Item 1. Business - -----------------
American Express Certificate Company (AECC, or AXP Certificate Company), formerly IDS Certificate Company (IDSC), is incorporated under the laws of Delaware. (IDSC filed a Certificate of Amendment of its Certificate of Incorporation with the Delaware Secretary of State to change the Company's name to American Express Certificate Company effective April 26, 2000, and filed registration statement amendments with the Securities and Exchange Commission under which "IDS" in the names of certificates would change to "American Express" on April 26, 2000.) Its principal executive offices are located at 52 AXP Financial Center, Minneapolis, Minnesota 55474, and its telephone number is (612) 671-3131. American Express Financial Corporation, a Delaware corporation, 200 AXP Financial Center, Minneapolis, Minnesota 55474, owns 100% of the outstanding voting securities of AECC. American Express Financial Corporation is a wholly owned subsidiary of American Express Company (American Express), a New York Corporation, with headquarters at American Express Tower, World Financial Center, New York, New York.
AECC is a face-amount certificate investment company, registered under the Investment Company Act of 1940 (1940 Act). AECC is in the business of issuing face-amount certificates. Face-amount certificates issued by AECC entitle the certificate owner to receive, at maturity, a stated amount of money and interest or credits declared from time to time by AECC, in its discretion.
AECC is continuously engaged in new product development. AECC currently offers nine certificates to the public: "American Express Cash Reserve Certificate," "American Express Flexible Savings Certificate" (formerly "IDS Variable Term Certificate"), "American Express Installment Certificate," "American Express Preferred Investors Certificate," "American Express Stock Market Certificate," "American Express Market Strategy Certificate," "American Express Equity Indexed Savings Certificate" (for sale through broker-dealers not affiliated with AECC), "American Express Investors Certificate" (including a form of American Express Investors Certificate offered to select investors who, among other things, invest at least $50 million in the certificate), and "American Express Special Deposits." The American Express Special Deposits is only marketed through offices of American Express Bank Ltd. (AEB) in England and Hong Kong and is not registered for sale in the United States. All certificates are currently sold without a sales charge. The American Express Installment Certificate, the American Express Flexible Savings Certificate, the American Express Stock Market Certificate, the American Express Preferred Investors Certificate, the American Express Market Strategy Certificate, the American Expres Equity Indexed Savings Certificate, the American Express Investors Certificate and the American Express Special Deposits currently bear surrender charges for premature surrenders. All of the above described certificates, except the American Express Special Deposits, are distributed pursuant to a Distribution Agreement with American Express Financial Advisors Inc., an affiliate of AECC. With respect to the American Express Investors Certificate and a form of the American Express Stock Market Certificate, American Express Financial Advisors Inc., in turn, has Selling Agent Agreements with American Express Bank International (AEBI), a subsidiary of American Express, and Coutts & Co. (USA) International (Coutts), a subsidiary of National Westminster Bank
PLC, for selling the certificates. With respect to the American Express Special Deposits, AECC has a Marketing Agreement with AEB, an indirect subsidiary of American Express, for marketing the certificate. AECC has a Distribution Agreement with American Express Service Corporation (AESC) under which AESC can distribute the American Express Stock Market Certificate and potentially other certificates. As of December 31, 2000, no certificates have been distributed through AESC. With respect to American Express Stock Market Certificate, American Express Financial Advisors Inc. has a Selling Agent Agreement effective March 10, 1999 with Securities America Inc., an affiliate of AECC. There is no assurance that AXP certificates will be distributed by AESC or sold by Securities America Inc.
AEBI and Coutts are Edge Act corporations organized under the provisions of Section 25(a) of the Federal Reserve Act. American Express Financial Advisors Inc. has entered into a consulting agreement with AEBI under which AEBI provides consulting services related to any selling agent agreements between American Express Financial Advisors Inc. and other Edge Act corporations.
AECC also offers one certificate in connection with certain employee benefit plans available to eligible American Express Financial Corporation employees, financial advisors, retirees, and eligible employees of the American Express funds, and to IRAs of persons retired as employees or financial advisors with American Express Financial Corporation. This certificate is called the Series D-1 Investment Certificate.
Except for the American Express Investors Certificate and the American Express Special Deposits, all of the certificates are available as qualified investments for Individual Retirement Accounts (IRAs), or 401(k) plans and other qualified retirement plans.
The specified maturities of the certificates range from ten to twenty years. Within that maturity period, most certificates have interest rate terms ranging from three to thirty-six months. Interest rates change and certificate owners can surrender their certificates without penalty at term end.
The American Express Cash Reserve Certificate is a single pay certificate that permits additional investments and on which AECC guarantees interest in advance for a three-month term.
The American Express Flexible Savings Certificate is a single payment certificate that permits a limited amount of additional payments and on which AECC guarantees interest in advance for a term of 6, 12, 18, 24, 30, or 36 months, and potentially other terms, at the buyer's option.
The American Express Installment Certificate is an installment payment certificate that declares interest in advance for a three-month period and offers bonuses in the second through ninth years for regular investments.
The American Express Stock Market Certificate is a single payment certificate that offers the certificate owner the opportunity to have all or part of his/her interest tied to 52- week stock market performance, as measured by a broad stock market index, with return of principal guaranteed by AECC. The owner can also choose to earn a fixed rate of interest. This certificate is sold to clients of American Express Financial Advisors Inc., and is available through Securities America Inc. under a Selling Agent Agreement effective March 10, 1999 with American Express Financial Advisors Inc., and may be available from time to time through American Express Service Corporation under its Distribution Agreement with AECC. This certificate is also marketed as the American Express Stock Market Certificate by AEBI and Coutts, under Selling Agent Agreements with American Express Financial Advisors Inc., to AEBI's clients and certain of Coutts' clients, respectively, who are neither citizens nor residents of the United States.
The American Express Market Strategy Certificate is a single payment certificate that pays interest at a fixed rate or that offers the owner the opportunity to have all or part of his/her interest tied to 52-week stock market performance as measured by a broad stock market index, for a series of 52- week terms starting every month or at intervals the owner selects.
The American Express Investors Certificate is a single payment certificate that generally permits additional payments within 15 days of term renewal. Interest rates are guaranteed in advance by IDSC for a term of 1, 2, 3, 6, 12, 24, or 36 months, at the buyer's option. This certificate is currently sold by AEBI and Coutts, under Selling Agent Agreements with American Express Financial Advisors Inc., only to AEBI's clients and certain of Coutts' clients, respectively, who are neither citizens nor residents of the United States.
The American Express Preferred Investors Certificate is a single payment certificate that combines a fixed rate of return with AECC's guarantee of principal for investments of $250,000 to $5,000,000. Interest rates are guaranteed in advance by AECC for a term of 1, 2, 3, 6, 12, 24 or 36 months, at the buyer's option.
The American Express Special Deposits is a single payment certificate that generally permits additional payments within 15 days of term renewal. Interest rates are guaranteed in advance by IDSC for a term of 1, 2, 3, 6, 12, 24, or 36 months (by the date of term renewal in the case of 1- month terms), at the buyer's option. This certificate is currently marketed by AEB through its London and Hong Kong offices, under a Marketing Agreement with IDSC, only to AEB's clients who are neither citizens nor residents of the United States. This certificate is not registered for sale in the United States.
To AECC's knowledge, AECC is by far the largest issuer of face-amount certificates in the United States. However, such certificates compete with many other investments offered by banks, savings and loan associations, mutual funds, broker-dealers and others, which may be viewed by potential clients as offering a comparable or superior combination of safety and return on investment. In particular, some of AECC's products are designed to be competitive with the types of investment offered by banks and thrifts. Since AECC's face-amount certificates are securities, their offer and sale are subject to regulation under federal and state securities laws. AECC's certificates are backed by its qualified assets on deposit and are not insured by any governmental agency or other entity.
For all the certificates, except for the American Express Investors Certificate, American Express Preferred Investors Certificate, and the American Express Special Deposits, AECC's current policy is to re-evaluate the certificate rates weekly to respond to marketplace changes. For the American Express Investors Certificate, American Express Preferred Investors Certificate, and the American Express Special Deposits, AECC's current policy is to re-evaluate the rates on a daily basis. For each product, AECC refers to an independent index or source to set the rates for new sales. Except for American Express Special Deposits, AECC must set the rates for an initial purchase of the certificate within a specified range of the rate from such index or source. For renewals, AECC uses such rates as an indication of the competitors' rates, but is not required to set rates within a specified range.
For the American Express Flexible Savings Certificate, American Express Cash Reserve Certificate and the American Express Series D-1 Investment Certificate, the published rates of the BANK RATE MONITOR Top 25 Market Average(R) for various length bank certificates of deposit are used as the guide in setting rates. For the American Express Installment Certificate, the average interest rate for money market deposit accounts, as published by the BANK RATE MONITOR Top 25 Market Average(R) (the BRM Average), is used as a guide in setting rates. For the American Express Investors Certificate, American Express Preferred Investors Certificate, and American Express Special Deposits, the published average rates for comparable length dollar deposits available on an interbank basis, referred to as the London Interbank Offered Rates (LIBOR), are used as a guide in setting rates.
To compete with popular short-term investment vehicles such as certificates of deposit, money market certificates and money market mutual funds that offer comparable yields, liquidity and safety of principal, AECC offers the American Express Cash Reserve Certificate and the American Express Flexible Savings Certificate. The yields and features on these products are designed to be competitive with such short-term products. The American Express Investors Certificate, American Express Preferred Investors Certificate and American Express Special Deposits also compete with short-term products, but use LIBOR rates. The American Express Installment Certificate is intended to help clients save systematically and may compete with passbook savings and NOW accounts. The American Express Stock Market Certificate, American Express Market Strategy Certificate and American Express Equity Indexed Savings Certificate are designed to offer interest tied to a major stock market index and principal guaranteed by AECC. Certain banks offer certificates of deposit that have features similar to the Stock Market Certificate, Market Strategy Certificate and Equity Indexed Savings Certificate.
AECC's gross income is derived principally from interest and dividends generated by its investments. AECC'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 American Express Financial Corporation for advisory and other services, the distribution fees paid to American Express Financial Advisors Inc., and marketing fees paid to AEB.
AECC may make forward-looking statements in documents such as this 10-K Annual Report. In addition, from to time to time, AECC through its management may make oral forward-looking statements. Forward-looking statements are subject to uncertainties that could cause actual results to differ materially from such statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. AECC undertakes no obligation to update publicly or revise any forward-looking statements.
In 2000, approximately 39% of single payment certificate payments were through AEBI, AEB, and Coutts, and approximately 13% of single payment certificate payments and 1% of installment certificate payments were of tax-qualified certificates for use in IRAs, 401(k) plans and other qualified retirement plans.
The certificates offered by American Express Financial Advisors Inc. are sold pursuant to a distribution agreement which is terminable on 60 days notice and is subject to annual approval by AECC's Board of Directors, including a majority of the directors who are not "interested persons" of American Express Financial Advisors Inc. or AECC as that term is defined in the 1940 Act. The agreement provides for the payment of distribution fees to American Express Financial Advisors Inc. for services provided thereunder. American Express Financial Advisors Inc. is a wholly owned subsidiary of American Express Financial Corporation. For the sale of the American Express Investors Certificate and the American Express Stock Market Certificate by AEBI, American Express Financial Advisors Inc., in turn, has Selling Agent Agreements with AEBI and Coutts. For the sale of American Express Stock Market Certificate and American Express Equity Indexed Savings Certificates, American Express Financial Advisors Inc. also has a Selling Agent Agreement with Securities America Inc. effective March 10, 1999. For the distribution of the American Express Stock Market Certificate, AECC has a distribution agreement with American Express Service Corporation. For marketing American Express Special Deposits, AECC has a Marketing Agreement with AEB. These agreements are terminable upon 60 days notice and subject to annual review by directors who are not "interested persons" of American Express Financial Advisors Inc. or AECC except that such annual review is not required for selling agent agreements.
AECC receives advice, statistical data and recommendations with respect to the acquisition and disposition of securities for its portfolio from American Express Financial Corporation, under an investment management agreement which is subject to annual review by AECC's Board of Directors, including a majority of the directors who are not "interested persons" of American Express Financial Corporation or AECC.
AECC is required to maintain cash and "qualified investments" meeting the standards of Section 28(b) of the 1940 Act, as modified by an order of the Securities and Exchange Commission (the SEC). The amortized cost of said investments must be at least equal to AECC's net liabilities on all outstanding face-amount certificates plus $250,000. So long as AECC wishes to rely on the SEC order, as a condition to the order, AECC has agreed to maintain an amount of unappropriated retained earnings and capital equal to at least 5% of net certificate reserves. For these purposes, net certificate reserves means certificate reserves less outstanding certificate loans. In determining compliance with this condition, qualified investments are valued in accordance with the provisions of Minnesota Statutes where such provisions are applicable. AECC's qualified assets consist of cash and cash equivalents, first mortgage loans on real estate, U.S. government and government agency securities, municipal bonds, corporate bonds, preferred stocks and other securities meeting specified standards. AECC has also entered into a written informal understanding with the State of Minnesota, Department of Commerce, that AECC will maintain capital equal to 5% of the assets of AECC (less any loans on outstanding certificates). When computing its capital for these purposes, AECC values its assets on the basis of statutory accounting for insurance companies rather than generally accepted accounting principles. AECC is subject to annual examination and supervision by the State of Minnesota, Department of Commerce (Banking Division).
Distribution fees on sales of certain certificates are deferred and amortized over the estimated lives of the related certificates, which is approximately 10 years. Upon surrender, unamortized deferred distribution fees and any related surrender charges are recognized in income. Thus, these certificates must remain in effect for a period of time to permit AECC to recover such costs.
Item 2.
Item 2. Properties - -------------------
None.
Item 3.
Item 3. Legal Proceedings - --------------------------
Registrant has no material pending legal proceedings other than ordinary routine litigation incidental to its business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder - ------------------------------------------------------------------------- Matters -------
There is no market for the Registrant's common stock since it is a wholly owned subsidiary of American Express Financial Corporation and, indirectly, of American Express. Frequency and amount of cash dividends declared during the past two years are as follows:
Dividend Payable Date --------------------- For the year ended December 31, 2000:
January 28, 2000 $ 5,000,000 ===========
Dividend Payable Date --------------------- For the year ended December 31, 1999:
January 15, 1999 $13,000,000 June 4, 1999 12,000,000 November 29, 1999 15,000,000 ----------- $40,000,000 ===========
Restriction on the Registrant's present or future ability to pay dividends:
Certain series of installment certificates outstanding provide that cash dividends may be paid by AECC only in calendar years for which additional credits of at least 1/2 of 1% on such series of certificates have been authorized by AECC. This restriction has been removed for 2001 and 2002 by AECC's declaration of additional credits in excess of this requirement.
Appropriated retained earnings resulting from the predeclaration of additional credits to AECC's certificate owners are not available for the payment of dividends by AECC. In addition, AECC will discontinue issuance of certificates subject to the predeclaration of additional credits and will make no further predeclaration as to outstanding certificates if at any time the capital and unappropriated retained earnings of AECC should be less than 5% of net certificate reserves (certificate reserves less certificate loans). At December 31, 2000, the capital and unappropriated retained earnings amounted to 5.68% of net certificate reserves.
Item 6.
Item 6. Selected Financial Data - ---------------------------------
SUMMARY OF SELECTED FINANCIAL INFORMATION
The following selected financial information has been derived from the audited financial statements and should be read in conjunction with those statements and the related notes to financial statements. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional comments.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
Results of operations
American Express Certificate Company's (AECC), formerly IDS Certificate Company, 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 due to changes in the mix of fully taxable and tax-advantaged investments in the AECC portfolio.
During 2000, total assets and certificate reserves increased $272 million and $294 million, respectively. The increase in total assets resulted primarily from certificate payments exceeding certificate maturities and surrenders. The increase in certificate reserves resulted primarily from interest accruals of $148 million and certificate sales exceeding certificate maturities and surrenders by $146 million.
During 1999, total assets decreased $73 million whereas certificate reserves increased $132 million. The decreases in total assets and accounts payable and accrued liabilities resulted primarily from net repayments under reverse repurchase agreements of $116 million. The decrease in total assets reflects also, a decrease in net unrealized appreciation on investment securities classified as available for sale of $115 million. The increase in certificate reserves resulted primarily from interest accruals of $203 million offset by certificate maturities and surrenders exceeding certificate sales by $71 million.
2000 Compared to 1999
Gross investment income increased 4.6% due primarily to a higher average balance of invested assets.
Investment expenses increased 13.3% in 2000. The increase resulted primarily from the net of higher amortization of premiums paid for index options of $12.3 million and lower interest expense on interest rate swap and reverse repurchase agreements of $1.1 million and $.6 million, respectively.
Net provision for certificate reserves increased 12.2% due primarily to higher accrual rates and a higher average balance of certificate reserves during 2000.
The decrease in income tax benefit resulted primarily from less tax-advantaged investment income.
1999 Compared to 1998
Gross investment income decreased 6.9% due primarily to a lower average balance of invested assets.
Investment expenses increased slightly in 1999. The slight increase resulted primarily from the net of higher amortization of premiums paid for index options of $10.1 million and lower interest expense on reverse repurchase and interest rate swap agreements of $6.5 million, lower distribution fees of $2.3 million and lower investment advisory and services and transfer agent fees of $.8 million.
Net provision for certificate reserves decreased 17.1% due primarily to lower accrual rates during 1999.
The decrease in income tax benefit resulted primarily from less tax-advantaged investment income.
Liquidity and cash flow
AECC's principal sources of cash are payments from sales of face-amount certificates and cash flows from investments. In turn, AECC'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 2000 reflecting clients' ongoing desire for safety of principal. Sales of certificates totaled $1.5 billion in both 2000 and 1999 compared to $1.1 billion in 1998. The higher certificate sales in 1999 over 1998 resulted primarily from special promotions of the seven- and 13-month term American Express Flexible Savings Certificate (formerly IDS Flexible Savings Certificate) which produced sales of $295 million. Certificate sales in 1999 benefited also, from higher sales of the American Express Market Strategy Certificate (formerly IDS Market Strategy Certificate) and American Express Investors Certificate of $95 million and $118 million, respectively.
Certificate maturities and surrenders totaled $1.5 billion during 2000 compared to $1.7 billion during both 1999 and 1998. The lower certificate maturities and surrenders in 2000 compared to 1999 and 1998, resulted primarily from lower surrenders of American Express Flexible Savings Certificates.
AECC, 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, AECC continues to invest in securities that provide for more immediate, periodic interest/principal payments, resulting in improved liquidity. To accomplish this, AECC continues to invest much of its cash flow in intermediate-term bonds and mortgage-backed securities.
AECC'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 AECC has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities AECC 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 AECC 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, 2000, securities classified as held to maturity and carried at amortized cost were $.3 billion. Securities classified as available for sale and carried at fair value were $3.1 billion. These securities, which comprise 87% of AECC's total invested assets, are well diversified. Of these securities, approximately 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, 2000, write-downs of $11.4 million were recorded on AECC's below-investment-grade securities and the reserve for possible losses on investments in first mortgage loans on real estate was increased by $.2 million. These losses were partially offset by net realized gains of $1.5 million from investment security sales and redemptions.
At Dec. 31, 2000, approximately 8.5% of AECC's invested assets were below-investment-grade bonds. During the year 2000, the industry-wide default rate on below-investment-grade bonds increased significantly and this trend is expected to continue over the next year and possibly beyond.* Additional writedowns of AECC's below-investment-grade securities in 2001 are likely but the amount of any such writedowns cannot be estimated at this time.* AECC's management believes that there will be no adverse impact on the certificate owners of any such losses.*
During the year ended Dec. 31, 2000, securities classified as available for sale were sold with an amortized cost and fair value of $312 million and $313 million, respectively. The securities were sold in general management of the investment portfolio.
During the year ended Dec. 31, 2000, a security classified as held to maturity was tendered with an amortized cost and fair value of $5.0 million and $4.7 million, respectively. In addition, a held-to-maturity security with an amortized cost and fair value of $4.0 million and $4.1 million, respectively, was sold due to credit concerns. There were no sales or tenders of held-to-maturity securities during the year ended Dec. 31, 1999.
There were no transfers of available-for-sale or held-to-maturity securities during the years ended Dec. 31, 2000 and 1999.
In June 1998, the Financial Accounting Standards Board (FASB) issued, and subsequently amended, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which AECC adopted on Jan. 1, 2001. This Statement allows a one-time opportunity to reclassify held-to-maturity investments to available-for-sale without tainting the remaining securities in the held-to-maturity portfolio. AECC has elected to take this opportunity to reclass its held-to-maturity investments to available-for-sale. As of Jan. 1, 2001, the cumulative impact of applying the Statement's accounting requirements will not have a significant impact on AECC's financial position or results of operations.
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 effects in the future will differ from those quantified below.
* Statements in this discussion and analysis of AECC's financial condition and results of operations marked with an asterisk 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, changes in the industry-wide and AECC's default rate on below-investment-grade bonds over the next several months and beyond, changes in economic conditions, such as a recession or a substantial increase in prevailing interest rates, or other factors that could cause a slowdown in the economy, and changes in government regulation that affects the ability of issuers to repay their debt.
AECC 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 AECC with a historically dependable and targeted margin between the interest rate earned on investments and the interest rate credited to certificate owners' accounts. AECC does not invest in securities to generate trading profits for its own account.
AECC's Investment Committee, which comprises senior business managers, meets regularly to review models projecting different interest rate scenarios and their impact on AECC's profitability. The committee's objective is to structure AECC'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, AECC'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 three 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 AECC'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, 2000 and 1999, would be approximately $3.4 million and $8.2 million for 2000 and 1999, respectively. The 10% decrease in a major stock market index level would have a minimal impact on AECC's pretax earnings as of Dec. 31, 2000 and 1999, because the income effect is a decrease in option income and a corresponding decrease in interest credited to the American Express Stock Market Certificate, American Express Market Strategy Certificate and American Express Equity Indexed Savings Certificate owners' accounts.
Ratios
The ratio of stockholder's equity, excluding accumulated other comprehensive loss net of tax, to total assets less certificate loans and net unrealized holding gains/losses on investment securities (capital to asset ratio) at Dec. 31, 2000 and 1999 was 5.4% and 5.5%, respectively. Under an informal agreement established with the Commissioner of Commerce for the State of Minnesota, AECC has agreed to maintain at all times a minimum capital to asset ratio of 5.0%.
Item 7A.
Item 7A. Ouantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------
See Item 7.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
1. Financial Statements and Schedules Required under Regulation S-X ----------------------------------------------------------------
Index to Financial Statements and Schedules - ------------------------------------------- Page ---- Financial Statements:
Responsibility for Preparation of Financial Statements 22 Report of Independent Auditors 23 Balance Sheets, Dec. 31, 2000 and 1999 24 - 25 Statements of Operations, year ended Dec. 31, 2000, 1999 and 1998 26 - 27 Statements of Comprehensive Income, year ended Dec. 31, 2000, 1999 and 1998 28 Statements of Stockholder's Equity, year ended Dec. 31, 2000, 1999 and 1998 29 Statements of Cash Flows, year ended Dec. 31, 2000, 1999 and 1998 30 - 31 Notes to Financial Statements 32 - 49
Schedules:
I - Investments in Securities of Unaffiliated Issuers, Dec. 31, 2000 II - Investments in and Advances to Affiliates and Income Thereon, Dec. 31, 2000, 1999 and 1998 III - Mortgage Loans on Real Estate and Interest earned on Mortgages, year ended Dec. 31, 2000 V - Qualified Assets on Deposit, Dec. 31, 2000 VI - Certificate Reserves, year ended Dec. 31, 2000 VII - Valuation and Qualifying Accounts, year ended Dec. 31, 2000, 1999 and 1998
Schedules I, III and VI for the year ended Dec. 31, 1999, and Schedule VI for the year ended Dec. 31, 1998, are included in Registrant's Annual Reports on Form 10-K for the fiscal years ended Dec. 31, 1999 and Dec. 31, 1998, respectively, Commission file 2-23772, and are incorporated herein by reference.
All other Schedules required by Article 6 of the Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
2. Supplementary Data ------------------
None
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure --------------------
None
PART III
Items omitted pursuant to General Instructions I(2)(c) of Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------------
(a) List the following documents filed as a part of the report:
1. All financial statements. See Item 8.
2. Financial statement schedules. See Item 8.
3. Exhibits.
1. None or not applicable.
2. None or not applicable.
3(a). Certificate of Incorporation, dated December 31, 1977, filed electronically as Exhibit 3(a) to Post-Effective Amendment No. 10 to Registration Statement No. 2-89507, is incorporated herein by reference.
3(b). Certificate of Amendment, dated April 2, 1984 filed electronically as Exhibit 3(b) to Post-Effective Amendment No. 10 to Registration Statement No. 2-89507, is incorporated herein by reference.
3(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.
3(d). Certificate of Amendment, dated April 30, 1999, filed electronically as Exhibit 3(a) to Registrant's March 31, 1999 Quarterly Report on Form 10-Q is incorporated herein by reference.
3(e). Certificate of Amendment, dated January 28, 2000, filed electronically as exhibit 3(e) to Post-Effective Amendment No. 47 to Registration Statement No. 2-55252, is incorporated herein by reference.
3(f). Current By-Laws, filed electronically as Exhibit 3(e) to Post-Effective Amendment No. 19 to Registration Statement No. 33-26844, are incorporated herein by reference.
4-9. None or not applicable.
10(a). Investment Advisory and Services Agreement between Registrant and IDS/American Express Inc. dated January 12, 1984, filed electronically as Exhibit 10(b) to Registrant's Post-Effective Amendment No. 3 to Registration Statement No. 2-89507, is incorporated herein by reference.
10(b). Distribution Agreement dated November 18, 1988, between Registrant and IDS Financial Services Inc., filed electronically as Exhibit 1(a) to the Registration Statement No. 33-26844, for the American Express International Investment Certificate (now called, the IDS Investors Certificate) is incorporated herein by reference.
10(c). Depositary and Custodial Agreement dated September 30, 1985 between IDS Certificate Company and IDS Trust Company, filed electronically as Exhibit 10(b) to Registrant's Post-Effective Amendment No. 3 to Registration Statement No. 2-89507, is incorporated herein by reference.
10(d). Foreign Deposit Agreement dated November 21, 1990, between IDS Certificate Company 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.
10(e). Selling Agent Agreement dated June 1, 1990, between American Express Bank International and IDS Financial Services Inc. for the American Express Investors and American Express Stock Market Certificates, filed electronically as Exhibit 1(c) to the Post-Effective Amendment No. 5 to Registration Statement No. 33-26844, is incorporated herein by reference.
10(f). Second amendment to Selling Agent Agreement between American Express Financial Advisors Inc. and American Express Bank International dated as of May 2, 1995, filed electronically as Exhibit (1) to Registrant's June 30, 1995, Quarterly Report on Form 10-Q, is incorporated herein by reference.
10(g). 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 2-55252, is incorporated herein by reference.
10(h). Amendment to the Selling Agent Agreement dated December 12, 1994, between IDS Financial Services Inc. and American Express Bank International, filed electronically as Exhibit 1(d) to Post-Effective Amendment No. 13 to Registration Statement No. 2-95577, is incorporated herein by reference.
10(i). Selling Agent Agreement dated December 12, 1994, between IDS Financial Services Inc. and Coutts & Co. (USA) International, filed electronically as Exhibit 1(e) to Post-Effective Amendment No. 13 to Registration Statement No. 2-95577, is incorporated herein by reference.
10(j). Consulting Agreement dated December 12, 1994, between IDS Financial Services Inc. and American Express Bank International, filed electronically as Exhibit 16(f) to Post-Effective Amendment No. 13 to Registration Statement No. 2-95577 is incorporated herein by reference.
10(k). 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.
10(l). 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. 14 to Registration Statement 33-26844, is incorporated herein by reference.
10(m). Letter Agreement dated July 28, 1999 amending the Selling Agent Agreement dated June 1, 1990, or a schedule thereto, as amended, between American Express Financial Advisors Inc. (formerly IDS Financial Services Inc.) and American Express Bank International, filed electronically to Registrant's June 30, 1999 Quarterly Report on Form 10-Q, is incorporated herein by reference.
10(n). Letter Agreement dated July 28, 1999, amending the Marketing Agreement dated October 10, 1991, or a schedule thereto, as amended, between IDS Certificate Company and American Express Bank Ltd., filed electronically to Registrant's June 30, 1999 Quarterly Report on Form 10-Q, is incorporated herein by reference.
10(o) Selling Agent Agreement, dated March 10, 1999 between American Express Financial Advisors Inc. and Securities America, Inc., filed electronically as Exhibit 10 (l) to Post-Effective Amendment No. 18 to Registration Statement 33-26844, is incorporated herein by reference.
10(p) Letter Agreement, dated April 10, 2000, amending the Selling Agent Agreement, dated March 10, 1999, between American Express Financial Advisors Inc. and Securities America, Inc., filed electronically as Exhibit 10 (o) to Post-Effective Amendment No. 20 to Registration Statement 33-26844, is incorporated herein by reference.
10(q) (1) Code of Ethics under rule 17j-1 for Registrant, filed electronically as Exhibit 10(p)(1) to Pre-Effective Amendment No. 1 to Registration Statement No. 333-34982, is incorporated herein by reference.
(2) Code of Ethics under rule 17j-1 for Registrant's investment advisor and principal underwriters, filed electronically as Exhibit 10(p)(2) to Pre-Effective Amendment No. 1 to Registration Statement No. 333-34982, is incorporated herein by reference.
10(r) Letter of Representations dated August 22, 2000 between American Express Certificate Company and the Depository Trust Company, filed electronically as Exhibit 10(r) to Post-Effective Amendment No. 2-552527 is incorporated herein by reference.
11-23. None or not applicable.
24(a). Officers' Power of Attorney, dated October 12, 2000, filed electronically as exhibit 24(a) to Registrant's September 30, 2000 Quarterly Report on Form 10-Q, is incorporated herein by reference.
24(b). Directors' Power of Attorney, dated October 12, 2000, filed electronically as exhibit 24(b) to Registrant's September 30, 2000 Quarterly Report on Form 10-Q, is incorporated herein by reference.
25-99. None or not applicable.
(b) Reports on Form 8-K filed during the last quarter of the period covered by this report. None.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT American Express Certificate Company
BY /s/ Paula R. Meyer * NAME AND TITLE Paula R. Meyer, President DATE March 29, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BY /s/ Paula R. Meyer, * * * NAME AND TITLE Paula R. Meyer, President and Director (Principal Executive Officer) DATE March 29, 2001
BY /s/ Jeffrey S. Horton * NAME AND TITLE Jeffrey S. Horton, Vice President and Treasurer (Principal Financial Officer) DATE March 29, 2001
BY /s/ Philip C. Wentzel * NAME AND TITLE Philip C. Wentzel, Vice President and Controller (Principal Accounting Officer) DATE March 29, 2001
BY /s/ Rodney P. Burwell * * NAME AND TITLE Rodney P. Burwell, Director DATE March 29, 2001
BY /s/ Charles W. Johnson * * NAME AND TITLE Charles W. Johnson, Director DATE March 29, 2001
BY /s/ Jean B. Keffeler * * NAME AND TITLE Jean B. Keffeler, Director DATE March 29, 2001
BY /s/ Richard W. Kling * * NAME AND TITLE Richard W. Kling, Chairman of the Board of Directors and Director DATE March 29, 2001
BY /s/ Thomas R. McBurney * * NAME AND TITLE Thomas R. McBurney, Director DATE March 29, 2001
BY /s/ Pamela J. Moret * * NAME AND TITLE Pamela J. Moret, Director DATE March 29, 2001
* Signed pursuant to Officers' Power of Attorney dated October 12, 2000, filed electronically as Exhibit 24(a) to Registrant's September 30, 2000 Quarterly Report on Form 10-Q, is incorporated herein by reference.
- -------------------------------- Monica P. Vickman
* * Signed pursuant to Directors' Power of Attorney dated October 12, 2000, filed electronically as Exhibit 24(b) to Registrant's September 30, 2000 Quarterly Report on Form 10-Q, is incorporated herein by reference.
- -------------------------------- Monica P. Vickman
American Express Certificate Company Responsibility for Preparation of Financial Statements
The management of American Express Certificate Company (AECC) is responsible for the preparation and fair presentation of its financial statements. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States which are appropriate in the circumstances, and include amounts based on the best judgment of management. AECC's management is also responsible for the accuracy and consistency of other financial information included in this Form 10-K.
In recognition of its responsibility for the integrity and objectivity of data in the financial statements, AECC 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 AECC's financial statements. The concept of reasonable assurance is based on the notion that the cost of internal control should not exceed the benefits derived.
Internal control 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 internal control and report their findings to management throughout the year. AECC'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 internal controls over financial reporting.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Security Holders American Express Certificate Company:
We have audited the accompanying balance sheets of American Express Certificate Company ( formerly IDS Certificate Company) a wholly owned subsidiary of American Express Financial Corporation, as of December 31, 2000 and 1999, 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, 2000. Our audits also included the financial statement schedules listed in the index at Item 8. These financial statements and schedules are the responsibility of the management of American Express Certificate Company. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. Our procedures included confirmation of investments owned as of December 31, 2000 and 1999, by correspondence with custodians. 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 American Express Certificate Company at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Minneapolis, Minnesota February 8, 2001
Balance Sheets, Dec. 31,
Notes to Financial Statements
($ in thousands unless indicated otherwise)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
American Express Certificate Company (AECC), formerly IDS Certificate Company, is a wholly owned subsidiary of American Express Financial Corporation (Parent), which is a wholly owned subsidiary of American Express Company. AECC 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 AECC are not insured by any government agency. AECC's certificates are sold primarily by American Express Financial Advisors Inc.'s (AEFA) (an affiliate) field force operating in 50 states, the District of Columbia and Puerto Rico. AECC's Parent acts as investment advisor for AECC.
On Jan. 28, 2000, the AECC Board of Directors approved the name change of IDS Certificate Company to American Express Certificate Company effective April 26, 2000.
AECC currently offers ten types of certificates with specified maturities ranging from 10 to 20 years. Within their specified maturity, most certificates have interest rate terms of one- to 36-months. In addition, three 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.
AECC's gross income is derived primarily from interest and dividends generated by its investments. AECC'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 AEFA.
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 accounting principles generally accepted in the United States. AECC 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.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Preferred stock dividend income
AECC 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.
Investment securities
Cash equivalents are carried at amortized cost, which approximates fair value. AECC 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 AECC has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities AECC 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 loss 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 fair value with the amount of adjustment included in income.
First mortgage loans on real estate
Mortgage loans are carried at amortized cost, less reserves for losses, which is the basis for determining any realized gains or losses. The estimated fair value of the mortgage loans is determined by a discounted cash flow analysis using mortgage interest rates currently offered for mortgages of similar maturities.
Impairment is measured as the excess of the loan's recorded investment over its present value of expected principal and interest payments discounted at the loan's effective interest rate, or the fair value of collateral. The amount of the impairment is recorded in a reserve for mortgage loan losses.
The reserve for mortgage loan losses is maintained at a level that management believes is adequate to absorb estimated losses in the portfolio. The level of the reserve account is determined based on several factors, including historical experience, expected future principal and interest payments, estimated collateral values, and current and anticipated economic and political conditions. Management regularly evaluates the adequacy of the reserve for mortgage loan losses.
AECC 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 interest at specified percentage rates as declared by AECC. Reserves also are maintained for advance payments made by certificate owners, accrued interest thereon, and for additional credits in excess of minimum guaranteed rates and accrued interest thereon. On certificates allowing for the deduction of a surrender charge, the cash surrender values may be less than accumulated investment certificate reserves prior to maturity dates. Cash surrender values on certificates allowing for no surrender charge are equal to certificate reserves. The payment distribution, reserve accumulation rates, cash surrender values, reserve values and other matters are governed by the 1940 Act.
Deferred distribution fee expense
On certain series of certificates, distribution fees are deferred and amortized over the estimated lives of the related certificates, which is approximately 10 years. Upon surrender prior to maturity, unamortized deferred distribution fees are recognized in expense and any related surrender charges are recognized as a reduction in Provision for certificate reserves.
Federal income taxes
AECC's taxable income or loss is included in the consolidated federal income tax return of American Express Company. AECC 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 the Parent and its subsidiaries that the Parent will reimburse a subsidiary for any tax benefits recorded.
Accounting developments
In June 1998, the Financial Accounting Standards Board (FASB) issued, and subsequently amended, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which AECC adopted on Jan. 1, 2001. This Statement establishes accounting and reporting standards for derivative instruments, including some embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value.
Changes in the fair value of a derivative will be recorded in income or directly to equity, depending on the instrument's designated use. Upon adoption of SFAS No. 133, AECC will use cash flow hedge accounting on its interest rate swaps.
A one-time opportunity to reclassify held-to-maturity investments to available-for-sale is allowed without tainting the remaining securities in the held-to-maturity portfolio. AECC has elected to take this opportunity to reclass its held-to-maturity investments to available-for-sale.
As of Jan 1, 2001, the cumulative impact of applying the Statement's accounting requirements will not have a significant impact on AECC's financial position or results of operations.
2. DEPOSIT OF ASSETS AND MAINTENANCE OF QUALIFIED ASSETS
A) Under the provisions of its certificates and the 1940 Act, AECC was required to have Qualified Assets (as that term is defined in Section 28(b) of the 1940 Act) in the amount of $3,829,659 and $3,476,365 at Dec. 31, 2000 and 1999, respectively. AECC had Qualified Assets of $4,064,694 at Dec. 31, 2000 and $3,805,634 at Dec. 31, 1999, excluding net unrealized depreciation on Available-for-sale securities of $80,717 and $101,141 at Dec. 31, 2000 and 1999, respectively, and Payable for investment securities purchased of $1,946 and $1,734 at Dec. 31, 2000 and 1999, 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 depository agreement and to requirements of various states, qualified assets of AECC were deposited as follows:
The assets on deposit at Dec. 31, 2000 and 1999 consisted of securities having a deposit value of $3,589,196 and $3,217,101, respectively; mortgage loans of $358,575 and $378,047, respectively; and other assets of $104,200 and $88,063, respectively.
American Express Trust Company is the central depository for AECC. 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 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. AECC'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.
A summary of Held-to-maturity securities and Available-for-sale securities at Dec. 31, is as follows:
The Amortized cost and Fair value of Held-to-maturity securities and Available-for-sale securities, by contractual maturity, at Dec. 31, 2000, are shown below. Cash flows may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Amortized Fair
cost value
Held to maturity:
Due within 1 year $ 50,996 $ 52,326
Due after 1 year through 5 years 105,431 105,067
Due after 5 years through 10 years 148,701 150,523
305,128 307,916
Mortgage-backed securities 12,604 12,764
Total $ 317,732 $ 320,680
Available for sale:
Due within 1 year $ 125,591 $ 125,682
Due after 1 year through 5 years 1,043,320 1,032,010
Due after 5 years through 10 years 493,840 414,700
Due after 10 years 324,910 322,415
1,987,661 1,894,807
Mortgage-backed securities 1,106,998 1,121,923
Perpetual preferred stock 109,008 106,220
Total $3,203,667 $3,122,950
During the years ended Dec. 31, 2000 and 1999, 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, were as follows:
2000 1999 1998
Proceeds $312,728 $105,112 $346,353
Gross realized gains 4,447 3,270 4,487
Gross realized losses 3,136 195 1,461
During the years ended Dec. 31, 2000 and 1999, AECC recognized losses of $11,413 and $2,141, respectively, due to declines in the fair value of available-for-sale securities that were other than temporary. These amounts are reflected in Net unrealized loss on investments in the Statements of Operations. No such losses were recognized during the year ended Dec. 31, 1998.
Sales of Held-to-maturity securities, due to credit concerns and acceptance of a tender offer during the year ended Dec. 31, 2000, and acceptance of a tender offer during the year ended Dec. 31, 1998, were as follows:
2000 1999 1998
Amortized cost $9,015 $-- $6,182
Gross realized gains 94 -- 63
Gross realized losses 273 -- --
There were no sales of Held-to-maturity securities during the year ended Dec. 31, 1999.
During the years ended Dec. 31, 2000 and 1999, no securities were reclassified from held to maturity to available for sale.
B) Investments in securities with fixed maturities comprised 87% and 84% of AECC's total invested assets at Dec. 31, 2000 and 1999, 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 2000 1999
Aaa/AAA 44% 36%
Aa/AA 1 2
Aa/A 1 2
A/A 13 15
A/BBB 3 3
Baa/BBB 28 31
Below investment grade 10 11
100% 100%
Of the securities rated Aaa/AAA, 73% and 72% at Dec. 31, 2000 and 1999, respectively, are U.S. Government Agency mortgage-backed securities that are not rated by a public rating agency. At Dec. 31, 2000 and 1999, approximately 13% of securities with fixed maturities, other than U.S. Government Agency mortgage-backed securities, are rated by Parent's internal analysts.
At Dec. 31, 2000 and 1999 no one issuer, other than U.S. Government Agency mortgage-backed securities, is greater than 1% of AECC's total investment in securities with fixed maturities.
C) AECC reserves freedom of action with respect to its acquisition of restricted securities that offer advantageous and desirable investment opportunities. In a private negotiation, AECC may purchase for its portfolio all or part of an issue of restricted securities. Since AECC 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 AECC 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 AECC were to be deemed to be a distributor of the restricted securities, it is possible that AECC 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, 2000 and 1999, AECC's recorded investment in impaired mortgage loans was $155 and $233, respectively, and the reserve for loss on those amounts was $nil and $161, respectively. During 2000, 1999 and 1998, the average recorded investment in impaired mortgage loans was $195, $267 and $331, respectively.
AECC recognized $13, $25 and $31 of interest income related to impaired mortgage loans for the years ended Dec. 31, 2000, 1999 and 1998, respectively.
The reserve for loss on mortgage loans increased $233 during the year ended Dec. 31, 2000, from $511 at Dec. 31, 1999 to $744 at Dec. 31, 2000 and decreased $100 during the year ended Dec. 31, 1999, from $611 at Dec. 31, 1998, to $511 at Dec. 31, 1999. During the year ended Dec. 31, 1998, there was no change in the reserve for loss on mortgage loans of $611.
At Dec. 31, 2000 and 1999, approximately 9% and 10%, respectively, of AECC's invested assets were First mortgage loans on real estate. A summary of First mortgage loans on real estate by Region and Property Type at Dec. 31, is as follows:
Region 2000 1999
South Atlantic 20% 20%
West North Central 18 19
East North Central 16 16
Mountain 16 16
West South Central 12 12
Pacific 7 7
New England 6 5
Middle Atlantic 5 5
Total 100% 100%
Property Type 2000 1999
Office buildings 28% 29%
Retail/shopping centers 27 26
Apartments 17 17
Industrial buildings 15 15
Other 13 13
Total 100% 100%
The Carrying amounts and Fair values of First mortgage loans on real estate at Dec. 31, follows: The Fair values are estimated using discounted cash flow analysis, using market interest rates currently being offered for loans with similar maturities.
At Dec. 31, 2000 and 1999, commitments for fundings of first mortgage loans, at market interest rates, aggregated $1,200 and $800, respectively. AECC holds the mortgage document, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreements. AECC employs policies and procedures to ensure the creditworthiness of the borrowers and that funds will be available on the funding date. AECC's loan fundings are restricted to 80% or less of the market value of the real estate at the time of the loan funding. Management believes there is no fair value for these commitments.
5. CERTIFICATE RESERVES
Reserves maintained on outstanding certificates have been computed in accordance with the provisions of the certificates and Section 28 of the 1940 Act. The average rates of accumulation on certificate reserves at Dec. 31, were as follows:
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, 2000, $2,684 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 3.22%. AECC has increased the rate of accrual to 5.15% through April 30, 2002. An appropriation of retained earnings amounting to $15 has been made, which represents the estimated additional accrual that will result from the increase granted by AECC.
D) American Express Stock Market Certificate, American Express Market Strategy Certificate and American Express Equity Indexed Savings 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, 2000 and 1999 was $1,063,383 and $886,240, respectively.
E) Fair values of certificate reserves with interest rate terms of one year or less approximated the carrying values less any applicable surrender charges. Fair values for other certificate reserves are determined by a discounted cash flow analysis using interest rates currently offered for certificates with similar remaining terms, less any applicable surrender charges.
6. DIVIDEND RESTRICTION
Certain series of installment certificates outstanding provide that cash dividends may be paid by AECC only in calendar years for which additional credits of at least one-half of 1% on such series of certificates have been authorized by AECC. This restriction has been removed for 2001 and 2002 by AECC's declaration of additional credits in excess of this requirement.
7. FEES PAID TO PARENT AND AFFILIATED COMPANIES ($ 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 AECC, 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 AECC pays an outside service fee.
B) The basis of computing fees paid or payable to American Express Financial Advisors Inc. (AEFA) (an affiliate) for Distribution services is:
Fees payable to AEFA on sales of AECC's certificates are based upon terms of agreements giving AEFA the 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, AECC 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 AEFA may be lowered. For the promotion of the seven-month interest rate term IDS Flexible Savings Certificate which occurred March 10, 1999 to June 8, 1999, and the promotion of the seven- and 13-month interest rate term IDS Flexible Savings Certificate which occurred August 4, 1999 to April 25, 2000, the distribution fee 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:
Fees on the American Express Cash Reserve (formerly IDS Cash Reserve) Certificate 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.
Effective April 26, 2000, fees on the American Express Flexible Savings (formerly IDS Flexible Savings) Certificate are paid at a rate of 0.08% of the purchase price at the time of issuance and 0.08% of the reserves maintained for these certificates at the beginning of the second and subsequent quarters from issue date. For certificates sold from April 30, 1997 to April 25, 2000, fees were paid at the rate of 0.20% of the purchase price at 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.
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 American Express Preferred Investors (formerly IDS Preferred Investors) Certificate are paid at a rate of 0.165% of the initial payment on issue date of the certificate and 0.165% of the certificate's reserve at the beginning of the second and subsequent quarters from issue date.
Effective April 28, 1999, fees on the American Express Stock Market (formerly IDS Stock Market), sold through AEFA, and American Express Market Strategy (formerly IDS Market Strategy) Certificates are paid at a rate of 0.90%. For certificates sold from April 30, 1997 to April 27, 1999, fees were paid at the rate of 0.70%. Fees are paid on the purchase price on the first day of the certificate's term and on the reserves maintained for these certificates at the beginning of each subsequent term.
Effective April 26, 2000, fees on the American Express Stock Market Certificates, sold through American Express Bank International, are paid at a rate of 0.90%. For certificates sold from April 28, 1999 to April 25, 2000, fees were paid at the rate of 1.00%. For certificates sold from April 30, 1997 to April 27, 1999, fees were paid at a rate of 1.25%. Fees are paid on the purchase price on the first day of the certificate's term and on the reserves maintained for these certificates at the beginning of each subsequent term.
Fees on the American Express Equity Indexed Savings Certificate are paid at a rate of 1.00% of the initial investment on the first day of each certificate's term and 1.00% of the certificate's reserve at the beginning of each subsequent term.
C) The basis of computing Depository fees paid or payable to American Express Trust Company (an affiliate) is:
Maintenance charge per account 5 cents per $1,000 of assets on deposit
Transaction charge $20 per transaction
Security loan activity:
Depositary Trust Company receive/deliver $20 per transaction
Physical receive/deliver $25 per transaction
Exchange collateral $15 per transaction
A transaction consists of the receipt or withdrawal of securities and commercial paper and/or a change in the security position. The charges are payable quarterly except for maintenance, which is an annual fee.
D) The basis for computing fees paid or payable to American Express Bank Ltd. (an affiliate) for the distribution of the American Express Special Deposits Certificate on an annualized basis is:
1.25% of the reserves maintained for the certificates on an amount from $100,000 to $249,999, 0.80% on an amount from $250,000 to $499,999, 0.65% on an amount from $500,000 to $999,999 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. AECC 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 AECC under the investment advisory and services agreement.
8. INCOME TAXES
Income tax (expense) benefit as shown in the Statements of Operations for the three years ended Dec. 31, consists of:
2000 1999 1998
Federal:
Current $ 8,586 $(5,978) $(5,668)
Deferred (4,941) 1,063 4,183
3,645 (4,915) (1,485)
State (120) (137) (50)
Total income tax (expense) benefit $ 3,525 $(5,052) $(1,535)
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:
2000 1999 1998
Federal tax expense at U.S. statutory rate $(4,554) $(13,932) $(12,026)
Tax-exempt interest 82 264 394
Dividend exclusion 8,064 8,730 10,121
Other, net 53 23 26
Federal tax (expense) benefit $ 3,645 $ (4,915) $ (1,485)
Deferred income taxes result from the net tax effects of temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in differences between income for tax purposes and income for financial statement purposes in future years. Principal components of AECC's Deferred tax assets and Deferred tax liabilities as of Dec. 31, are as follows:
Deferred tax assets 2000 1999
Certificate reserves $ 1,869 $21,741
Investment reserves 5,081 1,005
Investment unrealized losses 28,251 35,399
Investments 646 --
Other, net 18 19
Total deferred tax assets $35,865 $58,164
Deferred tax liabilities
Deferred distribution fees $ 3,255 $ 4,286
Purchased/written call options 1,523 10,494
Dividends receivable 543 490
Investments -- 261
Return of capital dividends 43 43
Total deferred tax liabilities 5,364 15,574
Net deferred tax assets $30,501 $42,590
AECC is required to establish a valuation allowance for any portion of the Deferred tax assets that management believes will not be realized. In the opinion of management, it is more likely than not that AECC will realize the benefit of the Deferred tax assets and, therefore, no such valuation allowance has been established.
9. DERIVATIVE FINANCIAL INSTRUMENTS
AECC enters into transactions involving derivative financial instruments as an end user (nontrading). AECC uses these instruments to manage its exposure to interest rate risk and equity price risk, including hedging specific transactions. AECC 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. AECC 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. AECC 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, 2000, AECC's counterparties to the interest rate swaps are rated A or better by nationally recognized rating agencies. The counterparties to the purchased call options are eight major broker/dealers that are rated A or better by nationally recognized rating agencies.
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 Sheets.
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.
Interest rate caps, corridors, floors and swaps, and options may be used to manage AECC's exposure to changing interest rates. These instruments are used primarily to protect the margin between the interest earned on investments and the interest rate credited to investment certificate owners.
Interest rate swaps at Dec. 31, 2000, with a notional amount of $250,000 reset monthly and $250,000 reset quarterly. AECC pays a fixed rate on the notional amount ranging from 7.07% to 7.31% and receives a floating rate on the notional amount tied to the London Interbank Offered Rate. There is no amount carried on the Balance Sheets. Interest earned and interest expensed under the agreements are shown net in Investment Expenses or Other Investment Income, as appropriate.
AECC 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, AECC 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 Expenses over the life of the option. The intrinsic value of these index options is also reported in Other Qualified Assets or Other Liabilities, as appropriate. Changes in the intrinsic value of these options are recognized currently in Provision for certificate reserves.
On the same series of certificates, AECC also purchases futures on the index to hedge its obligations. The futures are marked-to-market daily and exchange traded, exposing AECC to no counterparty risk. For futures contracts that meet the criteria for hedge accounting, gains and losses are deferred in Other comprehensive income and will be recognized in Provision for certificate reserves upon sale or disposition of the hedged investment. For futures that do not meet the criteria for hedge accounting, gains and losses are recognized currently in Provision for certificate reserves.
A summary of open option contracts at Dec. 31, is as follows:
Contract Average Index at amount strike price Dec. 31, 2000
Purchased call options $620 1,428 1,320
Written call options 620 1,580 1,320
Contract Average Index at amount strike price Dec. 31, 1999
Purchased call options $532 1,326 1,469
Written call options 532 1,453 1,469
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
AECC 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, and Investment securities sold, Accounts Payable Due to Parent and other 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. AECC's off-balance sheet intangible assets, such as AECC's name and future earnings of the core business are also excluded. AECC's management believes the value of these excluded assets is significant. The fair value of AECC, therefore, cannot be estimated by aggregating the amounts presented.
AMERICAN EXPRESS CERTIFICATE COMPANY (formerly IDS Certificate Company)
NOTES:
a) See Notes 1 and 3 to the financial statements regarding determination of cost and fair values.
b) In the absence of market quotations, securities are valued by American Express Certificate Company at fair value.
c) Aggregate cost of investment in securities of unaffiliated issuers for federal income tax purposes was $3,536,676.
d) Securities acquired in private negotiation which may require registration under federal securities law if they were to be publicly sold. Also see Note 3b to financial statements.
e) Non-income producing securities.
f) Securities classified as available for sale and carried at fair value on the balance sheet. Also see Notes 1 and 3A to financial statements.
AMERICAN EXPRESS CERTIFICATE COMPANY SCHEDULE II (formerly IDS Certificate Company)
AMERICAN EXPRESS CERTIFICATE COMPANY SCHEDULE II (formerly IDS Certificate Company)
Investments in and Advances to Affiliates and Income Thereon
December 31, 2000, 1999 and 1998 ($ in thousands)
NOTES:
(a) The aggregate cost for federal income tax purposes was $422 at December 31, 2000 and 1999, and $438 at December 31, 1998, subject to possible adjustment in certain circumstances under consolidated income tax return regulations.
(b) Investments in stocks of wholly owned subsidiaries are carried at cost adjusted for equity in undistributed net income since organization or acquisition of the subsidiaries.
(c) There were no dividends or interest earned which were not credited to income.
IDS CERTIFICATE COMPANY SCHEDULE III (formerly IDS Certificate Company) Mortgage Loans on Real Estate and Interest Earned on Mortgages
Part 3 - Location of mortgaged properties
($ in thousands)
Amount of principal unpaid at end of period ----------------- Carrying amount of Subject mortgages to Amount of State in Number Prior (c), (g) delinquent mortgages which mortgaged of liens (h), and interest being property is located loans (b) (i) Total (d) foreclosed - --------------------- ------- ---- ---------- ------- --------- ----------
Arizona 6 21,591 21,591 0 0 California 3 9,251 9,251 0 0 Colorado 6 18,832 18,832 0 0 Connecticut 4 13,463 13,463 0 0 Florida 9 40,520 40,520 0 0 Georgia 1 2,686 2,686 0 0 Illinois 1 3,546 3,546 0 0 Indiana 1 3,350 3,350 0 0 Iowa 3 9,628 9,628 0 0 Massachusetts 2 6,031 6,031 0 0 Maryland 2 5,029 5,029 0 0 Michigan 4 18,324 18,324 0 0 Minnesota 11 38,984 38,984 0 0 Missouri 2 4,358 4,358 0 0 Nebraska 1 2,754 2,754 0 0 Nevada 2 7,914 7,914 0 0 New Jersey 2 9,751 9,751 0 0 New Mexico 3 8,661 8,661 0 0 New York 1 3,118 3,118 0 0 North Carolina 5 9,302 9,302 0 0 North Dakota 1 5,693 5,693 0 0 Ohio 7 23,658 23,658 0 0 Oklahoma 2 6,733 6,733 0 0 Oregon 2 6,170 6,170 0 0 Pennsylvania 1 4,490 4,490 0 0 South Carolina 1 935 935 0 0 South Dakota 4 3,543 3,543 0 0 Texas 13 34,776 34,776 0 0 Utah 1 1,926 1,926 0 0 Virginia 6 14,200 14,200 0 0 Washington 2 11,009 11,009 0 0 Wisconsin 3 9,093 9,093 0 0 ------- --------- ---------- --------- ---------
112 359,319 359,319 0 0 ------- --------- ---------- --------- ---------
Unallocated Reserve
for Losses 744 ---------
Total 112 $358,575 $359,319 $0 $0 ======= ========= ========== ========= =========
NOTES:
(a) The classification "residential" includes single dwellings only. Residential multiple dwellings are included in "apartment and business".
(b) Real estate taxes and easements, which in the opinion of the Company are not undue burden on the properties, have been excluded from the determination of "prior liens".
(c) In this schedule III, carrying amount of mortgage loans represents unpaid principal balances plus unamortized premiums less unamortized discounts and reserve for loss.
(d) Interest in arrears for less than three months has been disregarded in computing the total amount of principal subject to delinquent interest. The amounts of mortgage loans being forclosed are also included in amounts subject to delinquent interest.
(e) Information as to interest due and accrued for the various classes within the types of mortgage loans is not readily available and the obtaining thereof would involve unreasonable effort and expense.
The Company does not accrue interest on loans which are over three months delinquent.
(f) Information as to interest income by type and class of loan has been omitted because it is not readily available and the obtaining thereof would involve unreasonable effort and expense. In lieu thereof, the average gross interest rates (exclusive of amortization of discounts and premiums) on mortgage loans held at December 31, 2000 are shown by type and class of loan.
(h) The aggregate cost of mortgage loans for federal income tax purposes at December 31, 2000 was $359,319.
(i) At December 31, 2000, an unallocated reserve for loss on first mortgage loans of $744 is recorded.
AMERICAN EXPRESS CERTIFICATE COMPANY SCHEDULE V (formerly IDS Certificate Company)
Notes:
(a) Represents amortized cost of bonds and notes.
(b) Represents average cost of individual issues of stocks.
(c) Represents unpaid principal balance of mortgage loans less unamortized discounts and reserve for losses.
(d) Represents amortized cost of purchased call options.
AMERICAN EXPRESS CERTIFICATE COMPANY SCHEDULE VI (formerly IDS Certificate Company) Certificate Reserves
Notes:
(a) On these series of certificates, there is no minimum rate of accrual of interest. Interest is declared for a quarter or quarters by American Express Certificate Company (AECC) and credited to the reserves maintained at the end of each calendar quarter.
(b) On these series of certificates, there is no minimum rate of accrual of interest. Interest is declared for a quarter or quarters by AECC and credited to the reserves maintained or paid in cash at the end of each calendar month.
(c) On these series of certificates, there is no minimum rate of accrual of interest. Interest is declared by AECC for the first four certificate quarters, then annually thereafter, and credited to the reserves maintained at the end of each certificate year.
(d) On this series of certificates, there is no minimum rate of accrual of interest. Interest is declared by AECC for the term selected and credited to the reserves maintained or paid in cash at the end of each certificate month.
(e) On this series of certificates, there is no minimum rate of accrual of interest. Interest is declared by AECC for a three-month term and credited to the reserves maintained or paid in cash at the end of each certificate month.
(f) On this series of certificates, there is no minimum rate of accrual of interest. Interest is declared by AECC for a four, five, six, seven, eight, nine or ten year maturity and credited to the reserves maintained at maturity.
(g) On this series of certificates, the certificate holder may elect to receive minimum interest only or minimum interest plus participation interest. Minimum interest is declared by AECC for a twelve-month term and is credited to the the reserves maintained at the end of each certificate term. Participation interest is determined at the end of each certificate term by multiplying the market participation rate in effect at the beginning of the certificate term for each certificate times any total percentage appreciation in a broad stock market indicator subject to specified maximums. Participation interest is credited to the reserves maintained at the end of each certificate term.
Part 2 - Description of Additions to Reserves Charged to Other Accounts and Deductions from Reserves Credited to Other Accounts
Part 2 - Description of Additions to Reserves Charged to Other Accounts and Deductions from Reserves Credited to Other Accounts
Year ended December 31, 2000 ($ in thousands)
Deductions from reserves credited to other accounts - -----------------------------------------------------------------------------
Conversions to optional Maturities settlement transferred Conversions certificates- to extended to paid-up credited maturities- certificates- to optional credited to credited settlement reserves to to paid-up reserves and mature- surrender surrender extended income income maturities Total - ---------------------------- ------------ ----------- ------------
0 0 0 0
0 14 0 14
0 0 0 0
485 724 272 1,481 240 0 0 240 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 28 0 28 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 - -------------------- --------- ------- ------------
725 767 272 1,764 ==================== ========= ======= ============
Part 2 - Description of Additions to Reserves Charged to Other Accounts and Deductions from Reserves Credited to Other Accounts
Part 4 - Amounts Periodically Credited to Certificate Holders' Accounts to Accumulate the Maturity Amount of Installment Certificates.
Information as to (1) amounts periodically credited to each class of security holders' accounts from installment payments and (2) such other amounts periodically credited to accumulate the maturity amount of the certificate (on a $1,000 face-amount certificate basis for the term of the certificate), is filed in Part 4 of Schedule IX as part of Post- effective Amendment No. 9 to Registration Statement No. 2-17681, Post effective Amendment No. 1 to Registration Statement No. 2-23772 and Post-effective Amendment No. 1 to Registration Statement No. 2-258081 and is incorporated herein by reference.
AMERICAN EXPRESS CERTIFICATE COMPANY SCHEDULE VII (formerly IDS Certificate Company)
a) Applicable to adjustment of the adequacy of the reserve for mortgage loan losses.
b) Applicable to reversal on securities sold.