paid to you monthly in
cash if you maintain a principal balance of at least $500,000.
The Issuer declares and guarantees a fixed rate of interest for each term during
the life of your certificate. We calculate the amount of interest you earn each
certificate month by:
o applying the interest rate then in effect to your balance each day;
o adding these daily amounts to get a monthly total; and
o subtracting interest accrued on any amount you withdraw during the certificate
month.
Interest is calculated on a 30-day month and 360-day year basis.
This certificate may be available through other distributors or selling agents
with different interest rates or related features and consequently with
different returns. You may obtain information about any such other distributors
or selling agents by calling 800-437-3133.
Promotions and pricing flexibility
The Issuer may sponsor or participate in promotions involving the certificate
and its 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 or its affiliates. These promotions
will generally be for a specified period of time. We also may offer different
rates based on your amount invested.
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Rates for new purchases
When your application is accepted and we have received your initial investment,
we will send you a confirmation of your purchase showing the rate that your
investment will earn. The Issuer guarantees that the rate in effect for your
initial term will be within a 100 basis point (1%) range tied to certain average
interest rates for comparable length dollar deposits available on an interbank
basis in the London market, and generally referred to as the London Interbank
Offered Rates (LIBOR). For investments of $1 million or more, initial rates for
specific terms are determined as follows:
<TABLE>
<CAPTION>
<S> <C>
1 month Within a range of 80 basis points below to 20 basis points above the one-month LIBOR rate.
2 months Within a range of 80 basis points below to 20 basis points above the one-month LIBOR rate. (A two-month LIBOR rate is
not published.)
3 months Within a range of 80 basis points below to 20 basis points above the three-month LIBOR rate.
6 months Within a range of 80 basis points below to 20 basis points above the six-month LIBOR rate.
12 months Within a range of 80 basis points below to 20 basis points above the 12-month LIBOR rate.
24 months Within a range of 50 basis points below to 50 basis points above the 12-month LIBOR rate. (A 24-month LIBOR rate is
not published.)
36 months Within a range of 50 basis points below to 50 basis points above the 12-month LIBOR rate. (A 36-month LIBOR rate is
not published.)
</TABLE>
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<TABLE>
<CAPTION>
For investments from $250,000 to $999,999 initial rates for specific terms are
determined as follows:
<S> <C>
1 month Within a range of 100 basis points below to zero basis points above the one-month LIBOR rate.
2 months Within a range of 100 basis points below to zero basis points above the
one-month LIBOR rate. (A two-month LIBOR rate is not published.)
3 months Within a range of 100 basis points below to zero basis points above the three-month LIBOR rate.
6 months Within a range of 100 basis points below to zero basis points above the six-month LIBOR rate.
12 months Within a range of 100 basis points below to zero basis points above the 12-month LIBOR rate.
24 months Within a range of 85 basis points below to 15 basis points above the 12-month LIBOR rate. (A 24-month LIBOR rate is
not published.)
36 months Within a range of 85 basis points below to 15 basis points above the 12-month LIBOR rate. (A 36-month LIBOR rate
is not published.)
</TABLE>
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<TABLE>
<CAPTION>
For investments of $100,000 to $249,999, initial rates for specific terms are
determined as follows:
<S> <C>
1 month Within a range of 180 basis points below to 80 basis points below the one-month LIBOR rate.
2 months Within a range of 180 basis points below to 80 basis points below the
one-month LIBOR rate. (A two-month LIBOR rate is not published.)
3 months Within a range of 180 basis points below to 80 basis points below the three-month LIBOR rate.
6 months Within a range of 180 basis points below to 80 basis points below the six-month LIBOR rate.
12 months Within a range of 180 basis points below to 80 basis points below the 12-month LIBOR rate.
24 months Within a range of 175 basis points below to 75 basis points below the 12-month LIBOR rate. (A 24-month LIBOR rate is
not published.)
36 months Within a range of 175 basis points below to 75 basis points below
the 12-month LIBOR rate. (A 36-month LIBOR rate is not published.)
</TABLE>
For example, if the LIBOR rate published on the date rates are determined with
respect to a six-month deposit is 6.50%, the rate declared on a six-month
American Express Investors Certificate greater than $250,000 but less than $1
million would be between 5.50% and 6.50%. If the LIBOR rate published for a
given week
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with respect to 12-month certificates is 7.00%, the Issuer's rates in effect
that week for the 24- and 36-month American Express Investors Certificates
greater than $250,000 would be between 6.15% and 7.15%. When your application is
accepted, you will be sent a confirmation showing the rate that your investment
will earn for the first term.
LIBOR is the interbank-offered rates for dollar deposits at which major
commercial banks will lend for specific terms in the London market. Generally,
LIBOR rates quoted by major London banks will be the same. However, market
conditions, including movements in the U.S. prime rate and the internal funding
position of each bank, may result in minor differences in the rates offered by
different banks. LIBOR is a generally accepted and widely quoted interest-rate
benchmark. The average LIBOR rate used by the Issuer is published in The Wall
Street Journal.
Rates for new purchases are reviewed and may change daily. The guaranteed rate
that is in effect for your chosen term on the day your application is accepted
at the Issuer's corporate office in Minneapolis, Minnesota, U.S.A. will apply to
your certificate. The interest rates printed in the front of this prospectus may
or may not have changed on the date your application to invest is accepted.
Rates for new purchases may vary depending on the amount you invest, but will
always be within the 100 basis point range described above. You may obtain the
current interest rates by calling your AEBI or other selling agent
representative.
<PAGE>
In determining rates based on the amount of your investment, the Issuer may
offer a rate based on your aggregate investment determined by totaling only the
amounts invested in each certificate that has a current balance exceeding a
specified level. The current balance considered in this calculation may be
exclusive of interest. Part of the balance may be required to be invested in
terms of a specified minimum length. The aggregate investment may be required to
be for terms that average at least a specified minimum length. The certificates
whose balances are aggregated must have identical ownership. The rate may be
available only for a certificate whose current balance exceeds a specified level
or that is offered through a specified distributor or selling agent.
Interest rates for the term you have selected will not change once the term has
begun, unless a withdrawal reduces your account value to a point where we pay a
lower interest rate, as described in "Full and partial withdrawals" under "How
to invest and withdraw funds."
Rates for future terms
Interest on your certificate for future terms may be greater or less than the
rates you receive during your first term. In setting future interest rates for
subsequent terms, a primary consideration will be the prevailing investment
climate, including the LIBOR rates. Nevertheless, the Issuer has complete
discretion as to what interest rates it will declare beyond the initial term.
The Issuer will send you notice at the end of each term of the rate your
certificate will earn for the new term. You have a 15-day grace period to
withdraw your certificate without a withdrawal charge. If LIBOR is no longer
publicly available or feasible to use, the Issuer may use another, similar index
as a guide for setting rates.
<PAGE>
Additional investments
You may add to your investment when your term ends. If your new term is a
one-month term, you may add to your investment on the first day of your new term
(the renewal date) or the following business day if the renewal date is a
non-business day. If your new term is greater than one month, you may add to
your investment within the 15 days following the end of your term. A $25,000
minimum additional investment is required, payable in U.S. currency. Your
confirmation will show the applicable rate. However, unless you receive prior
approval from the Issuer, your investment may not bring the aggregate net
investment of any one or more certificates held by you (excluding any interest
added during the life of the certificate and less withdrawals) over $5 million.
Additional investments of at least $25,000 may be made by bank wire.
The Issuer must receive your additional investment within the 15 days following
the end of a certificate's current term (unless your new investment is a
one-month term), if you wish to increase your principal investment as of the
first day of the new term. Interest accrues from the first day of the new term
or the day your additional investment is accepted by the Issuer, whichever is
later, at the rate then in effect for your account. If your new term is a
one-month term, your additional investment must be received by the end of the
certificate's current term.
The interest rate for these additional investments is the rate then in effect
for your account. If your additional investment increases the principal of your
certificate so that your certificate's principal has exceeded a break point for
a higher interest rate, the certificate will earn this higher interest rate for
the remainder of the term, from the date the Issuer accepts the additional
investment.
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About the certificate
Earning interest
At the end of each certificate month, interest is compounded and credited to
your account. A certificate month is the monthly anniversary of the issue date.
Interest may be paid to you monthly in cash if you maintain a principal balance
of at least $500,000.
The amount of interest you earn each certificate month is determined by applying
the interest rate then in effect to the daily balance of your certificate, and
subtracting from that total the interest accrued on any amount withdrawn during
the month. Interest is calculated on a 360-day year basis. This means interest
is calculated on the basis of a 30-day month even though terms are determined on
a calendar month.
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How to invest and withdraw funds
Buying your certificate
This certificate is available only to AEBI clients who are neither citizens nor
residents of the United States (or which are foreign corporations, partnerships,
estates or trusts) and to U.S. trusts organized under the laws of any state in
the United States, so long as the following are true in the case of such a U.S.
trust:
o the trust is unconditionally revocable by the grantor or grantors (the
person or persons who put the money into the trust);
o there are no more than 10 grantors of the trust;
o all the grantors are neither citizens nor residents of the United States;
o each grantor provides an appropriately certified Form W-8 (or approved
substitute), as described under "Tax treatment of your investment;"
o the trustee of the trust is a bank organized under the laws of the United
States or any state in the United States; and
o the trustee supplies IDSC with appropriate tax documentation.
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How to invest and withdraw funds
The certificate is available through AEBI offices located in Florida and New
York. An AEBI or other selling agent representative will help you prepare your
purchase application. The Issuer will process the application at our corporate
offices in Minneapolis, MN, U.S.A. When your application is accepted and we have
received your initial investment, we will send you a confirmation of your
purchase, indicating your account number and applicable rate of interest for
your first term, as described under "Rates for new purchases." See "Purchase
policies" below.
Important: When you open an account, you must provide a Form W-8 or approved
substitute. See "Taxes on your earnings."
Purchase policies:
o You have 15 days from the date of purchase to cancel your investment without
penalty by notifying your AEBI or other selling agent representative, or by
writing or calling the Client Service Organization at the address or phone
number on the cover of this prospectus. If you decide to cancel your certificate
within this 15-day period, you will not earn any interest.
o The Issuer has complete discretion to determine whether to accept an
application and sell a certificate.
<PAGE>
How to make investments at term end
By wire
If you have an
established account,
you may wire money to:
Norwest Bank Minnesota
Routing No. 091000019
Minneapolis, MN
Attn: Domestic Wire Dept.
Give these instructions:
Credit IDS
Account #00-29-882
for personal account #
(your account number)
for (your name).
If this information
is not included,
the order may be
rejected and all
money received
less any costs IDSC
incurs will be
returned promptly.
o Minimum amount
you may wire: $1,000.
o Wire orders can be
accepted only on days
when your bank, AEFC,
IDSC and Norwest Bank
Minnesota are open
for business.
o Purchases made by wire
are accepted by AEFC
only from banks located
in the United States.
o Wire purchases are completed
when wired payment is received
and we accept the purchase.
o Wire investments must be received
and accepted in the Minneapolis
headquarters on a business day
before 3 p.m. Central time to be
credited that day. Otherwise
your purchase will be processed
the next business day.
o The Issuer, AEFC, its subsidiaries,
AEBI, and other selling agents
are not responsible for any delays
that occur in wiring funds,
including delays in processing by the bank.
o You must pay any fee the bank charges for wiring.
<PAGE>
How to invest and withdraw funds
Full and partial withdrawals
You may receive all or part of your money at any time. However:
o If your withdrawal request is received in the Minneapolis headquarters on a
business day before 3 p.m. Central time, it will be processed that day and
payment will be sent the next business day. Otherwise, your request will be
processed one business day later.
o Full and partial withdrawals of principal are subject to penalties, described
below.
o Partial withdrawals during a term must be
at least $10,000. You may not make a partial withdrawal if it would reduce your
certificate balance to less than $100,000. If you request such a withdrawal, we
will contact you for revised instructions.
o If a withdrawal reduces your account value to a point where we pay a lower
interest rate, you will earn the lower rate from the date of the withdrawal.
o Withdrawals before the end of the certificate month will result in loss of
interest on the amount withdrawn. You'll get the best result by timing a
withdrawal at the end of the certificate month.
o If your certificate is pledged as collateral, any withdrawal will be
delayed until we get approval from the secured party.
<PAGE>
Penalties for early withdrawal during a term:
When you request a full or partial withdrawal, we pay the amount you request:
o first from interest credited during the current term;
o then from the principal of your certificate.
Any withdrawals during a term exceeding the interest credited are deducted from
the principal and are used in determining any withdrawal charges. However, the
2% penalty is waived upon the death of the certificate owner.
Withdrawal penalties: When a penalty applies, a 2% withdrawal penalty will be
deducted from the account's remaining balance.
For example, assume you invest $1 million in a certificate and select a
six-month term. Four months later assume you have earned $27,000 in interest.
The following demonstrates how the withdrawal charge is deducted:
<PAGE>
How to invest and withdraw funds
When you withdraw a specific amount of money in excess of the interest credited,
the Issuer has to withdraw somewhat more from your account to cover the
withdrawal charge. For instance, suppose you request a $100,000 check on a $1
million investment. The first $27,000 paid to you is interest earned that term,
and the remaining $73,000 paid to you is principal. The Issuer would send you a
check for $100,000 and deduct a withdrawal charge of $1,460 (2% of $73,000) from
the remaining balance of your certificate. Your new balance would be $925,540.
Total investments $1,000,000
Interest credited $27,000
Total balance $1,027,000
Requested check $100,000
Credited interest withdrawn $(27,000)
Withdrawal charge percent 2%
Actual withdrawal charge $1,460
Balance prior to withdrawal $1,027,000
Requested withdrawal check $(100,000)
Withdrawal charge $(1,460)
Total balance after withdrawal $925,540
Additionally, if you make a withdrawal during a certificate month, you will not
earn interest for the month on the amount withdrawn.
Penalty exceptions: The 2% penalty is waived upon death of the certificate
owner.
For more information on withdrawal charges, talk with your AEBI or other selling
agent representative.
<PAGE>
When your certificate term ends
On or shortly after the end of the term you have selected for your certificate,
the Issuer will send you a notice indicating the interest rate that will apply
to the certificate for the new term. When your certificate term ends, the Issuer
will automatically renew your certificate for the same term unless you notify
your AEBI or other selling agent representative otherwise. If you wish to select
a different term, you must notify your representative in writing before the end
of the grace period. You will not be allowed to select a term that would carry
the certificate past its maturity date.
The interest rates that will apply to your new term will be those in effect on
the day the new term begins. We will send you a confirmation showing the rate of
interest that will apply to the new term you have selected. This rate of
interest will not be changed during that term.
If you want to withdraw your certificate without a withdrawal charge, you must
notify us within 15 calendar days following the end of a term.
For most terms, you may also add to your investment within the 15 calendar days
following the end of your term. See "Additional investments" under "About the
Certificate."
Other full and partial withdrawal policies:
o If you request a partial or full withdrawal of a certificate recently
purchased or added to by a check or money order that is not guaranteed, we will
wait for your check to clear. Please expect a minimum of 10 days from the date
of your payment before the Issuer mails a check to you. We may mail a check
earlier if the bank provides evidence that your check has cleared.
<PAGE>
o If your certificate is pledged as collateral, any withdrawal will be delayed
until we get approval from the secured party.
o Any payments to you may be delayed under applicable rules, regulations or
orders of the Securities and Exchange Commission (SEC).
Transfers to other accounts
You may transfer part or all of your certificate to other IDS certificates
available through AEBI.
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 another selling agent as collateral
security. Your AEBI or other selling agent 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 other selling agent
representative, or call the Issuer's toll free client service number listed on
the back cover.
Giving instructions and written notification
Your AEBI or other selling agent representative will handle instructions
concerning your account. Written instructions may be provided to either your
representative's office or directly to the Issuer.
<PAGE>
Proper written notice to your AEBI or other selling agent representative or the
Issuer must:
o be addressed to your AEBI or other selling agent office or the Issuer's
corporate office, in which case it must identify your AEBI or other selling
agent office,
o include your account number and sufficient information for the Issuer to
carry out your request, and
o be signed and dated by all registered owners.
The Issuer will acknowledge your written instructions. If your instructions are
incomplete or unclear, you will be contacted for revised instructions.
In the absence of any other written mandate or instructions you have provided to
AEBI or your other selling agent, you may elect in writing, on your initial or
any subsequent purchase application, to authorize AEBI or your other selling
agent to act upon the sole verbal instructions of any one of the named owners,
and in turn to instruct the Issuer with regard to any and all actions in
connection with the certificate referenced in the application as it may be
modified from time to time by term changes, renewals, additions or withdrawals.
The individual providing verbal instructions must be a named owner of the
certificate involved. In providing such authorization you agree that the Issuer,
its transfer agent, AEBI and other selling agents will not be liable for any
loss, liability, cost or expense arising in connection with implementing such
instructions, reasonably believed by the Issuer, AEBI or your other selling
agent, or their representatives, to be genuine. You may revoke such authority at
any time by providing proper written notice to your AEBI or other selling agent
office.
All amounts payable to or by the Issuer in connection with this certificate are
payable at the Issuer's corporate office unless you are advised otherwise.
<PAGE>
Purchases by bank wire
You may wish to lock in a specific interest rate by using a bank wire to
purchase a certificate. Your representative can instruct you about how to use
this procedure. Using this procedure will allow you to start earning interest at
the earliest possible time. The minimum that may be wired to purchase a new
certificate is $100,000.
Wire orders will be accepted only in U.S. currency and only on days your bank,
the Issuer and Norwest Bank Minnesota are open for business. The payment must be
received by the Issuer before 12 noon Central U.S.A. time to be credited that
day. Otherwise, it will be processed the next business day. The wire purchase
will not be made until the wired amount is received and the purchase is accepted
by the Issuer. Wire transfers not originating from AEBI or another selling agent
are accepted by IDSC's corporate office only when originating from banks located
in the United States of America. Any delays that may occur in wiring the funds,
including delays in processing by the banks, are not the responsibility of the
Issuer. Wire orders may be rejected if they do not contain complete information.
While the Issuer does not charge a service fee for incoming wires, you must pay
any charge assessed by your bank for the wire service. If a wire order is
rejected, all money received will be returned promptly less any costs incurred
in rejecting it.
<PAGE>
Tax treatment of your investment
Interest paid on your certificate is "portfolio interest" as defined in U.S.
Internal Revenue Code Section 871(h) if earned by a nonresident alien who has
supplied the Issuer with Form W-8, Certificate of Foreign Status. Form W-8 must
be supplied with 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). The Form W-8 must be resupplied every three calendar years. If you
have supplied a Form W-8 that certifies that you are a nonresident alien, the
interest income 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. We
are required to attach your Form W-8 to the forms sent to the Internal Revenue
Service (IRS). Your interest income will be reported to the IRS even though it
is not taxed by the U.S. Government. The United States participates in various
tax treaties with foreign countries. Those treaties provide that tax information
may be shared upon request between the United States and such foreign
governments.
<PAGE>
Withholding taxes
If you fail to provide a Form W-8 as required above, you will be subject to
backup withholding on interest payments and surrenders.
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.
Trusts
If the investor is a trust described in "Buying your certificate" under "How to
invest and withdraw funds," the policies and procedures described above will
apply with regard to each grantor.
Important: The information in this prospectus is a brief and selective summary
of certain federal tax rules that apply to this certificate and is based on
current law and practice. Tax matters are highly individual and complex.
Investors should consult a qualified tax advisor about their own position.
<PAGE>
How your money is used and protected
Invested and guaranteed by the Issuer
The Issuer, a wholly owned subsidiary of American Express Financial Corporation
(AEFC), issues and guarantees the American Express Investors Certificate. We are
by far the largest issuer of face amount certificates in the United States, with
total assets of more than $3.8 billion and a net worth in excess of $222 million
on Dec. 31, 1998.
We back our certificates by investing the money received and keeping the
invested assets on deposit. Our investments generate interest and dividends, out
of which we pay:
o interest to certificate owners; and
o various expenses, including taxes, fees to AEFC for advisory and other
services, distribution fees to American Express Financial Advisors Inc. and
American Express Service Corporation (AESC), and selling agent fees to
selling agents.
For a review of significant events relating to our business, see "Management's
discussion and analysis of financial condition and results of operations." No
national rating agency rates our certificates.
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.
<PAGE>
Regulated by government
Because the American Express Investors 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, 1998, the
amortized cost of these investments exceeded the required carrying value of our
outstanding certificates by more than $226 million. The law requires us to use
amortized cost for these regulatory purposes. In general, amortized cost is
determined by systematically increasing the carrying value of a security if
acquired at a discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the maturity date.
<PAGE>
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, 1998:
Type of investment Net amount invested
Corporate and other bonds 50%
Government agency bonds 24
Preferred stocks 16
Mortgages 9
Municipal bonds 1
As of Dec. 31, 1998 about 90% of our securities portfolio (including bonds and
preferred stocks) is rated investment grade. For additional information
regarding securities ratings, please refer to Note 3B to the financial
statements.
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, 1998 schedule of Investments in Securities of
Unaffiliated Issuers are available upon request. For comments regarding the
valuation, carrying values and unrealized appreciation (depreciation) of
investment securities, see Notes 1, 2 and 3 to the financial statements.
<PAGE>
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 whether a company can 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.
<PAGE>
As of Dec. 31, 1998, IDSC held about 10% 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.
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 (selling securities for others) under
federal securities laws.
Borrowing money --
From time to time we have established a line of credit with banks 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.
<PAGE>
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 secured by real estate. 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% of IDSC's assets.
<PAGE>
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 available for sale, issued and delivered to us. We generally do not pay for
these securities or start earning on them until delivery. We have established
procedures to ensure that sufficient cash is available to meet when-issued
commitments. When-issued securities are subject to market fluctuations and they
may affect IDSC's investment portfolio the same as owned securities.
Financial transactions 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.
<PAGE>
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.
<PAGE>
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.
The Issuer files reports on Forms 10-K and 10-Q with the SEC. The public may
read and copy materials we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
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, 1998, AEFC managed or
administered investments, including its own, of more than $212 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 180 offices and more than 9,000
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:
o travel related services (including American Express(R) Card and Travelers
Cheque operations through American Express Travel Related Services Company,
Inc. and its subsidiaries); and
o international banking services (through American Express Bank Ltd. and
its subsidiaries including American Express Bank International).
<PAGE>
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, 1998, the Issuer had issued (in face
amount) $99,499,694 of installment certificates and $1,092,517,052 of single
payment certificates. As of Dec. 31, 1998, the Issuer had issued (in face
amount) $13,593,267,561 of installment certificates and $18,351,877,659 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:
o providing investment research;
o making specific investment recommendations; and
o executing purchase and sale orders according to our policy of obtaining the
best price and execution.
All these activities are subject to direction and control by our board of
directors and officers. Our agreement with AEFC requires annual renewal by our
board, including a majority of directors who are not interested persons of AEFC
or the Issuer as defined in the federal Investment Company Act of 1940.
<PAGE>
For its services, we pay AEFC a monthly fee, equal on an annual basis to a
percentage of the total book value of certain assets (included assets).
Advisory and services fee computation:
Percentage of
Included assets 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
1998 $ 9,084,332 0.24%
1997 $17,232,602 0.50
1996 $16,989,093 0.50
Estimated advisory and services fees for 1999 are $8,651,000.
Other expenses payable by the Issuer: The Investment Advisory and Services
Agreement provides that we will pay:
o costs incurred by us in connection with real estate and mortgages;
o taxes;
o depository and custodian fees;
o brokerage commissions;
<PAGE>
o fees and expenses for services not covered by other agreements and provided to
us at our request, or by requirement, by attorneys, auditors, examiners and
professional consultants who are not officers or employees of AEFC;
o fees and expenses of our directors who are not officers or employees of AEFC;
o provision for certificate reserves (interest accrued on certificate owner
accounts); and
o expenses of customer settlements not attributable to sales function.
Distribution
Under a Distribution Agreement with American Express Financial Advisors Inc.,
the Issuer pays an annualized fee equal to 1% of the amount outstanding for the
distribution of this certificate. Payments are made at the end of each term on
certificates with a one-, two- or three-month term. Payments are made each
quarter from issuance date on certificates with a six-, 12-, 24- or 36-month
term.
Total distribution fees paid to American Express Financial Advisors Inc. for all
series of certificates amounted to $28,472,007 during the year ended Dec. 31,
1998. The Issuer expects to pay American Express Financial Advisors Inc.
distribution fees amounting to $26,147,000 during 1999.
See Note 1 to financial statements regarding deferral of distribution fee
expense.
American Express Financial Advisors Inc. pays selling expenses in connection
with services to the Issuer. The Issuer's board of directors, including a
majority of directors who are not interested persons of AEFC or IDSC, approved
this distribution agreement.
<PAGE>
Selling Agent Agreement with AEBI
In turn, under a Selling Agent Agreement with AEBI, American Express Financial
Advisors compensates AEBI for its services as selling agent of this certificate
as follows:
AEBI is paid an annualized fee ranging from 0.50% to 1.25% of the reserve
balance of each certificate, depending on the amount outstanding for each such
certificate, with this exception: the fee will be 0.30% of the reserve balance
of each certificate with an amount outstanding of $1 million or more when:
o the aggregate reserve balance for that certificate, and any other
certificate with identical ownership and an amount outstanding of $1 million or
more, is at least $20 million;
o the aggregate reserve balance is invested for terms that average at least six
months; and
o at least $5 million of this aggregate reserve balance is invested for a term
of 12 months or longer.
Other selling agents
This certificate may be sold through other selling agents, under arrangements
with American Express Financial Advisors, at commissions of up to:
o 0.90% of the investment on the first day of the certificate's term; and
o 0.90% of the certificate's reserve at the beginning of each subsequent term.
This fee is not assessed to your certificate account.
In addition, IDSC may pay distributors, and American Express Financial Advisors
Inc. may pay selling agents, additional compensation for selling and
distribution activities under certain circumstances. From time to time, IDSC or
<PAGE>
American Express Financial Advisors Inc. may pay or permit other promotional
incentives, in cash or credit or other compensation.
American Express Financial Advisors 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 and other Edge Act
corporations. For these services, American Express Financial Advisors pays AEBI
a fee for this certificate ranging from 0.075% to 0.12% of the reserve balance
of each certificate, depending on the amount outstanding for each certificate
for which another Edge Act corporation is the selling agent.
Such payments will be made periodically
in arrears.
These fees are not assessed to your
certificate account.
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.
About AEBI
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.
<PAGE>
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,
1998, AEBI had total assets of $529 million and total equity of $165 million.
Although AEBI is a banking entity, the American Express Investors Certificate is
not a bank product, nor is it backed or guaranteed by AEBI, by AEBL 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.
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:
o we receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar services;
o the affiliate charges us commissions consistent with those charged to
comparable unaffiliated customers for similar transactions; and
o the affiliate's employment is consistent with the terms of the current
Investment Advisory and Services Agreement and federal securities laws.
Directors and officers
The Issuer's sole shareholder, AEFC, elects the board of directors that oversees
IDSC's operations. The board annually elects the directors, chairman, president
and controller for a term of one year. The president appoints the other
executive officers.
We paid a total of $37,000 during 1998 to directors not employed by AEFC.
<PAGE>
Board of directors
Rodney P. Burwell
Born in 1939. Director beginning in 1999.
Chairman, Xerxes Corporation (fiberglass storage tanks). Director, Fairview
Corporation.
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. Acting president of Fisk University from
1998 to 1999. Former vice president and group executive, Industrial Systems,
with Honeywell, Inc. Retired 1989.
Jean B. Keffeler
Born in 1945. Director beginning in 1999.
Independent management consultant.
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.
Thomas R. McBurney
Born in 1938. Director beginning in 1999.
President, McBurney Management Advisors. Director, The Valspar Corporation
(paints), Wenger Corporation, Allina, Space Center Enterprises and Greenspring
Corporation.
Paula R. Meyer*
Born in 1954. President since June 1998.
Piper Capital Management (PCM) President from October 1997
to May 1998. PCM Director of Marketing from June 1995 to October 1997. PCM
Director of Retail Marketing from December 1993 to June 1995.
*"Interested Person" of IDSC as that term is defined in Investment Company Act
of 1940.
<PAGE>
Executive Officers
Paula R. Meyer
Born in 1954. President since June 1998.
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 Services 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.
<PAGE>
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.
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, 1998. 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.
<PAGE>
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>
Quick telephone reference*
Selling Agent American Express
Bank International
Region offices 101 East 52nd Street (212) 415-9500
4th Floor
New York, NY 10022
1221 Brickell Avenue (305) 350-2502
8th Floor
Miami, FL 33131
*You may experience delays when call volumes are high.
American Express
Investors Certificate
IDS Tower 10
Minneapolis, MN
55440-0010
800-437-3133
612-671-3131
Distributed by
American Express
Financial Advisors Inc.
S-6037 N (4/99)
<PAGE>
Summary of selected financial information
<TABLE>
<CAPTION>
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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.
<S> <C> <C> <C> <C> <C>
Year Ended Dec. 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Statement of Operations Data
Investment income $273,135 $258,232 $251,481 $256,913 $207,975
Investment expenses 76,811 70,137 62,851 62,817 58,690
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before provision for
certificate reserves and income tax benefit 196,324 188,095 188,630 194,096 149,285
Net provision for certificate reserves 167,108 165,136 171,968 176,407 107,288
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before income
tax benefit 29,216 22,959 16,662 17,689 41,997
Income tax benefit 265 3,682 6,537 9,097 2,663
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 29,481 26,641 23,199 26,786 44,660
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments:
Securities of unaffiliated issuers 5,143 980 (444) 452 (7,514)
Other - unaffiliated - - 101 (120) 1,638
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
before income taxes 5,143 980 (343) 332 (5,876)
Income tax (expense) benefit (1,800) (343) 120 (117) 2,047
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 3,343 637 (223) 215 (3,829)
Net income - wholly owned subsidiary 1,646 328 1,251 373 241
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $34,470 $27,606 $24,227 $27,374 $41,072
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared $29,500 $- $65,000 $- $40,200
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total assets $3,834,244 $4,053,648 $3,563,234 $3,912,131 $3,040,857
Certificate loans 32,343 37,098 43,509 51,147 58,203
Certificate reserves 3,404,883 3,724,978 3,283,191 3,628,574 2,887,405
Stockholder's equity 222,033 239,510 194,550 250,307 141,852
- ------------------------------------------------------------------------------------------------------------------------------------
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 1998, 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 1998 reflects also, a decrease in net unrealized
appreciation on investment securities classified as available for sale of $35
million and cash dividends paid to Parent of $30 million.
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 seven- and 13-month term IDS 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.
1998 Compared to 1997:
Gross investment income increased 5.8% due primarily to a higher average balance
of invested assets partially offset by slightly lower yields.
Investment expenses increased 9.5% in 1998. The increase resulted primarily from
higher amortization of premiums paid for index options of $6.4 million, higher
interest expense on reverse repurchase and interest rate swap agreements of $5.2
million, and $3.9 million of fees paid under a transfer agent agreement with
American Express Client Service Corporation effective Jan. 1, 1998. Prior to
Jan. 1, 1998, transfer agent services were provided by AEFC under the investment
advisory and services fee agreement. These higher expenses were partially offset
by lower investment advisory and services fees of $8.1 million and lower
distribution fees of $.7 million.
Net provision for certificate reserves increased 1.2% due primarily to the net
of a higher average balance of certificate reserves and lower accrual rates
during 1998.
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.
1997 Compared to 1996:
Gross investment income increased 2.7% due primarily to a higher average balance
of invested assets.
<PAGE>
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.
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 1998 reflecting clients' ongoing desire for
safety of principal. Sales of certificates totaled $1.1 billion in 1998 compared
to $1.5 billion in 1997 and $1.0 billion in 1996. The higher certificate sales
in 1997 over 1996 resulted primarily from a special introductory promotion of
the seven- and 13-month term IDS Flexible Savings Certificate which produced
sales of $238 million. Certificate sales in 1997 benefited also, from higher
sales of the IDS Preferred Investors Certificate of $113 million and sales of
the American Express Special Deposits Certificate of $85 million. The IDS
Preferred Investors Certificate was first offered for sale early in the last
quarter of 1996. The American Express 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.
The special promotion of the seven- and 13-month term IDS 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 AverageTM of comparable length certificates of deposit.
Certificate maturities and surrenders totaled $1.7 billion during 1998 compared
to $1.3 billion in 1997 and $1.7 billion in 1996. The higher certificate
maturities and surrenders in 1998 resulted primarily from $242 million of
surrenders of the seven- and 13-month IDS Flexible Savings Certificate. The
higher certificate maturities and surrenders in 1996 resulted primarily from
$461 million of surrenders of the 11-month IDS Flexible Savings Certificate.
These surrenders 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
intermediate-term bonds and mortgage-backed securities.
<PAGE>
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, 1998, securities classified as held to maturity and carried at
amortized cost were $.6 billion. Securities classified as available for sale and
carried at fair value were $2.7 billion. These securities, which comprise 88% of
IDSC's total invested assets, are well diversified. Of these securities, 97%
have fixed maturities of which 90% 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.
During the year ended Dec. 31, 1998, IDSC accepted a tender offer of a
held-to-maturity security with an amortized cost and fair value of $6.2 million.
During the same period in 1998, securities classified as available for sale were
sold with an amortized cost and fair value of $343 million and $346 million,
respectively. 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, 1998 and 1997.
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 year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, 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.
<PAGE>
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 two
series of certificates, interest is credited to the certificate owners' accounts
based upon the relative change in a major stock market index between the
beginning and end of the certificates' terms. 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 pretax earnings of the 100 basis point increase in
interest rates, which assumes repricings and customer behavior based on the
application of proprietary models to the book of business at Dec. 31, 1998 and
1997, would be approximately $7.5 million and $5.9 million for 1998 and 1997,
respectively. The 10% decrease in a major stock market index level would have a
minimal impact on IDSC's pretax earnings as of Dec. 31, 1998 and 1997, because
the income effect is a decrease in option income and a corresponding decrease in
interest credited to the IDS and American Express Stock Market Certificate
owners' accounts.
Year 2000 Issue:
IDSC is a wholly owned subsidiary of American Express Financial Corporation
(AEFC), which is a wholly owned subsidiary of American Express Company (American
Express). All of the major systems used by IDSC are maintained by AEFC and are
utilized by multiple subsidiaries and affiliates of AEFC. American Express is
coordinating Year 2000 (Y2K) efforts on behalf of all of its businesses and
subsidiaries. Representatives of AEFC are participating in these efforts. The
Y2K issue is the result of computer programs having been written using two
digits rather than four to define a year. Some programs may recognize a date
using "00" as the year 1900 rather than 2000. This misinterpretation could
result in the failure of major systems or miscalculations, which could have a
material impact on American Express and its businesses and subsidiaries through
business interruption or shutdown, financial loss, reputation damage and legal
liability to third parties. American Express and AEFC began addressing the Y2K
issue in 1995 and have established a plan for resolution, which involves the
remediation, decommissioning and replacement of relevant systems, including
mainframe, mid-range and desktop computers, application software, operating
systems, systems software, date back-up archival and retrieval services,
telephone and other communications systems, and hardware peripherals and
facilities dependent on embedded technology. As part of their plan, American
Express has generally followed and utilized the specific policies and guidelines
established by the
<PAGE>
Federal Financial Institutions Examination Council, as well as other U.S. and
international regulatory agencies. Additionally, American Express continues to
participate in Y2K related industry consortia sponsored by various partners and
suppliers. Progress is reviewed regularly with IDSC's senior management and
American Express' senior management and Board of Directors.
American Express' and AEFC's Y2K compliance effort related to information
technology (IT) systems is divided into two initiatives. The first, which is the
much larger initiative, is known internally as "Millenniax," and relates to
mainframe and other technological systems maintained by the American Express
Technologies organization. The second, known as "Business T," relates to the
technological assets that are owned, managed or maintained by American Express'
individual business units, including AEFC. Business T also encompasses the
remediation of non-IT systems. These initiatives involve a substantial number of
employees and external consultants. This multiple sourcing approach is intended
to mitigate the risk of becoming dependent on any one vendor or resource. While
the vast majority of American Express' and AEFC's systems that require
modification are being remediated, in some cases they have chosen to migrate to
new applications that are already Y2K compliant.
American Express's and AEFC's plans for remediation with respect to Millenniax
and Business T include the following program phases: (i) employee awareness and
mobilization, (ii) inventory collection and assessment, (iii) impact analysis,
(iv) remediation/decommission, (v) testing and (vi) implementation. As part of
the first three phases, American Express and AEFC have identified their
mission-critical systems for purposes of prioritization. American Express' and
AEFC's goals are to complete testing of critical systems by early 1999, and to
continue compliance efforts, including but not limited to, the testing of
systems on an integrated basis and independent validation of such testing,
through 1999.** American Express and AEFC are currently on schedule to meet
these goals. With respect to systems maintained by American Express and AEFC,
the first three phases referred to above have been substantially completed for
both Millenniax and Business T. In addition, remediation of critical systems is
substantially complete. As of Dec. 31, 1998, for Millenniax for American
Express, the remediation/decommission, testing and implementation phases for
critical and non-critical systems in total are 82%, 75% and 60% complete,
respectively. For Millenniax for AEFC, such phases are 99%, 97% and 97%
complete, respectively. For Business T for American Express, such phases are
85%, 70% and 69% complete, respectively. For Business T for AEFC, such phases
are 74%, 62% and 62% complete, respectively.
American Express' most commonly used methodology for remediation is the sliding
window. Once an application/system has been remediated, American Express applies
specific types of tests, such as stress, regression, unit, future date and
baseline to ensure that the remediation process has achieved Y2K compliance
while maintaining the fundamental data processing integrity of the particular
system. To assist with remediation and testing, American Express is using
various standardized tools obtained from a variety of vendors.
American Express's cumulative costs since inception of the Y2K initiatives were
$383 million through Dec. 31, 1998 and are estimated to be in the range of
$135-$160 million for the remainder through 2000.** AEFC's cumulative costs
since inception of the Y2K initiative were $56 million through Dec. 31, 1998 and
are estimated to be in the range of $13-$19 million for the remainder through
2000.** These include both remediation costs and costs related to replacements
that were or will be required as a result of Y2K. These costs, which are
expensed as incurred, relate to both Millenniax and Business T, and have not
had, nor are they expected to have, a material adverse impact on American
Express', AEFC's or IDSC's results of operations or financial condition.**
Costs related to Millenniax, which represent most of the total Y2K costs of
American
<PAGE>
Express, are managed by and included in the American Express corporate level
financial results; costs related to Business T are included in American
Express' individual business segment's financial results, including AEFC's.
American Express and AEFC have not deferred other critical technology projects
or investment spending as a result of Y2K. However, because American Express and
AEFC must continually prioritize the allocation of finite financial and human
resources, certain non-critical spending initiatives have been deferred.
American Express' and AEFC's major businesses are heavily dependent upon
internal computer systems, and all have significant interaction with systems of
third parties, both domestically and internationally. American Express and AEFC
are working with key external parties, including merchants, clients,
counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory
agencies to mitigate the potential risks to American Express and AEFC of Y2K.
The failure of external parties to resolve their own Y2K issues in a timely
manner could result in a material financial risk to American Express or AEFC. As
part of their overall compliance program, American Express and AEFC are actively
communicating with third parties through face-to-face meetings and
correspondence, on an ongoing basis, to ascertain their state of readiness.
Although numerous third parties have indicated to American Express and AEFC in
writing that they are addressing their Y2K issues on a timely basis, the
readiness of third parties overall varies across the spectrum. Because American
Express' and AEFC's Y2K compliance is dependent on key third parties being
compliant on a timely basis, there can be no assurances that American Express'
and AEFC's efforts alone will resolve all Y2K issues.
At this point, American Express and AEFC are in the process of performing an
assessment of reasonably likely Y2K systems failures and related consequences.
American Express is also preparing specific Y2K contingency plans for all key
American Express business units, including AEFC, to mitigate the potential
impact of such failures. This effort is a full-scale initiative that includes
both internal and external experts under the guidance of an American
Express-wide steering committee. The contingency plans, which will be based in
part on an assessment of the magnitude and probability of potential risks, will
primarily focus on proactive steps to prevent Y2K failures from occurring, or if
they should occur, to detect them quickly, minimize their impact and expedite
their repair. The Y2K contingency plans will supplement disaster recovery and
business continuity plans already in place, and are expected to include measures
such as selecting alternative suppliers and channels of distribution, and
developing American Express' and AEFC's own technology infrastructure in lieu
of those provided by third parties. Development of the Y2K contingency plans is
expected to be substantially complete by the end of the first quarter of 1999,
and will continue to be refined throughout 1999 as additional information
related to American Express' and AEFC's exposures is gathered.**
** Statements in this Y2K discussion marked with two asterisks are
forward-looking statements which are subject to risks and uncertainties.
Important factors that could cause results to differ materially from these
forward-looking statements include, among other things, the ability of American
Express or AEFC to successfully identify systems containing two-digit codes, the
nature and amount of programming required to fix the affected systems, the costs
of labor and consultants related to such efforts, the continued availability of
such resources, and the ability of third parties that interface with American
Express and AEFC to successfully address their Y2K issues.
Ratios:
The ratio of stockholder's equity, excluding accumulated other comprehensive
income net of tax, to total assets less certificate loans and net unrealized
holding gains on investment securities at Dec. 31, 1998 and 1997 was 5.6% and
5.2%, respectively. 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, 1998 and 1997, and the related statements of operations,
comprehensive income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Minneapolis, Minnesota
February 4, 1999
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance Sheets, Dec. 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Qualified Assets (note 2) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Investments in unaffiliated issuers (notes 3, 4 and 10):
Held-to-maturity securities $592,815 $758,143
Available-for-sale securities 2,710,545 2,911,524
First mortgage loans on real estate 334,280 212,433
Certificate loans - secured by certificate reserves 32,343 37,098
Investments in and advances to affiliates 418 6,772
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments 3,670,401 3,925,970
- ------------------------------------------------------------------------------------------------------------------------------------
Receivables:
Dividends and interest 46,579 48,817
Investment securities sold 3,085 1,635
- ------------------------------------------------------------------------------------------------------------------------------------
Total receivables 49,664 50,452
- ------------------------------------------------------------------------------------------------------------------------------------
Other (notes 9 and 10) 96,213 56,127
- ------------------------------------------------------------------------------------------------------------------------------------
Total qualified assets 3,816,278 4,032,549
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred federal income taxes (note 8) 1,095 -
Due from affiliate 1,082 -
Deferred distribution fees and other 15,789 21,099
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 17,966 21,099
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $3,834,244 $4,053,648
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Balance Sheets, Dec. 31, (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity
Liabilities 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Certificate Reserves (notes 5 and 10):
Installment certificates:
Reserves to mature $309,110 $343,219
Additional credits and accrued interest 15,062 19,554
Advance payments and accrued interest 894 968
Other 55 56
Fully paid certificates:
Reserves to mature 2,909,891 3,186,191
Additional credits and accrued interest 169,514 174,699
Due to unlocated certificate holders 357 291
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificate reserves 3,404,883 3,724,978
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities:
Due to Parent (note 7A) 771 1,639
Due to Parent for federal income taxes 7,381 495
Due to affiliates (note 7B, 7C, 7D and 7E) 426 331
Reverse repurchase agreements 141,000 22,000
Payable for investment securities purchased 2,211 19,601
Accounts payable, accrued expenses and other (notes 9 and 10) 55,539 29,919
- ------------------------------------------------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 207,328 73,985
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred federal income taxes (note 8) - 15,175
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,612,211 3,814,138
- ------------------------------------------------------------------------------------------------------------------------------------
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 3,710 6,375
Appropriated for additional interest on advance payments 10 50
Unappropriated 63,623 55,948
Accumulated other comprehensive income - net of tax (note 1) 9,346 31,793
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 222,033 239,510
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $3,834,244 $4,053,648
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Investment Income
Interest income from investments:
Bonds and notes:
Unaffiliated issuers $209,408 $191,190 $184,653
Mortgage loans on real estate:
Unaffiliated 18,173 18,053 19,583
Affiliated - - 36
Certificate loans 1,896 2,200 2,533
Dividends 40,856 44,543 44,100
Other 2,802 2,246 576
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment income 273,135 258,232 251,481
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Expenses
Parent and affiliated company fees (note 7):
Distribution 33,783 34,507 32,732
Investment advisory and services 9,084 17,233 16,989
Transfer agent 3,932 - -
Depositary 250 238 228
Options (note 9) 21,012 14,597 10,156
Interest rate caps, corridors and floors (note 9) - 35 2,351
Reverse repurchase agreements 3,689 1,217 -
Interest rate swap agreements (note 9) 4,676 1,956 -
Other 385 354 395
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment expenses 76,811 70,137 62,851
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before provision
for certificate reserves and income tax benefit $196,324 $188,095 $188,630
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statements of Operations (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Provision for Certificate Reserves (notes 5 and 9)
According to the terms of the certificates:
Provision for certificate reserves $9,623 $9,796 $10,445
Interest on additional credits 1,032 1,244 1,487
Interest on advance payments 44 50 61
Additional credits/interest authorized by IDSC:
On fully paid certificates 146,434 141,515 146,474
On installment certificates 11,001 13,560 14,574
- ------------------------------------------------------------------------------------------------------------------------------------
Total provision for certificate reserves before reserve recoveries 168,134 166,165 173,041
Reserve recoveries from terminations prior to maturity (1,026) (1,029) (1,073)
- ------------------------------------------------------------------------------------------------------------------------------------
Net provision for certificate reserves 167,108 165,136 171,968
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income before income tax benefit 29,216 22,959 16,662
Income tax benefit (note 8) 265 3,682 6,537
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 29,481 26,641 23,199
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
Securities of unaffiliated issuers 5,143 980 (444)
Other-unaffiliated - - 101
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments before income taxes 5,143 980 (343)
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax (expense) benefit (note 8):
Current (1,800) (304) 772
Deferred - (39) (652)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income tax (expense) benefit (1,800) (343) 120
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 3,343 637 (223)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income - wholly owned subsidiary 1,646 328 1,251
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $34,470 $27,606 $24,227
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statements of Comprehensive Income
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Net income $34,470 $27,606 $24,227
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (note 1)
Unrealized (losses) gains on available-for-sale
securities:
Unrealized holding (losses) gains arising during year (32,020) 26,639 (25,853)
Income tax benefit (expense) 11,207 (9,324) 9,048
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains arising during period (20,813) 17,315 (16,805)
- ------------------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for (gains) losses included in net income (2,514) 59 2,802
Income tax expense (benefit) 880 (20) (981)
- ------------------------------------------------------------------------------------------------------------------------------------
Net reclassification adjustment for (gains) losses included in net income (1,634) 39 1,821
- ------------------------------------------------------------------------------------------------------------------------------------
Net other comprehensive (loss) income (22,447) 17,354 (14,984)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $12,023 $44,960 $9,243
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statements of Stockholder's Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
($ 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 $143,844 $168,844
Cash dividends declared - - (25,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $143,844 $143,844 $143,844
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Appropriated for predeclared additional credits/interest (note 5B)
Balance at beginning of year $6,375 $11,989 $18,878
Transferred to unappropriated retained earnings (2,665) (5,614) (6,889)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $3,710 $6,375 $11,989
- ------------------------------------------------------------------------------------------------------------------------------------
Appropriated for additional interest on advance payments (note 5C)
Balance at beginning of year $50 $50 $50
Transferred to unappropriated retained earnings (40) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $10 $50 $50
- ------------------------------------------------------------------------------------------------------------------------------------
Unappropriated (note 6)
Balance at beginning of year $55,948 $22,728 $31,612
Net income 34,470 27,606 24,227
Transferred from appropriated retained earnings 2,705 5,614 6,889
Cash dividends declared (29,500) - (40,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $63,623 $55,948 $22,728
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income -
net of tax (note 1)
Balance at beginning of year $31,793 $14,439 $29,423
Net other comprehensive (loss) income (22,447) 17,354 (14,984)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $9,346 $31,793 $14,439
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholder's equity $222,033 $239,510 $194,550
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Cash Flows from Operating Activities
Net income $34,470 $27,606 $24,227
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of wholly owned subsidiary (1,646) (328) (1,251)
Net provision for certificate reserves 167,108 165,136 171,968
Interest income added to certificate loans (1,180) (1,414) (1,631)
Amortization of premiums/discounts-net 22,620 15,484 14,039
Provision for deferred federal income taxes (3,088) (2,266) (1,124)
Net realized (gain) loss on investments before income taxes (5,143) (980) 343
Decrease (increase) in dividends and interest receivable 2,238 (4,804) 5,619
Decrease in deferred distribution fees 5,310 4,434 2,761
Increase in other assets (1,082) - -
Increase (decrease) in other liabilities 16,814 443 (679)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 236,421 203,311 214,272
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Maturity and redemption of investments:
Held-to-maturity securities 161,649 76,678 163,066
Available-for-sale securities 468,218 408,019 537,565
Other investments 76,894 79,929 52,189
Sale of investments:
Held-to-maturity securities 6,245 33,910 24,984
Available-for-sale securities 344,901 160,207 356,194
Other investments - - 385
Certificate loan payments 4,006 4,814 6,003
Purchase of investments:
Held-to-maturity securities (1,034) (4,565) (49,984)
Available-for-sale securities (663,347) (1,283,620) (617,138)
Other investments (189,905) (62,831) (28,617)
Certificate loan fundings (3,703) (5,021) (5,288)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $203,924 ($592,480) $439,359
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statements of Cash Flows (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Dec. 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
($ thousands)
Cash Flows from Financing Activities
Payments from certificate owners $1,192,026 $1,580,013 $1,129,023
Proceeds from reverse repurchase agreements 919,500 433,000 -
Dividend from wholly owned subsidiary 8,000 - -
Certificate maturities and cash surrenders (1,729,871) (1,324,175) (1,663,196)
Payments under reverse repurchase agreements (800,500) (411,000) -
Dividends paid (29,500) - (65,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (440,345) 277,838 (599,173)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents - (111,331) 54,458
Cash and cash equivalents beginning of year - 111,331 56,873
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of year $- $- $111,331
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures Including Non-cash Transactions
Cash received (paid) for income taxes $1,217 ($104) $7,195
Certificate maturities and surrenders through
loan reductions 5,632 8,032 8,554
See notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements ($ 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 nine 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 36-months. In addition, two
types of certificates have 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.
Comprehensive Income
Effective Jan. 1, 1998, IDSC adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires the
reporting and display of comprehensive income and its components. Comprehensive
income is defined as the aggregate change in stockholder's equity excluding
changes in ownership interests. For IDSC, comprehensive income consists of net
income and unrealized gains or losses on available-for-sale securities net of
taxes. Prior year amounts have been reclassified to conform to the requirements
of the new Statement.
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 accumulated other
comprehensive income in 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.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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.
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.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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.
Accounting developments
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP, which is effective
Jan. 1, 1999, requires the capitalization of certain costs incurred to develop
or obtain software for internal use. Software utilized by IDSC is owned by
Parent and will be capitalized on Parent's financial statements. As a result,
the new rule will not have a material impact on IDSC's results of operations or
financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective Jan. 1, 2000. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Earlier application of all of the provisions of this Statement is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of the Statement. This Statement cannot be applied retroactively.
The ultimate financial impact of the new rule will be measured based on the
derivatives in place at adoption and cannot be estimated at this time.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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 $3,353,920 and $3,694,204 at Dec. 31, 1998 and 1997,
respectively. IDSC had qualified assets of $3,799,689 at Dec. 31, 1998 and
$3,964,036 at Dec. 31, 1997, excluding net unrealized appreciation on
available-for-sale securities of $14,378 and $48,912 at Dec. 31, 1998 and 1997,
respectively and payable for securities purchased of $2,211 and $19,601 at Dec.
31, 1998 and 1997, 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.
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, 1998
-----------------------------------------------
Required
Deposits deposits Excess
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deposits to meet certificate
liability requirements:
States $364 $327 $37
Central Depositary 3,543,964 3,317,295 226,669
- -----------------------------------------------------------------------------------------------------
Total $3,544,328 $3,317,622 $226,706
- -----------------------------------------------------------------------------------------------------
Dec. 31, 1997
-----------------------------------------------
Required
Deposits deposits Excess
- -----------------------------------------------------------------------------------------------------
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 $176,419
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
The assets on deposit at Dec. 31, 1998 and 1997 consisted of securities having a
deposit value of $3,153,038 and $3,580,866, respectively; mortgage loans of
$334,280 and $212,433, respectively; and other assets of $57,010 and $33,569,
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.
The following is a summary of securities held to maturity and securities
available for sale at Dec. 31, 1998 and 1997.
<TABLE>
<CAPTION>
Dec. 31, 1998
---------------------------------------------------------------
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Held to maturity
U.S. Government and
agencies obligations $363 $373 $10 $-
Mortgage-backed securities 22,366 22,986 620 -
Corporate debt securities 168,191 172,941 4,750 -
Stated maturity preferred stock 401,895 428,689 26,802 8
- ---------------------------------------------------------------------------------------------------------------------
Total $592,815 $624,989 $32,182 $8
- ---------------------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities $831,677 $846,864 $15,787 $600
State and municipal obligations 32,075 33,437 1,362 -
Corporate debt securities 1,674,932 1,667,264 29,197 36,865
Stated maturity preferred stock 63,257 65,822 2,637 72
Perpetual preferred stock 94,226 97,158 2,947 15
- ---------------------------------------------------------------------------------------------------------------------
Total $2,696,167 $2,710,545 $51,930 $37,552
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
Total $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
- ---------------------------------------------------------------------------------------------------------------------
Total $2,862,612 $2,911,524 $51,437 $2,525
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities held to maturity and available
for sale, by contractual maturity, at Dec. 31, 1998, 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 $99,718 $100,336
Due after 1 year through 5 years 274,565 288,415
Due after 5 years through 10 years 179,098 194,280
Due after 10 years 17,068 18,972
- ---------------------------------------------------------------------------------------------------------------------
570,449 602,003
Mortgage-backed securities 22,366 22,986
- ---------------------------------------------------------------------------------------------------------------------
Total $592,815 $624,989
- ---------------------------------------------------------------------------------------------------------------------
Available for sale
Due within 1 year $76,383 $76,569
Due after 1 year through 5 years 825,032 841,426
Due after 5 years through 10 years 506,693 508,301
Due after 10 years 362,156 340,227
- ---------------------------------------------------------------------------------------------------------------------
1,770,264 1,766,523
Mortgage-backed securities 831,677 846,864
Perpetual preferred stock 94,226 97,158
- ---------------------------------------------------------------------------------------------------------------------
Total $2,696,167 $2,710,545
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
During the years ended Dec. 31, 1998 and 1997, 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,
1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds $346,353 $161,188 $313,976
Gross realized gains 4,487 1,292 456
Gross realized losses 1,461 1,637 5,836
- ---------------------------------------------------------------------------------------------------------------------
Sales of held-to-maturity securities resulting from acceptance of a tender offer during the year ended
Dec. 31, 1998 and significant credit deterioration during the years ended Dec. 31, 1997 and 1996,
were as follows:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Amortized cost $6,182 $32,969 $22,297
Gross realized gains 63 1,621 3,200
Gross realized losses - 680 513
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During the years ended Dec. 31, 1998 and 1997, no securities were reclassified
from held to maturity to available for sale.
B) Investments in securities with fixed maturities comprised 85% and 89% of
IDSC's total invested assets at Dec. 31, 1998 and 1997, respectively. Securities
are rated by Moody's and Standard & Poors (S&P), or by Parent's internal
analysts, using criteria similar to Moody's and S&P, when a public rating does
not exist. A summary of investments in securities with fixed maturities by
rating of investment is as follows:
Rating 1998 1997
- ---------------------------------------------------------------------
Aaa/AAA 37% 44%
Aa/AA 1 1
Aa/A 1 1
A/A 13 14
A/BBB 5 6
Baa/BBB 33 25
Below investment grade 10 9
- ---------------------------------------------------------------------
100% 100%
- ---------------------------------------------------------------------
Of the securities rated Aaa/AAA, 84% and 83% at Dec. 31, 1998 and 1997,
respectively, are U.S. Government Agency mortgage-backed securities that are not
rated by a public rating
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
agency. Approximately 11% and 9% at Dec. 31, 1998 and 1997, respectively, of
securities with fixed maturities, other than U.S. Government Agency
mortgage-backed securities, are rated by Parent's internal analysts. At Dec. 31,
1998 and 1997 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.
4. Investments in first mortgage loans on real estate
At Dec. 31, 1998 and 1997, IDSC's recorded investment in impaired mortgage loans
was $296 and $363, respectively, and the reserve for loss on those amounts was
$261 in both years. During 1998, 1997 and 1996, the average recorded investment
in impaired mortgage loans was $331, $743 and $925, respectively.
IDSC recognized $31, $37 and $88 of interest income related to impaired mortgage
loans for the years ended Dec. 31, 1998, 1997 and 1996, respectively.
During the years ended Dec. 31, 1998, 1997 and 1996, there were no changes in
the reserve for loss on mortgage loans of $611.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
At Dec. 31, 1998 and 1997, approximately 9% and 5%, 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 1998 1997
- ---------------------------------------------------------------------
West North Central 21% 21%
South Atlantic 18 23
East North Central 17 18
Mountain 14 13
West South Central 12 6
Pacific 7 3
New England 6 5
Middle Atlantic 5 11
- ---------------------------------------------------------------------
Total 100% 100%
- ---------------------------------------------------------------------
Property Type 1998 1997
- ---------------------------------------------------------------------
Retail/shopping centers 28% 31%
Office buildings 25 20
Apartments 19 23
Industrial buildings 12 17
Other 16 9
- ---------------------------------------------------------------------
Total 100% 100%
- ---------------------------------------------------------------------
The carrying amounts and fair values of first mortgage loans on real estate are
as follows at Dec. 31. The fair values are estimated using discounted cash flow
analysis, using market interest rates currently being offered for loans with
similar maturities.
<TABLE>
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
---------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First mortgage loans on real estate $334,891 $343,406 $213,044 $216,951
Reserve for losses (611) - (611) -
- ---------------------------------------------------------------------------------------------------------------------
Net first mortgage loans on
real estate $334,280 $343,406 $212,433 $216,951
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
At Dec. 31, 1998 and 1997, commitments for fundings of first mortgage loans, at
market interest rates, aggregated $60,828 and $9,375, respectively. IDSC employs
policies and procedures to ensure the creditworthiness of the borrowers and that
funds will be available on the funding date. IDSC's loan fundings are restricted
to 80% or less of the market value of the real estate at the time of the loan
funding. Management believes there is no fair value for these commitments.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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, 1998 and 1997
were:
<TABLE>
<CAPTION>
1998
------------------------------------------------
Average Average
gross additional
Reserve accumulation credit
balance rate rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Installment certificates
Reserves to mature:
With guaranteed rates $21,018 3.50% .50%
Without guaranteed rates (A) 288,092 - 2.92
Additional credits and accrued interest 15,061 3.16 -
Advance payments and accrued interest (C) 894 3.18 .82
Other 55 - -
Fully paid certificates
Reserves to mature:
With guaranteed rates 146,437 3.20 1.47
Without guaranteed rates (A) and (D) 2,763,454 - 4.29
Additional credits and accrued interest 169,515 3.18 -
Due to unlocated certificate holders 357 - -
- ---------------------------------------------------------------------------------------------------------------------
Total $3,404,883
- ---------------------------------------------------------------------------------------------------------------------
1997
------------------------------------------------
Average Average
gross additional
Reserve accumulation credit
balance 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 -
- ---------------------------------------------------------------------------------------------------------------------
Total $3,724,978
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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, 1998, $3,710 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 3.18%. IDSC has increased the rate of accrual
to 4.00% through April 30, 2000. An appropriation of retained earnings amounting
to $10 has been made, which represents the estimated additional accrual that
will result from the increase granted by IDSC.
D) IDS Stock Market Certificate, American Express Stock Market Certificate and
IDS Market Strategy Certificate enable the certificate owner to participate in
any relative rise in a major stock market index without risking loss of
principal. Generally the certificates have a term of 12 months and may continue
for up to 20 successive terms. The reserve balance on these certificates at Dec.
31, 1998 and 1997 was $622,409 and $416,485, respectively.
E) The carrying amounts and fair values of certificate reserves consisted of the
following at Dec. 31, 1998 and 1997. Fair values of certificate reserves with
interest rate terms of one year or less approximated the carrying values less
any applicable surrender charges.
The fair values for other certificate reserves are determined by a discounted
cash flow analysis using interest rates currently offered for certificates with
similar remaining terms, less any applicable surrender charges.
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserves with terms of one year or less $3,070,001 $3,068,463 $3,186,971 $3,185,396
Other 334,882 350,509 538,007 551,988
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificate reserves 3,404,883 3,418,972 3,724,978 3,737,384
Unapplied certificate transactions 853 853 868 868
Certificate loans and accrued interest (32,703) (32,703) (37,495) (37,495)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3,373,033 $3,387,122 $3,688,351 $3,700,757
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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 1999 and 2000 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, joint facilities, technology support and treasury 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.
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 the seven- and
13-month term IDS 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 $22.50 9
On sales prior to April 30, 1997(a) 30.00 6.00 24.00 4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
(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 the IDS Cash Reserve and IDS 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 0.25% of the reserves maintained
for these certificates at the beginning of the second and subsequent quarters
from issue date.
Fees on the IDS Future Value Certificate were paid at the rate of 5% of the
purchase price at time of issuance. Effective May 1, 1997, the IDS Future Value
Certificate is no longer being offered for sale.
Fees on the American Express Investors Certificate are paid at an annualized
rate of 1% of the reserves maintained for the certificates. Fees are paid at the
end of each term on certificates with a one-, two- or three-month term. Fees are
paid each quarter from date of issuance on certificates with a six-, 12-, 24- or
36-month term.
Fees on the IDS 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, and IDS Market Strategy Certificate 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 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 $15 per transaction
- -------------------------------------------------------------------------------
A transaction consists of the receipt or withdrawal of securities and commercial
paper and/or a change in the security position. The charges are payable
quarterly except for maintenance, which is an annual fee.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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 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. Prior to
Jan. 1, 1998, AEFC provided this service to IDSC under the investment advisory
and services agreement.
8. Income taxes
Income tax (expense) benefit as shown in the statement of operations for the
three years ended Dec. 31, consists of:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current ($5,668) $1,138 $5,560
Deferred 4,183 2,266 1,124
- ---------------------------------------------------------------------------------------------------------------------
(1,485) 3,404 6,684
State (50) (65) (27)
- ---------------------------------------------------------------------------------------------------------------------
Total income tax (expense) benefit ($1,535) $3,339 $6,657
- ---------------------------------------------------------------------------------------------------------------------
Income tax (expense) benefit differs from that computed by using the U.S. Statutory rate
of 35%. The principal causes of the difference in each year are shown below:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Federal tax expense at U.S. statutory rate ($12,026) ($8,378) ($5,711)
Tax-exempt interest 394 724 1,517
Dividend exclusion 10,121 11,044 10,865
Other, net 26 14 13
- ---------------------------------------------------------------------------------------------------------------------
Federal tax (expense) benefit ($1,485) $3,404 $6,684
- ---------------------------------------------------------------------------------------------------------------------
Deferred income taxes result from the net tax effects of temporary differences. Temporary differences
are differences between the tax bases of assets and liabilities and their reported amounts in the financial
statements that will result in differences between income for tax purposes and income for financial statement
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
purposes in future years. Principal components of IDSC's deferred tax assets and
liabilities as of Dec. 31, are as follows.
Deferred tax assets 1998 1997
- ---------------------------------------------------------------------
Certificate reserves $19,423 $13,488
Investment reserves 502 502
Other, net 18 19
- ---------------------------------------------------------------------
Total deferred tax assets $19,943 $14,009
- ---------------------------------------------------------------------
Deferred tax liabilities 1998 1997
- ---------------------------------------------------------------------
Deferred distribution fees $5,523 $7,382
Investment unrealized gains 5,032 17,119
Purchased/written call options 7,417 3,557
Dividends receivable 553 654
Investments 280 429
Return of capital dividends 43 43
- ---------------------------------------------------------------------
Total deferred tax liabilities 18,848 29,184
- ---------------------------------------------------------------------
Net deferred tax assets (liabilities) $1,095 ($15,175)
- ---------------------------------------------------------------------
9. Derivative financial instruments
IDSC enters into transactions involving derivative financial instruments as an
end user (nontrading). IDSC uses these instruments to manage its exposure to
interest rate risk and equity price risk, including hedging specific
transactions. IDSC manages risks associated with these instruments as described
below.
Market risk is the possibility that the value of the derivative financial
instrument will change due to fluctuations in a factor from which the instrument
derives its value, primarily an interest rate or a major market index. IDSC is
not impacted by market risk related to derivatives held because derivatives are
largely used to manage risk and, therefore, the cash flows and income effects of
the derivatives are inverse to the effects of the underlying hedged
transactions.
Credit risk is the possibility that the counterparty will not fulfill the terms
of the contract. IDSC monitors credit risk related to derivative financial
instruments through established approval procedures, including setting
concentration limits by counterparty, reviewing credit ratings and requiring
collateral where appropriate. At Dec. 31, 1998, IDSC's counterparties to the
interest rate floors and swaps are rated AA by nationally recognized rating
agencies. The counterparties to the purchased call options are seven major
broker/dealers.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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,
1998 and 1997.
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Notional Total
or contract Carrying Fair credit
amount value value risk
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Interest rate floors $500,000 $37 $348 $348
Purchased call options 448 96,176 92,357 92,357
- ---------------------------------------------------------------------------------------------------------------------
Total $500,448 $96,213 $92,705 $92,705
- ---------------------------------------------------------------------------------------------------------------------
Liabilities
Interest rate swaps $500,000 $- $1,488 $-
Written call options 448 38,071 54,181 -
- ---------------------------------------------------------------------------------------------------------------------
Total $500,448 $38,071 $55,669 $-
- ---------------------------------------------------------------------------------------------------------------------
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 $- $2,138 $-
Written call options 376 24,739 32,990 -
- ---------------------------------------------------------------------------------------------------------------------
Total $1,000,376 $24,739 $35,128 $-
- ---------------------------------------------------------------------------------------------------------------------
The fair values of derivative financial instruments are based on market values, dealer quotes or
pricing models. The interest rate floors and swaps at Dec. 31, 1998, expire in April of 1999. The
options at Dec. 31, 1998, expire throughout 1999.
</TABLE>
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
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 or other investment
income, as appropriate.
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 or other investment income, as
appropriate.
The interest rate swaps are reset monthly. IDSC pays a fixed rate on the
notional amount ranging from 5.46% to 5.66% 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. Interest
earned and interest expensed under the agreements is shown net in investment
expenses or other investment income, as appropriate.
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. Changes in the
intrinsic value of these options are recognized currently in provision for
certificate reserves.
<PAGE>
Notes to Financial Statements ($ in thousands unless indicated otherwise)
- -------------------------------------------------------------------------------
Following is a summary of open option contracts at Dec. 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
-----------------------------------------------
Contract Average Index at
amount strike price Dec.31,1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchased call options $448 1,088 1,229
Written call options 448 1,206 1,229
- -----------------------------------------------------------------------------------------------------
1997
-----------------------------------------------
Contract Average Index at
amount strike price Dec.31,1997
- -----------------------------------------------------------------------------------------------------
Purchased call options $389 876 970
Written call options 376 969 970
- -----------------------------------------------------------------------------------------------------
</TABLE>
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.
A summary of fair values of financial instruments as of Dec. 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------
Carrying Fair Carrying Fair
value value value value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Assets for which carrying values
approximate fair values $50,288 $50,288 $49,940 $49,940
Investment securities (note 3) 3,303,360 3,335,534 3,669,667 3,695,839
First mortgage loans on real estate (note 4) 334,280 343,406 212,433 216,951
Derivative financial instruments (note 9) 96,213 92,705 56,127 54,860
Financial liabilities
Liabilities for which carrying values
approximate fair values 154,964 154,964 48,255 48,255
Certificate reserves (note 5) 3,373,033 3,387,122 3,688,351 3,700,757
Derivative financial instruments (note 9) 38,071 55,669 24,739 35,128
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Prospectus April 28, 1999
American Express Investors Certificate
(for selected investors)
Provides high fixed rates with capital preservation.
IDS Certificate Company (the Issuer or IDSC), a subsidiary of American Express
Financial Corporation, issues American Express Investors Certificates. You can:
o Purchase this certificate in any amount from $100,000 through $5 million,
unless you receive prior authorization from the Issuer to invest more.
o Select a term of one, two, three, six, 12, 24 or 36 months.
o Invest in successive terms up to a total of 20 years from the issue date of
the certificate.
This prospectus is designed for selected persons who plan to invest at least $50
million in combinations of these certificates with authorization from the
Issuer. Unless you plan to invest at least $50 million, you should discuss with
your relationship manager whether this is the right prospectus for you.
This certificate is available in New York and Florida to persons who are neither
citizens nor residents of the United States and to certain U.S. trusts.
Like all investment companies, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
This certificate is backed solely by the assets of the Issuer. See "Risk
factors" on page 2p.
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.
The distributor and selling agent are not required to sell any specific amount
of certificates.
Issuer:
IDS Certificate Company
Unit 557
IDS Tower 10
Minneapolis, MN 55440-0010
800-437-3133
612-671-3131
Distributor:
American Express Financial Advisors Inc.
Selling Agent:
American Express Bank International
<PAGE>
Initial interest rates
The Issuer guarantees a fixed rate of interest for each term. For the initial
term, the rate will be within a specified range of certain average interest
rates generally referred to as the London Interbank Offered Rates (LIBOR). See
"About the certificate" for more explanation.
Here are the interest rates in effect
April 28, 1999*:
Actual
Simple Compound Effective
Interest Yield for Annualized
Term Rate* the Term** Yield***
1 month 3.426% 3.426% 3.480%
2 month 3.421 3.426 3.475
3 month 3.490 3.500 3.546
6 month 3.513 3.539 3.570
12 month 3.652 3.714 3.714
24 month 3.774 3.840 3.840
36 month 3.774 3.840 3.840
* These are the rates for investments of $100,000. Rates may depend on factors
described in "Rates for new purchases" under "About the certificate."
** Assuming monthly compounding for the number of months in the term and a
$100,000 purchase.
*** Assuming monthly compounding for 12 months and a $100,000 purchase.
These rates may or may not have changed when you apply to purchase your
certificate. Rates for future terms are set at the discretion of the Issuer and
may also differ from the rates shown here.
Risk factors
You should consider the following when investing in this certificate.
This certificate is backed solely by the assets of the Issuer. Most of our
assets are debt securities whose price generally falls as interest rates
increase, and rises as interest rates decrease. Credit ratings of the issuers of
securities in our portfolio vary. See "Invested and guaranteed by the Issuer,"
"Regulated by government," "Backed by our investments" and "Investment policies"
under "How your money is used and protected."
<PAGE>
American Express Financial Corporation (AEFC), the parent company of IDSC,
maintains the major computer systems used by the Issuer. The Year 2000 (Y2K)
issue is the result of computer programs that may recognize a date using "00" as
the year 1900 rather than 2000. This could result in the failure of major
systems. AEFC and its parent company, American Express Company, began addressing
the Y2K issue in 1995 and have established a plan for resolution. See
"Management's discussion and analysis of financial condition and results of
operation."
Table of Contents
Initial interest rates 2p
Risk factors 2p
About the certificate 6p
Read and keep this prospectus 6p
Investment amounts and terms 6p
Face amount and principal 7p
Value at maturity 8p
Receiving cash during the term 8p
Interest 9p
Promotions and pricing flexibility 9p
Rates for new purchases 10p
Rates for future terms 14p
Additional investments 15p
Earning interest 16p
How to invest and withdraw funds 17p
Buying your certificate 17p
How to make investments at term end 19p
Full and partial withdrawals 20p
When your certificate term ends 23p
Transfers to other accounts 24p
Transfer of ownership 24p
For more information 24p
Giving instructions and written notification 24p
Purchases by bank wire 26p
Tax treatment of your investment 27p
Withholding taxes 27p
Trusts 28p
How your money is used and protected 29p
Invested and guaranteed by the Issuer 29p
Regulated by government 30p
Backed by our investments 30p
Investment policies 31p
<PAGE>
How your money is managed 37p
Relationship between the Issuer and American
Express Financial Corporation 37p
Capital structure and certificates issued 39p
Investment management and services 39p
Distribution 41p
Selling Agent Agreement with AEBI 42p
Other selling agents 42p
About American Express Service Corporation 43p
About American Express Bank International 43p
Transfer agent 44p
Employment of other American Express affiliates 45p
Directors and officers 45p
Independent auditors 48p
Appendix 49p
Annual financial information 51p
Summary of selected financial information 51p
Management's discussion and analysis of financial
condition and results of operations 52p
Report of independent auditors 67p
Financial statements 69p
Notes to financial statements 76p
<PAGE>
About the certificate
Read and keep this prospectus
This prospectus describes terms and conditions of your American Express
Investors 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 Investors Certificate as described
in the prospectus, or to bind the Issuer by any statement not in it.
This prospectus describes American Express Investors Certificate distributed by
American Express Financial Advisors Inc. American Express Bank International
(AEBI) has an arrangement with American Express Financial Advisors Inc. under
which the certificate is offered to AEBI's clients who are neither citizens nor
residents of the United States and to certain U.S. trusts. The certificate is
currently available through AEBI offices located in Florida and New York. This
certificate also may be available through other selling agents.
Investment amounts and terms
You may purchase the American Express Investors Certificate in any amount from
$100,000 payable in U.S. currency. The American Express Investors Certificate is
a security purchased with a single investment. Unless you receive prior
approval, your total amount paid in any one or more certificates, in the
aggregate over the life of the certificates, less withdrawals, cannot exceed $5
million. Unless you plan to invest at least $50 million in total, with at least
$5 million (exclusive of interest) for a term of 12 months or longer, you should
discuss with your relationship manager whether this is the right prospectus for
you.
<PAGE>
After determining the amount you wish to invest, you select a term of one, two,
three, six, 12, 24 or 36 months for which the Issuer will guarantee a specific
interest rate. The Issuer guarantees the principal of and interest on your
certificate. At the end of the term, you may have interest earned on the
certificate during its term credited to your certificate or paid to you.
Investments in the certificate may continue for successive terms up to a total
of 20 years from the issue date of the certificate. Generally, you will be able
to select any of the terms offered. But if your certificate is nearing its
20-year maturity, you will not be allowed to select a term that would carry the
certificate past its maturity date.
Face amount and principal
The face amount of the certificate is the amount of your initial investment, and
will remain the same over the life of the certificate. Any investment or
withdrawal within 15 days of the end of a term will be added on or deducted to
determine principal for the new term. A withdrawal at any other time is taken
first from interest credited to your investment during that term. The principal
is the amount that is reinvested at the beginning of each subsequent term, and
is calculated as follows:
Principal equals Face amount (initial investment)
===============================================================================
plus At the end of a term, interest credited to your account
during the term
minus Any interest paid to you in cash
plus Any additional investments to your certificate
minus Any withdrawals, fees and applicable penalties
Principal may change during a term as described in "Full and partial
withdrawals."
<PAGE>
For example: Assume your initial investment (face amount) of $500,000 earned
$7,500 of interest during the term. You have not taken any interest as cash or
made any withdrawals. You have invested an additional $250,000 prior to the
beginning of the next term. Your principal for the next term will equal:
$500,000 Face amount (initial investment)
plus 7,500 Interest credited to your account
minus (0) Interest paid to you in cash
plus 250,000 Additional investment to your certificate
minus (0) Withdrawals and applicable penalties or fees
$757,500 Principal at the beginning of the next term.
Value at maturity
You may continue to invest for successive terms for up to a total of 20 years
from the issue date of the certificate. Your certificate matures at 20 years
from its issue date. At maturity, you will receive a distribution for the value
of your certificate, which will be the total of your purchase price, plus
additional investments and any credited interest not paid to you in cash, less
any withdrawals and penalties. Some fees may apply as described in "How to
invest and withdraw funds."
Receiving cash during the term
If you need your 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."
<PAGE>
Interest
Your investments earn interest from the date they are credited to your account.
Interest is compounded and credited at the end of each certificate month (on the
monthly anniversary of the issue date). Interest may be paid to you monthly in
cash if you maintain a principal balance of at least $500,000.
The Issuer declares and guarantees a fixed rate of interest for each term during
the life of your certificate. We calculate the amount of interest you earn each
certificate month by:
o applying the interest rate then in effect to your balance each day;
o adding these daily amounts to get a monthly total; and
o subtracting interest accrued on any amount you withdraw during the
certificate month.
Interest is calculated on a 30-day month and 360-day year basis.
This certificate may be available through other distributors or selling agents
with different interest rates or related features and consequently with
different returns. You may obtain information about any such other distributors
or selling agents by calling 800-437-3133.
Promotions and pricing flexibility
The Issuer may sponsor or participate in promotions involving the certificate
and its 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 or its affiliates. These promotions
will generally be for a specified period of time. We also may offer different
rates based on your amount invested.
<PAGE>
Rates for new purchases
When your application is accepted and we have received your initial investment,
we will send you a confirmation of your purchase showing the rate that your
investment will earn. The Issuer guarantees that the rate in effect for your
initial term will be within a 100 basis point (1%) range tied to certain average
interest rates for comparable length dollar deposits available on an interbank
basis in the London market, and generally referred to as the London Interbank
Offered Rates (LIBOR). For investments of $1 million or more, initial rates for
specific terms are determined as follows:
<TABLE>
<CAPTION>
<S> <C>
1 month Within a range of 80 basis points below to 20 basis points above the one-month LIBOR rate.
2 months Within a range of 80 basis points below to 20 basis points above the one-month LIBOR rate. (A two-month LIBOR rate is
not published.)
3 months Within a range of 80 basis points below to 20 basis points above the three-month LIBOR rate.
6 months Within a range of 80 basis points below to 20 basis points above the six-month LIBOR rate.
12 months Within a range of 80 basis points below to 20 basis points above the 12-month LIBOR rate.
24 months Within a range of 50 basis points below to 50 basis points above the 12-month LIBOR rate. (A 24-month LIBOR rate is not
published.)
36 months Within a range of 50 basis points below to 50 basis points above the 12-month LIBOR rate. (A 36-month LIBOR rate is not
published.)
</TABLE>
<PAGE>
For investments from $250,000 to $999,999 initial rates for specific terms are
determined as follows:
<TABLE>
<CAPTION>
<S> <C>
1 month Within a range of 100 basis points below to zero basis points above the one-month LIBOR rate.
2 months Within a range of 100 basis points below to zero basis points above the
one-month LIBOR rate. (A two-month LIBOR rate is not published.)
3 months Within a range of 100 basis points below to zero basis points above the three-month LIBOR rate.
6 months Within a range of 100 basis points below to zero basis points above the six-month LIBOR rate.
12 months Within a range of 100 basis points below to zero basis points above the 12-month LIBOR rate.
24 months Within a range of 85 basis points below to 15 basis points above the
LIBOR rate. (A 24-month LIBOR rate is not published.)
36 months Within a range of 85 basis points below to 15 basis points above the
LIBOR rate. (A 36-month LIBOR rate is not published.)
</TABLE>
For investments of $100,000 to $249,999, initial rates for specific terms are
determined as follows:
<TABLE>
<CAPTION>
<S> <C>
1 month Within a range of 180 basis points below to 80 basis points below the one-month LIBOR rate.
2 months Within a range of 180 basis points below to 80 basis points below the
one-month LIBOR rate. (A two-month LIBOR rate is not published.)
<PAGE>
3 months Within a range of 180 basis points below to 80 basis points below the three-month LIBOR rate.
6 months Within a range of 180 basis points below to 80 basis points below the six-month LIBOR rate.
12 months Within a range of 180 basis points below to 80 basis points below the 12-month LIBOR rate.
24 months Within a range of 175 basis points below to 75 basis points below the 12-month LIBOR rate. (A 24-month LIBOR rate is
not published.)
36 months Within a range of 175 basis points below to 75 basis points below the 12-month LIBOR rate. (A 36-month LIBOR rate is
not published.)
</TABLE>
For example, if the LIBOR rate published on the date rates are determined with
respect to a six-month deposit is 6.50%, the rate declared on a six-month
American Express Investors Certificate greater than $250,000 but less than $1
million would be between 5.50% and 6.50%. If the LIBOR rate published for a
given week with respect to 12-month certificates is 7.00%, the Issuer's rates in
effect that week for the 24- and 36-month American Express Investors
Certificates greater than $250,000 would be between 6.15% and 7.15%. When your
application is accepted, you will be sent a confirmation showing the rate that
your investment will earn for the first term.
<PAGE>
LIBOR is the interbank-offered rates for dollar deposits at which major
commercial banks will lend for specific terms in the London market. Generally,
LIBOR rates quoted by major London banks will be the same. However, market
conditions, including movements in the U.S. prime rate and the internal funding
position of each bank, may result in minor differences in the rates offered by
different banks. LIBOR is a generally accepted and widely quoted interest-rate
benchmark. The average LIBOR rate used by the Issuer is published in The Wall
Street Journal.
Rates for new purchases are reviewed and may change daily. The guaranteed rate
that is in effect for your chosen term on the day your application is accepted
at the Issuer's corporate office in Minneapolis, Minnesota, U.S.A. will apply to
your certificate. The interest rates printed in the front of this prospectus may
or may not have changed on the date your application to invest is accepted.
Rates for new purchases may vary depending on the amount you invest, but will
always be within the 100 basis point range described above. You may obtain the
current interest rates by calling your AEBI or other selling agent
representative.
In determining rates based on the amount of your investment, the Issuer may
offer a rate based on your aggregate investment determined by totaling only the
amounts invested in each certificate that has a current balance exceeding a
specified level. The current balance considered in this calculation may be
exclusive of interest. Part of the balance may be required to be invested in
terms of a specified minimum length. The aggregate investment may be required to
be for terms that average at least a
<PAGE>
specified minimum length. The certificates whose balances are aggregated must
have identical ownership. The rate may be available only for a certificate whose
current balance exceeds a specified level or that is offered through a specified
distributor or selling agent.
Interest rates for the term you have selected will not change once the term has
begun, unless a withdrawal reduces your account value to a point where we pay a
lower interest rate, as described in "Full and partial withdrawals" under "How
to invest and withdraw funds."
Rates for future terms
Interest on your certificate for future terms may be greater or less than the
rates you receive during your first term. In setting future interest rates for
subsequent terms, a primary consideration will be the prevailing investment
climate, including the LIBOR rates. Nevertheless, the Issuer has complete
discretion as to what interest rates it will declare beyond the initial term.
The Issuer will send you notice at the end of each term of the rate your
certificate will earn for the new term. You have a 15-day grace period to
withdraw your certificate without a withdrawal charge. If LIBOR is no longer
publicly available or feasible to use, the Issuer may use another, similar index
as a guide for setting rates.
<PAGE>
Additional investments
You may add to your investment when your term ends. If your new term is a
one-month term, you may add to your investment on the first day of your new term
(the renewal date) or the following business day if the renewal date is a
non-business day. If your new term is greater than one month, you may add to
your investment within the 15 days following the end of your term. A $25,000
minimum additional investment is required, payable in U.S. currency. Your
confirmation will show the applicable rate. However, unless you receive prior
approval from the Issuer, your investment may not bring the aggregate net
investment of any one or more certificates held by you (excluding any interest
added during the life of the certificate and less withdrawals) over $5 million.
Additional investments of at least $25,000 may be made by bank wire.
The Issuer must receive your additional investment within the 15 days following
the end of a certificate's current term (unless your new investment is a
one-month term), if you wish to increase your principal investment as of the
first day of the new term. Interest accrues from the first day of the new term
or the day your additional investment is accepted by the Issuer, whichever is
later, at the rate then in effect for your account. If your new term is a
one-month term, your additional investment must be received by the end of the
certificate's current term.
<PAGE>
The interest rate for these additional investments is the rate then in effect
for your account. If your additional investment increases the principal of your
certificate so that your certificate's principal has exceeded a break point for
a higher interest rate, the certificate will earn this higher interest rate for
the remainder of the term, from the date the Issuer accepts the additional
investment.
Earning interest
At the end of each certificate month, interest is compounded and credited to
your account. A certificate month is the monthly anniversary of the issue date.
Interest may be paid to you monthly in cash if you maintain a principal balance
of at least $500,000.
The amount of interest you earn each certificate month is determined by applying
the interest rate then in effect to the daily balance of your certificate, and
subtracting from that total the interest accrued on any amount withdrawn during
the month. Interest is calculated on a 360-day year basis. This means interest
is calculated on the basis of a 30-day month even though terms are determined on
a calendar month.
<PAGE>
How to invest and withdraw funds
Buying your certificate
This certificate is available only to AEBI clients who are neither citizens nor
residents of the United States (or which are foreign corporations, partnerships,
estates or trusts) and to U.S. trusts organized under the laws of any state in
the United States, so long as the following are true in the case of such a U.S.
trust:
o the trust is unconditionally revocable by the grantor or grantors (the
person or persons who put the money into the trust);
o there are no more than 10 grantors of the trust;
o all the grantors are neither citizens nor residents of the United States;
o each grantor provides an appropriately certified Form W-8 (or approved
substitute), as described under "Tax treatment of your investment;"
o the trustee of the trust is a bank organized under the laws of the United
States or any state in the United States; and
o the trustee supplies IDSC with appropriate tax documentation.
<PAGE>
The certificate is available through AEBI offices located in Florida and New
York. An AEBI or other selling agent representative will help you prepare your
purchase application. The Issuer will process the application at our corporate
offices in Minneapolis, MN, U.S.A. When your application is accepted and we have
received your initial investment, we will send you a confirmation of your
purchase, indicating your account number and applicable rate of interest for
your first term, as described under "Rates for new purchases." See "Purchase
policies" below.
Important: When you open an account, you must provide a Form W-8 or approved
substitute. See "Taxes on your earnings."
Purchase policies:
o You have 15 days from the date of purchase to cancel your investment without
penalty by notifying your AEBI or other selling agent representative, or by
writing or calling the Client Service Organization at the address or phone
number on the cover of this prospectus. If you decide to cancel your certificate
within this 15-day period, you will not earn any interest.
o The Issuer has complete discretion to determine whether to accept an
application and sell a certificate.
<PAGE>
How to make investments at term end
By wire
If you have an established account, you may wire money to:
Norwest Bank Minnesota
Routing No. 091000019
Minneapolis, MN
Attn: Domestic Wire Dept.
Give these instructions:
Credit IDS
Account #00-29-882
for personal account #
(your account number)
for (your name).
If this information
is not included,
the order may be
rejected and all
money received
less any costs IDSC
incurs will be
returned promptly.
o Minimum amount
you may wire: $1,000.
o Wire orders can be accepted only on days when your bank, AEFC, IDSC and
Norwest Bank Minnesota are open for business.
o Purchases made by wire are accepted by AEFC only from banks located in the
United States.
o Wire purchases are completed when wired payment is received and we accept the
purchase.
o Wire investments must be received and accepted in the Minneapolis headquarters
on a business day before 3 p.m. Central time to be credited that day. Otherwise
your purchase will be processed the next business day.
o The Issuer, AEFC, its subsidiaries, AEBI, and other selling agents are not
responsible for any delays that occur in wiring funds, including delays in
processing by the bank.
o You must pay any fee the bank charges for wiring.
<PAGE>
How to invest and withdraw funds
Full and partial withdrawals
You may receive all or part of your money at any time. However:
o If your withdrawal request is received in the Minneapolis headquarters on a
business day before 3 p.m. Central time, it will be processed that day and
payment will be sent the next business day. Otherwise, your request will be
processed one business day later.
o Full and partial withdrawals of principal are subject to penalties, described
below.
o If you request a withdrawal or a series of withdrawals exceeding $50,000,000
in any 30 day period, the Issuer at its option may, prior to the maturity of
any of these certificates, defer any payment or payments to the certificate
owner for a period of not more than 30 days. If the Issuer exercises this
option, interest will accrue on any such payment or payments, for the period
of deferment, at a rate at least equal to that applicable to the last term of
the certificate.
o Partial withdrawals during a term must be at least $10,000. You may not make
a partial withdrawal if it would reduce your certificate balance to less than
$100,000. If you request such a withdrawal, we will contact you for revised
instructions.
o If a withdrawal reduces your account value to a point where we pay a lower
interest rate, you will earn the lower rate from the date of the withdrawal.
<PAGE>
o Withdrawals before the end of the certificate month will result in loss of
interest on the amount withdrawn. You'll get the best result by timing a
withdrawal at the end of the certificate month.
o If your certificate is pledged as collateral, any withdrawal will be
delayed until we get approval from the secured party.
Penalties for early withdrawal during a term:
When you request a full or partial withdrawal, we pay the amount you request:
o first from interest credited during the current term;
o then from the principal of your certificate.
Any withdrawals during a term exceeding the interest credited are deducted from
the principal and are used in determining any withdrawal charges. However, the
2% penalty is waived upon the death of the certificate owner.
Withdrawal penalties: When a penalty applies, a 2% withdrawal penalty will be
deducted from the account's remaining balance.
For example, assume you invest $1 million in a certificate and select a
six-month term. Four months later assume you have earned $27,000 in interest.
The following demonstrates how the withdrawal charge is deducted:
<PAGE>
How to invest and withdraw funds
When you withdraw a specific amount of money in excess of the interest credited,
the Issuer has to withdraw somewhat more from your account to cover the
withdrawal charge. For instance, suppose you request a $100,000 check on a $1
million investment. The first $27,000 paid to you is interest earned that term,
and the remaining $73,000 paid to you is principal. The Issuer would send you a
check for $100,000 and deduct a withdrawal charge of $1,460 (2% of $73,000) from
the remaining balance of your certificate. Your new balance would be $925,540.
Total investments $1,000,000
Interest credited $ 27,000
Total balance $1,027,000
Requested check $ 100,000
Credited interest withdrawn $ (27,000)
Withdrawal charge percent 2%
Actual withdrawal charge $ 1,460
Balance prior to withdrawal $1,027,000
Requested withdrawal check $(100,000)
Withdrawal charge $ (1,460)
Total balance after withdrawal $ 925,540
Additionally, if you make a withdrawal during a certificate month, you will not
earn interest for the month on the amount withdrawn.
Penalty exceptions: The 2% penalty is waived upon death of the certificate
owner.
For more information on withdrawal charges, talk with your AEBI or other selling
agent representative.
<PAGE>
When your certificate term ends
On or shortly after the end of the term you have selected for your certificate,
the Issuer will send you a notice indicating the interest rate that will apply
to the certificate for the new term. When your certificate term ends, the Issuer
will automatically renew your certificate for the same term unless you notify
your AEBI or other selling agent representative otherwise. If you wish to select
a different term, you must notify your representative in writing before the end
of the grace period. You will not be allowed to select a term that would carry
the certificate past its maturity date.
The interest rates that will apply to your new term will be those in effect on
the day the new term begins. We will send you a confirmation showing the rate of
interest that will apply to the new term you have selected. This rate of
interest will not be changed during that term.
If you want to withdraw your certificate without a withdrawal charge, you must
notify us within 15 calendar days following the end of a term.
For most terms, you may also add to your investment within the 15 calendar days
following the end of your term. See "Additional investments" under "About the
Certificate."
Other full and partial withdrawal policies:
o If you request a partial or full withdrawal of
a certificate recently purchased or added to by a check or money order that
is not guaranteed, we will wait for your check to clear. Please expect a
minimum of 10 days from the date of your payment before the Issuer mails a
check to you. We may mail a check earlier if the bank provides evidence
that your check has cleared.
<PAGE>
o If your certificate is pledged as collateral, any withdrawal will be delayed
until we get approval from the secured party.
o Any payments to you may be delayed under applicable rules, regulations
or orders of the Securities and Exchange Commission (SEC).
Transfers to other accounts
You may transfer part or all of your certificate to other IDS certificates
available through AEBI.
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 another selling agent as collateral
security. Your AEBI or other selling agent 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 other selling agent
representative, or call the Issuer's toll free client service number listed on
the back cover.
Giving instructions and written notification
Your AEBI or other selling agent representative will handle instructions
concerning your account. Written instructions may be provided to either your
representative's office or directly to the Issuer.
<PAGE>
Proper written notice to your AEBI or other selling agent representative or the
Issuer must:
o be addressed to your AEBI or other selling agent office or the Issuer's
corporate office, in which case it must identify your AEBI or other selling
agent office,
o include your account number and sufficient information for the Issuer to
carry out your request, and
o be signed and dated by all registered owners.
The Issuer will acknowledge your written instructions. If your instructions are
incomplete or unclear, you will be contacted for revised instructions.
In the absence of any other written mandate or instructions you have provided to
AEBI or your other selling agent, you may elect in writing, on your initial or
any subsequent purchase application, to authorize AEBI or your other selling
agent to act upon the sole verbal instructions of any one of the named owners,
and in turn to instruct the Issuer with regard to any and all actions in
connection with the certificate referenced in the application as it may be
modified from time to time by term changes, renewals, additions or withdrawals.
The individual providing verbal instructions must be a named owner of the
certificate involved. In providing such authorization you agree that the Issuer,
its transfer agent, AEBI and other selling agents will not be liable for any
loss, liability, cost or expense arising in connection with implementing such
instructions, reasonably believed by the Issuer, AEBI or your other selling
agent, or their representatives, to be genuine. You may revoke such authority at
any time by providing proper written notice to your AEBI or other selling agent
office.
All amounts payable to or by the Issuer in connection with this certificate are
payable at the Issuer's corporate office unless you are advised otherwise.
<PAGE>
Purchases by bank wire
You may wish to lock in a specific interest rate by using a bank wire to
purchase a certificate. Your representative can instruct you about how to use
this procedure. Using this procedure will allow you to start earning interest at
the earliest possible time. The minimum that may be wired to purchase a new
certificate is $100,000.
Wire orders will be accepted only in U.S. currency and only on days your bank,
the Issuer and Norwest Bank Minnesota are open for business. The payment must be
received by the Issuer before 12 noon Central U.S.A. time to be credited that
day. Otherwise, it will be processed the next business day. The wire purchase
will not be made until the wired amount is received and the purchase is accepted
by the Issuer. Wire transfers not originating from AEBI or another selling agent
are accepted by IDSC's corporate office only when originating from banks located
in the United States of America. Any delays that may occur in wiring the funds,
including delays in processing by the banks, are not the responsibility of the
Issuer. Wire orders may be rejected if they do not contain complete information.
While the Issuer does not charge a service fee for incoming wires, you must pay
any charge assessed by your bank for the wire service. If a wire order is
rejected, all money received will be returned promptly less any costs incurred
in rejecting it.
<PAGE>
Tax treatment of your investment
Interest paid on your certificate is "portfolio interest" as defined in U.S.
Internal Revenue Code Section 871(h) if earned by a nonresident alien who has
supplied the Issuer with Form W-8, Certificate of Foreign Status. Form W-8 must
be supplied with 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). The Form W-8 must be resupplied every three calendar years. If you
have supplied a Form W-8 that certifies that you are a nonresident alien, the
interest income 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. We
are required to attach your Form W-8 to the forms sent to the Internal Revenue
Service (IRS). Your interest income will be reported to the IRS even though it
is not taxed by the U.S. Government. The United States participates in various
tax treaties with foreign countries. Those treaties provide that tax information
may be shared upon request between the United States and such foreign
governments.
Withholding taxes
If you fail to provide a Form W-8 as required above, you will be subject to
backup withholding on interest payments and surrenders.
<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.
Trusts
If the investor is a trust described in "Buying your certificate" under "How to
invest and withdraw funds," the policies and procedures described above will
apply with regard to each grantor.
Important: The information in this prospectus is a brief and selective summary
of certain federal tax rules that apply to this certificate and is based on
current law and practice. Tax matters are highly individual and complex.
Investors should consult a qualified tax advisor about their own position.
<PAGE>
Invested and guaranteed by the Issuer
The Issuer, a wholly owned subsidiary of American Express Financial Corporation
(AEFC) issues and guarantees the American Express Investors Certificate. We are
by far the largest issuer of face amount certificates in the United States, with
total assets of more than $3.8 billion and a net worth in excess of $222 million
on Dec. 31, 1998.
We back our certificates by investing the money received and keeping the
invested assets on deposit. Our investments generate interest and dividends, out
of which we pay:
o interest to certificate owners; and
o 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), and selling agent fees to
selling agents.
For a review of significant events relating to our business, see "Management's
discussion and analysis of financial condition and results of operations." No
national rating agency rates our certificates.
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.
<PAGE>
How your money is used and protected
Regulated by government
Because the American Express Investors 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, 1998, the
amortized cost of these investments exceeded the required carrying value of our
outstanding certificates by more than $226 million. The law requires us to use
amortized cost for these regulatory purposes. In general, amortized cost is
determined by systematically increasing the carrying value of a security if
acquired at a discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the maturity date.
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, 1998:
Type of investment Net amount invested
Corporate and other bonds 50%
Government agency bonds 24
Preferred stocks 16
Mortgages 9
Municipal bonds 1
<PAGE>
As of Dec. 31, 1998 about 90% of our securities portfolio (including bonds and
preferred stocks) is rated investment grade. For additional information
regarding securities ratings, please refer to Note 3B to the financial
statements.
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, 1998 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."
<PAGE>
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 whether a company can 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, 1998, IDSC held about 10% 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 (selling securities for others) under
federal securities laws.
Borrowing money --
From time to time we have established a line of credit with banks 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 secured by real estate. We expect that investments in real estate, either
directly or through a subsidiary of IDSC, will be less than 5 percent of IDSC's
assets.
<PAGE>
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% 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 available for sale, 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.
<PAGE>
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.
<PAGE>
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.
The Issuer files reports on Forms 10-K and 10-Q with the SEC. The public may
read and copy materials we file with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
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, 1998, AEFC managed or
administered investments, including its own, of more than $212 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 180 offices and more than 9,000
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:
o travel related services (including American Express(R) Card and Travelers
Cheque operations through American Express Travel Related Services Company, Inc.
and its subsidiaries); and
o international banking services (through American Express Bank Ltd. and its
subsidiaries including American Express Bank International).
<PAGE>
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, 1998, the Issuer had issued (in face
amount) $99,499,694 of installment certificates and $1,092,517,052 of single
payment certificates. As of Dec. 31, 1998, the Issuer had issued (in face
amount) $13,593,267,561 of installment certificates and $18,351,877,659 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:
o providing investment research;
o making specific investment recommendations; and
o executing purchase and sale orders according to our policy of obtaining the
best price and execution.
All these activities are subject to direction and control by our board of
directors and officers. Our agreement with AEFC requires annual renewal by our
board, including a majority of directors who are not interested persons of AEFC
or the Issuer as defined in the federal Investment Company Act of 1940.
<PAGE>
For its services, we pay AEFC a monthly fee, equal on an annual basis to a
percentage of the total book value of certain assets (included assets).
Advisory and services fee computation:
Percentage of
Included assets 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
1998 $ 9,084,332 0.24%
1997 $17,232,602 0.50
1996 $16,989,093 0.50
Estimated advisory and services fees for 1999 are $8,651,000.
Other expenses payable by the Issuer: The Investment Advisory and Services
Agreement provides that we will pay:
o costs incurred by us in connection with real estate and mortgages;
o taxes;
o depository and custodian fees;
o brokerage commissions;
<PAGE>
o fees and expenses for services not covered by other agreements and provided to
us at our request, or by requirement, by attorneys, auditors, examiners and
professional consultants who are not officers or employees of AEFC;
o fees and expenses of our directors who are not officers or employees of AEFC;
o provision for certificate reserves (interest accrued on certificate owner
accounts); and
o expenses of customer settlements not attributable to sales function.
Distribution
Under a Distribution Agreement with American Express Financial Advisors Inc.,
the Issuer pays an annualized fee equal to 1% of the amount outstanding for the
distribution of this certificate. Payments are made at the end of each term on
certificates with a one-, two- or three-month term. Payments are made each
quarter from issuance date on certificates with a six-, 12-, 24- or 36-month
term.
Total distribution fees paid to American Express Financial Advisors Inc. for all
series of certificates amounted to $28,472,007 during the year ended Dec. 31,
1998. The Issuer expects to pay American Express Financial Advisors Inc.
distribution fees amounting to $26,147,000 during 1999.
See Note 1 to financial statements regarding deferral of distribution fee
expense.
American Express Financial Advisors Inc. pays selling expenses in connection
with services to the Issuer. The Issuer's board of directors, including a
majority of directors who are not interested persons of AEFC or IDSC, approved
this distribution agreement.
<PAGE>
Selling Agent Agreement with AEBI
In turn, under a Selling Agent Agreement with AEBI, American Express Financial
Advisors compensates AEBI for its services as selling agent of this certificate
as follows:
AEBI is paid an annualized fee ranging from 0.50% to 1.25% of the reserve
balance of each certificate, depending on the amount outstanding for each such
certificate, with this exception: the fee will be 0.30% of the reserve balance
of each certificate with an amount outstanding of $1 million or more when:
o the aggregate reserve balance for that certificate, and any other
certificate with identical ownership and an amount outstanding of $1 million or
more, is at least $20 million;
o the aggregate reserve balance is invested for terms that average at least six
months; and
o at least $5 million of this aggregate reserve balance is invested for a term
of 12 months or longer.
Other selling agents
This certificate may be sold through other selling agents, under arrangements
with American Express Financial Advisors, at commissions of up to:
o 0.90% of the investment on the first day of the certificate's term; and
o 0.90% of the certificate's reserve at the beginning of each subsequent term.
This fee is not assessed to your certificate account.
In addition, IDSC may pay distributors, and American Express Financial Advisors
Inc. may pay selling agents, additional compensation for selling and
distribution activities under certain circumstances. From time to time, IDSC or
<PAGE>
American Express Financial Advisors Inc. may pay or permit other promotional
incentives, in cash or credit or other compensation.
American Express Financial Advisors 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 and other Edge Act
corporations. For these services, American Express Financial Advisors pays AEBI
a fee for this certificate ranging from 0.075% to 0.12% of the reserve balance
of each certificate, depending on the amount outstanding for each certificate
for which another Edge Act corporation is the selling agent.
Such payments will be made periodically in arrears.
These fees are not assessed to your certificate account.
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.
About AEBI
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.
<PAGE>
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,
1998, AEBI had total assets of $529 million and total equity of $165 million.
Although AEBI is a banking entity, the American Express Investors Certificate
is not a bank product, nor is it backed or guaranteed by AEBI, by AEBL 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.
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:
o we receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar services;
o the affiliate charges us commissions consistent with those charged to
comparable unaffiliated customers for similar transactions; and
o the affiliate's employment is consistent with the terms of the current
Investment Advisory and Services Agreement and federal securities laws.
Directors and officers
The Issuer's sole shareholder, AEFC, elects the board of directors that oversees
IDSC's operations. The board annually elects the directors, chairman, president
and controller for a term of one year. The president appoints the other
executive officers.
We paid a total of $37,000 during 1998 to directors not employed by AEFC.
<PAGE>
Board of directors
Rodney P. Burwell
Born in 1939. Director beginning in 1999.
Chairman, Xerxes Corporation (fiberglass storage tanks). Director, Fairview
Corporation.
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. Acting president of Fisk University from
1998 to 1999. Former vice president and group executive, Industrial Systems,
with Honeywell, Inc. Retired 1989.
Jean B. Keffeler
Born in 1945. Director beginning in 1999.
Independent management consultant.
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.
Thomas R. McBurney
Born in 1938. Director beginning in 1999.
President, McBurney Management Advisors. Director, The Valspar Corporation
(paints), Wenger Corporation, Allina, Space Center Enterprises and Greenspring
Corporation.
Paula R. Meyer*
Born in 1954. President since June 1998.
Piper Capital Management (PCM) President from October 1997 to May 1998. PCM
Director of Marketing from June 1995 to October 1997. PCM Director of Retail
Marketing from December 1993 to June 1995.
*"Interested Person" of IDSC as that term is defined in Investment Company Act
of 1940.
<PAGE>
Executive officers
Paula R. Meyer
Born in 1954. President since June 1998.
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 Services of AEFC from July 1997 to
December 1997. Controller, Risk Management Products of AEFC from May 1998 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.
<PAGE>
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.
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, 1998. 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.
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.
<PAGE>
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>
Quick telephone reference*
Selling Agent American Express
Bank International
Region offices 101 East 52nd Street (212) 415-9500
4th Floor
New York, NY 10022
1221 Brickell Avenue (305) 350-2502
8th Floor
Miami, FL 33131
*You may experience delays when call volumes are high.
American Express
Investors Certificate
IDS Tower 10
Minneapolis, MN
55440-0010
800-437-3133
612-671-3131
Distributed by American Express
Financial Advisors Inc.
S-6040 D (4/99)
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item
Number
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution of the
securities being registered are to be borne by the registrant.
Item 14. Indemnification of Directors and Officers.
The By-Laws of IDS Certificate Company provide that it shall indemnify
any person who was or is a party or is threatened to be made a party,
by reason of the fact that he was or is a director, officer, employee
or agent of the company, or is or was serving at the direction of the
company, or any predecessor corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, to any threatened, pending or completed
action, suit or proceeding, wherever brought, to the fullest extent
permitted by the laws of the state of Delaware, as now existing or
hereafter amended.
The By-Laws further provide that indemnification questions applicable
to a corporation which has been merged into the company relating to
causes of action arising prior to the date of such merger shall be
governed exclusively by the applicable laws of the state of
incorporation and by the by-laws of such merged corporation then in
effect. See also Item 17.
Item 15. Recent Sales of Unregistered Securities.
(a) Securities Sold
1995 IDS Special Deposits $56,855,953.53
1996 IDS Special Deposits* 41,064,486.74
1997 American Express Special Deposits 182,788,631.00
1998 American Express Special Deposits 91,416,078.00
*Renamed American Express Special Deposits in April, 1996.
(b) Underwriters and other purchasers
American Express Special Deposits are marketed by American Express Bank Ltd.
(AEB), an affiliate of IDS Certificate Company, to private banking clients of
AEB in the United Kingdom and Hong Kong.
(c) Consideration
All American Express Special Deposits were sold for cash. The aggregate offering
price was the same as the amount sold in the table above. Aggregate marketing
fees to AEB were $172,633.41 in 1995, $301,946.44 in 1996, $592,068.70 in 1997
and $967,791.95 in 1998.
(d) Exemption from registration claimed
American Express Special Deposits are marketed, pursuant to the exemption in
Regulation S under the Securities Act of 1933, by AEB in the United Kingdom and
Hong Kong to persons who are not U.S. persons, as defined in Regulation S.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
1. (a) Copy of Distribution Agreement dated November 18, 1988, between
Registrant and IDS Financial Services Inc., filed electronically as Exhibit
1(a) to the Registration Statement for the American Express International
Investment Certificate (now called, the IDS Investors Certificate), is
incorporated herein by reference.
2. Not Applicable.
<PAGE>
3. (a) Certificate of Incorporation, dated December 31, 1977, filed
electronically as Exhibit 3(a) to Post-Effective Amendment No. 2 to
Registration Statement No. 2-95577, is incorporated herein by reference.
(b) Certificate of Amendment, dated February 29, l984, filed electronically as
Exhibit 3(b) to Post-Effective Amendment No. 2 to Registration Statement
No. 2-95577, is incorporated herein by reference.
(c) Certificate of Amendment, dated September 12, 1995, filed electronically as
Exhibit 3(c) to Post-Effective Amendment No. 44 to Registration Statement
No. 2-55252, is incorporated herein by reference.
(d) Form of Certificate of Amendment dated _______, is filed electronically
herewith.
(e) By-Laws, dated December 31, 1977, filed electronically as Exhibit 3(c) to
Post-Effective Amendment No. 2 to Registration Statement No. 2-95577, are
incorporated herein by reference.
4. Not applicable.
5. An Opinion and Consent of Counsel as to the legality of the securities
being registered is filed electronically herewith.
6 through 9. -- None.
10. (a) Investment Advisory and Services Agreement between Registrant and
IDS/American Express Inc., dated January 12, 1984, filed electronically as
Exhibit 10(a) to Post-Effective Amendment No. 2 to Registration Statement
No. 2-95577, is incorporated herein by reference.
(b) Depository and Custodial Agreement, between IDS Certificate Company and IDS
Trust Company dated September 30, 1985, filed electronically as Exhibit
10(b) to Post-Effective Amendment No. 2 to Registration Statement No.
2-95577, is incorporated herein by reference.
(c) Foreign Deposit Agreement dated November 24, 1990, between Registrant and
IDS Bank & Trust, filed electronically as Exhibit 10(h) to Post-Effective
Amendment No. 5 to Registration Statement No. 33-26844, is incorporated
herein by reference.
(d) Selling Agent Agreement dated June 1, 1990 between American Express Bank
International and IDS Financial Services Inc. for the American Express
Investors Certificate, filed electronically as Exhibit 1 to the
Pre-Effective Amendment 2 to Registration Statement No. 33-26844 for the
IDS Investors Certificate is incorporated herein by reference.
(e) Selling Agent Agreement dated Dec. 12, 1994 between American Express Bank
International, Coutts & Co (USA) International and IDS Financial Services
Inc. for the Investors Certificate is filed electronically. As Exhibit 1(e)
to Post-Effective Amendment No. 9 to Registration Statement No. 33-26844
for IDS Investors Certificate is incorporated herein by reference.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 16.
(a) Continued
(f) Amendment to the Selling Agent Agreement dated Dec. 12, 1994 between
American Express Bank International and IDS Financial Services Inc. for the
IDS Investors Certificate is filed electronically as Exhibit 1(d) to
Post-Effective Amendment No. 9 to Registration Statement No. 33-26844 for
IDS Investors Certificate is incorporated herein by reference.
(g) Consulting Agreement dated Dec. 12, 1994 between American Express Bank and
IDS Financial Services Inc. for the IDS Investors Certificate is filed
electronically. As Exhibit 1(f) to Post-Effective Amendment No. 9 to
Registration Statement No. 33-26844 for IDS Investors Certificate is
incorporated herein by reference.
(h) Marketing Agreement dated October 10, 1991, between Registrant and American
Express Bank Ltd., filed electronically as Exhibit 1(d) to Post-Effective
Amendment No. 31 to Registration Statement No. 2-55252, is incorporated
herein by reference.
(i) Letter amendment dated January 9, 1997 to the Marketing Agreement dated
October 10, 1991, between Registrant and American Express Bank Ltd., filed
electronically as Exhibit 10(j) to Post-Effective Amendment No. 40 to
Registration Statement No. 2-55252, is incorporated herein by reference.
(j) Form of Letter amendment dated April 7, 1997 to the Selling Agent Agreement
dated June 1, 1990, between American Express Financial Advisors Inc. and
American Express Bank International, filed electronically as Exhibit 10(j)
to Post-Effective Amendment No. 16 to Registration Statement No. 33-26844,
is incorporated herein by reference.
(k) Distribution Agreement dated March 29, 1996 between Registrant and American
Express Service Corporation filed electronically as Exhibit 1(b) to
Post-Effective Amendment No. 17 to Registration Statement No. 2-95577, is
incorporated herein by reference.
(l) Selling Agent Agreement, dated March 10, 1999 between American Express
Financial Advisors Inc. and Securities America Inc., is filed
electronically herewith.
11 through 22. -- None.
23. Consent of Independent Auditors Report is filed electronically herewith.
24. (a) Officers' Power of Attorney, dated Sept. 8, 1998 filed electronically
as Exhibit 24(a) to Post-Effective Amendment No. 22 to Registration
Statement No. 33-22503, is incorporated herein by reference.
(b) Directors' Power of Attorney, dated Oct. 14, 1998 filed electronically as
Exhibit 24(b) to Post-Effective Amendment No. 22 to Registration Statement
No. 33-22503 is incorporated herein by reference.
25 through 27. -- None.
(b) The financial statement schedules for IDS Certificate Company filed
electronically as Exhibit 16(b) to Post-Effective Amendment No. 44 to
Registration Statement No. 2-55252 for Series D-1 Investment Certificate
are incorporated herein by reference.
<PAGE>
Item 17. Undertakings.
Without limiting or restricting any liability on the part of
the other, American Express Financial Advisors Inc.,
(formerly, IDS Financial Services Inc.) as underwriter, and
American Express Bank International and Coutts & Co (USA)
International, as selling agents, will assume any actionable
civil liability which may arise under the Federal Securities
Act of 1933, the Federal Securities Exchange Act of 1934 or
the Federal Investment Company Act of 1940, in addition to any
such liability arising at law or in equity, out of any untrue
statement of a material fact made by their respective agents
in the due course of their business in selling or offering for
sale, or soliciting applications for, securities issued by the
Company or any omission on the part of their respective agents
to state a material fact necessary in order to make the
statements so made, in the light of the circumstances in which
they were made, not misleading (no such untrue statements or
omissions, however, being admitted or contemplated), but such
liability shall be subject to the conditions and limitations
described in said Acts. American Express Financial Advisors
Inc., American Express Bank International and Coutts & Co
(USA) International will also assume any liability of the
Company for any amount or amounts which the Company legally
may be compelled to pay to any purchaser under said Acts
because of any untrue statements of a material fact, or any
omission to state a material fact, on the part of the
respective agents of American Express Financial Advisors Inc.,
American Express Bank International, and Coutts & Co (USA)
International to the extent of any actual loss to, or expense
of, the Company in connection therewith. The By-Laws of the
Registrant contain a provision relating to Indemnification of
Officers and Directors as permitted by applicable law.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this amendment to this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis
and State of Minnesota, on the 16th day of April 1999.
IDS CERTIFICATE COMPANY
By /s/ Paula R. Meyer*
Paula R. Meyer, President
Pursuant to the requirements of the Securities Act of 1933, this amendment has
been signed below by the following persons in the following capacities on the
16th day of April 1999.
Signature Capacity
/s/ Paula R. Meyer* ** President and Director
Paula R. Meyer (Principal Executive Officer)
/s/ Jeffrey S. Horton* Vice President and
Jeffrey S. Horton Treasurer
(Principal Financial Officer)
/s/ Jay C. Hatlestad* Vice President and
Jay C. Hatlestad Controller
(Principal Accounting Officer)
__________________ Director
Rodney P. Burwell
/s/ David R. Hubers** Director
David R. Hubers
/s/ Charles W. Johnson** Director
Charles W. Johnson
____________________ Director
Jean B. Keffeler
/s/ Richard W. Kling** Chairman of the
Richard W. Kling Board of Directors and Director
___________________ Director
Thomas R. McBurney
*Signed pursuant to Officers' Power of Attorney dated September 8, 1998 filed
electronically as Exhibit 24(a) to Post-Effective Amendment No. 22 to
Registration Statement No. 33-22503, incorporated herein by reference.
/s/Bruce A. Kohn
Bruce A. Kohn
**Signed pursuant to Directors' Power of Attorney dated October 14, 1998 filed
electronically as Exhibit 24(b) to Post-Effective Amendment No. 22 to
Registration Statement No. 33-22503, incorporated herein by reference.
/s/Bruce A. Kohn
Bruce A. Kohn
<PAGE>
EXHIBIT INDEX
Exhibit 3(d): Form of Certificate of Amendment
Exhibit 5: Opinion and Consent of Counsel
Exhibit 16(l): Selling Agent Agreement
Exhibit 23: Consent of Independent Auditors
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
IDS Certificate Company, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said Corporation has given
written consent to the adoption of a resolution proposing and declaring
advisable the following amendment to the Certificate of Incorporation of said
Corporation:
RESOLVED, That the Certificate of Incorporation of IDS Certificate
Company be amended by adding a revised Article Thirteenth set forth
below in its entirety:
THIRTEENTH: No director shall be personally liable to the
Corporation or its stockholder for monetary damages for breach of duty
as a director, except (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholder; (ii) for acts or
omissions not in good faith or that involve intentional misconduct, a
knowing violation of law, willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of the director's office; (iii) for acts or omissions giving rise to
liability under Section 174 of Delaware General Corporation Law; (iv)
for any transaction from which the director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the
adoption of this Article Thirteenth.
SECOND: That the sole stockholder has given written consent to said
amendment in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, said IDS Certificate Company has caused this
certificate to be signed by Paula R. Meyer, its President, and attested by Mary
Jo Olson, its Assistant Secretary, this ______day of April, 1999.
IDS CERTIFICATE COMPANY
-----------------------------
President
ATTEST:
- ------------------------
Assistant Secretary
<PAGE>
April 16, 1998
IDS Certificate Company
IDS Tower 10
Minneapolis, MN 55440-0010
Ladies and Gentlemen:
Reference is made to your Registration Statement, No. 33-26844, Form S-1 under
the Securities Act of 1933, registering an indefinite number of face-amount
certificates pursuant to Section 24(f) of the Investment Company Act of 1940.
I have examined the Certificate of Incorporation, as amended, and the By-Laws of
IDS Certificate Company (the "Company") and all necessary certificates, permits,
minute books, documents and records of the Company, and the applicable statutes
of the State of Delaware and such other matters of fact and law as I have deemed
necessary, and it is my opinion:
(a) That the Company is a corporation duly organized and existing under the
laws of the State of Delaware.
(b) That the face-amount certificates registered under the above-referenced
registration number and issued by the Company since Dec. 31, 1996,
until today, when sold in accordance with the prospectus contained in
the above-referenced Registration Statement and with applicable law,
were legal and non-assessable and were fully-paid face-amount
certificates as that term is used in section 2(a)(15) of the Investment
Company Act of 1940 and were binding obligations of the Company.
(c) That other face-amount certificates registered under the
above-referenced registration number and issued by the Company, when
sold in accordance with the prospectus contained in the
above-referenced Registration Statement and with applicable law, will
be legal and non-assessable and will be fully-paid face-amount
certificates as that term is used in section 2(a)(15) of the Investment
Company Act of 1940 and will be binding obligations of the Company.
I hereby consent that the foregoing opinion may be used in connection with
Post-Effective Amendment No. 18 to the above-referenced Registration Statement.
Very truly yours,
/s/Bruce A. Kohn
Bruce A. Kohn
Vice President and General Counsel
IDS Certificate Company
<PAGE>
SELLING AGENT AGREEMENT
This Agreement is made as of March 10, 1999, by and between American Express
Financial Advisors Inc., a Delaware corporation (the "Company"), distributor for
certain registered face-amount certificates offered by IDS Certificate Company
(the "Issuer"), and Securities America Inc., a Delaware corporation (the
"Agent").
I. ACTIVITIES
(1) During the term of this Agreement, the Agent and persons designated by it
shall have the non-exclusive right to solicit applications for and to
distribute those face-amount certificates issued by the Issuer that the
Company may from time to time agree to permit the Agent to offer to the
AgentOs clients ("Certificates"). The Agent and the Company agree to be
bound by the terms of this Agreement in connection with any such offers of
Certificates. Each Certificate that the Company may permit the Agent to
offer shall be described in Schedules attached hereto, which Schedules may
be amended or supplemented by the Company from time to time by mailing a
revised Schedule to the Agent.
(2) It is the Agent's responsibility to insure that any investments in
Certificates by its clients are suitable for those clients. Therefore, the
Agent shall cause applications for Certificates to be made available to its
clients if the Agent, in its sole discretion, determines that such products
are appropriate or suitable for its clients. The Company and the Issuer
shall each have the right, in its sole discretion, to the extent not
inconsistent with the Certificates, to decline to accept investments by
clients of the Agent in Certificates.
(3) The Agent agrees that all applications for Certificates shall be made in
writing on forms acceptable to the Company and the Issuer; provided
however, that the Agent may accept telex or telephone purchase instructions
from its clients in accordance with Section V(3) hereof. Every application
shall be subject to acceptance or rejection by the Issuer according to the
terms thereof. The Agent shall handle applications in accordance with
instructions forwarded by the Company to the Agent from time to time and
shall obtain, keep on file and provide copies to the Company and the Issuer
of any and all tax related documentation as required by law or requested by
the Company or the Issuer from time to time. The Agent shall promptly
<PAGE>
remit to the Issuer the payment tendered with each application, such
payment to be in conformity with the provisions of the Certificate for
which such application is made. Prior to the acceptance by the Company or
the Issuer of instructions from the Agent with regard to a Certificate or
prospective investment in aECertificate, the Agent shall provide the
Company and the Issuer with written authorization from the owner of or
prospective investor in the Certificate, as the case may be, that the
Company and the Issuer may accept such instructions from the Agent in
the form in which the Agent provides them.
(4) Company reserves the right in its discretion to suspend sales or withdraw
the offering of any Certificate in whole or in part, without notice. Upon
notice to the Agent that the Company has so suspended sales or withdrawn an
offering, or of the suspension of the effectiveness of a registration
statement or amendment or that a prospectus is not on file as described
below in this Section I(4), Certificates shall not be offered by the Agent
under any of the provisions of this Agreement and no application for the
purchase or sale of Certificates hereunder shall be accepted if and so long
as the effectiveness of the current registration statement or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act of 1933 (the "1933 Act") or any applicable state securities
laws or if and so long as a current prospectus as required by Section
5(b)(2) of the 1933 Act or any applicable state securities laws is not on
file with the Securities and Exchange Commission (the "SEC") or any
applicable state securities regulator, as the case may be.
(5) The Agent and its personnel shall not make any representations concerning a
Certificate except those contained in the prospectus therefor or any
applicable written sales literature approved by Company in accordance with
Section IV(4).
(6) The Agent and its personnel shall be responsible for determining the
suitability of each sale, and of any other transaction recommended by the
Agent to one or more of its clients, and for servicing its client accounts.
Servicing client accounts shall include the following:
i) serving as the primary contact for the Agent's clients and prospects
regarding Certificates; ii) receiving from clients and prospects and timely
transmitting to Company instructions as to sales, surrenders, ownership
changes, term changes and other actions sought with respect to
Certificates; iii) answering client questions and inquiries regarding
Certificates;
<PAGE>
iv) determining whether the actions sought by clients concerning Certificate
ownership, transfer, surrender and the like are legally permissible or
advisable in all applicable jurisdictions;
v) delivering to clients in a timely fashion all of the documentation
described in Section I(7) hereof; provided, however, that the Agent has
received such documentation in a timely fashion; and, if the Agent has not
received such documentation in a timely fashion, delivering such
documentation to clients promptly after the Agent receives it;
vi) keeping and maintaining such records as required pursuant to this agreement
or by law; and
vii) carrying out such other activities and responsibilities as are described in
this Agreement and/or may be agreed to between the Agent and Company from
time to time.
II. COMPANY'S RESPONSIBILITY
The Company shall promptly provide the Agent with current
prospectuses, sales materials and other literature and information
legally required or reasonably requested by the Agent; provided,
however, that the Company and the Issuer shall not be obligated to
disclose proprietary information, trade secrets or other confidential
information. The Company shall arrange with the Issuer for
confirmations and quarterly statements of account that identify the
Agent to be sent to Certificate owners with regard to whom the Agent
is entitled to compensation under Exhibit A.
III. COMPENSATION
The Company shall pay the Agent and the Agent accepts in full payment
for its activities hereunder, compensation with respect to each
Certificate as described in the Schedule(s) attached hereto. Such
Schedule(s) may be amended or supplemented by the Company from time
to time by mailing a revised Schedule to the Agent.
IV. FURTHER LEGAL COMPLIANCE
(1) This Agreement and any transaction through, or payment to,
the Agent pursuant to the terms of this Agreement is
conditioned on the Agent's representation to the Company and
the Issuer that, as of the date of this Agreement, the Agent
is, and at all times during its effectiveness the Agent will
be, a registered broker-dealer under the Securities Exchange
Act of 1934 and qualified under applicable state
<PAGE>
securities laws in each jurisdiction in which the Agent is required
to be qualified to act as a broker-dealer in securities, and a member
in good standing of the National Association of Securities Dealers,
Inc. (the "NASD"). The Agent agrees to immediately notify the Company and
the Issuer promptly in writing and immediately suspend sales of
Certificates if this representation ceases to be true. The Agent agrees
that it will comply with the rules of the NASD.
(2) The Company and the Issuer shall have no obligation or responsibility with
respect to the Agent's right to sell Certificates in any state or
jurisdiction. From time to time the Company may furnish the Agent with
information identifying the states and jurisdictions under the securities
laws of which it is believed Certificates may be sold. The Agent shall not
transact applications for Certificates in states or jurisdictions in which
the Company or the Issuer indicates Certificates may not be sold.
(3) The Agent represents and warrants that it will observe and comply with all
applicable laws, rules and regulations ("Laws") with respect to the
distribution, sale and servicing of the Certificates and the conduct of its
business in relation thereto, including but not limited to Laws relating to
currency transactions, transporting funds or monetary instruments in or out
of the United States, wire transfers and other financial transactions.
(4) The Company or the Issuer will furnish the Agent with copies of the
prospectus and sales literature for each Certificate identified in a
Schedule hereto, in reasonable quantities upon the Agent's request. The
Agent agrees to deliver a copy of the current prospectus in accordance with
the provisions of the 1933 Act to each purchaser of such a Certificate for
whom the Agent acts as broker. The Company shall file sales literature and
promotional material for such Certificates with the NASD and the SEC as
required. The Agent may not publish or use any sales literature or
promotional materials with respect to Certificates without the Company's
prior review and written approval.
(5) The Agent shall provide the Company and the Issuer with true, accurate and
complete information about the Agent for inclusion in the prospectuses and
periodic reports, including reports on Forms 10-K and 10-Q, of the Issuer.
<PAGE>
V. MISCELLANEOUS
(1) The Agent for all purposes herein shall be deemed to be an independent
contractor, and except as expressly provided or authorized in this
Agreement, shall have no authority to act for, represent or bind the
Company, the Issuer or its transfer agent.
(2) Any notice under this Agreement shall be given in writing, addressed and
delivered or mailed postpaid to the party to this Agreement entitled to
receive the same, (a) if to the Company, at American Express Financial
Advisors Inc., IDS Tower 10, Minneapolis, Minnesota 55440, Attn: Vice
President-Assured Assets, and (b) if to the Agent, at Securities America
Inc., 7100 West Center Road, Suite 500, Omaha, Nebraska 68106, Attn: Legal
Department, or to such other address as either party may designate by such
written notice to the other.
(3) The Agent may at its own risk accept telex or telephone purchase,
withdrawal or transfer instructions from its clients in accordance with the
Agent's internal procedures. All such instructions shall nevertheless be
communicated in written form to the Company and shall be subject to
acceptance or rejection by the Issuer.
(4) This Agreement may be amended only by written instrument executed by both
parties hereto.
(5) This Agreement may be executed in any number of counterparts, each executed
counterpart constituting an original but all together only one Agreement.
(6) All references in this Agreement to the prospectus refer to the then
current version of the relevant prospectus and include any stickers or
supplements thereto.
VI. TERMINATION
(1) This Agreement shall continue in effect until December, 1999 and shall
continue from year to year thereafter unless and until terminated by either
party as hereinafter provided.
(2) This Agreement may be terminated without penalty by either the Company or
the Agent at any time whether prior to, at or after the date hereof by
giving the other party at least sixty (60) days' prior written notice of
such intention to terminate.
<PAGE>
(3) This Agreement will terminate automatically in the event of its assignment
(as defined in the Investment Company Act of 1940.)
VII. INDEMNIFICATION
In the event the Agent breaches any of the terms and conditions of this
Agreement, the Agent shall indemnify the Company, the Issuer and their
affiliates for any damages, losses, costs and expenses (including
reasonable attorneys' fees) arising out of or relating to such breach. The
Company and the Issuer may offset any such damages, losses, costs and
expenses against any amounts due to the Agent hereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
AMERICAN EXPRESS FINANCIAL
ADVISORS INC.
/s/Paula R. Meyer
Paula R. Meyer
Print Title: Vice President - Assured Assets
/s/George R. Daly
George R. Daly
Print Title: Assistant Secretary
SECURITIES AMERICA INC.
/s/Steven F. McWhorter
Steven F. McWhorter
Print title: Sr. Vice President
/s/David O. Spinar
David O. Spinar
Print title: Secretary
<PAGE>
Schedule A
Effective as of March 10, 1999
1. Pursuant to Section I(1) of the Selling Agent Agreement, dated as of
March 10, 1999, the Agent may offer the American Express Stock Market
Certificate ("Market Certificate"), which Market Certificate bears
interest that may be tied in whole or in part to any upward movement in
a stock market index.
2. The Agent shall be compensated as follows on the basis of the principal
amount of the Market Certificates, if the client has purchased a Market
Certificate through the Agent and has not designated another selling
agent, distributor or servicing agent for the account, or if the client
has designated the Agent as selling agent or servicing agent for the
account, or if the Company, the Issuer and the Agent agree in writing
that the Agent should be compensated with regard to the client's Market
Certificate account.
The Agent shall receive a sales commission equal to 0.80% per term of
the principal amount of each such Market Certificate and shall receive
marketing support fees and other compensation equal to 0.10% of the
principal amount of each such Market Certificate. For the purposes of
this Schedule A, "principal amount" shall be equal to the amount
invested, plus additional investments and interest when credited to the
account but less withdrawals and penalties.
Provided, however, that no payment shall be made to the Agent, or to
any other selling agent or distributor (except the Company) with whom
the Company or the Issuer has a selling agent or distribution
agreement, of compensation as to which the Company or the Issuer has
actually received at its principal office written notice of a competing
claim to such compensation from the Agent or such a selling agent or
distributor, until the parties disputing the payment resolve their
dispute or such payment is ordered by a court, panel of arbitrators, or
similar authority with jurisdiction over the matter.
The Agent shall be paid quarterly in arrears, so that the Agent shall
be paid after the end of each of the first three quarterly
anniversaries of the beginning of each one-year term and then after the
end of each such term. Compensation shall be calculated on a 90 day per
term quarter basis; provided, however, that compensation shall not be
earned during any period in which the Market Certificate is earning
only interim interest. Notwithstanding the foregoing, during any term
in which a client is receiving fixed interest, if she/he elects to
again participate in the market, the fee shall be prorated for such
partial quarter and paid after the client's new term begins.
<PAGE>
3. The compensation payable to the Agent for term quarters, or prorated
quarters, as the case may be, ending during any given calendar month
shall be aggregated and paid to the Agent in a lump sum within 15 days
after each calendar month end.
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent auditors"
and to the use of our report dated February 4, 1999 in the Post-Effective
Amendment Number 18 to Registration Statement Number 33-26844 on Form S-1 and
related prospectus of IDS Certificate Company for the registration of its
American Express Investors Certificate.
Our audits also included the financial statements schedules of IDS Certificate
Company listed in Item 16(b) of this Registration Statement. These schedules are
the responsibility of the management of the IDS Certificate Company. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/Ernst & Young LLP
Minneapolis, Minnesota
April 13, 1999
