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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 30(a) OF THE INVESTMENT COMPANY ACT OF
1940 AND SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________.
Commission file number 2-23772.
American Express Certificate Company (formerly IDS Certificate Company)
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(Exact name of registrant as specified in its charter)
Delaware 41-6009975
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
52 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: None Name of each exchange on which registered: None
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Securities registered pursuant to Section 12(g) of the Act:
Title of class: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant. None
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
150,000 Common shares
CERTAIN DOCUMENTS INCORPORATED BY REFERENCE.
None
The registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
The Exhibit Index is located on sequential pages 16-19.
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Item 1. Business
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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.
The following table shows AECC's certificate payments received and certificate
surrenders for the three years ended December 31, 2000:
2000 1999 1998
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($ in Millions)
Single Payment Certificates
Non-Qualified
Payments through:
American Express Financial Advisors Inc. $773.5 $950.2 $685.3
AEBI, AEB, and Coutts 636.1 387.7 303.0
Surrenders through:
American Express Financial Advisors Inc. 710.2 854.3 922.9
AEBI, AEB, and Coutts 482.9 358.4 370.6
Qualified
Payments through:
American Express Financial Advisors Inc. 209.1 194.7 122.4
Surrenders through:
American Express Financial Advisors Inc. 151.8 160.7 164.7
Installment Payment Certificates
Through American Express Financial Advisors Inc.
Non-Qualified
Payments 48.3 62.9 80.4
Surrenders 101.8 114.5 118.5
Qualified
Payments .4 .6 1.0
Surrenders 1.4 1.8 2.5
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. Properties
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None.
Item 3. Legal Proceedings
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Registrant has no material pending legal proceedings other than
ordinary routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
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Item omitted pursuant to General Instructions I(2)(c) of Form 10-K.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
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Matters
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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
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For the year ended December 31, 2000:
January 28, 2000 $ 5,000,000
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Dividend Payable Date
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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
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$40,000,000
===========
Restriction on the Registrant's present or future ability to pay
dividends:
Certain series of installment certificates outstanding provide that
cash dividends may be paid by AECC only in calendar years for which additional
credits of at least 1/2 of 1% on such series of certificates have been
authorized by AECC. This restriction has been removed for 2001 and 2002 by
AECC's declaration of additional credits in excess of this requirement.
Appropriated retained earnings resulting from the predeclaration of
additional credits to AECC's certificate owners are not available for the
payment of dividends by AECC. In addition, AECC will discontinue issuance of
certificates subject to the predeclaration of additional credits and will make
no further predeclaration as to outstanding certificates if at any time the
capital and unappropriated retained earnings of AECC should be less than 5% of
net certificate reserves (certificate reserves less certificate loans). At
December 31, 2000, the capital and unappropriated retained earnings amounted to
5.68% of net certificate reserves.
Item 6. Selected Financial Data
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SUMMARY OF SELECTED FINANCIAL INFORMATION
The following selected financial information has been derived from the audited
financial statements and should be read in conjunction with those statements and
the related notes to financial statements. Also see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
comments.
Year Ended Dec. 31, ($ thousands)
Statement of Operations Data
2000 1999 1998 1997 1996
Investment income $266,106 $254,344 $273,135 $258,232 $251,481
Investment expenses 87,523 77,235 76,811 70,137 62,851
Net investment income before provision
for certificate reserves and income
tax (expense) benefit 178,583 177,109 196,324 188,095 188,630
Net provision for certificate reserves 155,461 138,555 167,108 165,136 171,968
Net investment income before income
tax (expense) benefit 23,122 38,554 29,216 22,959 16,662
Income tax (expense) benefit (14) (4,615) 265 3,682 6,537
Net investment income 23,108 33,939 29,481 26,641 23,199
Net realized (loss) gain on investments:
Securities of unaffiliated issuers (10,110) 1,250 5,143 980 (444)
Other-- unaffiliated -- -- -- -- 101
Net realized (loss) gain on investments
before income taxes (10,110) 1,250 5,143 980 (343)
Income tax (expense) benefit 3,539 (437) (1,800) (343) 120
Net realized (loss) gain on investments (6,571) 813 3,343 637 (223)
Net income-- wholly owned subsidiary -- 4 1,646 328 1,251
Net income $ 16,537 $ 34,756 $ 34,470 $ 27,606 $ 24,227
Cash Dividends Declared
$5,000 $40,000 $29,500 $-- $65,000
Balance Sheet Data
Total assets $4,032,745 $3,761,068 $3,834,244 $4,053,648 $3,563,234
Certificate loans 25,547 28,895 32,343 37,098 43,509
Certificate reserves 3,831,059 3,536,659 3,404,883 3,724,978 3,283,191
Stockholder's equity 166,514 141,702 222,033 239,510 194,550
American Express Certificate Company (AECC), formerly IDS Certificate Company,
is 100% owned by American Express Financial Corporation (Parent).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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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. Ouantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See Item 7.
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. 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. 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,
Assets
($ thousands) 2000 1999
Qualified Assets (note 2)
Investments in unaffiliated issuers (notes 3, 4 and 10):
Cash and cash equivalents $ 58,711 $ 47,086
Held-to-maturity securities 317,732 464,648
Available-for-sale securities 3,122,950 2,620,747
First mortgage loans on real estate 358,575 378,047
Certificate loans-- secured by certificate reserves 25,547 28,895
Investments in and advances to affiliates 422 422
Total investments 3,883,937 3,539,845
Receivables:
Dividends and interest 47,901 41,584
Investment securities sold 1,070 953
Total receivables 48,971 42,537
Other (note 9) 53,015 123,845
Total qualified assets 3,985,923 3,706,227
Other Assets
Deferred federal income taxes (note 8) 30,501 42,590
Due from Parent for federal income taxes 7,016 --
Deferred distribution fees and other 9,305 12,251
Total other assets 46,822 54,841
Total assets $4,032,745 $3,761,068
Balance Sheets, Dec. 31, (continued)
Liabilities and Stockholder's Equity
($ thousands, except share amounts) 2000 1999
Liabilities
Certificate Reserves (note 5):
Installment certificates:
Reserves to mature $ 215,971 $ 263,204
Additional credits and accrued interest 7,088 10,932
Advance payments and accrued interest 697 838
Other 55 56
Fully paid certificates:
Reserves to mature 3,537,832 3,120,351
Additional credits and accrued interest 69,155 140,988
Due to unlocated certificate holders 261 290
Total certificate reserves 3,831,059 3,536,659
Accounts Payable and Accrued Liabilities:
Due to Parent (note 7A) 771 733
Due to Parent for federal income taxes -- 4,126
Due to other affiliates (notes 7B through 7E) 730 515
Reverse repurchase agreements -- 25,000
Payable for investment securities purchased 1,946 1,734
Other (notes 9 and 10) 31,725 50,599
Total accounts payable and accrued liabilities 35,172 82,707
Total liabilities 3,866,231 3,619,366
Commitments (note 4)
Stockholder's Equity (notes 5B, 5C, and 6)
Common stock, $10 par-- authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 143,844 143,844
Retained earnings:
Appropriated for predeclared additional credits/interest 2,684 2,879
Appropriated for additional interest on advance payments 15 10
Unappropriated 70,937 59,210
Accumulated other comprehensive loss-- net of tax (note 1) (52,466) (65,741)
Total stockholder's equity 166,514 141,702
Total liabilities and stockholder's equity $4,032,745 $3,761,068
See notes to financial statements.
Statements of Operations
Year ended Dec. 31, ($ thousands) 2000 1999 1998
Investment Income
Interest income from unaffiliated investments:
Bonds and notes $204,923 $188,062 $209,408
Mortgage loans on real estate 26,675 27,294 18,173
Certificate loans 1,471 1,662 1,896
Dividends 32,478 35,228 40,856
Other 559 2,098 2,802
Total investment income 266,106 254,344 273,135
Investment Expenses
Parent and affiliated company fees (note 7):
Distribution 31,209 31,484 33,783
Investment advisory and services 8,779 8,692 9,084
Transfer agent 3,300 3,572 3,932
Depository 254 238 250
Options (note 9) 43,430 31,095 21,012
Reverse repurchase agreements 124 677 3,689
Interest rate swap agreements (note 9) 17 1,146 4,676
Other 410 331 385
Total investment expenses 87,523 77,235 76,811
Net investment income before provision for
certificate reserves and income tax (expense) benefit 178,583 177,109 196,324
Provision for Certificate Reserves (notes 5 and 9)
According to the terms of the certificates:
Provision for certificate reserves 12,599 11,493 9,623
Interest on additional credits 714 874 1,032
Interest on advance payments 33 33 44
Additional credits/interest authorized by AECC:
On fully paid certificates 134,633 118,371 146,434
On installment certificates 8,483 8,676 11,001
Total provision for certificate reserves before reserve recoveries 156,462 139,447 168,134
Reserve recoveries from terminations prior to maturity (1,001) (892) (1,026)
Net provision for certificate reserves 155,461 138,555 167,108
Net investment income before income tax (expense) benefit 23,122 38,554 29,216
Income tax (expense) benefit (note 8) (14) (4,615) 265
Net investment income 23,108 33,939 29,481
Net realized (loss) gain on investments
Securities of unaffiliated issuers before income tax expense (10,110) 1,250 5,143
Income tax (expense) benefit (note 8):
Current (537) (1,151) (1,800)
Deferred 4,076 714 --
Total income tax (expense) benefit 3,539 (437) (1,800)
Net realized (loss) gain on investments (6,571) 813 3,343
Net income-- wholly owned subsidiary -- 4 1,646
Net income $ 16,537 $ 34,756 $ 34,470
See notes to financial statements.
Statements of Comprehensive Income
Year ended Dec. 31, ($ thousands) 2000 1999 1998
Net income $ 16,537 $ 34,756 $ 34,470
Other comprehensive income (loss) (note 1)
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during year 21,840 (112,460) (32,020)
Income tax (expense) benefit (7,644) 39,361 11,207
Net unrealized holding gains (losses) arising during period 14,196 (73,099) (20,813)
Reclassification adjustment for gains included in net income (1,417) (3,058) (2,514)
Income tax expense 496 1,070 880
Net reclassification adjustment for gains included in net income (921) (1,988) (1,634)
Net other comprehensive income (loss) 13,275 (75,087) (22,447)
Total comprehensive income (loss) $29,812 $ (40,331) $ 12,023
See notes to financial statements.
Statements of Stockholder's Equity
Year ended Dec. 31, ($ thousands) 2000 1999 1998
Common Stock
Balance at beginning and end of year $ 1,500 $ 1,500 $ 1,500
Additional Paid-in Capital
Balance at beginning and end of year $143,844 $143,844 $143,844
Retained Earnings
Appropriated for predeclared additional credits/interest (note 5B)
Balance at beginning of year $ 2,879 $ 3,710 $ 6,375
Transferred to unappropriated retained earnings (195) (831) (2,665)
Balance at end of year $ 2,684 $ 2,879 $ 3,710
Appropriated for additional interest on advance payments (note 5C)
Balance at beginning of year $ 10 $ 10 $ 50
Transferred from (to) unappropriated retained earnings 5 -- (40)
Balance at end of year $ 15 $ 10 $ 10
Unappropriated (note 6)
Balance at beginning of year $ 59,210 $ 63,623 $ 55,948
Net income 16,537 34,756 34,470
Transferred from appropriated retained earnings 190 831 2,705
Cash dividends declared (5,000) (40,000) (29,500)
Balance at end of year $ 70,937 $ 59,210 $ 63,623
Accumulated other comprehensive (loss) income-- net of tax (note 1)
Balance at beginning of year $(65,741) $ 9,346 $ 31,793
Net other comprehensive income (loss) 13,275 (75,087) (22,447)
Balance at end of year $(52,466) $(65,741) $ 9,346
Total stockholder's equity $ 166,514 $ 141,702 $222,033
See notes to financial statements.
Statements of Cash Flows
Year ended Dec. 31, ($ thousands) 2000 1999 1998
Cash Flows from Operating Activities
Net income $ 16,537 $ 34,756 $ 34,470
Adjustments to reconcile net income to net cash provided by operating
activities:
Net income of wholly owned subsidiary -- (4) (1,646)
Net provision for certificate reserves 155,461 138,555 167,108
Interest income added to certificate loans (914) (1,037) (1,180)
Amortization of premiums/discounts-net 42,192 29,030 22,620
Provision for deferred federal income taxes 4,940 (1,063) (3,088)
Net realized loss (gain) on investments before income taxes 10,110 (1,250) (5,143)
(Increase) decrease in dividends and interest receivable (6,317) 4,995 2,238
Decrease in deferred distribution fees 2,946 3,533 5,310
(Increase) decrease in other assets (7,016) 1,082 (1,082)
(Decrease) increase in other liabilities (2,823) (18,390) 16,814
Net cash provided by operating activities 215,116 190,207 236,421
Cash Flows from Investing Activities
Maturity and redemption of investments:
Held-to-maturity securities 138,150 134,907 161,649
Available-for-sale securities 447,643 426,257 468,218
Other investments 68,877 73,387 76,894
Sale of investments:
Held-to-maturity securities 8,836 -- 6,245
Available-for-sale securities 312,612 107,244 344,901
Certificate loan payments 3,399 4,162 4,006
Purchase of investments:
Held-to-maturity securities (161) (6,785) (1,034)
Available-for-sale securities (1,250,487) (554,270) (663,347)
Other investments (49,460) (102,183) (189,905)
Certificate loan fundings (3,197) (3,680) (3,703)
Net cash (used in) provided by investing activities (323,788) 79,039 203,924
Cash Flows from Financing Activities
Payments from certificate owners 1,667,475 1,596,079 1,192,026
Proceeds from reverse repurchase agreements -- 123,500 919,500
Dividend from wholly owned subsidiary -- -- 8,000
Certificate maturities and cash surrenders (1,517,178) (1,662,239) (1,729,871)
Payments under reverse repurchase agreements (25,000) (239,500) (800,500)
Dividends paid (5,000) (40,000) (29,500)
Net cash provided by (used in) financing activities 120,297 (222,160) (440,345)
Net increase in cash and cash equivalents 11,625 47,086 --
Cash and cash equivalents at beginning of year 47,086 -- --
Cash and cash equivalents at end of year $ 58,711 $ 47,086 $ --
Supplemental Disclosures Including Non-cash Transactions
Cash paid (received) for income taxes $ 2,558 $ 9,233 $ (1,217)
Certificate maturities and surrenders through loan reductions 4,060 4,003 5,632
See notes to financial statements.
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:
Dec. 31, 2000
Required
Deposits deposits Excess
Deposits to meet certificate liability requirements:
States $ 360 $ 320 $ 40
Central Depository 4,051,611 3,800,923 250,688
Total $4,051,971 $3,801,243 $250,728
Dec. 31, 1999
Required
Deposits deposits Excess
Deposits to meet certificate liability requirements:
States $ 364 $ 325 $ 39
Central Depository 3,682,847 3,444,056 238,791
Total $3,683,211 $3,444,381 $238,830
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:
2000
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
Held to maturity:
U.S. Government and agencies obligations $ 161 $ 169 $ 8 $ --
Mortgage-backed securities 12,604 12,764 160 --
Corporate debt securities 35,794 35,845 713 662
Stated maturity preferred stock 269,173 271,902 5,974 3,245
Total $ 317,732 $ 320,680 $ 6,855 $ 3,907
Available for sale:
U.S. Government and agencies obligations $ 199 $ 205 $ 6 $ --
Mortgage-backed securities 1,106,998 1,121,923 15,747 822
State and municipal obligations 17,911 18,281 370 --
Corporate debt securities 1,902,799 1,810,187 13,715 106,327
Stated maturity preferred stock 66,752 66,134 565 1,183
Perpetual preferred stock 109,008 106,220 533 3,321
Total $3,203,667 $3,122,950 $30,936 $111,653
1999
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
Held to maturity:
U.S. Government and agencies obligations $ 364 $ 365 $ 1 $ --
Mortgage-backed securities 16,662 16,596 178 244
Corporate debt securities 78,267 78,970 1,402 699
Stated maturity preferred stock 369,355 375,052 6,398 701
Total $ 464,648 $ 470,983 $ 7,979 $ 1,644
Available for sale:
Mortgage-backed securities $ 773,120 $ 763,195 $ 2,339 $ 12,264
State and municipal obligations 33,430 33,615 265 80
Corporate debt securities 1,743,621 1,653,271 1,944 92,294
Stated maturity preferred stock 62,708 62,370 292 630
Perpetual preferred stock 109,009 108,296 574 1,287
Total $2,721,888 $2,620,747 $ 5,414 $106,555
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.
Dec. 31, 2000 Dec. 31, 1999
Carrying Fair Carrying Fair
amount value amount value
First mortgage loans on real estate $359,319 $356,283 $378,558 $359,018
Reserve for losses (744) -- (511) --
Net first mortgage loans on real estate $358,575 $356,283 $378,047 $359,018
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:
2000
Average Average
gross additional
Reserve accumulation credit
balance rate rate
Installment certificates:
Reserves to mature:
With guaranteed rates $ 16,217 3.50% 1.65%
Without guaranteed rates (A) 199,754 -- 4.13
Additional credits and accrued interest 7,088 3.17 --
Advance payments and accrued interest (C) 697 3.22 1.93
Other 55 -- --
Fully paid certificates:
Reserves to mature:
With guaranteed rates 113,194 3.20 1.78
Without guaranteed rates (A) and (D) 3,424,638 -- 3.06
Additional credits and accrued interest 69,155 3.12 --
Due to unlocated certificate holders 261 -- --
Total $3,831,059
1999
Average Average
gross additional
Reserve accumulation credit
balance rate rate
Installment certificates:
Reserves to mature:
With guaranteed rates $ 18,817 3.50% .50%
Without guaranteed rates (A) 244,387 -- 3.14
Additional credits and accrued interest 10,932 3.16 --
Advance payments and accrued interest (C) 838 3.20 1.30
Other 56 -- --
Fully paid certificates:
Reserves to mature:
With guaranteed rates 129,019 3.20 .95
Without guaranteed rates (A) and (D) 2,991,332 -- 4.13
Additional credits and accrued interest 140,988 3.15 --
Due to unlocated certificate holders 290 -- --
Total $3,536,659
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.
The Carrying amounts and Fair values of certificate reserves at Dec. 31, consisted of the following:
2000 1999
Carrying Fair Carrying Fair
amount value amount value
Reserves with terms of one year or less $3,576,811 $3,575,189 $3,246,098 $3,244,495
Other