SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM S-1
POST-EFFECTIVE AMENDMENT NUMBER 28 TO
REGISTRATION STATEMENT NUMBER 333-46683
American Express Market Strategy Certificate
UNDER
THE SECURITIES ACT OF 1933
AMERICAN EXPRESS CERTIFICATE COMPANY
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(Exact name of registrant as specified in charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
6725
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(Primary Standard Industrial Classification Code Number)
41-6009975
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(I.R.S. Employer Identification No.)
200 AXP Financial Center, Minneapolis, MN 55474, (612) 671-3131
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Eileen J. Newhouse - 50605 AXP Financial Center,
Minneapolis, MN 55474, (612) 671-2772
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
CONTENTS OF THIS POST-EFFECTIVE AMENDMENT NO. 28 TO
REGISTRATION STATEMENT NO. 333-46683
Cover Page
Prospectus
Part II Information
Signatures
Exhibits
American Express
Market Strategy
Certificate
PROSPECTUS MAY 1, 2002
Potential for stock market growth with safety of principal.
American Express Certificate Company (AECC), formerly IDS Certificate Company,
issues American Express Market Strategy Certificates. You may:
o Purchase this certificate in any amount from $1,000 through $1 million.
o Allocate your money to a fixed-interest subaccount. You must make periodic
investments from this subaccount to participation terms.
o Participate through participation terms in any increase of the stock market
based on the S&P 500 Index while protecting your principal, up to a maximum
return between 6% and 7%, for a 52-week term (see page 2p).
o Decide whether AECC will guarantee part of your return from participation
terms or whether to link all of it to the market.
o Keep your certificate for up to 20 years from its issue date.
Purchasers of these certificates or other similar certificates through some
distribution channels may be eligible for special rates. See "Initial Interest
and Participation Rates" on page 2p.
Like all investment companies, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
This certificate is backed solely by the assets of AECC. To the extent you link
your interest to the S&P 500 Index, you might earn no interest. See "Risk
Factors" on page 2p.
AECC is not a bank or financial institution, and the securities it offers are
not deposits or obligations of, or backed or guaranteed or endorsed by, any bank
or financial institution, nor are they insured by the Federal Deposit Insurance
Corporation (FDIC), the Federal Reserve Board or any other agency.
The distributor is not required to sell any specific amount of certificates.
Issuer: American Express Certificate Company
70100 AXP Financial Center
Minneapolis, MN 55474
(800) 862-7919 (toll free)
Distributor: American Express Financial Advisors Inc.
American Express companies
Initial Interest and Participation Rates
AECC guarantees return of your principal. The interest on your certificate may
be fixed or may be linked to stock market performance as measured by the
Standard & Poor's 500 Composite Stock Index (S&P 500 Index). See "About the
Certificate" for more explanation.
Here are the interest rates and market participation percentages in effect May
1, 2002:
Fixed interest:
Currently 2.33%
Participation terms:
Maximum return Market participation percentage Minimum interest
6% 100% (full) None
6% 25% (partial) 1%
These rates may or may not have changed when you apply to purchase your
certificate. If you choose fixed interest, AECC guarantees that, when the rate
for new purchases takes effect, the rate will be within a specified range of the
average rate for 12-month certificates of deposit as published in the most
recent BANKRATE MONITOR(R) (BRM), Top 25 Market Average(R). BANKRATE MONITOR and
Top 25 Market Average(R) are marks owned by BANKRATE.COM(SM), a publication of
Bankrate, Inc., N. Palm Beach, FL 33408. See "About the Certificate" for more
explanation. For your first term, your maximum return will be between 6% and 7%.
Rates for future terms are set at the discretion of AECC and may differ from the
rates shown here.
AECC may offer different maximum returns, market participation percentages and
minimum interest rates for these certificates or other similar face-amount
certificates for different distribution channels or in other circumstances. For
more information call (800) 862-7919 and see "Promotions and Pricing
Flexibility" under "About the Certificates." Face-amount certificates from AECC
and certificates of deposit (CDs) from American Express Centurion Bank, an
affiliate of AECC, may be available with different rates, including high rate
CDs through Membership B@nking(SM).
RISK FACTORS
You should consider the following when investing in this certificate:
To the extent you link your interest to the S&P 500 Index, you might earn no
interest. If you choose to link all of your return on this certificate to the
S&P 500 Index, you earn interest only if the value of the S&P 500 Index is
higher on the last day of your term than it was on the first day of your term.
See "Interest" under "About the Certificate."
This certificate is backed solely by the assets of AECC. Most of our assets are
debt securities and are subject to the following risks:
Interest rate risk: The price of debt securities generally falls as interest
rates increase, and rises as interest rates decrease. In general, the longer the
maturity of a bond, the greater its loss of value as interest rates increase,
and the greater its gain in value as interest rates decrease. See "How Your
Money Is Used and Protected."
Credit risk: This is the risk that the issuer of a security, or the counterparty
to a contract, will default or otherwise become unable to honor a financial
obligation (such as payments due on a bond or note). Credit ratings of the
issuers of securities in our portfolio vary. See "How Your Money Is Used and
Protected."
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2p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Table of Contents
Initial Interest and Participation Rates 2p
Risk Factors 2p
About the Certificate
Read and Keep This Prospectus 4p
Investment Amounts 4p
Face Amount and Principal 5p
Participation Term 5p
Value at Maturity 5p
Receiving Cash Before the End of Term 5p
Interest 5p
Promotions and Pricing Flexibility 11p
Historical Data on the S&P 500 Index 11p
Calculation of Return 14p
About the S&P 500 Index 16p
Opportunities at the End of a Participation Term 17p
How to Invest and Withdraw Funds 18p
Buying Your Certificate 18p
Two Ways to Make Investments 19p
Full and Partial Withdrawals 20p
Transfers to Other Accounts 21p
Two Ways to Request a Withdrawal or Transfer 22p
Three Ways to Receive Payment When You Withdraw Funds 22p
Retirement Plans: Special Policies 23p
Transfer of Ownership 24p
For More Information 24p
Taxes on Your Earnings 24p
Retirement Accounts 25p
Gifts to Minors 25p
Your TIN and Backup Withholding 26p
Foreign Investors 26p
How Your Money Is Used and Protected 28p
Invested and Guaranteed by AECC 28p
Regulated by Government 29p
Backed by Our Investments 30p
Investment Policies 30p
How Your Money Is Managed 32p
Relationship Between AECC and
American Express Financial Corporation 32p
Capital Structure and Certificates Issued 33p
Investment Management and Services 33p
Distribution 35p
Transfer Agent 35p
Employment of Other American Express Affiliates 35p
Directors and Officers 36p
Independent Auditors 39p
American Express Certificates 39p
Appendix 40p
Annual Financial Information 41p
Summary of Selected Financial Information 41p
Management's Discussion and
Analysis of Financial Condition and
Results of Operations 42p
American Express Certificate Company
Responsibility for Preparation of
Financial Statements 47p
Report of Independent Auditors 48p
Financial Statements 49p
Notes to Financial Statements 55p
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3p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
About the Certificate
READ AND KEEP THIS PROSPECTUS
This prospectus describes terms and conditions of your American Express Market
Strategy Certificate. It contains facts that can help you decide if the
certificate is the right investment for you. Read the prospectus before you
invest and keep it for future reference. No one has the authority to change the
terms and conditions of the American Express Market Strategy Certificate as
described in the prospectus, or to bind AECC by any statement not in it.
INVESTMENT AMOUNTS
You may purchase the American Express Market Strategy Certificate in any amount
from $1,000 through $1 million (unless you receive prior approval from AECC to
invest more) payable in U.S. currency. You may also make additional lump-sum
investments in any amount in the fixed-interest portion of your investment at
any time, as long as your total amount paid in is not more than the $1 million
(unless you receive prior approval from AECC to invest more).
Your certificate is recorded as a certificate account on our books. Within this
account, you may allocate your investment among a subaccount that earns fixed
interest and other subaccounts that earn interest linked to the S&P 500 Index
during a participation term. Your investment always is placed initially in the
fixed-interest subaccount. Consequently, your investment initially earns fixed
interest. The minimum time that money must remain in the fixed-interest
subaccount before being moved to a participation term is one day. This could
happen if we accept your application and receive your investment on a Tuesday
and your instructions say to start your first participation term as soon as
possible.
After determining the initial amount you wish to invest, you must set up
periodic investments from the fixed-interest subaccount to participation terms.
When you make your investment, you must give instructions to move money from the
fixed-interest subaccount to participation terms monthly, quarterly, or
semiannually. If your total investment is $1,000, however, you will have only
one participation term. You may subsequently change your initial instructions.
Thus, you could choose to change your instructions to keep your investment in
the fixed-interest subaccount and never start a participation term. Each
participation term is 52 weeks and each has its own grace period. The amount
invested in each participation term must be at least $1,000. If your certificate
is nearing its 20-year maturity, you will not be able to select a participation
term that would carry the certificate past its 20-year maturity date. Each
account can have a maximum of 12 participation terms at one time. You will be
sent a confirmation at the time you purchase your certificate confirming your
instructions at the time you submitted your application.
This certificate provides the ability to make a single payment that can be
invested in individually staggered stock market participation terms in one
certificate that lets you select participation terms like those you might select
when staggering several American Express Stock Market Certificates. American
Express Stock Market Certificate is another certificate that offers interest
linked to the S&P 500 Index, but permits only one participation term at a time.
"Staggering" is the strategy of purchasing several smaller certificates over a
period of a year instead of one larger certificate, as a method of increasing
liquidity and reducing the possibility of unfavorable market timing.
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4p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The certificate may be used as an investment for your Individual Retirement
Account (IRA). If so used, the amount of your contribution (investment) will be
subject to limitations in applicable federal law.
FACE AMOUNT AND PRINCIPAL
The face amount of your certificate is the amount of your initial investment.
Your principal consists of the amount you actually have invested in your
certificate plus interest credited to your account and compounded less
withdrawals, penalties and any compounded interest paid to you in cash. AECC
guarantees your principal.
PARTICIPATION TERM
Each participation term in your certificate is a 52-week period that begins on a
Wednesday and ends the Tuesday before the one-year anniversary. Subsequent terms
are 52-week periods that begin on the Wednesday following the 14-day grace
period at the end of the prior 52-week term, unless you start a new term during
the grace period as described in "New term" on page 17p. Each account can have a
maximum of 12 terms at one time. The principal of your certificate that is not
invested in participation terms will earn fixed interest. See "Fixed interest"
under "Interest."
VALUE AT MATURITY
Your certificate matures after 20 years. Then you will receive a distribution
for its value. At maturity, the value of your certificate will be the total of
your actual investments, plus credited interest not paid to you in cash, less
any withdrawals and withdrawal penalties. Certain other fees may apply.
RECEIVING CASH BEFORE THE END OF TERM
If you need your money before your certificate term ends, you may withdraw part
or all of its value at any time, less any penalties that apply. Procedures for
withdrawing money, as well as conditions under which penalties apply, are
described in "How to Invest and Withdraw Funds."
INTEREST
Participation interest: Before the start of a participation term, you choose
from two types of interest: 1) full participation, or 2) partial participation
together with minimum interest. Interest earned under both of these options has
an upper limit which is the maximum annual return explained below. Your
selection is established at the time of purchase but can be changed at any time
for participation terms that have not yet started. You may change your
participation interest selection at any time prior to any term start date or
during a 14-day grace period. The change will be in effect for any future term
unless we again receive instructions from you changing your selection.
Full participation interest: With this option:
o You participate 100% in any percentage increase in the S&P 500 Index up to
the maximum return. For the maximum return in effect on the date of this
prospectus, see "Initial Interest and Participation Rates" on page 2p.
o You earn interest only if the value of the S&P 500 Index is higher on the
last day of your term than it was on the first day of your term.
o Your return is linked to stock market performance.
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5p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The S&P 500 Index is frequently used to measure the relative performance of the
stock market. For a more detailed discussion of the S&P 500 Index, see "About
the S&P 500 Index."
Partial participation and minimum interest: This option allows you to
participate in a certain part (market participation rate) of any increase in the
S&P 500 Index together with a rate of interest guaranteed by AECC in advance for
each term (minimum interest). Your return consists of two parts:
o a percentage of any increase in the S&P 500 Index, and
o a rate of interest guaranteed by AECC in advance for each term.
Together, they cannot exceed the maximum return. For the maximum return in
effect on the date of this prospectus, see "Initial Interest and Participation
Rates" on page 2p.
The market participation rate and the minimum interest rate on the date of this
prospectus are listed on the inside cover under "Initial Interest and
Participation Rates."
Fixed interest: The fixed-interest subaccount allows you to earn interest on
your principal that is not invested in participation terms, including your
entire investment before the start of your first participation term, and amounts
in the 14-day grace period in between participation term end dates and start
dates. Your fixed interest accrues daily and is credited and compounded monthly.
Your fixed interest rates are reset quarterly, based on the original date of
your certificate.
Amounts in the fixed-interest subaccount, including compounded fixed interest,
can be withdrawn at any time without a withdrawal penalty. If these amounts are
not withdrawn, they will become part of a participation term according to the
instructions you've established with the company, unless you change your
instructions, which can be changed at any time. Values in participation terms
can not be withdrawn without withdrawal penalties.
AECC has complete discretion to determine whether to accept an application and
sell a certificate. When your application is accepted and we have received your
initial investment, we will send you a confirmation of your purchase showing the
initial rate that your investment will earn as well as confirmation of your
instructions for moving your money to your participation terms. Instructions for
moving your money are given at the time you purchase your certificate. You
choose the day of the month for the movement of your money, as well as the
amount, starting month, and full or partial participation. Your term resulting
from those instructions will begin on the Wednesday following that date. If that
date is a Wednesday, the term will begin on the following Wednesday.
AECC guarantees that when fixed-interest rates for new purchases take effect,
the rates will be within a range based on the average interest rates then
published in the BRM Top 25 Market Average(R) (The BMR Average). In the case of
fixed interest, AECC guarantees that your rate for your initial term will be 50
basis points (.50%) below to 50 basis points (.50%) above the average interest
rate published for 12-month certificates of deposit in the BRM Top 25 Market
Average(R). If the BRM Top 25 Market Average(R) is no longer publicly available
or feasible to use, AECC may use another, similar index as a guide for setting
rates.
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6p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The BRM is a weekly magazine published by Advertising News Service Inc., an
independent national news organization that collects and disseminates
information about bank products and interest rates. Advertising News Service has
no connection with AECC, AEFC or any of their affiliates.
The BRM Top 25 Market Average(R) is an index of rates and annual effective
yields offered on various length certificates of deposit by large banks and
thrifts in 25 metropolitan areas. The frequency of compounding varies among the
banks and thrifts. Certificates of deposit in the BRM Top 25 Market Average(R)
are government insured fixed-rate time deposits.
The BRM may be available in your local library. To obtain information or current
BRM Top 25 Market Average(R) rates, call the Client Service Organization at the
telephone numbers listed on the back cover.
Rates for new purchases are reviewed and may change weekly. Normally, the
initial fixed-interest rate you receive will be the higher of:
o the fixed-interest rate in effect on the date of your application, or
o the fixed-interest rate in effect on the date your completed application is
accepted by AECC.
However, if your application bears a date more than seven days before its
receipt by AECC, the initial fixed-interest rate you receive will be the higher
of:
o the fixed-interest rate in effect on the date your completed application is
accepted by AECC, or
o the fixed-interest rate in effect seven days before receipt.
Maximum annual return: This is the cap, or upper limit, of your return on the
amount invested in each participation term, regardless of whether you choose
full or partial participation. Your total return, including both participation
interest and minimum interest for a term for which you have chosen partial
participation will be limited to this maximum return percentage. For the maximum
return in effect on the date of this prospectus, see "Initial Interest and
Participation Rates" on page 2p.
Determining the S&P 500 Index value: The stock market generally closes at 3 p.m.
Central time. The S&P 500 Index value generally is available at approximately
4:30 p.m Central time. This is the value we currently use to determine
participation interest. Occasionally, Standard & Poor's (S&P) makes minor
adjustments to the closing value after 4:30 p.m., and the value we use may not
be exactly the one that is published the next business day.
In the future, we may use a later time cut-off if it becomes feasible to do so.
If the stock market is not open or the S&P 500 Index is unavailable as of the
last day of your term, the preceding business day for which a value is available
will be used instead. Each Tuesday's closing value of the S&P 500 Index is used
for establishing the term start and the term end values each week.
Earning interest: AECC calculates, credits and compounds participation interest
at the end of your participation term. Minimum interest accrues daily and is
credited and compounded at the end of your participation term. Fixed interest
accrues daily and is credited and compounded monthly, except that, if amounts
move from fixed interest to a participation term and the resulting balance in
the fixed-interest subaccount is zero, then fixed interest credited on the
principal moved will be compounded on the day the participation term begins.
Both minimum and fixed interest are calculated on a 30-day month and 360-day
year basis.
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7p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Moving between fixed and participation interest: You can move all or part of
your investment from the fixed-interest subaccount to a participation term. The
move from the fixed-interest subaccount to a participation term happens
according to your standing instructions unless you notify us separately. If you
make the change from fixed interest to participation interest either through a
scheduled or an unscheduled move, your participation term will begin on the
Wednesday following the move instructions. For further explanation of how we
apply your instructions, see "Fixed interest" above.
You may not move from participation interest to fixed interest during a
participation term without incurring a surrender charge. At the end of a
participation term, you can elect to leave the money in the fixed-interest
subaccount.
Rates for future periods: After your certificate purchase date, the maximum
return, and the market participation percentage and minimum interest rate for
participation terms, may be greater or less than those shown on the front of or
elsewhere in this prospectus or its wrapper. Fixed interest may be greater or
lesser than that shown. We review rates weekly and have complete discretion to
decide what interest rate will be declared.
If you plan to continue with a new participation term, to find out what your
certificate's new maximum return, market participation percentage and minimum
interest rate, if applicable, will be for your next term, please consult your
American Express financial advisor, or the Client Service Organization at the
telephone numbers listed on the back cover.
Your fixed interest rates are declared quarterly. You will be given notice of
the changes in interest rates in your periodic statements or you may call the
Client Service Organization at the numbers listed on the back cover to find out
your current rate.
The following example shows how the Market Strategy Certificate works assuming
an initial investment of $12,000 and moving $1,000 per month into a
participation term. The example is based on assumptions that the fixed-interest
subaccount pays an interest rate of 5.00% while the yield earned for each
participation term is the maximum of 10.00%. There is no assurance that any of
these returns will be achieved.
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8p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Full participation in the stock market
Initial investment $12,000.00
Maximum return 10.00%
Minimum return 0.00%
Fixed interest rate 5.00%
Market
Fixed participation
1st term Renewal interest interest
Fixed staggered staggered earned earned Market
interest investment investment in prior for the term participation Total
Date balance amount amount month just ended balance balance
Beginning of Month 1 $11,000.00 $1,000.00 0.00 $ 1,000.00 $12,000.00
Beginning of Month 2 10,045.83 1,000.00 45.83 2,000.00 12,045.83
Beginning of Month 3 9,087.69 1,000.00 41.86 3,000.00 12,087.69
Beginning of Month 4 8,125.56 1,000.00 37.87 4,000.00 12,125.56
Beginning of Month 5 7,159.42 1,000.00 33.86 5,000.00 12,159.42
Beginning of Month 6 6,189.25 1,000.00 29.83 6,000.00 12,189.25
Beginning of Month 7 5,215.04 1,000.00 25.79 7,000.00 12,215.04
Beginning of Month 8 4,236.77 1,000.00 21.73 8,000.00 12,236.77
Beginning of Month 9 3,254.42 1,000.00 17.65 9,000.00 12,254.42
Beginning of Month 10 2,267.98 1,000.00 13.56 10,000.00 12,267.98
Beginning of Month 11 1,277.43 1,000.00 9.45 11,000.00 12,277.43
Beginning of Month 12 282.75 1,000.00 5.32 12,000.00 12,282.75
Beginning of Month 13 283.93 1.18 100.00 12,000.00 12,283.93
Middle of Month 13 283.93 1,100.00 12,100.00* 12,373.93
Beginning of Month 14 287.40 3.47 100.00 12,100.00 12,387.40
Middle of Month 14 287.40 1,100.00 12,200.00** 12,487.40
* The market participation balance in the middle of month 13 is equal to
$12,100. This is equal to the total invested principal balance of $12,000,
plus $100 interest earned (participation return). The $100 interest earned
is based on $1,000 invested at month 1 which is assumed to earn the maximum
of 10%. ($12,000 + $1,000 x 10% = $12,100). During the grace period for the
first participation term, $1,100 of this balance will earn interest in the
fixed interest subaccount. In the middle of month 13, at the end of the
grace period, this $1,100 balance begins a new participation term.
** The market participation balance in the middle of month 14 is equal to
$12,200. This is equal to the total invested principal balance of $12,000,
plus $100 interest earned on $1,000 invested at the beginning of month 1,
plus $100 interest earned on $1,000 invested at the beginning of month 2
(both $1,000 investments are assumed to earn the maximum of 10% ($12,000 +
$1,000 x 10%= $12,200)). During the grace period for the second
participation term, $1,100 of this balance will earn interest in the
fixed-interest subaccount. In the middle of month 14, at the end of the
grace period, this $1,100 balance begins a new participation term.
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9p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The following example shows how the Market Strategy Certificate works assuming
an initial investment of $12,000 and moving $1,000 per month into a
participation term. The example is based on assumptions that the fixed interest
subaccount pays an interest rate of 5.00% while the yield earned for each
participation term is the minimum of 2.50%. There is no assurance that any of
these returns will be achieved when you invest. In this example, we assume that
the index declined at the end of each term compared to the beginning of each
term so that no market participation interest was earned.
Partial participation in the stock market
Initial investment $12,000.00
Maximum return 10.00%
Minimum return 2.50%
Fixed interest rate 5.00%
Guaranteed Market
minimum participation
Fixed interest interest
1st term Renewal interest earned earned
Fixed staggered staggered earned for the for the Market
interest investment investment in prior term term participation Total
Date balance amount amount month just ended just ended balance balance
Beginning of Month 1 $11,000.00 $1,000.00 0.00 $ 1,000.00 $12,000.00
Beginning of Month 2 10,045.83 1,000.00 45.83 2,000.00 12,045.83
Beginning of Month 3 9,087.69 1,000.00 41.86 3,000.00 12,087.69
Beginning of Month 4 8,125.56 1,000.00 37.87 4,000.00 12,125.56
Beginning of Month 5 7,159.42 1,000.00 33.86 5,000.00 12,159.42
Beginning of Month 6 6,189.25 1,000.00 29.83 6,000.00 12,189.28
Beginning of Month 7 5,215.04 1,000.00 25.79 7,000.00 12,215.04
Beginning of Month 8 4,236.77 1,000.00 21.73 8,000.00 12,236.77
Beginning of Month 9 3,254.42 1,000.00 17.65 9,000.00 12,254.42
Beginning of Month 10 2,267.98 1,000.00 13.56 10,000.00 12,267.98
Beginning of Month 11 1,277.43 1,000.00 9.45 11,000.00 12,277.43
Beginning of Month 12 282.75 1,000.00 5.32 12,000.00 12,282.75
Beginning of Month 13 283.93 1.18 25.00 0.00 12,000.00 12,283.93
Middle of Month 13 283.93 1,025.00 12,025.00* 12,308.93
Beginning of Month 14 287.25 3.32 25.00 0.00 12,025.00 12,312.25
Middle of Month 14 287.25 1,025.00 12,050.00** 12,337.25
* The market participation balance in the middle of month 13 is equal to
$12,025. This is equal to the total invested principal balance of $12,000,
plus $25 interest earned (guaranteed return). The $25 interest earned is
based on $1,000 invested at month 1 which is assumed to earn only the
minimum of 2.50%. ($ 12,000 + $ 1,000 x 2.50% = $ 12,025). During the grace
period for the first participation term, $1,025 of this balance will earn
interest in the fixed-interest subaccount. In the middle of month 13, at
the end of the grace period, this $1,025 balance begins a new participation
term.
** The market participation balance in the middle of month 14 is equal to
$12,050. This is equal to the total invested principal balance of $12,000,
plus $25 interest earned on $1,000 invested at the beginning of month 1,
plus $25 interest earned on $1,000 invested at the beginning of month 2
(both $1,000 investments are assumed to earn only the minimum of 2.50%
($12,000 + $ 1,000 x 2.50% + $1,000 x 2.50% = $12,050)). During the grace
period for the second participation term, $1,025 of this balance will earn
interest in the fixed-interest subaccount. In the middle of month 14, at
the end of the grace period, this $1,025 balance begins a new participation
term.
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10p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
This certificate may be available through other distributors or selling agents
with different interest rates or related features and consequently with
different returns. You may obtain information about other such distributors or
selling agents by calling the Client Service Organization at the telephone
numbers listed on the back cover.
PROMOTIONS AND PRICING FLEXIBILITY
AECC may sponsor or participate in promotions involving the certificate and its
respective terms. For example, we may offer different rates to new clients, to
existing clients, or to individuals who purchase or use other products or
services offered by American Express Company or its affiliates. These promotions
will generally be for a specified period of time.
We also may offer different rates based on your amount invested, geographic
location and whether the certificate is purchased for an IRA or a qualified
retirement account.
HISTORICAL DATA ON THE S&P 500 INDEX
The following chart illustrates the month-end closing values of the Index from
Dec. 31, 1983 through Feb. 28, 2002. The values of the S&P 500 Index are
reprinted with the permission of S&P.
S&P 500 Index Values - December 1983 to February 2002
(line chart)
1,600
[X]
1,400
[X]
1,200 [X]
[X]
[X]
1,000
[X]
800
[X]
600 [X]
[X] [X]
[X]
400 [X]
[X] [X]
200 [X] [X]
[X] [X]
[X] [X]
12/83 12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 2/02
S&P 500 Index Average Annual Return
Beginning date Dec. 31, Period held in years Average annual return
1991 10 10.66%
1996 5 9.16%
2000 1 -13.04%
- --------------------------------------------------------------------------------
11p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The next chart illustrates, on a moving 52-week basis, the price return of the
S&P 500 Index measured for every 52-week period beginning with the period ended
Dec. 31, 1984. The price return is the percentage return for each period using
month-end closing prices of the S&P 500 Index. Dividends and other distributions
on the securities comprising the S&P 500 Index are not included in calculating
the price return.
S&P 500 Index - December 1984 to February 2002
(line chart)
50%
52-Week Moving
40% Price Return
30% [X]
[X] [X] [X] [X]
20% [X] [X] [X]
[X]
10% [X] [X]
[X] [X]
0% [X] [X]
- -10% [X]
[X] [X]
- -20%
[X]
12/84 12/85 12/86 12/87 12/88 12/89 12/90 12/91 12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 2/02
Label of "Y" axis reads: 12-Month Return
Using the same dates and data on price returns described above, the next graph
expands on the information in the preceding chart by illustrating the number of
weeks when the 52-week price return was in the range specified below under each
column. For example, the most common 52-week return during this time period was
in the 10 percent range.
S&P 500 Index - December 1984 to February 2002
(bar chart)
30
[X]
[X] [X]
25 Distribution of
52-Week Moving [X]
Price Returns [X] [X]
20
15
[X]
[X]
10 [X]
[X]
[X]
5
-15 -10 -5 0 5 10 15 20 25 29.9 >=30
Label of "Y" axis reads: Occurences
- --------------------------------------------------------------------------------
12p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The last chart illustrates, on a moving weekly basis, the actual 52-week return
of the Stock Market Certificate at full and partial participation compared to
the price return of the S&P 500 Index.
Like American Express Stock Market Certificate, American Express Market Strategy
Certificate permits you to receive all or part of your interest based on stock
market performance, as measured by the S&P 500 Index, with AECC's guarantee of
return of principal. In fact, the full and partial participation terms of
American Express Stock Market Certificate and American Express Market Strategy
Certificate are identical, assuming that the amount invested at the beginning of
the term is the same in both certificates. The amounts earned in the
fixed-interest account for Market Strategy Certificate will not be the same as
interim interest for the Stock Market Certificate. (For Stock Market
Certificate, interest earned before the initial participation term or during the
grace period is called interim interest.) Although performance during
participation terms will be the same for Market Strategy Certificate and Stock
Market Certificate, money earned outside of participation terms will vary. If a
participation term for Stock Market Certificate and for Market Strategy
Certificate start on the same day with the same amount of money and the same
selection of either full or partial participation, then the interest earned for
the participation term in both certificates will be identical. American Express
Market Strategy Certificate increases your choices by allowing you to have up to
12 participation terms plus a fixed-interest alternative simultaneously within
the same certificate. The certificates also pay interest differently on amounts
that are invested at only a fixed rate.
Actual 52-Week Return - 1/3/95 TO 2/26/02
50%
40% Market Index
30%
20%
10% Stock Market Certificate
100% Participation
0%
Stock Market Certificate
- -10% 25% Participation + Minimum Rate
Chart shows actual returns of the certificate at full and 25%
- -20% participation with the full participation generally tracking the
market indexes over the period and 25% level of participation
tracking at the 25% level of return.
1/95 6/95 12/95 12/96 5/97 11/97 5/98 11/98 4/99 10/99 4/00 10/00 3/01 9/01 2/02
- --------------------------------------------------------------------------------
13p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The performance information shown is the performance of American Express Stock
Market Certificate and not that of American Express Market Strategy Certificate.
Past performance is not indicative of future performance and there is no
assurance that the performance of American Express Market Strategy Certificate
will replicate that of American Express Stock Market Certificate.
The Stock Market Certificate was first available on Jan. 24, 1990. The
performance reflects the returns on the 52-week anniversary date, falling on a
Wednesday, of each of the weeks shown.
Your participation earnings are tied to the movement of the S&P 500 Index. They
will be based on any increase in this Index as measured on the beginning and
ending date of each 52-week term. Of course, if this Index is not higher on the
last day of your term than it was on the first day, your principal will be
secure but you will earn no participation interest.
How an index has performed in the past does not indicate how the stock market or
the certificate will perform in the future. There is no assurance that
certificate owners will receive interest on their accounts beyond any minimum
interest or fixed interest selected. The index could decline.
CALCULATION OF RETURN
The increase or decrease in the S&P 500 Index, as well as the actual return paid
to you, is calculated as follows:
Rate of return on S&P 500 Index
Term ending value of S&P 500 Index minus
Term beginning value of S&P 500 Index divided by
Term beginning value of S&P 500 Index equals
Rate of return on S&P 500 Index
The actual return paid to you will depend on your interest participation
selection.
For example, assume:
Term ending value of S&P 500 Index 1,375
Term beginning value of S&P 500 Index 1,300
Maximum return 6%
Minimum return 1.00%
Partial participation rate 25%
1,375 Term ending value of S&P 500 Index
minus 1,300 Term beginning value of S&P 500 Index
-----
equals 75 Difference between beginning and ending values
75 Difference between beginning and ending values
divided by 1,300 Term beginning value of S&P 500 Index
-----
equals 5.77% Percent increase --- full participation return
5.77% Percent increase or decrease
times 25% Partial participation rate
--
equals 1.44%
plus 1.00% 1.00% minimum interest rate
----
equals 2.44% Partial participation return
----
In both cases in the example, the return would be less than the 6% maximum.
- --------------------------------------------------------------------------------
14p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Maximum Return and Partial Participation Minimum Rate History -- The following
table illustrates the maximum annual returns and partial participation minimum
rates that have been in effect since the Stock Market Certificate was
introduced. American Express Market Strategy Certificate was introduced on April
29, 1998.
Start of term Maximum annual return Partial participation minimum rate
Jan. 24, 1990 18.00% 5.00%
Feb. 5, 1992 18.00 4.00
May 13, 1992 15.00 4.00
Sept. 9, 1992 12.00 3.00
Nov. 11, 1992 10.00 2.50
Nov. 2, 1994 10.00 2.75
April 26, 1995 12.00 3.50
Jan. 17, 1996 10.00 3.25
Feb. 26, 1997 10.00 3.00
May 7, 1997 10.00 2.75
Oct. 8, 1997 10.00 2.50
Dec. 16 1998 9.00 2.50
Feb. 2, 2000 10.00 2.50
June 14, 2000 11.00 2.75
Aug. 16, 2000 10.00 2.75
Jan. 31, 2001 9.00 2.50
Sept. 11, 2001 8.00 2.50
Nov. 6, 2001 8.00 2.00
Nov. 27, 2001 6.00 1.00
Examples
To help you understand the way a participation term of this certificate works,
here are some hypothetical examples. The following are three different examples
of market scenarios and how they affect the certificate's return. Assume for all
examples that:
o you purchased the certificate with a $10,000 original investment,
o the partial participation rate is 25%,
o the minimum interest rate for partial participation is 1.00%,
o the maximum total return for full and partial participation is 6%.
1. If the S&P 500 Index value rises
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 1,000 5% increase in the S&P 500 Index Index 1,050
Full participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 500 5% x $10,000 + 100 1.00% (Minimum interest rate) x $10,000
Participation interest + 125 25% x 5% x $10,000 Participation interest
------- --------
$10,500 Ending balance $10,225 Ending balance
(5% Total return) (2.25% Total return)
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15p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
2. If the Market and the S&P 500 Index value fall
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 1,000 4% decrease in the S&P 500 Index Index 961
Full participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 0 Participation interest + 100 1.00% (Minimum interest rate) x $10,000
$10,000 Ending balance + 0 Participation interest
------- --------
(0% Total return) $10,100 Ending balance
(1.00% Total return)
3. If the Market and the S&P 500 Index value rise above the maximum return
Week 1/Wed Week 52/Tues
S&P 500 S&P 500
Index 1,000 10% increase in the S&P 500 Index Index 1,100
Full participation interest Partial participation interest and minimum interest
$10,000 Original investment $10,000 Original investment
+ 600 6% x $10,000 + 100 1.00% (Minimum interest rate) x $10,000
Maximum interest + 250 25% x 10% x $10,000 Participation interest
------- --------
$10,600 Ending balance $10,350 Ending balance
(6% Total return) (3.50% Total return)
ABOUT THE S&P 500 INDEX
The description in this prospectus of the S&P 500 Index including its make-up,
method of calculation and changes in its components are derived from publicly
available information regarding the S&P 500 Index. AECC does not assume any
responsibility for the accuracy or completeness of such information.
The S&P 500 Index is composed of 500 common stocks, most of which are listed on
the New York Stock Exchange. The S&P 500 Index is published by S&P and is
intended to provide an indication of the pattern of common stock movement. S&P
chooses the 500 stocks to be included in the S&P 500 Index with the aim of
achieving a distribution by broad industry groupings that approximates the
distribution of these groupings in the U.S. common stock population. Changes in
the S&P 500 Index are reported daily in the financial pages of many major
newspapers. The index used for the American Express Market Strategy Certificate
excludes dividends on the 500 stocks.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500" and
"500" are trademarks of The McGraw-Hill Companies Inc. and have been licensed
for use by AECC. The certificate is not sponsored, endorsed, sold or promoted by
S&P. S&P makes no representation or warranty, express or implied, to the owners
of the certificate or any member of the public regarding the advisability of
investing in securities generally or in the certificate particularly or the
ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to AECC is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index, which is determined, composed and
calculated by S&P without regard to AECC or the certificate. S&P has no
obligation to take the needs of AECC or the owners of the certificate into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for and has not participated in the determination of the timing
of, prices at, or quantities of the certificate to be issued or in the
determination or calculation of the
- --------------------------------------------------------------------------------
16p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
equation by which the certificate is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the certificate.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to the results to be obtained by AECC, owners of the certificate, or any
person or entity from the use of the S&P 500 Index or any data included therein.
S&P makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein. Without limiting any
of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
If for any reason the S&P 500 Index were to become unavailable or not reasonably
feasible to use, we would use a comparable stock market index for determining
participation interest. If this were to occur, we would send you a notice by a
practical means such as correspondence (which may be electronic if you and we
have so agreed) or a quarterly account statement. The notice would indicate the
comparable index and give you the option to withdraw your principal without an
early withdrawal penalty. If you chose early withdrawal, you would lose any
interest accrued during the term.
OPPORTUNITIES AT THE END OF A PARTICIPATION TERM
Grace period: When a participation term ends, we will notify you of the start of
a 14-day grace period before a new term automatically begins. During this 14-day
grace period you can:
o change your participation selection,
o add money to your certificate,
o change your participation term to remain in fixed interest,
o renew your principal from the preceding term in a new participation term and
allow interest earned in a term to remain in fixed interest,
o withdraw part or all of your money in your fixed term or the money in the
participation term that just ended without a withdrawal penalty or loss of
interest,
o or receive your participation interest in cash.
Fixed interest only: Money can be withdrawn from the fixed-interest subaccount
at any time without a surrender penalty. The fixed interest on these amounts
continues for the life of the certificate. You can add money to your
fixed-interest investment at any time. The money added will earn the same rate
as the rest of the money in the fixed term.
New term: If you do not make changes when a participation term ends, your
certificate will continue with your current selections when the new
participation term begins 14 days later as long as the minimum invested for the
participation term is $1,000. You will earn fixed interest during this 14-day
grace period. If you don't want to wait 14 days before starting your next market
participation term, you must phone or send written instructions before your
current term ends. You can tell us to start your next term on any Wednesday
during the grace period. This will remain in effect for all future terms, unless
we receive instructions changing your selection before the term ends. The 2%
withdrawal charge will apply when you start your new term during the grace
period. Your notice may also tell us to change your interest selection or add to
your certificate. You can arrange to make periodic additional investments at
each participation
- --------------------------------------------------------------------------------
17p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
term renewal. You can tell us to change your participation selection, add money
to your renewing participation term, change your interest selection to remain in
fixed interest, renew your principal from the preceding term in a new
participation term and allow interest earned in a term to remain in fixed
interest, or withdraw part of your money. The change will be in effect for any
future term unless we receive instructions from you changing your selection. To
learn indexing information and the amount of interest (if any) at the end of a
participation term, you can contact your American Express financial advisor or
call the Client Service Organization.
How to Invest and Withdraw Funds
BUYING YOUR CERTIFICATE
Your American Express financial advisor can help you fill out and submit an
application to open an account with us and purchase a certificate. If you
purchase your certificate other than through an American Express financial
advisor -- for example, through a direct marketing channel -- you may be given
different purchase instructions. We will process the application at our
corporate offices in Minneapolis, Minnesota. When we have accepted your
application and we have received your initial investment and instructions, we
will send you a confirmation showing the acceptance date, the initial interest
rate for amounts invested at fixed interest, the date your participation term
begins and the participation interest selection you have made, detailing your
market participation percentage, instructions for participation terms and, if
applicable, the minimum interest rate for your first term. After the beginning
of each participation term that includes an additional investment sent to us by
you, we will send you notice of the value of the S&P 500 Index on the day the
term began. For a description of how we determine the fixed interest rate that
initially applies to a new investment, see the paragraph on "Fixed interest" of
"Interest" under "About the Certificate." For additional considerations, see
"Purchase policies" below. The participation rates and maximum interest in
effect at the time of movement from fixed-interest to a participation term will
apply to those participation terms.
Important: When you open an account, you must provide AECC with your correct
Taxpayer Identification Number (TIN), which is either your Social Security or
Employer Identification number. See "Taxes on Your Earnings."
Purchase policies
o Investments must be received and accepted in the Minneapolis headquarters on
a business day before 3 p.m. Central time to be included in your account that
day. Otherwise your purchase will be processed the next business day.
o If you purchase a certificate with a personal check or other non-guaranteed
funds, AEFC will wait one day for the process of converting your check to
federal funds (e.g., monies of member banks within the Federal Reserve Bank)
before your purchase will be accepted and you begin earning interest. For
information on how to avoid this wait, for example by using a certified
check, please call American Express Client Service Corporation at the
telephone numbers listed on the back cover.
o AECC has complete discretion to determine whether to accept an application
and sell a certificate.
A number of special policies apply to purchases, withdrawals and exchanges
within IRAs, 401(k) plans and other qualified retirement plans. See "Retirement
Plans: Special Policies."
- --------------------------------------------------------------------------------
18p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
TWO WAYS TO MAKE INVESTMENTS
1 By mail:
Send your check, by regular or express mail, along with your name and account
number to:
American Express Financial Advisors Inc.
70200 AXP Financial Center
Minneapolis, MN 55474
2 By wire:
For investment into an established account, you may wire money to:
Wells Fargo Bank Minnesota, N.A.
Routing No. 091000019
Minneapolis, MN
Attn: Domestic Wire Dept.
Give these instructions: Credit American Express Financial Advisors Account
#0000030015 for personal account # (your account number) for (your name). Please
be sure to include all 10 digits of the American Express Financial Advisors
account number, including the zeros.
If this information is not included, the order may be rejected and all money
received, less any costs AECC incurs, will be returned promptly.
o Minimum amount you may wire: $1,000.
o Wire orders can be accepted only on days when your bank, AEFC, AECC and Wells
Fargo Bank Minnesota, N.A. are open for business.
o Wire purchases are completed when wired payment is received and we accept the
purchase.
o Wire investments must be received and accepted in the Minneapolis
headquarters on a business day before 3 p.m. Central time to be credited that
day. Otherwise your purchase will be processed the next business day.
o AECC, AEFC and its other subsidiaries are not responsible for any delays that
occur in wiring funds, including delays in processing by the bank.
o You must pay any fee the bank charges for wiring.
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19p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
FULL AND PARTIAL WITHDRAWALS
You may make withdrawals at any time. However:
Source of withdrawals: If you request a withdrawal, the dollars will be removed
from credited fixed-interest first, then from principal in your fixed-interest
subaccount, then from any renewing participation terms in the grace period, and
then from principal in participation terms beginning with the most recent term
start date and continuing with such subsequent terms in order of term start
dates.
o Complete withdrawal of your certificate is made by giving us proper
instructions. To complete these transactions, see "Two Ways to Request a
Withdrawal or Transfer."
o If your withdrawal request is received in the Minneapolis headquarters on a
business day before 3 p.m. Central time, it will be processed that day and
payment will be sent the next business day. Otherwise, your request will be
processed one business day later.
o Full and partial withdrawals may result in loss of interest, depending upon
the timing of your withdrawal.
o You may not make a partial withdrawal if it would reduce your certificate
balance to less than $1,000 or if it would reduce the amount in a
participation term to less than $1,000. If you request such a withdrawal, we
will contact you for revised instructions.
Penalties for withdrawal from your participation terms: If you withdraw money
from a participation term, you will pay a penalty of 2% of the principal
withdrawn. Except to the extent your balance would be less than $1,000, this
penalty will be taken from the remaining balance, not the amount withdrawn. The
2% penalty is waived upon death of the certificate owner. When this certificate
is owned by a revocable trust, this penalty also is waived upon death of any
grantor of the revocable trust. We will also waive withdrawal penalties on
withdrawals for IRA certificate accounts for your required distributions. See
"Retirement Plans: Special Policies."
Loss of interest: If you make a withdrawal from a participation term at any time
other than at the end of the term, you will lose any interest accrued on the
withdrawal amount since we credit participation interest only at the end of a
term.
Withdrawals from the fixed-interest subaccount before the end of the certificate
month (the monthly anniversary of the issue date of your certificate) will
result in loss of interest on the amount withdrawn. You will get the best result
by timing a withdrawal at the end of the certificate month.
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20p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Following are examples describing a $2,000 withdrawal during a participation
term and from a fixed-interest investment:
Participation term:
Balance in participation term $10,000
Interest (interest is credited at the end of the term) 0
Withdrawal of principal (2,000)
2% withdrawal penalty (40)
---
Balance after withdrawal $ 7,960
=======
You will forfeit any accrued interest on the withdrawal amount.
Fixed interest subaccount:
Balance earning fixed interest $10,000
Interest credited to date 100
Withdrawal of credited interest (100)
Withdrawal of principal (1,900)
------
Balance after withdrawal $ 8,100
=======
Retirement plans: In addition, you may be subject to IRS penalties for early
withdrawals if your certificate is in an IRA, 401(k) or other qualified
retirement plan account.
Other full and partial withdrawal policies
o If you request a partial or full withdrawal of a certificate recently
purchased or added to by a check or money order that is not guaranteed, we
will wait for your check to clear. Please expect a minimum of 10 days from
the date of your payment before AECC mails a check to you. We may mail a
check earlier if the bank provides evidence that your check has cleared.
o If your certificate is pledged as collateral, any withdrawal will be delayed
until we get approval from the secured party.
o Any payments to you may be delayed under applicable rules, regulations or
orders of the Securities and Exchange Commission (SEC).
TRANSFERS TO OTHER ACCOUNTS
You may transfer part or all of your certificate to any other American Express
Certificate or into another new or existing American Express Financial Advisors
Inc. account that has the same ownership (subject to any terms and conditions
that may apply).
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21p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
TWO WAYS TO REQUEST A WITHDRAWAL OR TRANSFER
1 By phone:
Call the Client Service Organization at the telephone numbers listed on the back
cover.
o Maximum phone request: $100,000.
o Transfers into an American Express Financial Advisors Inc. account with the
same ownership.
o A telephone withdrawal request will not be allowed within 30 days of a
phoned-in address change.
o We will honor any telephone withdrawal or transfer request believed to be
authentic and will use reasonable procedures to confirm authenticity.
You may request that telephone withdrawals not be authorized from your account
by writing the Client Service Organization.
2 By mail:
Send your name, account number and request for a withdrawal or transfer, by
regular or express mail, to:
American Express Financial Advisors Inc.
70100 AXP Financial Center
Minneapolis, MN 55474
Written requests are required for:
o Transactions over $100,000.
o Pension plans and custodial accounts where the minor has reached the age at
which custodianship should terminate.
o Transfers to another American Express Financial Advisors Inc. account with
different ownership (all current registered owners must sign the request).
THREE WAYS TO RECEIVE PAYMENT WHEN YOU WITHDRAW FUNDS
1 By regular or express mail:
o Mailed to address on record; please allow seven days for mailing.
o Payable to name(s) listed on the account.
o The express mail delivery charges you pay will vary depending on the courier
you select. We will deduct the fee from your remaining certificate balance,
provided that balance would not be less than $1,000. If the balance would be
less than $1,000, we will deduct the fee from the proceeds of the withdrawal.
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22p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
2 By wire:
o Minimum wire amount: $1,000.
o Request that money be wired to your bank.
o Bank account must be in same ownership as the AECC account.
o Pre-authorization required. Complete the bank wire authorization section in
the application or use a form supplied by your American Express financial
advisor. All registered owners must sign.
o Applicable wire charges will be deducted from your balance (for partial
withdrawals) or from the proceeds of a full withdrawal.
3 By electronic transfer:
o Available only for pre-authorized scheduled partial withdrawals and other
full or partial withdrawals.
o No charge.
o Deposited electronically in your bank account.
o Allow two to five business days from request to deposit.
RETIREMENT PLANS: SPECIAL POLICIES
o If the certificate is purchased for a 401(k) plan or other qualified
retirement plan account, the terms and conditions of the certificate apply to
the plan as the owner of this certificate. However, the terms of the plan, as
interpreted by the plan trustee or administrator, will determine how a
participant's benefit under the plan is administered. These terms may differ
from the terms of the certificate.
o If your certificate is held in a custodial or trusteed retirement plan
(including a Keogh plan), special rules may apply at maturity. If no other
investment instructions are provided directing how to handle your certificate
at maturity, the full value of the certificate will automatically transfer to
a new or existing cash management account according to rules outlined in the
plan document or as otherwise provided in the plan document.
o The annual custodial fee for non-401(k) qualified retirement plans or IRA's
may be deducted from your certificate account. It may reduce the amount
payable at maturity or the amount received upon an early withdrawal.
o Retirement plan withdrawals may be subject to withdrawal penalties or loss of
interest even if they are not subject to federal tax penalties.
o We will waive withdrawal penalties on withdrawals for qualified retirement
plan or IRA certificate accounts for your required minimum distributions.
o If you withdraw all funds from your last account in an IRA at American
Express Trust Company, a termination fee will apply as set out in Your Guide
to IRAs, the IRS disclosure information received when you opened your
account.
o The IRA termination fee will be waived if a withdrawal occurs after you have
reached age 701/2 or upon the owner's death.
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23p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
TRANSFER OF OWNERSHIP
While this certificate is not negotiable, AECC will transfer ownership upon
written notification to our Client Service Organization. However, if you have
purchased your certificate for a 401(k) plan or other qualified retirement plan,
or an IRA you may be unable to transfer or assign the certificate without losing
the account's favorable tax status. Please consult your tax advisor.
FOR MORE INFORMATION
For information on purchases, withdrawals, exchanges, transfers of ownership,
proper instructions and other service questions regarding your certificate,
please consult your American Express financial advisor or call the Client
Service Organization at the telephone numbers listed on the back cover.
If you purchase your certificate other than through a financial advisor, you may
be given different purchase and withdrawal instructions.
Taxes on Your Earnings
Each calendar year we provide certificate owners and the IRS with reports of all
interest of $10 and above credited to their accounts on Form 1099-INT, "Interest
Income." Withdrawals are reported to certificate owners and the IRS on Form
1099-B, "Proceeds from Broker and Barter Exchange Transactions." We report
participation and minimum interest on certificates when credited to owners'
accounts, generally at the end of each certificate term, and fixed and interim
interest accrued through the end of each calendar year. The manner in which such
income is to be reported for tax purposes by a certificate owner will be based
on the method of accounting that the owner uses in general to report income.
Under IRS regulations governing the tax treatment of debt instruments such as
the American Express Market Strategy Certificate, which provide for variable
rates of interest, the certificate is treated as either a variable rate debt
instrument (VRDI) or a contingent debt instrument (CDI). We believe there is a
sound basis under these regulations to treat and report the certfiicate as a
VRDI. As a VRDI, full participation interest or partial participation together
with minimum interest on the certificate would generally be treated as qualified
stated interest that accrues over each term. However, there can be no guarantee
that the certificate will not be treated as a CDI since, among other items, the
regulations do not address an instrument with all the features of the
certificate. If treated as CDI, interest would generally be taken into account
for each term under a "noncontingent bond method," under which an owner would
have taxable income to report under the rules similar to those for accruing
original issue discount. For cash-basis owners, this could result in income
having to be reported in advance of interest being credited to their accounts.
There also could be differences in the character of income reported if the
certificate were classified as a CDI rather than a VRDI.
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24p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The foregoing does not address the tax consequences of ownership of a
certificate through an IRA, 401(k) or other tax qualified retirement plan
account, or try to cover all tax consequences arising from the ownership of a
certificate, and it is possible that changes in tax laws or interpretations may
result in changes to the above descriptions. As always, before purchasing an
American Express Market Strategy Certificate, you should consult your own tax
advisor as to all tax consequences of ownership of the certificate.
RETIREMENT ACCOUNTS
If you are using the certificate as an investment for a 401(k) plan account or
other qualified retirement plan account or an IRA, income tax rules for your
qualified plan or IRA apply.
AECC will withhold federal income taxes of 10% on a qualified plan or IRA
withdrawals unless you tell us not to. AECC is required to withhold federal
income taxes of 20% on most qualified plan distributions, unless the
distribution is directly rolled over to another qualified plan or IRA.
Withdrawals from retirement accounts are generally subject to a 10% early
withdrawal penalty by the IRS if you make them before age 591/2, unless you are
disabled or if they are made by your beneficiary in the event of your death.
Other exceptions may also apply. (Also, withdrawals of principal during a
certificate month may be subject to the certificate's provision for loss of
interest.)
Consult your tax advisor to see how these rules apply to you before you request
a distribution from your plan or IRA.
This certificate may not be available for all types of retirement accounts.
GIFTS TO MINORS
The certificate may be given to a minor under either the Uniform Gifts or
Uniform Transfers to Minors Act (UGMA/UTMA), whichever applies in your state.
UGMAs/UTMAs are irrevocable. Generally, under federal tax laws, income over
$1,500 for the year 2002 on property owned by children under age 14 will be
taxed at the parents' marginal tax rate, while income on property owned by
children 14 or older will be taxed at the child's rate.
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25p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
YOUR TIN AND BACKUP WITHHOLDING
As with any financial account you open, you must list your current and correct
TIN, which is either your Social Security or Employer Identification number. You
must certify your TIN under penalties of perjury on your application when you
open an account.
If you don't provide and certify the correct TIN, you could be subject to backup
withholding of 30% of your interest earnings. You could also be subject to
further penalties, such as:
o a $50 penalty for each failure to supply your correct TIN;
o a civil penalty of $500 if you make a false statement that results in no
backup withholding; and
o criminal penalties for falsifying information.
You could also be subject to backup withholding because you failed to report
interest on your tax return as required.
To help you determine the correct TIN to use on various types of accounts,
please use this chart:
How to Determine the Correct TIN
For this type of account: Use the Social Security or Employer
Identification number of:
- ------------------------------------ ----------------------------------------
Individual or joint account The individual or one of the owners
listed on the joint account
- ------------------------------------ ----------------------------------------
Custodian account of a minor The minor
(Uniform Gifts/Transfers to Minors
Act)
- ------------------------------------ ----------------------------------------
A revocable living trust The grantor-trustee (the person who puts
the money into the trust)
- ------------------------------------ ----------------------------------------
An irrevocable trust, pension The legal entity (not the personal
trust or estate representative or trustee, unless no
legal entity is designated in the
account title)
- ------------------------------------ ----------------------------------------
Sole proprietorship The owner
- ------------------------------------ ----------------------------------------
Partnership The partnership
- ------------------------------------ ----------------------------------------
Corporate The corporation
- ------------------------------------ ----------------------------------------
Association, club or tax-exempt The organization
organization
- ------------------------------------ ----------------------------------------
For details on TIN requirements, ask your financial advisor or contact your
local American Express Financial Advisors Inc. office for federal Form W-9,
Request for Taxpayer Identification Number and Certification. You may also
obtain the form on the Internet at (http://www.irs.gov/).
FOREIGN INVESTORS
Also, the U.S. Internal Revenue Service (IRS) has issued new nonresident alien
regulations that significantly change the withholding and reporting rules on
foreign accounts. The IRS requires that nonresident alien investors certifying
non-U.S. status and, if applicable, treaty eligibility, complete one of the
Forms W-8.
Interest on your certificate is "portfolio interest" as defined in U.S. Internal
Revenue Code Section 871(h) if earned by a nonresident alien. Even though your
interest income is not taxed by the U.S. government, it will be reported at year
end to you and to the U.S. government on a Form 1042-S, Foreign Person's U.S.
Source Income Subject to Withholding. The United States
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26p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
participates in various tax treaties with foreign countries, which provide for
sharing of tax information between the United States and such foreign countries.
Individuals applying for benefits under a tax treaty may have additional
requirements.
Tax treatment of your investment: Interest paid on your certificate is
"portfolio interest" as defined in U.S. Internal Revenue Code Section 871(h) if
earned by a nonresident alien who has supplied AECC with one of the Forms W-8.
If the certificate is treated as a CDI, part of the earned income may be treated
as a capital gain instead of portfolio interest. Form W-8 must be supplied with
an address of foreign residency and a current mailing address, if different.
(Form W-8BEN must be signed and dated by the beneficial owner, an authorized
representative or officer of the beneficial owner or an agent acting under and
providing us with a duly authorized power of attorney.) AECC will not accept
purchases of certificates by nonresident aliens without an appropriately
certified Form W-8 (or approved substitute). If you have supplied a Form W-8
that certifies that you are a nonresident alien, the interest income will be
reported at year end to you and to the U.S. government on a Form 1042-S, Foreign
Person's U.S. Source Income Subject to Withholding.
To help you determine the form that is appropriate for you, please note the
following description of the Forms W-8:
Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding)
This form should be completed by any foreign persons or organizations, if they
are the beneficial owner of the income, whether or not they are claiming a
reduced rate of, or exemption from, withholding. (Foreign persons or
organizations also may be required to fill out one of the forms that follow in
lieu of the W-8BEN.)
Form W-8ECI
(Certificate of Foreign Person's Claim for Exemption From Withholding on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States)
This form should be completed by any foreign person or organization if they
claim that the income is effectively connected with the conduct of a trade or
business within the United States.
Form W-8EXP
(Certificate of Fo reign Government or Other Foreign Organization for United
States Tax Withholding)
This form should be completed by any foreign government, international
organization, foreign central bank of issue, foreign tax-exempt organization,
foreign private foundation, or government of a U.S possession.
Form W-8IMY
(Certificate of Foreign Intermediary, Foreign Flow-Through Entity or Certain
U.S. Branches for United States Tax Withholding)
This form should be completed by an intermediary acting as custodian, broker,
nominee, trustee or executor, or other type of agent for another person.
The new Form W-8 must be resupplied every four calendar years, up from three
years with the prior form.
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27p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Joint ownership: If the account is owned jointly with one or more persons, each
owner must provide a Form W-8. If AECC receives a Form W-9 from any of the joint
owners, payment will be treated as made to a U.S. person.
Withholding taxes: If you fail to provide us with a complete Form W-8 as
required above, you will be subject to 30% backup withholding on interest
payments and withdrawals from certificates.
Estate tax: If you are a nonresident alien and you die while owning a
certificate, then, depending on the circumstances, AECC generally will not act
on instructions with regard to the certificate unless AECC first receives, at a
minimum, a statement from persons AECC believes are knowledgeable about your
estate. The statement must be satisfactory to AECC and must tell us that, on
your date of death, your estate did not include any property in the United
States for U.S. estate tax purposes. In other cases, we generally will not take
action regarding your certificate until we receive a transfer certificate from
the IRS or evidence satisfactory to AECC that the estate is being administered
by an executor or administrator appointed, qualified and acting within the
United States. In general, a transfer certificate requires the opening of an
estate in the United States and provides assurance that the IRS will not claim
your certificate to satisfy estate taxes.
Trusts: If the investor is a trust, the policies and procedures described above
will apply with regard to each grantor who is a nonresident alien. Also, foreign
trusts must apply for a permanent U.S. individual tax identification number
(ITIN) or an employer identification number, as appropriate for the trust.
Important: The information in this prospectus is a brief and selective summary
of certain federal tax rules that apply to this certificate and is based on
current law and practice. Tax matters are highly individual and complex.
Investors should consult a qualified tax advisor about their own position.
How Your Money Is Used and Protected
INVESTED AND GUARANTEED BY AECC
AECC, a wholly owned subsidiary of AEFC, issues and guarantees the American
Express Market Strategy Certificate. We are by far the largest issuer of
face-amount certificates in the United States, with total assets of more than
$4.6 billion and a net worth in excess of $263 million on Dec. 31, 2001.
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28p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
We back our certificates by investing the money received and keeping the
invested assets on deposit. Our investments generate interest and dividends, out
of which we pay:
o interest to certificate owners,
o and various expenses, including taxes, fees to AEFC for advisory and other
services, distribution fees to American Express Financial Advisors Inc.,
selling agent fees to selling agents, and transfer agent fees to American
Express Client Service Corporation (AECSC).
For a review of significant events relating to our business, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations." No
national rating agency rates our certificates.
Most banks and thrifts offer investments known as CDs that are similar to our
certificates in many ways. Early withdrawals of bank CDs often result in
penalties. Banks and thrifts generally have federal deposit insurance for their
deposits and lend much of the money deposited to individuals, businesses and
other enterprises. Other financial institutions and some insurance companies may
offer investments with comparable combinations of safety and return on
investment.
REGULATED BY GOVERNMENT
Because the American Express Market Strategy Certificate is a security, its
offer and sale are subject to regulation under federal and state securities
laws. (The American Express Market Strategy Certificate is a face-amount
certificate. It is not a bank product, an equity investment, a form of life
insurance or an investment trust.)
The federal Investment Company Act of 1940 requires us to keep investments on
deposit in a segregated custodial account to protect all of our outstanding
certificates. These investments back the entire value of your certificate
account. Their amortized cost must exceed the required carrying value of the
outstanding certificates by at least $250,000. As of Dec. 31, 2001, the
amortized cost of these investments exceeded the required carrying value of our
outstanding certificates by more than $418 million. The law requires us to use
amortized cost for these regulatory purposes. Among other things, the law
permits Minnesota statutes to govern qualified assets of AECC as described in
Note 2 to the financial statements. In general, amortized cost is determined by
systematically increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium, so that the
carrying value is equal to maturity value on the maturity date.
AECC has agreed with the SEC to maintain capital and surplus equal to 5% of
outstanding liabilities on certificates (not including loans made on
certificates in accordance with terms of some certificates that no longer are
offered by AECC). AECC also has entered into a written informal understanding
with the Minnesota Commerce Department 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.
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29p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
BACKED BY OUR INVESTMENTS
Our investments are varied and of high quality. This was the composition of our
portfolio as of Dec. 31, 2001:
Type of investment Net amount invested
Corporate and other bonds 38%
Government agency bonds 48
Preferred stocks 4
Mortgages 8
Cash and cash equivalents 2
As of Dec. 31, 2001 about 98% of our securities portfolio (including bonds and
preferred stocks) is rated investment grade. For additional information
regarding securities ratings, please refer to Note 3B to the financial
statements.
Most of our investments are on deposit with American Express Trust Company,
Minneapolis, although we also maintain separate deposits as required by certain
states. American Express Trust Company is a wholly owned subsidiary of AEFC.
Copies of our Dec. 31, 2001 schedule of Investments in Securities of
Unaffiliated Issuers are available upon request. For comments regarding the
valuation, carrying values and unrealized appreciation (depreciation) of
investment securities, see Notes 1, 2 and 3 to the financial statements.
INVESTMENT POLICIES
In deciding how to diversify the portfolio -- among what types of investments in
what amounts -- the officers and directors of AECC use their best judgment,
subject to applicable law. The following policies currently govern our
investment decisions:
Debt securities
Most of our investments are in debt securities as referenced in the table in
"Backed by Our Investments" under "How Your Money is Used and Protected."
The price of bonds generally falls as interest rates increase, and rises as
interest rates decrease. The price of a bond also fluctuates if its credit
rating is upgraded or downgraded. The price of bonds below investment grade may
react more to whether a company can pay interest and principal when due than to
changes in interest rates. They have greater price fluctuations, are more likely
to experience a default, and sometimes are referred to as junk bonds. Reduced
market liquidity for these bonds may occasionally make it more difficult to
value them. In valuing bonds, AECC relies both on independent rating agencies
and the investment manager's credit analysis. Under normal circumstances, at
least 85% of the securities in AECC's portfolio will be rated investment grade,
or in the opinion of AECC's investment advisor will be the equivalent of
investment grade. Under normal circumstances, AECC will not purchase any
security rated below B- by Moody's Investors Service, Inc. or Standard & Poor's.
Securities that are subsequently downgraded in quality may continue to be held
by AECC and will be sold only when AECC believes it is advantageous to do so.
As of Dec. 31, 2001, AECC held about 2% of its investment portfolio (including
bonds, preferred stocks and mortgages) in investments rated below investment
grade.
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30p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Purchasing securities on margin
We will not purchase any securities on margin or participate on a joint basis or
a joint-and-several basis in any trading account in securities.
Commodities
We have not and do not intend to purchase or sell commodities or commodity
contracts except to the extent that transactions described in "Financial
transactions including hedges" in this section may be considered commodity
contracts.
Underwriting
We do not intend to engage in the public distribution of securities issued by
others. However, if we purchase unregistered securities and later resell them,
we may be considered an underwriter (selling securities for others) under
federal securities laws.
Borrowing money
From time to time we have established a line of credit with banks if management
believed borrowing was necessary or desirable. We may pledge some of our assets
as security. We may occasionally use repurchase agreements as a way to borrow
money. Under these agreements, we sell debt securities to our lender, and
repurchase them at the sales price plus an agreed-upon interest rate within a
specified period of time. There is no limit on the extent to which we may borrow
money, except that borrowing must be through the sale of certificates, or must
be short-term and not a public offering and not intended to be publicly offered.
Real estate
We may invest in limited partnership interests in limited partnerships that
either directly, or indirectly through other limited partnerships, invest in
real estate. We may invest directly in real estate. We also invest in mortgage
loans secured by real estate. We expect that equity investments in real estate,
either directly or through a subsidiary of AECC, will be less than 5% of AECC's
assets.
Lending securities
We may lend some of our securities to broker-dealers and receive cash equal to
the market value of the securities as collateral. We invest this cash in
short-term securities. If the market value of the securities goes up, the
borrower pays us additional cash. During the course of the loan, the borrower
makes cash payments to us equal to all interest, dividends and other
distributions paid on the loaned securities. We will try to vote these
securities if a major event affecting our investment is under consideration. We
expect that outstanding securities loans will not exceed 10% of AECC's assets.
When-issued securities
Some of our investments in debt securities and loans originated by banks or
investment banks are purchased on a when-issued or similar basis. It may take as
long as 45 days or more before these investments are available for sale, issued
and delivered to us. We generally do not pay for these investments or start
earning on them until delivery. We have established procedures to ensure that
sufficient cash is available to meet when-issued commitments. AECC's ability to
invest in when-issued investments is not limited except by its ability to set
aside cash or high quality investments to meet when-issued commitments.
When-issued investments are subject to market fluctuations and they may affect
AECC's investment portfolio the same as owned securities.
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31p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Financial transactions including hedges
We buy or sell various types of options contracts for hedging purposes or as a
trading technique to facilitate securities purchases or sales. We may buy
interest rate caps for hedging purposes. These pay us a return if interest rates
rise above a specified level. If interest rates do not rise above a specified
level, the interest rate caps do not pay us a return. AECC may enter into other
financial transactions, including futures and other derivatives, for the purpose
of managing the interest rate exposures associated with AECC's assets or
liabilities. Derivatives are financial instruments whose performance is derived,
at least in part, from the performance of an underlying asset, security or
index. A small change in the value of the underlying asset, security or index
may cause a sizable gain or loss in the fair value of the derivative. There is
no limit on AECC's ability to enter into financial transactions to manage the
interest rate risk associated with AECC's assets and liabilities, but AECC does
not foresee a likelihood that it will be feasible to hedge most or all of its
assets or liabilities. We do not use derivatives for speculative purposes.
Illiquid securities
A security is illiquid if it cannot be sold in the normal course of business
within seven days at approximately its current market value. Some investments
cannot be resold to the U.S. public because of their terms or government
regulations. All securities, however can be sold in private sales, and many may
be sold to other institutions and qualified buyers or on foreign markets. AECC's
investment advisor will follow guidelines established by the board of directors
and consider relevant factors such as the nature of the security and the number
of likely buyers when determining whether a security is illiquid. No more than
15% of AECC's investment portfolio will be held in securities that are illiquid.
In valuing its investment portfolio to determine this 15% limit, AECC will use
statutory accounting under an SEC order. This means that, for this purpose, the
portfolio will be valued in accordance with applicable Minnesota law governing
investments of life insurance companies, rather than generally accepted
accounting principles.
Restrictions
There are no restrictions on concentration of investments in any particular
industry or group of industries or on rates of portfolio turnover.
How Your Money Is Managed
RELATIONSHIP BETWEEN AECC AND AMERICAN EXPRESS FINANCIAL CORPORATION
AECC was originally organized as Investors Syndicate of America, Inc., a
Minnesota corporation, on Oct. 15, 1940, and began business as an issuer of face
amount investment certificates on Jan. 1, 1941. The company became a Delaware
corporation on Dec. 31, 1977, changed its name to IDS Certificate Company on
April 2, 1984, and to American Express Certificate Company on April 26, 2000.
AECC files reports on Form 10-K and 10-Q with the SEC. The public may read and
copy materials we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
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32p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Before AECC was created, AEFC (formerly known as IDS Financial Corporation), our
parent company, had issued similar certificates since 1894. As of Jan. 1, 1995,
IDS Financial Corporation changed its name to AEFC. AECC and AEFC have never
failed to meet their certificate payments.
During its many years in operation, AEFC has become a leading manager of
investments in mortgages and securities. As of Dec. 31, 2001, AEFC managed or
administered investments, including its own, of more than $253 billion. American
Express Financial Advisors Inc., a wholly owned subsidiary of AEFC, provides a
broad range of financial planning services for individuals and businesses
through its nationwide network of more than 600 supervisory offices, more than
3,800 branch offices and more than 10,200 financial advisors. American Express
Financial Advisors' financial planning services are comprehensive, beginning
with a detailed written analysis that's tailored to your needs. Your analysis
may address one or all of these six essential areas: financial position,
protection planning, investment planning, income tax planning, retirement
planning and estate planning.
AEFC itself is a wholly owned subsidiary of American Express Company, a
financial services company with executive offices at American Express Tower,
World Financial Center, New York, NY 10285. American Express Company is a
financial services company engaged through subsidiaries in other businesses
including:
o travel related services (including American Express(R) Card and operations
through American Express Travel Related Services Company, Inc. and its
subsidiaries); and
o international banking services (through American Express Bank Ltd. and its
subsidiaries) and Travelers Cheque and related services.
CAPITAL STRUCTURE AND CERTIFICATES ISSUED
AECC has authorized, has issued and has outstanding 150,000 shares of common
stock, par value of $10 per share. AEFC owns all of the outstanding shares.
As of the fiscal year ended Dec. 31, 2001, AECC had issued (in face amount)
$85,900,891 of installment certificates and $1,851,545,013 of single payment
certificates. As of Dec. 31, 2001, AECC had issued (in face amount)
$13,831,161,154 of installment certificates and $23,235,188,761 of single
payment certificates since its inception in 1941.
INVESTMENT MANAGEMENT AND SERVICES
Under an Investment Advisory and Services Agreement, AEFC acts as our investment
advisor and is responsible for:
o providing investment research,
o making specific investment recommendations,
o and executing purchase and sale orders according to our policy of obtaining
the best price and execution.
All these activities are subject to direction and control by our board of
directors and officers. Our agreement with AEFC requires annual renewal by our
board, including a majority of directors who are not interested persons of AEFC
or AECC as defined in the federal Investment Company Act of 1940.
For its services, we pay AEFC a monthly fee, equal on an annual basis to a
percentage of the total book value of certain assets (included assets).
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33p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Advisory and services fee computation
Included assets Percentage of total book value
First $250 million 0.750%
Next $250 million 0.650
Next $250 million 0.550
Next $250 million 0.500
Any amount over $1 billion 0.107
Included assets are all assets of AECC except mortgage loans, real estate, and
any other asset on which we pay an outside advisory or service fee. The fee paid
to AEFC for managing and servicing banks loans is 0.35%.
Advisory and services fee for the past three years
Year Total fees Percentage of included assets
2001 $9,248,275 0.24%
2000 8,778,883 0.25
1999 8,691,974 0.26
Estimated advisory and services fees for 2002 are $9,729,000.
Other expenses payable by AECC: The Investment Advisory and Services Agreement
provides that we will pay:
o costs incurred by us in connection with real estate and mortgages;
o taxes;
o depository and custodian fees;
o brokerage commissions;
o fees and expenses for services not covered by other agreements and provided
to us at our request, or by requirement, by attorneys, auditors, examiners
and professional consultants who are not officers or employees of AEFC;
o fees and expenses of our directors who are not officers or employees of AEFC;
o provision for certificate reserves (interest accrued on certificate owner
accounts); and
o expenses of customer settlements not attributable to sales function.
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34p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
DISTRIBUTION
Under a Distribution Agreement with American Express Financial Advisors Inc., we
pay for the distribution of this certificate by American Express Financial
Advisors Inc. as follows:
o 0.90% of the initial investment on the first day of the certificate's term,
and
o 0.90% of the certificate's reserve at the beginning of each subsequent term
for certificates sold through American Express Financial Advisors Inc.
This fee is not assessed to your certificate account.
Total distribution fees paid to American Express Financial Advisors Inc. for all
series of certificates amounted to $29,399,557 during the year ended Dec. 31,
2001. We expect to pay American Express Financial Advisors Inc. distribution
fees amounting to $31,726,000 during 2002.
See Note 1 to financial statements regarding deferral of distribution fee
expense.
In addition, AECC may pay distributors additional compensation for distribution
activities under certain circumstances. From time to time, AECC may pay or
permit other promotional incentives, in cash or credit or other compensation.
American Express Financial Advisors Inc. pays commissions to its financial
advisors and pays other selling expenses in connection with services to us. Our
board of directors, including a majority of directors who are not interested
persons of American Express Financial Advisors Inc., or AECC, approved these
distribution agreements.
TRANSFER AGENT
Under a Transfer Agency Agreement, American Express Client Service Corporation
(AECSC), a wholly owned subsidiary of AEFC, maintains certificate owner accounts
and records. AECC pays AECSC a monthly fee of one-twelfth of $10.353 per
certificate owner account for this service.
EMPLOYMENT OF OTHER AMERICAN EXPRESS AFFILIATES
AEFC may employ an affiliate of American Express Company as executing broker for
our portfolio transactions only if:
o we receive prices and executions at least as favorable as those offered by
qualified independent brokers performing similar services;
o the affiliate charges us commissions consistent with those charged to
comparable unaffiliated customers for similar transactions; and
o the affiliate's employment is consistent with the terms of federal securities
laws.
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35p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
DIRECTORS AND OFFICERS
AECC's sole shareholder, AEFC, elects the board of directors that oversees
AECC's operations. The board annually elects the directors, chairman, president
and controller for a term of one year. The president appoints the other
executive officers.
We paid a total of $34,000 during 2001 to directors not employed by AEFC.
Independent Board Members
Name, address, age Position held with Principal occupations Other directorships Committee
Registrant and during past 5 years memberships
length of service
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Rodney P. Burwell Board member Chairman, Xerxes Fairview Corporation, Dividend
7901 Xerxes Avenue South, since 1999 Corporation TCF Financial, IPI
Suite 201 (fiberglass storage
Bloomington, MN 55431 tanks)
Born in 1939
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Jean B. Keffeler Board member Retired business
3424 Zenith Avenue South since 1999 executive
Minneapolis, MN 55416
Born in 1945
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Thomas R. Mc Burney Board member President, McBurney The Valspar Dividend
1700 Foshay Tower since 1999 Management Advisors Corporation (paints),
821 Marquette Avenue Wegner Corporation,
Minneapolis, MN 55402 Meritex Enterprises
Born in 1938 and Greenspring
Corporation
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Board Members Affiliated with American Express Certificate Company
Name, address, age Position held with Principal occupations Other directorships Committee
Registrant and during past 5 years memberships
length of service
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Kent M. Bergene Board member Vice president -
435 AXP Financial Center since June 2001 Products Group of
Minneapolis, MN 55474 AEFC, director -
Born in 1958 Variable Annuity
Products, actuary -
Variable Assets
Business Development
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Paula R. Meyer Board member and Vice president and Dividend,
596 AXP Financial Center president since 1998 Managing Director - Investment
Minneapolis, MN 55474 American Express
Born in 1954 Funds, vice president
- AEFC, president -
Piper Capital
Management (PCM),
director of marketing
of PCM
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
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36p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Board Members Affiliated with American Express Certificate Company (continued)
Name, address, age Position held with Principal occupations Other directorships Committee
Registrant and during past 5 years memberships
length of service
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Walter S. Berman Board member since Senior Vice President
50115 AXP Financial Center March 2002 and Corporate
Minneapolis, MN 55474 Treasurer - American
Born in 1942 Express Company
(AMEX) since 2002.
Acting Chief
Financial Officer -
AEFA since 2001.
Various senior
financial
positions,
including Treasurer
of IBM, at other
companies from 1996
to 2001.
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Executive Officers
Name, address, age Position held with Principal occupations Other directorships Committee
Registrant and during past 5 years memberships
length of service
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Paula R. Meyer Board member and Vice president and Dividend,
596 AXP Financial Center president since 1998 Managing Director - Investment
Minneapolis, MN 55474 American Express
Born in 1954 Fund, vice president
- AEFC, president -
Piper Capital
Management (PCM),
director of marketing
of PCM
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Lorraine R. Hart Vice president - Investment
53643 AXP Financial Center Investments
Minneapolis, MN 55474
Born in 1951
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Eileen J. Newhouse Vice president, Vice President and
50607 AXP Financial Center general counsel, Group Counsel - AEFC
Minneapolis, MN 55474 and secretary since
Born in 1955 March 2002
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
- --------------------------------------------------------------------------------
37p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Executive Officers (continued)
Name, address, age Position held with Principal occupations Other directorships Committee
Registrant and during past 5 years memberships
length of service
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
David L. Yowan Vice president and Senior vice president
40 Wall Street treasurer since and assistant
19th Floor April 2000 treasurer - American
New York, NY 10004 Express Company,
(temporary) Senior portfolio and
Born in 1957 risk management
officer - North
Ameri can Consumer
Bank of Citigroup
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
Philip C. Wentzel Vice president and Vice president -
805 AXP Financial Center controller since Finance, Insurance
Minneapolis, MN 55474 2000 Products of AEFC,
Born in 1961 vice president and
controller of IDS
Life, Director of
Financial Reporting
and Analysis - IDS
Life
- -------------------------------------- --------------------- ----------------------- ----------------------- -----------------
- --------------------------------------------------------------------------------
38p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
The officers and directors as a group beneficially own less than 1% of the
common stock of American Express Company.
AECC has provisions in its bylaws relating to the indemnification of its
officers and directors against liability, as permitted by law. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
1933 Act) may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is therefore unenforceable.
INDEPENDENT AUDITORS
A firm of independent auditors audits our financial statements at the close of
each fiscal year (Dec. 31). Copies of our annual financial statements (audited)
and semiannual financial statements (unaudited) are available to any certificate
owner upon request.
Ernst & Young LLP, Minneapolis, has audited our financial statements at Dec. 31,
2001 and 2000 and for each of the years in the three-year period ended Dec. 31,
2001. These statements are included in this prospectus. Ernst & Young LLP is
also the auditor for American Express Company, the parent company of AEFC and
AECC.
AMERICAN EXPRESS CERTIFICATES
Other certificates issued by AECC: Your American Express financial advisor can
give you more information on five other certificates issued by AECC. These
certificates offer a wide range of investment terms and features.
American Express Cash Reserve Certificate -- A single payment certificate that
permits additional investments on which AECC guarantees interest in advance for
a three-month term.
American Express Flexible Savings Certificate -- A single payment certificate
that permits additional investments and on which AECC guarantees interest in
advance for a term of six, 12, 18, 24, 30 or 36 months.
American Express Installment Certificate -- An installment payment certificate
that declares interest in advance for a three-month period and offers bonuses in
the third through sixth years for regular investments.
American Express Preferred Investors Certificate -- A single payment certificate
that combines a competitive fixed rate of return with AECC's guarantee of
principal for large investments of $250,000 to $5 million.
American Express Stock Market Certificate -- A single payment certificate that
calculates all or part of your interest based on stock market performance, as
measured by a broad market index, with AECC's guarantee of return of principal.
- --------------------------------------------------------------------------------
39p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Appendix
Description of corporate bond ratings
Bond ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's rating
may change which could affect its price. Ratings by Moody's Investors Service,
Inc. are Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C. Ratings by Standard & Poor's are
AAA, AA, A, BBB, BB, B, CCC, CC, C and D.
Aaa/AAA -- Judged to be of the best quality and carry the smallest degree of
investment risk. Interest and principal are secure.
Aa/AA -- Judged to be high-grade although margins of protection for interest and
principal may not be quite as good as Aaa or AAA rated securities.
A -- Considered upper-medium grade. Protection for interest and principal is
deemed adequate but may be susceptible to future impairment.
Baa/BBB -- Considered medium-grade obligations. Protection for interest and
principal is adequate over the short-term; however, these obligations may have
certain speculative characteristics.
Ba/BB -- Considered to have speculative elements. The protection of interest and
principal payments may be very moderate.
B -- Lack characteristics of more desirable investments. There may be small
assurance over any long period of time of the payment of interest and principal.
Caa/CCC -- Are of poor standing. Such issues may be in default or there may be
risk with respect to principal or interest.
Ca/CC -- Represent obligations that are highly speculative. Such issues are
often in default or have other marked shortcomings.
C -- Are obligations with a higher degree of speculation. These securities have
major risk exposures to default.
D -- Are in payment default. The D rating is used when interest payments or
principal payments are not made on the due date.
Non-rated securities will be considered for investment. When assessing each
non-rated security, AECC will consider the financial condition of the issuer or
the protection afforded by the terms of the security.
- --------------------------------------------------------------------------------
40p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
Annual Financial Information
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) 2001 2000 1999 1998 1997
Statements of Operations Data
Investment income $ 261,523 $ 266,106 $ 254,344 $ 273,135 $ 258,232
Investment expenses 101,228 87,523 77,235 76,811 70,137
------- ------ ------ ------ ------
Net investment income before provision
for certificate reserves and income
tax benefit (expense) 160,295 178,583 177,109 196,324 188,095
Net provision for certificate reserves 155,387 155,461 138,555 167,108 165,136
------- ------- ------- ------- -------
Net investment income before income
tax benefit (expense) 4,908 23,122 38,554 29,216 22,959
Income tax benefit (expense) 3,348 (14) (4,615) 265 3,682
----- --- ------ --- -----
Net investment income 8,256 23,108 33,939 29,481 26,641
----- ------ ------ ------ ------
Net realized (loss) gain on investments
in securities of unaffiliated
issuers before income taxes (92,375) (10,110) 1,250 5,143 980
Income tax benefit (expense) 32,331 3,539 (437) (1,800) (343)
------ ----- ---- ------ ----
Net realized (loss) gain on investments (60,044) (6,571) 813 3,343 637
Net income -- wholly owned subsidiary -- -- 4 1,646 328
Cumulative effect of accounting change (397) -- -- -- --
------ ----- ---- ------ ----
Net (loss) income $ (52,185) $ 16,537 $ 34,756 $ 34,470 $ 27,606
---------- ---------- ---------- ---------- ----------
Cash Dividends Declared
$ -- $ 5,000 $ 40,000 $ 29,500 $ --
Capital Dividends Declared
$ 166,906 $ -- $ -- $ -- $ --
Capital Contributions
$ 240,000 $ -- $ -- $ -- $ --
Balance Sheet Data
Total assets $4,628,353 $4,032,745 $3,761,068 $3,834,244 $4,053,648
Certificate loans 21,807 25,547 28,895 32,343 37,098
Certificate reserves 4,159,926 3,831,059 3,536,659 3,404,883 3,724,978
Stockholder's equity 263,005 166,514 141,702 222,033 239,510
------- ------- ------- ------- -------
American Express Certificate Company (AECC) is 100% owned by American Express
Financial Corporation (Parent).
- -----------------------------------------------------------------------------
41p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of operations
American Express Certificate Company's (AECC) earnings are derived primarily
from the after-tax yield on invested assets less investment expenses and
interest credited on certificate reserve liabilities, as well as realized
investment gains or losses. Changes in earnings' trends occur largely due to
changes in the rates of return on investments, the rates of interest credited to
certificate owner accounts, changes in the mix of fully taxable and
tax-advantaged investments in the AECC portfolio and from the realization of
investment gains or losses.
During 2001, total assets and certificate reserves increased $596 million and
$329 million, respectively. The increase in total assets resulted primarily from
capital contributions from Parent of $240 million, an increase in net unrealized
appreciation on available-for-sale securities of $125 million and certificate
payments exceeding certificate maturities and surrenders by $185 million. The
increase in certificate reserves resulted primarily from interest accruals of
$155 million and the total certificate payments being greater than the
maturities and surrenders.
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.
2001 compared to 2000
Gross investment income decreased 1.7% due primarily to lower rates of return on
invested assets, and adjustments to interest income on investments in certain
structured securities.
Investment expenses increased 15.7% in 2001. The increase resulted primarily
from higher interest rate swap expense of $17.6 million partially offset by
lower index options expense.
The net provision for certificate reserves remained relatively flat to 2000
levels as lower accrual rates offset the impact from the growth in certificate
reserves during 2001.
During 2001, AECC experienced net pretax realized losses on investments of $92.4
million vs. $10.1 million of pretax losses in 2000. The losses for the year are
primarily composed of a $36.9 million loss to recognize the impact of higher
default assumptions used to determine impairment on rated structured investments
and a $57.1 million loss on high-yield securities. The write-downs of these
investments are associated with AECC's decision to reduce its holdings of
high-yield investments and rebalance the fixed maturity investment portfolio
towards higher quality, less volatile holdings.
The increase in income tax benefit resulted from lower pretax income, primarily
due to the investment losses realized during 2001.
- -----------------------------------------------------------------------------
42p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
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.
Liquidity and cash flow
AECC's principal sources of cash are receipts 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 dividend payments to its Parent.
Certificate sales continued strong in 2001 reflecting clients' ongoing desire
for safety of principal. Sales of certificates totaled $1.9 billion in 2001
compared to $1.5 billion in both 2000 and 1999. The higher certificate sales in
2001 over 2000 resulted primarily from special promotions of the seven-month
term American Express Flexible Savings Certificate, which produced sales of $388
million in 2001. Certificate sales in 2000 compared to 1999 benefited from
higher sales of the American Express Market Strategy Certificate and American
Express Investors Certificate of $95 million and $118 million, respectively.
Certificate maturities and surrenders totaled $1.7 billion during 2001, compared
to $1.5 billion in 2000 and $1.7 billion in 1999. The higher certificate
maturities and surrenders in 2001, compared to 2000, resulted primarily from
higher surrenders of American Express Flexible Savings Certificates.
AECC, as an issuer of face-amount certificates, is impacted whenever there is a
significant change in interest rates. In view of the continued 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. In addition, AECC enters
into interest rate swap contracts to hedge the risk of rising interest rates on
a portion of the Certificate products.
- -----------------------------------------------------------------------------
43p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
AECC's investment program is designed to maintain an investment portfolio that
will produce the highest possible after-tax yield within acceptable risk and
liquidity parameters. The program considers investment securities as investments
acquired to meet anticipated certificate owner obligations.
At Dec. 31, 2001, approximately 1.7% of AECC's invested assets were below
investment grade bonds, compared to 8.5% at Dec. 31, 2000. The industry-wide
default rate on below investment grade bonds in 2001 increased over 2000 levels.
As described earlier, AECC recognized approximately $57.1 million in losses on
these below investment grade bonds, largely associated with AECC's decision to
reduce its holdings of high-yield investments and rebalance the fixed maturity
investment portfolio towards higher quality, less volatile holdings. Additional
investment security losses through 2002 are possible but the amount of any such
losses is dependent on a number of factors and 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.*
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 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 investments.
Due to changes to the rules for hedging investments, as described later, the
transition provisions of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, permitted held-to-maturity securities to be
reclassified at the date of adoption to available-for-sale or trading. AECC
adopted SFAS No. 133 effective Jan. 1, 2001 and reclassified all its
held-to-maturity securities to available-for-sale.
At Dec. 31, 2001, securities classified as available-for-sale were carried at a
fair market value of $4.1 billion. The fixed maturity securities comprise 88% of
AECC's total invested assets. Of these securities, approximately 98% 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.
* 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.
- -----------------------------------------------------------------------------
44p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
In 2001, available-for-sale securities sold had amortized cost and fair values
of $1.8 billion and $1.7 billion, respectively.
In July 2000, the Financial Accounting Standards Board's (FASB) Emerging Issues
Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." The Company elected to early adopt the consensus
as of Jan. 1, 2001. Issue 99-20 prescribes new procedures for recording interest
income and measuring impairment on retained and purchased beneficial interests.
The consensus primarily affects certain structured securities. Although there
was no significant impact resulting from the adoption of Issue 99-20, the
Company holds structured securities that are accounted for under Issue 99-20.
During the fourth quarter of 2001, AECC paid a $167 million dividend to American
Express Financial Corporation (AEFC) by transferring at book value certain
Collateralized Debt Obligation (CDO) securities owned by AECC. In part, the
dividend was paid to allow AEFC to transfer the CDO securities and related
accrued interest into a securitization trust. Additionally, AECC received $240
million in total cash as a capital contribution from AEFC during 2001.
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 presented 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.
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 certificate 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 is comprised of senior business managers,
meets regularly to review models projecting various interest rate scenarios and
risk/return measures and their impact on AECC's profitability. The committee's
objectives are 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 within defined risk
parameters and to meet certificate contractual obligations.
- -----------------------------------------------------------------------------
45p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
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 strategy includes entering into interest rate swaps to
hedge interest rate risk. AECC's goal is to manage interest rate sensitivity by
modifying the repricing characteristics of certificate liabilities so that the
interest credited to related investment certificate owners is not adversely
affected by movements in interest rates.
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. To meet the obligations
related to the provisions of these certain certificates, the company purchases
and writes index call options on the major stock market index.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments 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 are
recorded in earnings or directly to equity, depending on the instrument's
designated use. Those derivative instruments that are designated and qualify as
hedging instruments under SFAS No. 133 are further classified as either a fair
value hedge, cash flow hedge or a hedge of a net investment in a foreign
operation, based upon the exposure being hedged. See note 9 for further
discussion of the Company's derivative and hedging activities.
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, 2001 and
2000, would be approximately $2.2 million and $3.4 million for 2001 and 2000,
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, 2001 and 2000, 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
income (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, 2001 and 2000, was 5.2% and 5.4%, 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%.
- -----------------------------------------------------------------------------
46p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
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 the prospectus.
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.
- -----------------------------------------------------------------------------
47p AMERICAN EXPRESS MARKET STRATEGY CERTIFICATE -- PROSPECTUS
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, a wholly owned subsidiary of American Express Financial Corporation, as
of December 31, 2001 and 2000, 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, 2001. These financial statements are the
responsibility of the management of American Express Certificate Company. Our
responsibility is to express an opinion on these financial statements 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 are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned as of December 31, 2001
and 2000 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, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 25, 2002
Financial Statements
Balance Sheets, Dec. 31,
Assets
($ thousands) 2001 2000
Qualified Assets (note 2)
Investments in unaffiliated issuers (notes 3, 4 and 10):
Cash and cash equivalents $ 72,817 $ 58,711
Held-to-maturity securities -- 317,732
Available-for-sale securities 4,073,901 3,122,950
First mortgage loans on real estate 343,434 358,575
Certificate loans -- secured by certificate reserves 21,807 25,547
Investments in and advances to affiliates 422 422
--------- ---------
Total investments 4,512,381 3,883,937
--------- ---------
Receivables:
Dividends and interest 38,298 47,901
Investment securities sold 21,500 1,070
--------- ---------
Total receivables 59,798 48,971
--------- ---------
Other (note 9) 48,393 53,015
--------- ---------
Total qualified assets 4,620,572 3,985,923
--------- ---------
Other Assets
Deferred federal income taxes, net (note 8) -- 30,501
Due from Parent for federal income taxes -- 7,016
Deferred distribution fees and other 7,781 9,305
--------- ---------
Total other assets 7,781 46,822
--------- ---------
Total assets $4,628,353 $4,032,745
========== ==========
Balance Sheets, Dec. 31, (continued)
Liabilities and Stockholder's Equity
($ thousands, except share amounts) 2001 2000
Liabilities
Certificate Reserves (note 5):
Installment certificates:
Reserves to mature $ 193,175 $ 215,971
Additional credits and accrued interest 5,082 7,088
Advance payments and accrued interest 645 697
Other 33 55
Fully paid certificates:
Reserves to mature 3,900,824 3,537,832
Additional credits and accrued interest 59,948 69,155
Due to unlocated certificate holders 219 261
--------- ---------
Total certificate reserves 4,159,926 3,831,059
--------- ---------
Accounts Payable and Accrued Liabilities:
Due to Parent (note 7) 878 771
Due to Parent for federal income taxes 1,774 --
Due to other affiliates (note 7) 587 730
Deferred federal income taxes, net (note 8) 404 --
Payable for investment securities purchased 163,507 1,946
Other (notes 9 and 10) 38,272 31,725
--------- ---------
Total accounts payable and accrued liabilities 205,422 35,172
--------- ---------
Total liabilities 4,365,348 3,866,231
--------- ---------
Commitments (note 4)
Stockholder's Equity (notes 5 and 6)
Common stock, $10 par -- authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 383,844 143,844
Retained earnings (deficit):
Appropriated for predeclared additional credits/interest 1,123 2,684
Appropriated for additional interest on advance payments 15 15
Unappropriated (146,593) 70,937
Accumulated other comprehensive income (loss) -- net of tax (note 1) 23,116 (52,466)
--------- ---------
Total stockholder's equity 263,005 166,514
--------- ---------
Total liabilities and stockholder's equity $4,628,353 $4,032,745
========== ==========
See notes to financial statements.
Statements of Operations
Year ended Dec. 31, ($ thousands) 2001 2000 1999
Investment Income
Interest income from unaffiliated investments:
Bonds and notes $214,534 $204,923 $188,062
Mortgage loans on real estate 25,133 26,675 27,294
Certificate loans 1,293 1,471 1,662
Dividends 19,986 32,478 35,228
Other 577 559 2,098
------- ------- -------
Total investment income 261,523 266,106 254,344
------- ------- -------
Investment Expenses
Parent and affiliated company fees (note 7):
Distribution 30,924 31,209 31,484
Investment advisory and services 9,248 8,779 8,692
Transfer agent 3,161 3,300 3,572
Depository 285 254 238
Options (note 9) 39,510 43,430 31,095
Repurchase agreements 52 124 677
Interest rate swap agreements (note 9) 17,616 17 1,146
Other 432 410 331
------- ------- -------
Total investment expenses 101,228 87,523 77,235
------- ------- -------
Net investment income before provision for certificate
reserves and income tax benefit (expense) 160,295 178,583 177,109
------- ------- -------
Provision for Certificate Reserves (notes 5 and 9)
According to the terms of the certificates:
Provision for certificate reserves 10,321 12,599 11,493
Interest on additional credits 597 714 874
Interest on advance payments 34 33 33
Additional credits/interest authorized by AECC:
On fully paid certificates 138,020 134,633 118,371
On installment certificates 7,559 8,483 8,676
------- ------- -------
Total provision for certificate reserves before reserve recoveries 156,531 156,462 139,447
Reserve recoveries from terminations prior to maturity (1,144) (1,001) (892)
------- ------- -------
Net provision for certificate reserves 155,387 155,461 138,555
Net investment income before income tax benefit (expense) 4,908 23,122 38,554
Income tax benefit (expense) (note 8) 3,348 (14) (4,615)
------- ------- -------
Net investment income 8,256 23,108 33,939
------- ------- -------
Net realized (loss) gain on investments
Securities of unaffiliated issuers before income tax expense (92,375) (10,110) 1,250
------- ------- -------
Income tax benefit (expense) (note 8):
Current 36,320 (537) (1,151)
Deferred (3,989) 4,076 714
------- ------- -------
Total income tax benefit (expense) 32,331 3,539 (437)
------- ------- -------
Net realized (loss) gain on investments (60,044) (6,571) 813
------- ------- -------
Cumulative effect of accounting change
(net of income tax benefit of $214) (397) -- --
Net income -- wholly owned subsidiary -- -- 4
------- ------- -------
Net (loss) income $ (52,185) $ 16,537 $ 34,756
========= ======== ========
See notes to financial statements.
Statements of Comprehensive Income (Loss)
Year ended Dec. 31, ($ thousands) 2001 2000 1999
Net (loss) income $(52,185) $16,537 $ 34,756
-------- ------- ---------
Other comprehensive income (loss) net of tax (note 1)
Cumulative effect of accounting change (note 1) (2,187) -- --
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during year 19,959 21,840 (112,460)
Income tax (expense) benefit (6,986) (7,644) 39,361
-------- ------- ---------
Net unrealized holding gains (losses) arising during the period 12,973 14,196 (73,099)
-------- ------- ---------
Reclassification adjustment for losses (gains) included in net income 101,754 (1,417) (3,058)
Income tax (benefit) expense (35,614) 496 1,070
-------- ------- ---------
Net reclassification adjustment for losses (gains) included in net income 66,139 (921) (1,988)
-------- ------- ---------
Net unrealized gains (losses) on available-for-sale securities 79,113 13,275 (75,087)
Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (19,683) -- --
Income tax benefit 6,889 -- --
-------- ------- ---------
Net unrealized holding losses arising during the period (12,794) -- --
-------- ------- ---------
Reclassification adjustment for losses included in net income 17,616 -- --
Income tax benefit (6,166) -- --
-------- ------- ---------
Net reclassification adjustment for losses included in net loss 11,450 -- --
-------- ------- ---------
Net unrealized (losses) on interest rate swaps (1,344) -- --
Net other comprehensive income (loss) 75,582 13,275 (75,087)
-------- ------- ---------
Total comprehensive income (loss) $ 23,397 $29,812 $ (40,331)
======== ======= =========
See notes to financial statements.
Statements of Stockholder's Equity
Year ended Dec. 31, ($ thousands) 2001 2000 1999
Common Stock
Balance at beginning and end of year $ 1,500 $ 1,500 $ 1,500
--------- -------- --------
Additional Paid-in Capital
Balance at beginning of year $ 143,844 $143,844 $143,844
Contribution from Parent 240,000 -- --
--------- -------- --------
Balance at end of year $ 383,844 $143,844 $143,844
--------- -------- --------
Retained Earnings
Appropriated for predeclared additional credits/interest (note 5)
Balance at beginning of year $ 2,684 $ 2,879 $ 3,710
Transferred to unappropriated retained earnings (1,561) (195) (831)
--------- -------- --------
Balance at end of year $ 1,123 $ 2,684 $ 2,879
--------- -------- --------
Appropriated for additional interest on advance payments (note 5)
Balance at beginning of year $ 15 $ 10 $ 10
Transferred from unappropriated retained earnings -- 5 --
--------- -------- --------
Balance at end of year $ 15 $ 15 $ 10
--------- -------- --------
Unappropriated (note 6)
Balance at beginning of year $ 70,937 $ 59,210 $ 63,623
Net (loss) income (52,185) 16,537 34,756
Transferred from appropriated retained earnings 1,561 190 831
Capital dividends declared (166,906) -- --
Cash dividends declared -- (5,000) (40,000)
--------- -------- --------
Balance at end of year $(146,593) $ 70,937 $ 59,210
--------- -------- --------
Accumulated other comprehensive (loss) income -- net of tax (note 1)
Balance at beginning of year $ (52,466) $(65,741) $ 9,346
Net other comprehensive income (loss) 75,582 13,275 (75,087)
--------- -------- --------
Balance at end of year $ 23,116 $(52,466) $(65,741)
--------- -------- --------
Total stockholder's equity $ 263,005 $166,514 $141,702
========= ======== ========
See notes to financial statements.
Statements of Cash Flows
Year ended Dec. 31, ($ thousands) 2001 2000 1999
Cash Flows from Operating Activities
Net (loss) income $ (52,185) $ 16,537 $ 34,756
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax (note 1) 397 -- --
Net income of wholly owned subsidiary -- -- (4)
Net provision for certificate reserves 155,387 155,461 138,555
Interest income added to certificate loans (820) (914) (1,037)
Amortization of premiums/discounts-net (1,483) 42,192 29,030
Provision for deferred federal income taxes (9,793) 4,940 (1,063)
Net realized loss (gain) on investments before income taxes 92,375 10,110 (1,250)
Decrease (increase) in dividends and interest receivable 9,603 (6,317) 4,995
Decrease in deferred distribution fees 1,525 2,946 3,533
Decrease (increase) in other assets 4,622 (7,016) 1,082
Increase (decrease) in other liabilities 14,001 (2,823) (18,390)
------- ------- -------
Net cash provided by operating activities 213,629 215,116 190,207
------- ------- -------
Cash Flows from Investing Activities
Maturity and redemption of investments:
Held-to-maturity securities -- 138,150 134,907
Available-for-sale securities 704,877 447,643 426,257
Other investments 30,307 68,877 73,387
Sale of investments:
Held-to-maturity securities -- 8,836 --
Available-for-sale securities 969,308 312,612 107,244
Certificate loan payments 3,127 3,399 4,162
Purchase of investments:
Held-to-maturity securities -- (161) (6,785)
Available-for-sale securities (2,274,412) (1,250,487) (554,270)
Other investments (54,927) (49,460) (102,183)
Certificate loan fundings (2,830) (3,197) (3,680)
------- ------- -------
Net cash (used in) provided by investing activities (624,550) (323,788) 79,039
------- ------- -------
Cash Flows from Financing Activities
Payments from certificate owners 1,919,769 1,667,475 1,596,079
Proceeds from repurchase agreements 500 -- 123,500
Certificate maturities and cash surrenders (1,734,742) (1,517,178) (1,662,239)
Payments under repurchase agreements (500) (25,000) (239,500)
Capital contribution from parent 240,000 -- --
Dividends paid -- (5,000) (40,000)
------- ------- -------
Net cash provided by (used in) financing activities 425,027 120,297 (222,160)
------- ------- -------
Net increase in cash and cash equivalents 14,106 11,625 47,086
Cash and cash equivalents at beginning of year 58,711 47,086 --
------- ------- -------
Cash and cash equivalents at end of year $ 72,817 $ 58,711 $ 47,086
=========== =========== ===========
Supplemental Disclosures Including Non-cash Transactions
Cash paid for income taxes $ -- $ 2,558 $ 9,233
Certificate maturities and surrenders through loan reductions 4,263 4,060 4,003
------- ------- -------
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) 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.
The Parent acts as investment advisor for AECC.
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.
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.
Cash and cash equivalents
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.
Investment 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.
Unrealized holding gains and losses on securities classified as Available for
sale are carried, net of deferred income taxes, as Accumulated other
comprehensive income (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 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
Effective Jan. 1, 2001, AECC adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended (SFAS No. 133), which establishes the accounting and reporting standards
for derivative instruments 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 are recorded in earnings or directly to equity, depending on the
instrument's designated use. Those derivative instruments that are designated
and qualify as hedging instruments are further classified as either a cash flow
hedge, a fair value hedge, or a hedge of a net investment in a foreign
operation, based upon the exposure being hedged. The adoption of SFAS No. 133 on
Jan. 1, 2001, resulted in a cumulative after-tax reduction of $397 and $2,187 to
earnings and other comprehensive income (OCI), respectively. See Note 9 for
further discussion of the Company's derivative and hedging activities.
In July 2000, the Financial Accounting Standards Board's (FASB) Emerging Issues
Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." The Company elected to early adopt the consensus
as of Jan. 1, 2001. Issue 99-20 prescribes new procedures for recording interest
income and measuring impairment on retained and purchased beneficial interests.
The consensus primarily affects certain structured securities. Although there
was no significant impact resulting from the adoption of Issue 99-20, the
Company holds structured securities that are accounted for under Issue 99-20.
2. DEPOSIT OF ASSETS AND MAINTENANCE OF QUALIFIED ASSETS
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 $4,152,437 and $3,829,659 at Dec. 31, 2001 and 2000,
respectively. AECC had Qualified Assets of $4,413,104 at Dec. 31, 2001 and
$4,064,694 at Dec. 31, 2000, excluding net unrealized appreciation on
Available-for-sale securities of $43,962 at Dec. 31, 2001, and unrealized
depreciation of $80,717 at Dec. 31, 2000, respectively, and Payable for
investment securities purchased of $163,507 and $1,946 at Dec. 31, 2001 and
2000, 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.
Pursuant to provisions of the certificates, the 1940 Act, the central depository
agreement and requirements of various states, qualified assets of AECC were
deposited as follows:
Dec. 31, 2001
Required
Deposits deposits Excess
Deposits to meet certificate liability requirements:
States $ 361 $ 318 $ 43
Central Depository 4,547,283 4,129,056 418,227
--------- --------- -------
Total $4,547,644 $4,129,374 $418,270
---------- ---------- --------
Dec. 31, 2001
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
---------- ---------- --------
The assets on deposit at Dec. 31, 2001 and 2000 consisted of securities having a
deposit value of $3,955,748 and $3,589,196, respectively; mortgage loans of
$343,434 and $358,575, respectively; and other assets of $248,462 and $104,200,
respectively.
American Express Trust Company is the central depository for AECC. See note 7.
3. INVESTMENTS IN SECURITIES
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,
discounted cash flows, and market data from independent brokers and financial
files. The procedures are reviewed annually by management and the Board of
Directors.
Because of changes to the rules for hedging investments, the transition
provisions of SFAS No. 133, as amended, permitted held-to-maturity securities
under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," to be reclassified at the date of adoption to available-for-sale or
trading. AECC reclassified all held-to-maturity securities to available-for-sale
upon adoption.
A summary of Available-for-sale securities and Held-to-maturity securities at
Dec. 31, is as follows:
2001
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Available for sale:
U.S. Government and agencies obligations $ 361 $ 24 $ -- $ 385
Mortgage-backed securities 2,136,070 23,121 10,059 2,149,132
State and municipal obligations 10,893 563 -- 11,456
Corporate debt securities 1,683,198 38,660 12,992 1,708,866
Stated maturity preferred stock 168,963 4,489 150 173,302
Perpetual preferred stock 30,282 454 320 30,416
Common stock 172 172 -- 344
---------- ------- -------- ----------
Total $4,029,939 $67,483 $ 23,521 $4,073,901
---------- ------- -------- ----------
2000
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Held to maturity:
U.S. Government and agencies obligations $ 161 $ 8 $ -- $ 169
Mortgage-backed securities 12,604 160 -- 12,764
Corporate debt securities 35,794 713 662 35,845
Stated maturity preferred stock 269,173 5,974 3,245 271,902
---------- ------- -------- ----------
Total $ 317,732 $ 6,855 $ 3,907 $ 320,680
---------- ------- -------- ----------
Available for sale:
U.S. Government and agencies obligations $ 199 $ 6 $ -- $ 205
Mortgage-backed securities 1,106,998 15,747 822 1,121,923
State and municipal obligations 17,911 370 -- 18,281
Corporate debt securities 1,902,799 13,715 106,327 1,810,187
Stated maturity preferred stock 66,752 565 1,183 66,134
Perpetual preferred stock 109,008 533 3,321 106,220
---------- ------- -------- ----------
Total $3,203,667 $30,936 $111,653 $3,122,950
---------- ------- -------- ----------
The amortized cost and fair value of Available-for-sale securities, by
contractual maturity at Dec. 31, 2001 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
Due within 1 year $ 399,669 $ 405,687
Due after 1 year through 5 years 957,911 981,500
Due after 5 years through 10 years 276,864 273,693
Due after 10 years 228,971 233,129
---------- ----------
1,863,415 1,894,009
Mortgage-backed securities 2,136,070 2,149,132
Perpetual preferred stock 30,282 30,416
Common stock 172 344
---------- ----------
Total $4,029,939 $4,073,901
---------- ----------
During the years ended Dec. 31, 2001 and 2000, 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:
2001 2000 1999
Proceeds $1,694,615 $312,728 $105,112
Gross realized gains 20,679 4,447 3,270
Gross realized losses 111,864 3,136 195
---------- -------- --------
During the years ended Dec. 31, 2001, 2000 and 1999, AECC recognized losses of
$81,292, $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 realized loss on investments in the Statements of Operations.
Sales of Held-to-maturity securities, due to credit concerns and acceptance of a
tender offer during the year ended Dec. 31, 2000 was as follows:
2001 2000 1999
Amortized cost $-- $9,015 $--
Gross realized gains -- 94 --
Gross realized losses -- 273 --
---------- -------- --------
Investments in securities with fixed maturities comprised 88% and 87% of AECC's
total invested assets at Dec. 31, 2001 and 2000, 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 2001 2000
Aaa/AAA 60% 44%
Aa/AA 2 1
Aa/A 1 1
A/A 11 13
A/BBB 4 3
Baa/BBB 20 28
Below investment grade 2 10
--- ---
Total 100% 100%
--- ---
Of the securities rated Aaa/AAA, 88% and 73% at Dec. 31, 2001 and 2000,
respectively, are U.S. Government Agency mortgage-backed securities that are not
rated by a public rating agency. At Dec. 31, 2001 and 2000, approximately 11%
and 13%, respectively, of securities with fixed maturities, other than U.S.
Government Agency mortgage-backed securities, are rated by Parent's internal
analysts.
At Dec. 31, 2001 and 2000 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.
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 as described previously.
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.
AECC's net losses for the year were primarily composed of a $36.9 million loss
to recognize the impact of higher default assumptions used to determine
impairment on rated structured investments and a $57.1 million loss on
high-yield securities. The write-downs of these investments are associated with
the company's decision to reduce the Company's holdings of high-yield
investments and rebalance the fixed maturity investment portfolio towards higher
quality, less volatile holdings.
4. INVESTMENTS IN FIRST MORTGAGE LOANS ON REAL ESTATE
At Dec. 31, 2001 and 2000, AECC's recorded investment in impaired mortgage loans
was $nil and $155, respectively, and the reserve for loss on those amounts were
$nil. During 2001, 2000, and 1999, the average recorded investment in impaired
mortgage loans was $nil, $195 and $267, respectively.
AECC recognized $nil, $13, and $25 of interest income related to impaired
mortgage loans for the years ended Dec. 31, 2001, 2000, and 1999, respectively.
The reserve for loss on mortgage loans increased to $1,935 on Dec. 31, 2001,
from $744 at Dec. 31, 2000 and $511 at Dec. 31, 1999.
At Dec. 31, 2001 and 2000, approximately 8% and 9%, 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 2001 2000
South Atlantic 20% 20%
West North Central 17 18
East North Central 15 16
Mountain 17 16
West South Central 13 12
Pacific 9 7
New England 4 6
Middle Atlantic 5 5
--- ---
Total 100% 100%
--- ---
Property Type 2001 2000
Office buildings 29% 28%
Retail/shopping centers 24 27
Apartments 17 17
Industrial buildings 14 15
Other 16 13
--- ---
Total 100% 100%
--- ---
The carrying amounts and fair values of First mortgage loans on real estate at
Dec. 31 are below. The fair values are estimated using discounted cash flow
analyses, using market interest rates currently being offered for loans with
similar maturities.
2001 2000
Carrying Fair Carrying Fair
amount value amount value
First mortgage loans on real estate $345,369 $348,873 $359,319 $356,283
Reserve for losses (1,935) -- (744) --
-------- -------- -------- --------
Net first mortgage loans on
real estate $343,434 $348,873 $358,575 $356,283
-------- -------- -------- --------
At Dec. 31, 2001 and 2000, commitments for fundings of first mortgage loans, at
market interest rates, aggregated $7,100 and $1,200, 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:
2001
Average Average
gross additional
Reserve accumulation credit
balance rate rate
Installment certificates:
Reserves to mature:
With guaranteed rates $ 14,367 3.50% .50%
Without guaranteed rates (A) 178,808 -- 3.94
Additional credits and accrued interest 5,082 3.18 --
Advance payments and accrued interest (C) 645 3.26 .21
Other 33 -- --
Fully paid certificates:
Reserves to mature:
With guaranteed rates 104,025 3.20 .24
Without guaranteed rates (A) and (D) 3,796,799 -- 2.71
Additional credits and accrued interest 59,948 3.12 --
Due to unlocated certificate holders 219 -- --
------ ---- ----
Total $4,159,926
----------
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
----------
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, 2001, $1,123 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 3.26%. AECC has increased the rate of accrual
to 4.00% through April 30, 2003. 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, 2001 and 2000 was $1,095,531 and $1,063,383,
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 discounted cash
flow analyses 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:
2001 2000
Carrying Fair Carrying Fair
amount value amount value
Reserves with terms of one year or less $3,867,493 $3,872,897 $3,576,811 $3,575,189
Other 292,433 301,621 254,248 254,499
------- ------- ------- -------
Total certificate reserves 4,159,926 4,174,518 3,831,059 3,829,688
Unapplied certificate transactions 2,152 2,152 1,255 1,255
Certificate loans and accrued interest (22,054) (22,054) (25,843) (25,843)
------- ------- ------- -------
Total $4,140,024 $4,154,616 $3,806,471 $3,805,100
---------- ---------- ---------- ----------
6. DIVIDEND RESTRICTION
Certain series of installment certificates outstanding provide that cash
dividends may be paid by AECC only in calendar years for which additional
credits of at least one-half of 1% on such series of certificates have been
authorized by AECC. This restriction has been removed for 2002 and 2003 by
AECC's declaration of additional credits in excess of this requirement.
7. RELATED PARTY TRANSACTIONS ($ NOT IN THOUSANDS)
Investment advisory, joint facilities, technology support and treasury services
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. 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.
Distribution services
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 American
Express Flexible Savings Certificate which occurred March 7, 2001 to May 8, 2001
and Oct. 31, 2001 to Dec. 11, 2001, the distribution fee was lowered to 0.030%
and 0.017%, respectively. For the promotion of the seven- and 13-month interest
rate term Flexible Savings Certificate which occurred Aug. 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:
Number of
certificate
years over
Aggregate fees payable which
subsequent
First Subsequent years' fees
Total year years are payable
On sales effective April 30, 1997 $25.00 $2.50 $22.50 9
------ ----- ------ -
Effective April 25, 2001 fees on the American Express Cash Reserve Certificate
are paid at a rate of 0.0625% of the purchase price at the time of issuance and
0.0625% 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 24, 2001, fees on the American Express 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
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 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, sold
through AEFA, and American Express 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.
Depository fees
The basis for computing fees paid or payable to American Express Trust Company
for depository services is as follows:
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.
Distribution fees
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.
Transfer agent fees
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.
Dividends
The Company paid a $167 million dividend to its parent, American Express
Financial Corporation by transferring at book value certain Collateralized Debt
Obligation (CDO) securities owned by the Company. In part, the dividend was paid
to allow AEFC to transfer the CDO securities and related accrued interest into a
securitization trust.
8. INCOME TAXES
Income tax benefit (expense) as shown in the Statements of Operations for the
three years ended Dec. 31, consists of:
2001 2000 1999
Federal:
Current $26,007 $ 8,586 $(5,978)
Deferred 9,792 (4,941) 1,063
----- ------ -----
35,799 3,645 (4,915)
State (120) (120) (137)
---- ---- ----
Total income tax benefit (expense) $35,679 $ 3,525 $(5,052)
------- ------- -------
Income tax benefit (expense) differs from that computed by using the U.S.
Statutory rate of 35%. The principal causes of the difference in each year are
shown below:
2001 2000 1999
Federal tax benefit (expense) at U.S. statutory rate $30,752 $(4,554) $(13,932)
Dividend exclusion 4,971 8,064 8,730
Tax-exempt interest 41 82 264
Other, net 35 53 23
-- -- --
Federal tax benefit (expense) $35,799 $ 3,645 $ (4,915)
------- ------- --------
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 2001 2000
Investment reserves $13,723 $ 5,081
Certificate reserves 5,743 1,869
Investment unrealized losses -- 28,251
Investments 546 646
Other, net 160 18
--- --
Total deferred tax assets $20,172 $35,865
------- -------
Deferred tax liabilities
Investment unrealized gains $12,389 $ --
Deferred distribution fees 2,721 3,255
Purchased/written call options 5,227 1,523
Dividends receivable 196 543
Return of capital dividends 43 43
-- --
Total deferred tax liabilities 20,576 5,364
------ -----
Net deferred tax (liabilities) assets $ (404) $30,501
------- -------
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 maintains an overall risk management strategy that incorporates the use of
derivative instruments to minimize significant unplanned fluctuations in
earnings that are caused by interest rate and equity market volatility. The
Company enters into interest rate swaps to manage interest rate sensitivity and
enters into options and futures contracts to mitigate the negative effect on
earnings that would result from an increase in the equity markets.
AECC is exposed to risk associated with fluctuating interest payments on certain
certificate products tied to the London Interbank Offered Rate (LIBOR) as the
certificate products reset at shorter intervals than the average maturity of the
investment portfolio. The Company's goal is to manage interest rate sensitivity
by modifying the repricing characteristics of certificate liabilities so that
the interest credited to related investment certificate owners is not adversely
affected by movements in interest rates. As a result of interest rate
fluctuations, the amount of interest paid on hedged liabilities will positively
or negatively impact reported earnings. Income or loss on the derivative
instruments that are linked to the hedged liabilities will generally offset the
effect of this impact. The Company views this strategy as a prudent management
of interest rate sensitivity, such that earnings are not exposed to undue risk
presented by changes in interest rates.
AECC uses interest rate swap contracts to hedge the risk of rising interest
rates on a portion of the certificate products. Interest rate swaps generally
involve the exchange of fixed and variable rate interest rate payments between
two parties, based on a common notional principal amount and maturity date. The
Company is required to pay the counterparty to the contracts a stream of fixed
interest payments, and in turn, receives a stream of LIBOR-based variable
interest payments.
The interest rate swaps qualify for and are designated as cash flow hedges. The
effective portions of changes in the fair value of the derivatives are recorded
in OCI. Amounts are reclassified from OCI to Investment expenses as interest is
credited to certificate reserves. The fair value of the interest rate swaps are
included in Accounts payable and accrued liabilities on the balance sheet.
For the year ended Dec. 31, 2001, AECC recognized no losses on the derivatives
as a result of ineffectiveness. During 2001, $17,616 of unrealized net losses
accumulated in OCI were reclassified into earnings. An estimated $8,000 of the
unrealized losses accumulated in OCI related to derivatives designated as cash
flow hedges will be reclassified into earnings by Dec. 31, 2002. This effect
will occur at the same time as the Company realizes the benefits of lower market
rates of interest on its certificates. The longest period of time over which the
Company is hedging exposure to the variability in future cash flows is
approximately one year.
AECC offers American Express Stock Market Certificates ("SMC") that offer a
return based upon the relative change in a major stock market index between the
beginning and end of the SMC's term. The SMC product contains an embedded
derivative, essentially the equity based return of the certificate, that must be
separated from the host contract and accounted for as a derivative instrument
per SFAS No. 133. As a result of fluctuations in equity markets, and the
corresponding changes in value of the embedded derivative, the amount of
expenses incurred by the Company related to SMC will positively or negatively
impact reported earnings. As a means of hedging its obligations under the
provisions for these certificates, the Company purchases and writes call options
on the major market index. The Company views this strategy as a prudent
management of equity market sensitivity, such that earnings are not exposed to
undue risk presented by changes in equity market levels.
On the same series of certificates, AECC also purchases futures on the major
market index to hedge its obligations. The futures are marked-to-market daily
and exchange traded, exposing the Company to no counterparty risk.
The options and futures contracts do not receive special hedge accounting under
SFAS No. 133. As such, any changes in the fair value of the contracts are taken
through earnings. The fair values of the purchased and written call options are
included in Other qualified assets and Accounts payable and accrued liabilities,
respectively, on the balance sheet. The fair value of the embedded derivatives
are included under Certificate reserves. The gains and losses on the options,
futures and embedded derivative instruments are recognized in Investment
expenses on the statement of operations.
By using derivative instruments, AECC is exposed to credit and market risk.
Credit risk is the possibility that the counterparty will not fulfill the terms
of the contract. The Company 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.
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
manages the market risk associated with interest rate contracts by establishing
and monitoring limits as to the types and degree of risk that may be undertaken.
AECC primarily uses derivatives to manage risk and, therefore, the cash flow and
income effects of the derivatives are generally inverse to the effects of the
underlying hedged transactions.
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 approximate the carrying amounts disclosed in the Balance
Sheets.
A summary of fair values of financial instruments as of Dec. 31, is as follows:
2001 2000
Carrying Fair Carrying Fair
value value value value
Financial assets:
Assets for which carrying values
approximate fair values $ 132,303 $ 132,303 $ 107,309 $ 107,309
Investment securities (note 3) 4,073,901 4,073,901 3,440,682 3,443,630
First mortgage loans on real estate (note 4) 343,434 348,873 358,575 356,283
Derivative financial instruments (note 9) 48,393 48,393 53,015 33,108
Financial liabilities:
Liabilities for which carrying values
approximate fair values 179,080 179,080 4,516 4,516
Certificate reserves (note 5) 4,140,024 4,154,616 3,806,471 3,805,100
Derivative financial instruments (note 9) 32,558 32,558 27,822 15,996
--------- --------- --------- ---------
Quick telephone reference*
(800) 862-7919 American Express
Easy Access Line
Account value, cash transaction information, current rate
information (automated response for Touchtone(R) phones only)
(800) 862-7919 Client Service Organization
Withdrawals, transfers, inquiries
(800) 846-4852 TTY Service
For the hearing impaired
* You may experience delays when call volumes are high.
American Express Certificate Company
70100 AXP Financial Center
Minneapolis, MN 55474
Web site address:
americanexpress.com
Distributed by
American Express
Financial Advisors Inc.
Investment Company Act File #811-00002
S-6008 F (5/02)
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item
Number
Item 13. Other Expenses of Issuance and Distribution.
The expenses in connection with the issuance and distribution
of the securities being registered are to be borne by the
registrant.
Item 14. Indemnification of Directors and Officers.
The By-Laws of IDS Certificate Company provide that it shall
indemnify any person who was or is a party or is threatened to
be made a party, by reason of the fact that he was or is a
director, officer, employee or agent of the company, or is or
was serving at the direction of the company, or any
predecessor corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture,
trust or other enterprise, to any threatened, pending or
completed action, suit or proceeding, wherever brought, to the
fullest extent permitted by the laws of the state of Delaware,
as now existing or hereafter amended.
The By-Laws further provide that indemnification questions
applicable to a corporation which has been merged into the
company relating to causes of action arising prior to the date
of such merger shall be governed exclusively by the applicable
laws of the state of incorporation and by the by-laws of such
merged corporation then in effect. See also Item 17.
Item 15. Recent Sales of Unregistered Securities.
(a) Securities Sold
1999 American Express Special Deposits 50,132,542.00
2000 American Express Special Deposits 29,882,177.00
2001 American Express Special Deposits 11,585,244.00
(b) Underwriters and other purchasers
American Express Special Deposits are marketed by American Express Bank Ltd.
(AEB), an affiliate of American Express Certificate Company, to private banking
clients of AEB in the United Kingdom and Hong Kong.
(c) Consideration
All American Express Special Deposits were sold for cash. The aggregate offering
price was the same as the amount sold in the table above. Aggregate marketing
fees to AEB were $301,946.44 in 1996, $592,068.70 in 1997, $967,791.95 in 1998,
$877,981.60 in 1999, and $807,408.63 in 2000.
(d) Exemption from registration claimed
American Express Special Deposits are marketed, pursuant to the exemption in
Regulation S under the Securities Act of 1933, by AEB in the United Kingdom and
Hong Kong to persons who are not U.S. persons, as defined in Regulation S.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
1. (a) 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.
2. 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.
(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.
(c) Certificate of Amendment, dated September 12, 1995, filed
electronically as Exhibit 3(c) to Post-Effective Amendment
No. 44 to Registration Statement No. 2-55252, is
incorporated herein by reference.
(d) 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.
(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.
(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. Not Applicable.
5. An opinion and consent of counsel as to the legality of the
securities being registered, filed electronically as Exhibit
16(a)5 to Post-Effective Amendment No. 24 to Registration
Statement No. 2-95577 is incorporated by reference.
6. through 9. -- None.
10. (a) Investment Advisory and Services Agreement between Registrant
and American Express Financial Corporation dated March 6,
2002, filed electronically as Exhibit 10(a) to Post-Effective
Amendment No. 51 to Registration Statement No. 2-55252, is
incorporated herein by reference.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) 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.
(l) 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.
(m) 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.
(n) 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.
(o) 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.
(p) Form of Selling Dealer Agreement of American Express
Financial Advisors Inc., filed electronically as Exhibit
10(o) to Pre-Effective Amendment No. 2 to Registration
Statement No. 333-34982, is incorporated herein by
reference.
(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.
(q)(2) Code of Ethics under rule 17j-1 for Registrant's investment
advisor and principal underwriters, filed electronically as
Exhibit 10p(2) to Pre-Effective Amendment No. 1 to
Registration Statement No. 333-34982, is incorporated herein
by reference.
(r) Letter of Representations, dated August 22, 2000, between
Registrant and The Depository Trust Company, filed
electronically as Exhibit 10(r) to Post-Effective Amendment
No. 49 to Registration Statement No. 2-55252, is incorporated
herein by reference.
11. through 22. -- None.
23. Consent of Independent Auditors' Report is filed electronically herewith.
24. (a) Officers' Power of Attorney dated March 6, 2002, filed
electronically as Exhibit 24(a) to Post-Effective Amendment
No. 51 to Registration Statement No. 2-55252 is incorporated
herein by reference.
(b) Directors' Power of Attorney dated March 6, 2002, filed
electronically as Exhibit 24(b) to Post-Effective Amendment
No. 51 to Registration Statement No. 2-55252 is incorporated
herein by reference.
25. through 27. -- None.
(b) The financial statement schedules for American Express Certificate
Company (formerly IDS Certificate Company), filed electronically as
Exhibit 16(b) in Post-Effective Amendment No. 51 to Registration
Statement No. 2-55252, are incorporated by reference.
Item 17. Undertakings.
Without limiting or restricting any liability on the part of the
other, American Express Financial Advisors Inc. (formerly, IDS
Financial Services Inc.), as underwriter, will assume any
actionable civil liability which may arise under the Federal
Securities Act of 1933, the Federal Securities Exchange Act of
1934 or the Federal Investment Company Act of 1940, in addition
to any such liability arising at law or in equity, out of any
untrue statement of a material fact made by its agents in the due
course of their business in selling or offering for sale, or
soliciting applications for, securities issued by the Company or
any omission on the part of its agents to state a material fact
necessary in order to make the statements so made, in the light
of the circumstances in which they were made, not misleading (no
such untrue statements or omissions, however, being admitted or
contemplated), but such liability shall be subject to the
conditions and limitations described in said Acts. American
Express Financial Advisors Inc. will also assume any liability of
the Company for any amount or amounts which the Company legally
may be compelled to pay to any purchaser under said Acts because
of any untrue statements of a material fact, or any omission to
state a material fact, on the part of the agents of American
Express Financial Advisors Inc. to the extent of any actual loss
to, or expense of, the Company in connection therewith. The
By-Laws of the Registrant contain a provision relating to
Indemnification of Officers and Directors as permitted by
applicable law.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on
April 26, 2002.
AMERICAN EXPRESS CERTIFICATE COMPANY
By: /s/ Paula R. Meyer*
-----------------------
Paula R. Meyer, President
Pursuant to the requirements of the Securities Act of 1933, this amendment has
been signed below by the following persons in the capacities indicated on April
26, 2002.
Signature Capacity
/s/ Paula R. Meyer* ** President and Director
- ---------------------- (Principal Executive Officer)
Paula R. Meyer
/s/ David L. Yowan * Vice President and Treasurer
- ---------------------- (Principal Financial Officer)
David L. Yowan
/s/ Philip C. Wentzel* Vice President and Controller
- ---------------------- (Principal Accounting Officer)
Philip C. Wentzel
/s/ Rodney P. Burwell** Director
- -----------------------
Rodney P. Burwell
Director
- ----------------------
Jean B. Keffeler
/s/ Thomas R. McBurney** Director
- ------------------------
Thomas R. McBurney
/s/ Kent M. Bergene** Director
- ---------------------
Kent M. Bergene
/s/ Walter S. Berman** Director
- ----------------------
Walter S. Berman
* Signed pursuant to Officers' Power of Attorney dated March 6, 2002, filed
electronically as Exhibit 24(a) to Post-Effective Amendment No. 51 to
Registration Statement No. 2-55252 by:
/s/ Eileen J. Newhouse
- ----------------------
Eileen J. Newhouse
** Signed pursuant to Directors' Power of Attorney dated March 6, 2002, filed
electronically as Exhibit 24(b) to Post-Effective Amendment No. 51 to
Registration Statement No. 2-55252, by:
/s/ Eileen J. Newhouse
- ----------------------
Eileen J. Newhouse