SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM S-1
POST-EFFECTIVE AMENDMENT NUMBER 30 TO
REGISTRATION STATEMENT NUMBER 333-09611
American Express Preferred Investors 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.)
70100 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)
H. Bernt von Ohlen - 50605 AXP Financial Center,
Minneapolis, MN 55474, (612) 671-7981
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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. 30 TO
REGISTRATION STATEMENT NO. 333-09611
Cover Page
Prospectus
Part II Information
Signatures
Exhibits
(logo)
American
Express(R)
Certificates
American Express
Preferred Investors
Certificate
Prospectus April 28, 2004
Combines a competitive fixed rate of return with principal
guaranteed by American Express Certificate Company.
American Express Certificate Company (AECC) issues American Express Preferred
Investors Certificates. You may:
o Purchase this certificate in any amount from $250,000 through $5 million.
o Select a term of one, two, three, six, 12, 24 or 36 months.
o Invest in successive terms up to a total of 20 years from the issue date of
the certificate.
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. 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.
(logo)
AMERICAN
EXPRESS
(R)
Initial Interest Rates
AECC guarantees a fixed rate of interest for each term. For the initial term,
the rate will be within a specified range of certain average interest rates,
generally referred to as the London Interbank Offered Rates (LIBOR). See "About
the Certificate" for more explanation.
Here are the interest rates in effect April 28, 2004:
Term Simple interest rate* Effective annualized yield**
1 month 0.73% 0.73%
2 month 0.75% 0.75%
3 month 0.77% 0.77%
6 month 0.88% 0.88%
12 month 1.19% 1.19%
24 month 1.19% 1.19%
36 month 1.19% 1.19%
* These are the rates for investments of $250,000. Rates may depend on the
factors described in "Rates for New Purchases" and "Promotions and Pricing
Flexibility" under "About the Certificate."
** Assuming monthly compounding for 12 months and a $250,000 purchase.
These rates may or may not be in effect when you apply to purchase your
certificate. Rates for future terms are set at the discretion of AECC and may
also differ from the rates shown here. See "Rates for New Purchases" under
"About the Certificate" for further information.
AECC may offer different rates for different distribution channels. For more
information call (800) 862-7919.
RISK FACTORS
You should consider the following when investing in this 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 PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Table of Contents
Initial Interest Rates 2p
Risk Factors 2p
About the Certificate 4p
Read and Keep This Prospectus 4p
Investment Amounts and Terms 4p
Face Amount and Principal 4p
Value at Maturity 5p
Receiving Cash During the Term 5p
Interest 5p
Rates for New Purchases 6p
Promotions and Pricing Flexibility 7p
Additional Investments 8p
How to Invest and Withdraw Funds 8p
Buying Your Certificate 8p
Two Ways to Make Investments 9p
Full and Partial Withdrawals 10p
When Your Certificate Term Ends 11p
Transfers to Other Accounts 12p
Two Ways to Request a Withdrawal or Transfer 12p
Three Ways to Receive Payment When You Withdraw Funds 13p
Retirement Plans: Special Policies 14p
Withdrawal at Death 14p
Transfer of Ownership 14p
For More Information 14p
Taxes on Your Earnings 15p
Retirement Accounts 15p
Gifts to Minors 15p
Your TIN and Backup Withholding 15p
Foreign Investors 16p
How Your Money Is Used and Protected 18p
Invested and Guaranteed by AECC 18p
Regulated by Government 19p
Backed by Our Investments 19p
Investment Policies 20p
How Your Money Is Managed 22p
Relationship Between AECC and American Express
Financial Corporation 22p
Capital Structure and Certificates Issued 23p
Investment Management and Services 23p
Distribution 25p
Transfer Agent 25p
Employment of Other American Express Affiliates 25p
Directors and Officers 26p
Independent Auditors 29p
American Express Certificates 30p
Appendix 31p
Annual Financial Information 32p
Summary of Selected Financial Information 32p
Management's Discussion and
Analysis of Financial Condition and
Results of Operations 33p
American Express Certificate Company Responsibility of Management 39p
Report of Ernst & Young LLP Independent Auditors 40p
Financial Statements 41p
Notes to Financial Statements 48p
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3p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
About the Certificate
READ AND KEEP THIS PROSPECTUS
This prospectus describes terms and conditions of your American Express
Preferred Investors Certificate. It contains facts that can help you decide if
the certificate is the right investment for you. Read the prospectus before you
invest and keep it for future reference. No one has the authority to change the
terms and conditions of the American Express Preferred Investors Certificate as
described in the prospectus, or to bind AECC by any statement not in it.
INVESTMENT AMOUNTS AND TERMS
You may purchase the American Express Preferred Investors Certificate in any
amount from $250,000 payable in U.S. currency. As its name suggests, this
certificate is designed to offer attractive interest rates to investors with a
large amount to invest. Unless you receive prior approval from AECC, your total
amount paid in over the life of the certificate, less withdrawals, cannot exceed
$5 million.
After determining the amount you wish to invest, you select a term of one, two,
three, six, 12, 24 or 36 months for which AECC will guarantee an interest rate.
AECC guarantees your principal and interest. Generally, you will be able to
select any of the terms offered. But if your certificate is nearing its 20-year
maturity, you will not be allowed to select a term that would carry the
certificate past its maturity date.
The certificate may be used as an investment for your Individual Retirement
Account (IRA), 401(k) plan account or other qualified retirement plan account.
If so used, the amount of your contribution (investment) will be subject to any
limitations of the plan and applicable federal law.
FACE AMOUNT AND PRINCIPAL
The face amount of the certificate is the amount of your initial investment, and
will remain the same over the life of the certificate. Any investment or
withdrawal within 15 days of the end of a term will be added on or deducted to
determine principal for the new term. The principal is the amount that is
reinvested at the beginning of each subsequent term, and is calculated as
follows:
Principal equals Face amount (initial investment)
plus At the end of a term, interest credited to your account
during the term
minus Any interest paid to you in cash
plus Any additional investments to your certificate
minus Any withdrawals, fees and applicable penalties
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Principal may change during a term as described in "Full and Partial
Withdrawals."
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4p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
For example: Assume your initial investment (face amount) of $500,000 has earned
$7,500 of interest during the term. You have not taken any interest as cash, or
made any withdrawals. You have invested an additional $250,000 at the beginning
of the next term. Your principal for the next term will equal:
$500,000 Face amount (initial investment)
plus 7,500 Interest credited to your account
minus (0) Interest paid to you in cash
plus 250,000 Additional investment to your certificate made in the
current term's grace period
minus (0) Withdrawals and applicable penalties or fees
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$757,500 Principal at the beginning of the next term
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VALUE AT MATURITY
You may continue to invest for successive terms for up to a total of 20 years.
Your certificate matures at 20 years from its issue date. At maturity, you will
receive a distribution for the value of your certificate, which will be the
total of your purchase price, plus additional investments and any credited
interest not paid to you in cash, less any withdrawals and penalties. Some fees
may apply as described in "How to Invest and Withdraw Funds."
RECEIVING CASH DURING THE TERM
If you need your money before your certificate term ends, you may withdraw part
or all of its value at any time, less any penalties that apply. Procedures for
withdrawing money, as well as conditions under which penalties apply, are
described in "How to Invest and Withdraw Funds."
INTEREST
Your investments earn interest from the date they are credited to your account.
Interest is compounded and credited at the end of each certificate month (on the
monthly anniversary of the issue date).
AECC declares and guarantees a fixed rate of interest for each term during the
life of your certificate. We calculate the amount of interest you earn each
certificate month by:
o applying the interest rate then in effect to your balance each
day,
o adding these daily amounts to get a monthly total, and
o subtracting interest accrued on any amount you withdraw during
the certificate month.
Interest is calculated on a 30-day month and 360-day year basis.
This certificate may be available through other distributors or selling agents
with different interest rates or related features and consequently with
different returns. You may obtain information about other such distributors or
selling agents by calling American Express Client Service Corporation at the
telephone numbers listed on the back cover.
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5p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
RATES FOR NEW PURCHASES
AECC has complete discretion to determine whether to accept an application and
sell a certificate. When your completed application is accepted and we have
received your initial investment, we will send you a confirmation of your
purchase showing the rate that your investment will earn. AECC guarantees that
the rate in effect for your initial term will be within a 100 basis point (1%)
range tied to certain average interest rates for comparable length dollar
deposits available on an interbank basis in the London market, and generally
referred to as the London Interbank Offered Rates (LIBOR). For investments of $1
million or more, initial rates for specific terms are determined as follows:
1 month Within a range of 50 basis points below to 50 basis
points above the one-month LIBOR rate.
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2 months Within a range of 50 basis points below to 50 basis
points above the two-month LIBOR rate.
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3 months Within a range of 50 basis points below to 50 basis
points above the three-month LIBOR rate.
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6 months Within a range of 50 basis points below to 50 basis
points above the six-month LIBOR rate.
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12 months Within a range of 50 basis points below to 50 basis
points above the 12-month LIBOR rate.
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24 months Within a range of 25 basis points below to 75 basis
points above the 12-month LIBOR rate. (A 24-month LIBOR rate
is not published.)
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36 months Within a range of 25 basis points below to 75 basis
points above the 12-month LIBOR rate. (A 36-month LIBOR rate
is not published.)
For investments from $500,000 to $999,999, initial rates for specific terms are
determined as follows:
1 month Within a range of 75 basis points below to 25 basis
points above the one-month LIBOR rate.
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2 months Within a range of 75 basis points below to 25 basis
points above two-month LIBOR rate.
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3 months Within a range of 75 basis points below to 25 basis
points above the three-month LIBOR rate.
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6 months Within a range of 75 basis points below to 25 basis
points above the six-month LIBOR rate.
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12 months Within a range of 75 basis points below to 25 basis
points above the 12-month LIBOR rate.
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24 months Within a range of 50 basis points below to 50 basis
points above the 12-month LIBOR rate. (A 24-month LIBOR rate
is not published.)
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36 months Within a range of 50 basis points below to 50 basis
points above the 12-month LIBOR rate. (A 36-month LIBOR rate
is not published.)
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For investments from $250,000 to $499,999, initial rates for specific terms are
determined as follows:
1 month Within a range of 125 basis points below to 25 basis
points below the one-month LIBOR rate.
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2 months Within a range of 125 basis points below to 25 basis
points below the two-month LIBOR rate.
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3 months Within a range of 125 basis points below to 25 basis
points below the three-month LIBOR rate.
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6 months Within a range of 125 basis points below to 25 basis
points below the six-month LIBOR rate.
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12 months Within a range of 125 basis points below to 25 basis
points below the 12-month LIBOR rate.
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24 months Within a range of 100 basis points below to zero basis
points below the 12-month LIBOR rate. (A 24-month LIBOR rate
is not published.)
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36 months Within a range of 100 basis points below to zero basis
points below the 12-month LIBOR rate. (A 36-month LIBOR rate
is not published.)
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Although the minimum investment is $250,000, in the event that your investment
is less than the minimum, the range of initial rates for any given term will be
100 basis points less than the corresponding range of rates for an investment of
$250,000.
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6p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
For example, if the LIBOR rate published on the date rates are determined with
respect to a six-month certificate is 2.00%, the rate declared on a six-month
American Express Preferred Investors Certificate between $500,000 and $999,999
would be between 1.25% and 2.25%. If the LIBOR rate published for a given date
with respect to 12-month deposits is 2.50%, AECC's rates in effect for that date
for the 24- and 36-month American Express Preferred Investors Certificates
between $500,000 and $999,999 would be between 2.00% and 3.00%. When your
application is accepted, you will be sent a confirmation showing the rate that
your investment will earn for the first term.
LIBOR is the interbank-offered rates for dollar deposits at which major
commercial banks will lend for specific terms in the London market. Generally,
LIBOR rates quoted by major London banks will be the same. However, market
conditions, including movements in the U.S. prime rate and the internal funding
position of each bank, may result in minor differences in the rates offered by
different banks. LIBOR is a generally accepted and widely quoted interest-rate
benchmark. The average LIBOR rate used by AECC is published on the Chicago
Mercantile Exchange Web site at www.cme.com.
Rates for new purchases are reviewed and may change daily. The rate that is in
effect for your chosen term will be the higher of:
o the rate in effect for your chosen term on the date your completed
application is accepted at AECC's corporate office,
o or the rate in effect for your chosen term on the business day preceding
the date your completed application is accepted at AECC's corporate office.
The interest rates printed in the front of this prospectus may or may not have
changed on the date your application to invest is accepted. Rates for new
purchases may vary depending on the amount you invest, but will always be within
the 100 basis point range described above.
Interest rates for the term you have selected will not change once the term has
begun, unless a withdrawal reduces your account value to a point where we pay a
lower interest rate, as described in "Full and Partial Withdrawals" under "How
to Invest and Withdraw Funds."
PROMOTIONS AND PRICING FLEXIBILITY
AECC may sponsor or participate in promotions involving one or more of the
certificates and their respective terms. For example, we may offer different
rates to new clients, to existing clients, or to individuals who have purchased
other products or used other services of American Express Company or its
subsidiaries or affiliates. 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. These rates will be within a range
described in "Rates for New Purchases."
These promotions will generally be for a specified period of time. If we offer a
promotion, the rates for new purchases will be within the range of rates
described under "Rates for New Purchases."
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7p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Rates for future terms: Interest on your certificate for future terms may be
greater or less than the rates you receive during your first term. In setting
future interest rates, a primary consideration will be the prevailing investment
climate, including the LIBOR rates. Nevertheless, we have complete discretion as
to what interest rate shall be declared beyond the initial term. If LIBOR is no
longer publicly available or feasible to use, AECC may use another, similar
index as a guide for setting rates.
ADDITIONAL INVESTMENTS
You may make investments within 15 calendar days after the end of a term (the
grace period). About one week before the end of the term you have selected for
your certificate, we will send you a notice indicating your term end date.
Otherwise, to find out your term end date and/or the current interest rate,
contact AECSC at the telephone numbers listed on the back cover. The interest
rate for your next term can be obtained by calling this number after 12:00 noon
Central time on the business day preceding your renewal date. Your confirmation
will show the applicable rate. However, unless you receive prior approval from
AECC your investment may not bring the aggregate net investment of any one or
more certificates held by you (excluding any interest added during the life of
the certificate and less withdrawals) over $5 million.
How to Invest and Withdraw Funds
BUYING YOUR CERTIFICATE
Your American Express financial advisor will 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, we will send you a
confirmation of your purchase, indicating your account number and applicable
rate of interest for your first term, as described under "Rates for New
Purchases." See "Purchase policies" below.
Important: When you open an account, you must provide 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 You have 15 days from the date of purchase to cancel your investment
without penalty by writing the AECSC at the address on the back of this
prospectus. If you decide to cancel your certificate within this 15-day
period, you will earn interest at the rate declared for your current term.
o AECC has complete discretion to determine whether to accept an application
and sell a certificate.
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8p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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."
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, American Express
Financial Corporation (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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9p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
FULL AND PARTIAL WITHDRAWALS
You may withdraw your certificate for its full value or make a partial
withdrawal of $100 or more at any time. If you purchase this certificate for an
IRA, 401(k), or other retirement plan account, early withdrawals or cash
payments of interest taken prematurely may be subject to IRS penalty taxes.
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 Full and partial withdrawals of principal are subject to penalties,
described below.
o Interest payments in cash may be sent to you at the end of each certificate
month, quarter, semiannual or annual basis or end of term.
o If a withdrawal reduces your account value to a point where we pay a lower
interest rate, you will earn the lower rate from the date of the
withdrawal.
o Partial withdrawals during a term must be at least $100. You may not make a
partial withdrawal if it would reduce your certificate balance to less than
$250,000. If you request such a withdrawal, we will contact you for revised
instructions.
o Scheduled partial withdrawals may be made monthly, quarterly, semiannually,
annually and at term end.
o Because we credit interest on your certificate's monthly anniversary,
withdrawals before the end of the certificate month will result in loss of
accrued interest on the amount withdrawn. You'll get the best result by
timing a withdrawal at the end of the certificate month -- that is, on an
interest crediting date.
Penalties for early withdrawal during a term: When you request a full or partial
withdrawal, we pay the amount you request:
o first from interest credited during the current term,
o then from the principal of your certificate.
Any withdrawals, (other than of interest credited) during a term are deducted
from the principal and are used in determining any withdrawal charges.
Withdrawal penalties: For withdrawals during the term of more than the interest
credited that term, a 2% withdrawal penalty will be deducted from the account's
remaining balance. 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.
For example, assume you invest $1 million in a certificate and select a two-year
term. Four months later assume you have earned $27,000 in interest. The
following demonstrates how the withdrawal charge is deducted:
When you withdraw a specific amount of money in excess of the interest credited,
we would have to withdraw somewhat more from your account to cover the
withdrawal charge. For instance, suppose you request a $100,000 check on a $1
million investment. The first $27,000 paid to you is interest earned that term,
and the remaining $73,000 paid to you is principal. We would send you a check
for $100,000 and deduct a withdrawal charge of $1,460 (2% of $73,000) from the
remaining balance of your certificate. Your new balance would be $925,540.
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10p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Total investments $1,000,000
Interest credited 27,000
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Total balance $1,027,000
Requested check $ 100,000
Credited interest withdrawn (27,000)
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Remaining portion of requested withdrawal- subject to penalty $ 73,000
Withdrawal charge percent 2%
Actual withdrawal penalty $ 1,460
Balance prior to withdrawal $1,027,000
Requested withdrawal check (100,000)
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Withdrawal penalty (1,460)
Total balance after withdrawal $ 925,540
================================================================================
Additionally if you make a withdrawal during a certificate month, you will lose
the entire amount of accrued but uncredited interest for the month on the amount
withdrawn. Reducing your amount below $1 million would also cause it to earn
interest at a lower rate.
For more information on withdrawal charges, talk with your American Express
financial advisor or call the Client Service Organization at the number on the
back cover.
WHEN YOUR CERTIFICATE TERM ENDS
About one week before the end of the term you have selected for your
certificate, we will send you a notice indicating your term end date. Otherwise
to find out your term end date and/or the current interest rates, contact AECSC
at the telephone number listed on the back cover. The interest rate for your
next term can be obtained by calling this number after 12:00 noon Central time
on the business day preceding your renewal date. When your certificate term ends
we will automatically renew your certificate for the same term unless you notify
us otherwise.
If you wish to select a different term, you must notify us either by telephone
or in writing before the end of the grace period. You will not be allowed to
select a term that would carry the certificate past its 20-year maturity date.
The interest rates that will apply to your new term will be those in effect on
the day the new term begins. We will send you a confirmation showing the rate of
interest that will apply to the new term you have selected. This rate of
interest will not be changed during that term.
If you want to withdraw your certificate without a withdrawal charge, you must
notify us within 15 calendar days following the end of a term. If you decide to
cancel your certificate within this 15 day period you will earn interest at the
rate declared for your current term.
You may also add to your investment within the 15 calendar days following the
end of your term. See "Additional Investments" under "About the Certificate."
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11p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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).
TWO WAYS TO REQUEST A WITHDRAWAL OR TRANSFER
1 By phone
Call AECSC at the telephone numbers listed on the back cover.
o Maximum telephone withdrawal 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 AECSC.
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 Withdrawals 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).
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12p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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 $250,000. If the
balance would be less than $1,000, we will deduct the fee from the proceeds
of the withdrawal.
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.
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13p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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 IRAs
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 70 1/2 or upon the owner's death.
WITHDRAWAL AT DEATH
If a certificate is surrendered upon the client's death, any applicable
surrender charge will be waived. In addition, if an IRA termination fee is
applicable, it will also be waived.
TRANSFER OF OWNERSHIP
While this certificate is not negotiable, AECC will transfer ownership upon
written notification to AECSC. 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 AECSC 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.
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14p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Taxes on Your Earnings
Interest on your certificate is taxable when credited to your account. Each
calendar year we provide the 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."
RETIREMENT ACCOUNTS
If this certificate is held in an IRA or other qualified plan account, certain
income tax rules apply to withdrawals.
Income Tax Withholding: When you take a distribution from an IRA, 10% of the
amount must be withheld for federal income taxes, unless you elect to not have
the tax withholding apply. When you take a distribution from a qualified plan
account, such as a 401(k) or 403(b), 20% of the amount must be withheld for
federal income taxes unless the distribution is directly rolled over to another
qualified plan or IRA.
Tax Penalties: In general, distributions from IRAs and other qualified plan
accounts are also subject to an IRS 10% premature distribution penalty tax
unless the distribution is made after age 59 1/2 or to your beneficiaries
following your death, or you are disabled. Other exceptions may also apply.
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
$1,600 for the year 2004 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.
YOUR TIN AND BACKUP WITHOLDING
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 28% 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.
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15p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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 (Uniform The minor
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 trust or The legal entity (not the personal
estate representative or trustee, unless
no legal entity is designated in
the account title)
- ------------------------------------------- ------------------------------------
Sole proprietorship or single-owner LLC The owner
- ------------------------------------------- ------------------------------------
Partnership or multi-member LLC The partnership
- ------------------------------------------- ------------------------------------
Corporate or LLC electing corporate The corporation
status on Form 8837
- ------------------------------------------- ------------------------------------
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 also may
obtain the form on the Internet at www.irs.gov.
FOREIGN INVESTORS
Also, the U.S. Internal Revenue Service (IRS) has issued 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 participates in various
tax treaties with foreign countries, which provide for sharing of tax
information between the United States and such foreign countries.
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.
Form W-8 must be supplied with a permanent residence address 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.
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16p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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 other 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 Foreign 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 Form W-8 must be resupplied every four calendar years, up from three years
with the prior form.
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 28% backup withholding on interest
payments and withdrawals from certificates.
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17p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Transfers on death: 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 Preferred Investors Certificate. We are by far the largest issuer of
face-amount certificates in the United States, with total assets of more than
$5.2 billion and a net worth in excess of $323 million on Dec. 31, 2003.
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 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.
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18p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
REGULATED BY GOVERNMENT
Because the American Express Preferred Investors Certificate is a security, its
offer and sale are subject to regulation under federal and state securities
laws. (The American Express Preferred Investors 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, 2003, the
amortized cost of these investments exceeded the required carrying value of our
outstanding certificates by more than $142.2 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.
BACKED BY OUR INVESTMENTS
Our investments are varied and of high quality. This was the composition of
our portfolio as of Dec. 31, 2003:
Type of investment Net amount invested
Government agency bonds 53%
Corporate and other bonds 34
Mortgage loans and other loans 10
Cash and cash equivalents 1
Preferred stocks 1
Structured investments 1
As of Dec. 31, 2003 about 96% 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.
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19p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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, 2003 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, 2003, AECC held about 4% of its investment portfolio (including
bonds, preferred stocks and mortgages) in investments rated below investment
grade.
Purchasing securities on margin
We will not purchase any securities on margin or participate on a joint basis or
a joint-and-several basis in any trading account in securities.
Commodities
We have not and do not intend to purchase or sell commodities or commodity
contracts except to the extent that transactions described in "Financial
transactions including hedges" in this section may be considered commodity
contracts.
Underwriting
We do not intend to engage in the public distribution of securities issued by
others. However, if we purchase unregistered securities and later resell them,
we may be considered an underwriter (selling securities for others) under
federal securities laws.
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20p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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.
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
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21p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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.
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.
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22p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
During its many years in operation, AEFC has become a leading manager of
investments in mortgages and securities. 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, 2003, AECC had issued (in face amount)
$772,079,620 of installment certificates and $2,468,179,643 of single payment
certificates. As of Dec. 31, 2003, AECC had issued (in face amount)
$14,940,140,606 of installment certificates and $27,649,838,539 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.
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23p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
For its services, we pay AEFC a monthly fee, equal on an annual basis to a
percentage of the total book value of certain assets (included assets).
Advisory and services fee computation
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 bank loans is 0.35%.
Advisory and services fee for the past three years
Year Total fees Percentage of included assets
2003 $10,436,023 23%
2002 9,979,742 23
2001 9,248,275 24
Estimated advisory and services fees for 2004 are $10,533,000.
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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24p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
DISTRIBUTION
Under a Distribution Agreement with American Express Financial Advisors Inc.
we pay for the distribution of this certificate as follows:
o 0.165% of the initial payment on the issue date of the
certificate, and
o 0.165% of the certificate's reserve at the beginning of the second and
subsequent quarters from issue date.
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 $30,209,889 during the year ended Dec. 31,
2003. We expect to pay American Express Financial Advisors Inc. distribution
fees amounting to $27,725,000 during 2004.
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, 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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25p AMERICAN EXPRESS PREFERRED INVESTORS 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 $72,289 during 2003 to directors not employed by AEFC.
Independent Board Members*
Name, address, age Position held with Principal Other Committee
Registrant and occupations directorships memberships
length of service during past five
years
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Karen M. Bohn Board member President and Alerus Financial Audit
6620 Iroquois Trail since 2002 CEO, Galeo Group Corp., Ottertail
Edina, MN 55439 LLC; Independent Corporation,
Born in 1953 business American Express
consultant Bank, FSB
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Rodney P. Burwell Board member Chairman, Xerxes TCF Financial Audit, Dividend
7901 Xerxes Avenue South since 1999 Corporation
Suite 201 (fiberglass
Bloomington, MN 55431 storage tanks)
Born in 1939
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Jean B. Keffeler Board member Retired business Audit
P.O. Box 1377 since 1999 executive
Livingston, MT 59047
Born in 1945
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Thomas R. McBurney Board member President, The Valspar Audit, Dividend
4900 IDS Center since 1999 McBurney Corporation
80 South Eighth Street Management Advisors (paints)
Minneapolis, MN 55402
Born in 1938
- ------------------------------- -------------------- -------------------- ------------------- --------------------
* Mr. Burwell, Ms. Keffeler and Mr. McBurney also serve as directors of IDS
Life Series Fund, Inc., IDS Life Insurance Company of New York and American
Centurion Life Assurance Company which are indirectly controlled by AEFC.
- --------------------------------------------------------------------------------
26p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Board Members Affiliated with American Express Certificate Company**
Name, address, age Position held with Principal Other Committee
Registrant and occupations directorships memberships
length of service during past five
years
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Kent M. Bergene Board member Vice President -
435 AXP Financial Center since 2001 Products Group of
Minneapolis, MN 55474 AEFC, since 2001;
Born in 1958 Director -
Variable Annuity
Products,
1998-2001
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Walter S. Berman Board member Executive Vice
50115 AXP Financial Center since 2002 and President and
Minneapolis, MN 55474 Treasurer since Corporate
Born in 1942 2003 Treasurer -
American Express
Company (AMEX) since
2002. Chief
Financial Officer -
AEFA since 2001.
Various senior
financial positions
including Treasurer
of IBM, at other
companies from
1996 to 2001
- ------------------------------- -------------------- -------------------- ------------------- --------------------
Paula R. Meyer Board member and Senior Vice Dividend,
596 AXP Financial Center President since President and Investment
Minneapolis, MN 55474 1998 General Manager -
Born in 1954 Mutual Funds,
AEFC, since 2002; Vice
President and Managing
Director - American Express
Funds, AEFC, 2000-2002;
Vice President, AEFC,
1998-2000
- ------------------------------- -------------------- -------------------- ------------------- --------------------
** Interested person by reason of being an officer, director and/or employee
of AEFC.
- --------------------------------------------------------------------------------
27p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Executive Officers
Name, address, age Position held with Principal occupations during Other Committee
Registrant and past five years directorships memberships
length of service
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
Paula R. Meyer Board member and Senior Vice President and General Dividend,
596 AXP Financial Center President since Manager - Mutual Funds, AEFC, Investment
Minneapolis, MN 55474 1998 since 2002; Vice President and
Born in 1954 Managing Director - American
Express Funds, AEFC, 2000-2002;
Vice President, AEFC, 1998-2000
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
Brian J. McGrane Vice President and Vice President - Lead Financial
807 AXP Financial Center Chief Financial Officer - Asset Management
Minneapolis, MN 55474 Officer since 2003 Businesses, AEFC, since 2003;
Born in 1971 Vice President - Lead Financial
Officer - Institutional and
Brokerage, AEFC, 2002-2003;
Vice President - Lead
Financial Officer - US
Brokerage, AEFC, 2001-2002;
Director, Financial
Standards and Accounting
Policy - AEFC, 1999-2001
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
Jeryl A. Millner Vice President and Vice President and Lead Financial
50807 AXP Financial Center Controller since Officer, Insurance, Annuities and
Minneapolis, MN 55474 2003 Certificates of AEFC, since 2003;
Born in 1959 ING Group, Second Vice President,
Controller - U.S. Life Group,
2000-2002; ReliaStar Financial
Corp., Second Vice President,
Controller - ReliaStar Life and
Annuity, 1999-2000; ReliaStar
Financial Corp., Vice President,
Chief Financial Officer and
Treasurer - Northern Life Ins.
Co., 1998-1999
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
Walter S. Berman Board member Executive Vice President and
50115 AXP Financial Center since 2002 and Corporate Treasurer - American
Minneapolis, MN 55474 Treasurer since Express Company (AMEX) since
Born in 1942 2003 2002. Chief Financial Officer -
AEFA since 2001. Various senior
financial positions including
Treasurer of IBM, at other
companies from 1996 to 2001
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
Lorraine R. Hart Vice President - Vice President - Investments Investment
53643 AXP Financial Center Investments Administration Officer, AEFC,
Minneapolis, MN 55474 since 2003; Vice President -
Born in 1951 Insurance Investments, AEFC,
1989-2003
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
- --------------------------------------------------------------------------------
28p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Executive Officers (continued)
Name, address, age Position held with Principal occupations during Other Committee
Registrant and past five years directorships memberships
length of service
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
Michelle M. Keeley Vice President - Senior Vice President - Fixed Investment
257 AXP Financial Center Investments since Income, AEFC, since 2002;
Minneapolis, MN 55474 2003 Managing Director, Zurich Global
Born in 1964 Assets, 2000-2002; Managing
Director, Zurich Scudder
Investments, 1999-2000
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
H. Bernt von Ohlen Vice President, Vice President and Group Counsel,
50607 AXP Financial Center General Counsel, AEFC, since 2000; Partner,
Minneapolis, MN 55474 and Secretary D'Ancona & Pflaum LLC,
Born in 1946 since September 1999-2000; Counsel, Heartland
2002 Group, Inc., 1998-1999
- ------------------------------- -------------------- ----------------------------------- ------------------- --------------------
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, independent auditors, Minneapolis, Minnesota have audited our
financial statements at December 31, 2003 and 2002 and for each of the years in
the three-year period ended Dec. 31, 2003, as set forth in their report. We have
included these financial statements in the prospectus in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing. Ernst & Young LLP is also the auditor for American Express Company,
the parent company of AEFC and AECC.
- --------------------------------------------------------------------------------
29p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
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 Market Strategy Certificate -- A certificate that pays interest
at a fixed rate or linked to one-year stock market performance, as measured by a
broad market index, for a series of one-year terms starting every month or at
other intervals the client selects.
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.
- --------------------------------------------------------------------------------
30p AMERICAN EXPRESS PREFERRED INVESTORS 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.
- --------------------------------------------------------------------------------
31p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Annual Financial Information
SUMMARY OF SELECTED FINANCIAL INFORMATION
The following selected financial information was derived from AECC's 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 further
information.
Year Ended December 31, (Thousands) 2003 2002 2001 2000 1999
Statements of Operations Data(a)
Investment income $ 264,238 $ 221,151 $ 204,345 $ 222,535 $ 221,426
Investment expenses 44,417 43,626 44,050 43,952 44,317
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income before provision
for certificate reserves and
income tax (expense) benefit 219,821 177,525 160,295 178,583 177,109
Net provision for certificate reserves 141,483 100,252 155,387 155,461 138,555
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income before
income tax (expense) benefit 78,338 77,273 4,908 23,122 38,554
Income tax (expense) benefit (27,296) (24,866) 3,348 (14) (4,615)
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 51,042 52,407 8,256 23,108 33,939
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
in securities of unaffiliated issuers
before income taxes 2,944 (9,899) (92,375) (10,110) 1,250
Income tax (expense) benefit (1,031) 3,631 32,331 3,539 (437)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,913 (6,268) (60,044) (6,571) 813
Net income -- wholly-owned subsidiary -- -- -- -- 4
Cumulative effect of accounting change -- -- (397) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 52,955 $ 46,139 $ (52,185) $ 16,537 $ 34,756
- ----------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared
$ -- $ -- $ -- $ 5,000 $ 40,000
Capital Dividends Declared
-- -- 166,906 -- --
(Return of capital to) contributions from AEFC
(50,000) (10,000) 240,000 -- --
Balance Sheet Data(a)
Total assets $5,255,592 $5,199,769 $4,642,734 $4,043,806 $3,771,411
Certificate loans $ 15,606 $ 18,614 $ 21,807 $ 25,547 $ 28,895
Certificate reserves $4,787,817 $4,493,372 $4,159,926 $3,831,059 $3,536,659
Shareholder's equity $ 323,213 $ 359,389 $ 263,005 $ 166,514 $ 141,702
- ----------------------------------------------------------------------------------------------------------------------------
(a) Certain reclassifications of prior period amounts have been made to conform
to the current presentation.
- --------------------------------------------------------------------------------
32p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
American Express Certificate Company's (AECC's) net income is derived primarily
from the after-tax yield on investments and realized investment gains (losses),
less investment expenses and interest credited on certificate reserve
liabilities. Changes in net income trends occur largely due to changes in
investment returns, interest crediting rates to certificate products, the mix of
fully taxable and tax-advantaged investments in AECC's portfolio and from
realization of investment gains (losses). AECC follows accounting principles
generally accepted in the United States (GAAP).
Net income increased $6.8 million, or 14.8 percent, reflecting increased
investment income, increased gross realized gains and decreased gross realized
losses on sale of investments, partially offset by slightly higher investment
expenses and a higher provision expense for certificate reserves. In 2002, the
net income was significantly higher than 2001. The 2001 results included net
pre-tax realized losses on investments of ($92.4 million), primarily due to 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.
Investment income increased $43.1 million, or 19.5 percent, reflecting a $66.0
million increase in net pre-tax gains on equity index options, partially offset
by lower investment portfolio yields. The increase in net pre-tax gains on
equity index options was due to the effect of appreciation in the S&P 500 on the
value of options economically hedging stock market certificate products.
Investment income for 2002 was $16.8 million or 8.2 percent higher than 2001 as
a result of higher levels of invested assets and lower losses on interest rate
swap agreements in 2002.
The favorable impact on investment income from the equity index options was
largely offset by the increase in provision expenses for certificate reserves.
Provision for certificate reserves increased $41.2 million or 41.1 percent
reflecting the effect on stock market certificates of appreciation in the S&P
500 this year versus depreciation last year, partially offset by lower interest
crediting rates on the interest rate sensitive portion of AECC's certificate
product portfolio. The 2002 provision for certificate reserves was significantly
lower than 2001 as a result of lower client interest crediting rates, partially
offset by an increase in certificate reserves during 2002.
AECC's gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $47.1 million
and $23.4 million for the years ended December 31, 2003 and 2002, respectively.
Gross realized losses on sales were ($2.8 million) and ($15.7 million) for the
same periods. AECC also recognized losses of ($36.0 million) and ($15.8 million)
in other-than-temporary impairments on Available-for-Sale securities for the
years ended December 31, 2003 and 2002, respectively. In 2001, gross realized
gains on sales of securities classified as Available-for-Sale were $20.7 million
while gross realized losses on sales of securities classified as
Available-for-Sale were ($83.9 million). AECC also recognized
other-than-temporary impairment losses on Available-for-Sale securities of
($27.9 million) in 2001.
- --------------------------------------------------------------------------------
33p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Certain Critical Accounting Policies
AECC's significant accounting policies are described in Note 1 to the Financial
Statements. The following provides a critical accounting policy on investment
securities valuation that is important to the Financial Statements.
Investment securities valuation
Generally, investment securities are carried at fair value on the balance sheet
with unrealized gains (losses) recorded in other comprehensive income (loss)
within equity, net of income tax provisions (benefits). At December 31, 2003,
AECC had net unrealized pretax gains on Available-for-Sale securities of $74.0
million. Gains and losses are recognized in results of operations upon
disposition of the securities. In addition, losses are recognized when
management determines that a decline in value is other-than-temporary, which
requires judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer downgrade,
default or bankruptcy. AECC also considers the extent to which cost exceeds fair
value, the duration and size of that gap, and management's judgment about the
issuer's current and prospective financial condition. Fair value is generally
based on quoted market prices. As of December 31, 2003, there were $19 million
in gross unrealized losses that related to $1.5 billion of securities based on
fair values, of which only $30 million has been in a continuous unrealized loss
position for twelve months or more. AECC does not believe that the unrealized
loss on any individual security at December 31, 2003 represents an
other-than-temporary impairment, and AECC has the ability and intent to hold
these securities for a time sufficient to recover its amortized cost.
Liquidity and Capital Resources
AECC's principal sources of cash are receipts from sales of face-amount
certificate products and cash flows from investments. AECC's principal uses of
cash are payments to certificate product owners for matured and surrendered
certificates, purchases of investments, and return of capital or dividend
payments to AEFC.
Cash received from sales of certificates totaled $2.6 billion for the year ended
December 31, 2003 compared to $2.0 billion for the year ended December 31, 2002.
Certificate maturities and cash surrenders totaled $2.4 billion for the year
ended December 31, 2003, compared to $1.8 billion and $1.7 billion for the years
ended December 31, 2002 and 2001, respectively.
AECC, as an issuer of face-amount certificates, is impacted by significant
changes in interest rates as interest crediting rates on certificate products
generally reset at shorter intervals than the change in the yield on AECC's
investment portfolio. In view of the continued uncertainty in the investment
markets, AECC continues to invest in securities that provide for more immediate,
periodic interest and principal payments, resulting in improved liquidity. To
accomplish this, AECC continues to invest much of its cash flow in mortgage and
asset-backed securities, and to a lesser extent, intermediate term corporate
debt securities. In addition, AECC enters into interest rate swap contracts that
effectively lengthen the interest crediting rate reset interval on certificate
products. Also, on three series of AECC's certificates, interest is credited to
certificate products 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 equity market sensitive
certificates, AECC purchases and writes index call options on a major stock
market index and, from time to time, enters into futures contracts.
- --------------------------------------------------------------------------------
34p AMERICAN EXPRESS PREFERRED INVESTORS 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 product owner obligations.
Debt securities and marketable equity securities are classified as
Available-for-Sale and are carried at fair value. The Available-for-Sale
classification does not mean AECC expects to sell these securities, but rather
these securities are available to meet possible liquidity needs should there be
significant changes in market interest rates or certificate owner redemptions.
At December 31, 2003, securities classified as Available-for-Sale were carried,
in the aggregate, at a fair market value of $4.5 billion. Based on amortized
costs, fixed maturity securities comprise 90 percent of AECC's total investment
portfolio. Of these securities, 96 percent are investment grade. Investments
primarily include mortgage and asset-backed securities, and to a lesser extent,
corporate debt securities. AECC's corporate debt securities are a diverse
portfolio with concentrations in the following industries: banking and finance,
utilities, communications and media, and transportation. Other than U.S.
Government Agency mortgage-backed securities, no one issuer represents more than
1 percent of AECC's total investment portfolio.
AECC paid AEFC return of capital amounts of $50 million and $10 million during
2003 and 2002, respectively. During the fourth quarter of 2001, AECC paid a $167
million capital dividend to 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, and during 2001,
AECC received $240 million in cash as capital contributions from AEFC.
Cash used in investing activities was $448.7 million and $265.5 million in 2003
and 2002, respectively. This change was primarily due to decreased amounts due
to brokers in 2003, while in 2002, amounts due to brokers increased, and an
increase in purchases of Available-for-Sale securities and other investments,
partially offset by an increase in sales and maturities of such securities.
Cash provided by financing activities was $246.8 million and $332.7 million in
2003 and 2002, respectively. This decrease primarily resulted from a decrease in
net certificate inflows of $45.8 million together with an increase of $40
million of combined return of capital payments to AEFC.
Impact of Recent Market-Volatility on Results of Operations
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 percent 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.
- --------------------------------------------------------------------------------
35p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
Furthermore, the computations do not anticipate actions that may be taken by
management if the hypothetical market changes occur 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 maturity
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 short-term trading
profits for its own account.
AECC's goal is to manage interest rate sensitivity by modifying the length of
the interest crediting rate reset interval on certificate products so that
movements in interest rates do not adversely affect the interest credited to
such certificate products. AEFC holds regularly scheduled investment committee
meetings, which is comprised of senior business managers, to review models
projecting various interest rate scenarios and risk/return measures and their
effect on the profitability of AECC. 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. Part of the committee's strategy includes entering into
interest rate swaps to hedge interest rate risk.
AECC is exposed to risk associated with fluctuating interest payments from
certain certificate products tied to the London Interbank Offering Rate (LIBOR).
As such, certificate product interest crediting rates reset at shorter intervals
than the changes in the investment portfolio yield related to new investments
and reinvestments. Therefore, AECC's spreads may be negatively impacted by
increases in the general level of interest rates. AECC hedges the risk of rising
interest rates by entering into pay-fixed, receive-variable (LIBOR-based)
interest rate swaps that convert fluctuating crediting rate payments to fixed
payments, effectively protecting AECC from unfavorable interest rate movements.
The interest rate swaps are treated as cash flow hedges per Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". At December 31, 2003, AECC had $900 million
notional of interest rate swaps expiring at various dates from January 2004
through February 2005.
AECC is also exposed to risk associated with fluctuations in the equity market
from three series of its certificate products. Such amounts credited to
certificate product owners' accounts are tied to the relative change in a major
stock market index between the beginning and end of the certificates' terms.
AECC purchases and writes equity index call options on a major stock market
index in order to meet such obligations. The recent appreciation in the S&P 500
caused a relatively substantial increase in AECC's provision expense for
certificate reserves, which was effectively offset by an increase in net pre-tax
gains on equity index options.
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 fair
value hedges,
- --------------------------------------------------------------------------------
36p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
cash flow hedges or hedges of a net investment in a foreign operation, based
upon the exposure being hedged. See Note 9 to the Financial Statements for
further discussion of AECC's derivative and hedging activities.
The negative impact on AECC's annual pretax income of a 100 basis point increase
in interest rates, which assumes certificate product interest crediting rate
reset intervals and customer behavior based on the application of proprietary
models, to the book of business at December 31, 2003 and 2002, would be $11.8
million and $0.6 million for 2003 and 2002, respectively. A 10 percent decrease
in the level of a major stock market index would have a minimal impact on AECC's
annual pretax income related as of December 31, 2003 and 2002, because the
income effect is a decrease in option related 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 Certificates product owners' accounts.
The ratio of shareholder's equity, excluding accumulated other comprehensive
income (loss) net of tax, to total assets less certificate loans and net
unrealized gains (losses) on securities classified as Available-for-Sale (the
Capital-to-Assets Ratio) at December 31, 2003 and 2002, was 5.4 percent and 5.5
percent, respectively. In accordance with 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-Assets Ratio of 5 percent.
Other Reporting Matters
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which addresses
consolidation by business enterprises of variable interest entities (VIEs) and
was subsequently revised in December 2003. An entity is subject to consolidation
according to the provisions of FIN 46, if, by design, either (i) the total
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
or, (ii) as a group, the holders of the equity investment at risk lack: (a)
direct or indirect ability to make decisions about an entity's activities; (b)
the obligation to absorb the expected losses of the entity if they occur; or (c)
the right to receive the expected residual returns of the entity if they occur.
In general, FIN 46 requires a VIE to be consolidated when an enterprise has a
variable interest for which it is deemed to be the primary beneficiary which
means that it will absorb a majority of the VIE's expected losses or receive a
majority of the VIE's expected residual return.
FIN 46 did not impact the accounting for $27 million in a minority-owned secured
loan trust (SLT) or $6 million in a collateralized debt obligation traunche
(solely supported by a portfolio of high yield bonds), both of which are managed
by third parties, as AECC is not the primary beneficiary. AECC has a 33 percent
ownership interest in the SLT, which provides returns to investors primarily
based on the performance of an underlying portfolio of high yield loans. The
aggregate fair value of the loans related to AECC's pro rata share of this
structure approximates $92.5 million. AECC's maximum exposure to loss as a
result of its investment in this SLT is represented by the carrying value, which
was $27 million at December 31, 2003.
- --------------------------------------------------------------------------------
37p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
In April 2003, the FASB issued Statement of Financial Accounting Standards
Board (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies
accounting for derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts
entered into or modified and hedging relationships designated after June 30,
2003, and to certain preexisting contracts. SFAS No. 149 did not have a
material impact on AECC's financial statements.
Forward-Looking Statements
Certain statements in Item 7. of this Form 10-K Annual Report contain
forward-looking statements, which are subject to risks and uncertainties. The
words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "should," "could," "likely," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. AECC undertakes no obligation to update or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from these forward-looking statements include, but are not limited
to: AECC's ability to successfully implement a business model that allows for
significant net income growth based on revenue growth that is lower than
historical levels, including the ability to improve its operating expense to
revenue ratio both in the short-term and over time, which will depend in part on
the effectiveness of reengineering and other cost control initiatives, as well
as factors impacting AECC's revenues; AECC's ability to grow its business, over
time, which will depend on AECC's ability to manage its capital needs and the
effect of business mix; the ability to increase investment spending, which will
depend in part on the equity markets and other factors affecting revenues, and
the ability to capitalize on such investments to improve business metrics; the
accuracy of certain critical accounting estimates, including the fair value of
the assets in AECC's investment portfolio (including those investments that are
not readily marketable), fluctuation in the equity and fixed income markets,
which can affect the amount and types of certificate products sold by AECC,
potential deterioration in AECC's high-yield and other investments, which could
result in further losses in AECC's investment portfolio; the ability of AECC to
sell certain high-yield investments at expected values and within anticipated
timeframes and to maintain its high-yield portfolio at certain levels in the
future; and spreads in the certificate businesses; credit trends and the rate of
bankruptcies, which can affect returns on AECC's investment portfolios;
fluctuations in foreign currency exchange rates, which could affect commercial
activities, among other businesses, or restrictions on convertibility of certain
currencies; changes in laws or government regulations, including tax laws
affecting AECC's businesses or that may affect the sales of the products and
services that it offers, and regulatory activity in the areas of customer
privacy, consumer protection, business continuity and data protection; the
adoption of recently issued accounting rules related to the consolidation of
variable interest entities, including those involving collateralized debt
obligations and secured loan trusts, that AECC invests in, which could affect
both AECC's balance sheet and results of operations; and outcomes and costs
associated with litigation and compliance and regulatory matters. A further
description of these and other risks and uncertainties can be found in AECC's
other reports filed with the SEC.
- --------------------------------------------------------------------------------
38p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
AMERICAN EXPRESS CERTIFICATE COMPANY
RESPONSIBILITY OF MANAGEMENT
The management of American Express Certificate Company (AECC) is responsible for
the preparation and fair presentation of its Financial Statements, which have
been prepared in conformity with accounting principles generally accepted in the
United States; and include amounts based on the best judgment of management.
AECC's management is also responsible for the accuracy and consistency of other
financial information included in this filing.
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 which 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.
The internal control system is founded on an ethical climate and includes: (i)
an organizational structure with clearly defined lines of responsibility,
policies and procedures; (ii) a Code of Conduct; and (iii) a careful selection
and training of employees. Internal auditors monitor and assess the
effectiveness of internal control and report their findings to management and
the Board of Directors 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 control system over financial reporting to the
extent they believed necessary to support their report.
- --------------------------------------------------------------------------------
39p AMERICAN EXPRESS PREFERRED INVESTORS CERTIFICATE -- PROSPECTUS
American Express Certificate Company
- --------------------------------------------------------------------------------
Report of Ernst & Young LLP 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, 2003 and 2002, and the related statements of operations,
comprehensive income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 2003. 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, 2003
and 2002, 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, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Yound LLP
Minneapolis, Minnesota
January 26, 2004
American Express Certificate Company
- --------------------------------------------------------------------------------
Financial Statements
Balance Sheets
December 31, (Thousands, except share amount) 2003 2002
Assets
Qualified Assets (Note 2)
Investments in unaffiliated issuers (Note 3):
Cash and cash equivalents $ 25,099 $ 240,323
Available-for-Sale securities 4,509,726 4,389,396
First mortgage loans on real estate and other loans 469,309 452,243
Certificate loans -- secured by certificate reserves 15,606 18,614
- ----------------------------------------------------------------------------------------
Total investments 5,019,740 5,100,576
- ----------------------------------------------------------------------------------------
Receivables:
Dividends and interest 36,007 34,114
Investment securities sold 7,946 24,170
- ----------------------------------------------------------------------------------------
Total receivables 43,953 58,284
- ----------------------------------------------------------------------------------------
Equity index options (Note 9) 153,162 34,403
- ----------------------------------------------------------------------------------------
Total qualified assets 5,216,855 5,193,263
- ----------------------------------------------------------------------------------------
Other Assets
Due from AEFC for federal income taxes 22,963 --
Deferred taxes, net (Note 8) 9,321 --
Deferred distribution fees and other 6,453 6,506
- ----------------------------------------------------------------------------------------
Total other assets 38,737 6,506
- ----------------------------------------------------------------------------------------
Total assets $5,255,592 $5,199,769
========================================================================================
See Notes to Financial Statements
American Express Certificate Company
- --------------------------------------------------------------------------------
Balance Sheets (continued)
December 31, (Thousands, except share amount) 2003 2002
Liabilities and Shareholder's Equity
Liabilities
Certificate Reserves (Note 5):
Installment certificates:
Reserves to mature $ 146,052 $ 168,957
Additional credits and accrued interest 3,514 3,988
Advance payments and accrued interest 499 564
Other 32 34
Fully paid certificates:
Reserves to mature 4,573,514 4,277,348
Additional credits and accrued interest 64,114 42,311
Due to unlocated certificate holders 92 170
- --------------------------------------------------------------------------------------------------
Total certificate reserves 4,787,817 4,493,372
- --------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities:
Due to AEFC (Note 7) 880 887
Due to AEFC for federal income taxes -- 3,908
Due to other affiliates (Note 7) 560 690
Deferred taxes, net (Note 8) -- 29,556
Payable for investment securities purchased 9,173 263,658
Equity index options and other liabilities (Note 9) 133,949 48,309
- --------------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 144,562 347,008
- --------------------------------------------------------------------------------------------------
Total liabilities 4,932,379 4,840,380
- --------------------------------------------------------------------------------------------------
Commitments (Note 4)
- --------------------------------------------------------------------------------------------------
Shareholder's Equity (Note 6)
Common stock, $10 par -- authorized and issued 150,000 shares 1,500 1,500
Additional paid-in capital 323,844 373,844
Retained earnings (accumulated deficits):
Appropriated for pre-declared additional credits and interest 184 811
Appropriated for additional interest on advance payments 15 15
Unappropriated (46,556) (100,142)
Accumulated other comprehensive income -- net of tax (Note 1) 44,226 83,361
- --------------------------------------------------------------------------------------------------
Total shareholder's equity 323,213 359,389
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $5,255,592 $5,199,769
==================================================================================================
See Notes to Financial Statements
American Express Certificate Company
- --------------------------------------------------------------------------------
Statements of Operations
Years ended December 31, (Thousands) 2003 2002 2001
Investment Income
Interest income from unaffiliated investments:
Available-for-Sale securities $204,932 $227,609 $214,534
Mortgage loans on real estate and other loans 27,093 27,719 25,133
Certificate loans 933 1,095 1,293
Dividends 5,074 9,949 19,986
Equity index options (Note 9) 29,538 (36,421) (39,510)
Interest rate swap agreements (Note 9) (5,301) (9,780) (17,616)
Other 1,969 980 525
- --------------------------------------------------------------------------------------------------------------------
Total investment income 264,238 221,151 204,345
- --------------------------------------------------------------------------------------------------------------------
Investment Expenses
AEFC and affiliated company fees (Note 7):
Distribution 29,731 29,762 30,924
Investment advisory and services 10,436 9,980 9,248
Transfer agent 3,378 3,203 3,161
Depository 349 321 285
Other 523 360 432
- --------------------------------------------------------------------------------------------------------------------
Total investment expenses 44,417 43,626 44,050
- --------------------------------------------------------------------------------------------------------------------
Net investment income before provision for certificate reserves
and income tax (expense) benefit $219,821 $177,525 $160,295
- --------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements
American Express Certificate Company
- --------------------------------------------------------------------------------
Statements of Operations (continued)
Years ended December 31, (Thousands) 2003 2002 2001
Provision for Certificate Reserves (Note 5)
According to the terms of the certificates:
Provision for certificate reserves $ 6,043 $ 7,888 $ 10,321
Interest on additional credits 425 543 597
Interest on advance payments 17 19 34
Additional credits/interest authorized by AECC:
On fully paid certificates 132,975 88,201 138,020
On installment certificates 3,379 4,757 7,559
- --------------------------------------------------------------------------------------------------------------------
Total provision for certificate reserves before reserve recoveries 142,839 101,408 156,531
Reserve recoveries from terminations prior to maturity (1,356) (1,156) (1,144)
- --------------------------------------------------------------------------------------------------------------------
Net provision for certificate reserves 141,483 100,252 155,387
- --------------------------------------------------------------------------------------------------------------------
Net investment income before income tax (expense) benefit 78,338 77,273 4,908
Income tax (expense) benefit (Note 8) (27,296) (24,866) 3,348
- --------------------------------------------------------------------------------------------------------------------
Net investment income 51,042 52,407 8,256
- --------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments
Securities of unaffiliated issuers before
income tax (expense) benefit 2,944 (9,899) (92,375)
Income tax (expense) benefit (Note 8) (1,031) 3,631 32,331
- --------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,913 (6,268) (60,044)
- --------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change
(net of income tax benefit of $214) -- -- (397)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 52,955 $ 46,139 $(52,185)
====================================================================================================================
See Notes to Financial Statements
American Express Certificate Company
- --------------------------------------------------------------------------------
Statements of Cash Flows
Years Ended December 31, (Thousands) 2003 2002 2001
Cash Flows from Operating Activities
Net income (loss) $ 52,955 $ 46,139 $ (52,185)
Adjustments to reconcile net income (loss) to net
cash (used in)provided by operating activities:
Cumulative effect of accounting change, net of tax (Note 1) -- -- 397
Interest income added to certificate loans (630) (738) (820)
Amortization of premiums/discounts -- net 14,907 (2,426) (1,483)
Provision for deferred federal income taxes (38,877) (3,288) (9,793)
Net deferred distribution fees (amortized) (479) 1,802 1,525
Net realized (gain) loss on equity index options (29,538) 36,421 39,510
Net realized (gain) loss on investments (2,944) 9,899 92,375
(Increase) decrease in dividends and interest receivable (1,893) 4,184 9,603
Other assets and liabilities, net (6,856) (6,004) (17,564)
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (13,355) 85,989 61,565
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Available-for-Sale investments:
Sales 1,132,131 887,194 989,738
Maturities and redemptions 1,305,953 1,111,493 704,877
Purchases (2,626,239) (2,228,071) (2,435,973)
Other investments:
Sales 81,736 11,166 --
Maturities and redemptions 77,022 88,437 30,307
Purchases (182,293) (234,070) (54,927)
Certificate loans:
Payments 2,805 2,919 3,127
Fundings (1,553) (2,085) (2,830)
Changes in amounts due to and from brokers, net (238,262) 97,482 141,131
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (448,700) (265,535) (624,550)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payments from certificate owners 2,571,209 2,031,414 1,919,769
Net provision for certificate reserves 141,483 100,252 155,387
Certificate maturities and cash surrenders (2,415,861) (1,788,995) (1,734,742)
Proceeds from repurchase agreements 337,600 -- 500
Payments under repurchase agreements (337,600) -- (500)
(Return of capital to) contribution from AEFC (50,000) (10,000) 240,000
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 246,831 332,671 580,414
- -----------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (215,224) 153,125 17,429
Cash and cash equivalents at beginning of year 240,323 87,198 69,769
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 25,099 $ 240,323 $ 87,198
=======================================================================================================================
See Notes to Financial Statements
American Express Certificate Company
- --------------------------------------------------------------------------------
Statements of Comprehensive Income
Years Ended December 31, (Thousands) 2003 2002 2001
Net income (loss) $ 52,955 $ 46,139 $(52,185)
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income net of tax (Note 1)
Cumulative effect of accounting change (Note 1) -- -- (2,187)
- -----------------------------------------------------------------------------------------------------------------------
Unrealized (losses) gains on Available-for-Sale securities:
Unrealized holding (losses) gains arising during period (52,669) 82,904 19,959
Income tax benefit (provision) 18,434 (29,016) (6,986)
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains arising during the period (34,235) 53,888 12,973
- -----------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for (gains) losses
included in net income (loss) (8,260) 8,142 101,754
Income tax provision (benefit) 2,891 (2,850) (35,614)
- -----------------------------------------------------------------------------------------------------------------------
Net reclassification adjustment for (gains) losses
included in net income (loss) (5,369) 5,292 66,140
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized (losses) gains on Available-for-Sale securities (39,604) 59,180 79,113
- -----------------------------------------------------------------------------------------------------------------------
Unrealized losses on interest rate swaps:
Unrealized losses arising during the period (4,579) (8,141) (19,683)
Income tax benefit 1,603 2,849 6,889
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized holding losses arising during the period (2,976) (5,292) (12,794)
- -----------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included in net income (loss) 5,300 9,780 17,616
Income tax benefit (1,855) (3,423) (6,166)
- -----------------------------------------------------------------------------------------------------------------------
Net reclassification adjustment for losses
included in net income (loss) 3,445 6,357 11,450
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on interest rate swaps 469 1,065 (1,344)
- -----------------------------------------------------------------------------------------------------------------------
Net other comprehensive (loss) income (39,135) 60,245 75,582
- -----------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 13,820 $106,384 $ 23,397
=======================================================================================================================
See Notes to Financial Statements
American Express Certificate Company
- --------------------------------------------------------------------------------
Statements of Shareholder's Equity
Years Ended December 31, (Thousands) 2003 2002 2001
Common Stock $ 1,500 $ 1,500 $ 1,500
- -----------------------------------------------------------------------------------------------------------------------
Additional Paid-in Capital
Balance at beginning of year $ 373,844 $ 383,844 $ 143,844
(Return of capital to) contribution from Parent (50,000) (10,000) 240,000
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 323,844 $ 373,844 $ 383,844
=======================================================================================================================
Retained Earnings
Appropriated for pre-declared additional credits/interest (Note 5)
Balance at beginning of year $ 811 $ 1,123 $ 2,684
Transferred to unappropriated retained earnings (627) (312) (1,561)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 184 $ 811 $ 1,123
- -----------------------------------------------------------------------------------------------------------------------
Appropriated for additional interest on advance payments $ 15 $ 15 $ 15
- -----------------------------------------------------------------------------------------------------------------------
Unappropriated (Note 6)
Balance at beginning of year $(100,142) $(146,593) $ 70,937
Net income (loss) 52,955 46,139 (52,185)
Transferred from appropriated retained earnings 627 312 1,561
Other 4 -- --
Capital dividends declared -- -- (166,906)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (46,556) $(100,142) $(146,593)
=======================================================================================================================
Accumulated other comprehensive income -- net of tax (Note 1)
Balance at beginning of year $ 83,361 $ 23,116 $ (52,466)
Net other comprehensive (loss) income (39,135) 60,245 75,582
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 44,226 $ 83,361 $ 23,116
- -----------------------------------------------------------------------------------------------------------------------
Total shareholder's equity $ 323,213 $ 359,389 $ 263,005
=======================================================================================================================
See Notes to Financial Statements
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
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 (AEFC), 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. Face-amount
certificates issued by AECC entitle the certificate owner to receive at maturity
a stated amount of money and interest or credits declared from time to time by
AECC, at its discretion. The certificates issued by AECC are not insured by any
government agency. AECC's certificates are sold primarily by American Express
Financial Advisors Inc. (AEFAI) and American Express Bank Ltd. (AEB), both
affiliates of AECC. AEFAI is registered as a broker dealer in all 50 states, the
District of Columbia and Puerto Rico. AEFC acts as investment advisor for AECC.
As of December 31, 2003, AECC offered nine different certificate products to the
public with specified maturities ranging from ten to twenty years. Within their
specified maturity, most certificates have interest rate terms of one to
thirty-six months. In addition, three types of certificates have interest tied,
in whole or in part, to 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, 401(k) plans and other qualified retirement
plans.
AECC's net investment income is derived primarily from interest and dividends
generated by its investments. AECC's net income is determined by deducting from
net investment income provision expenses for certificate reserves, and other
expenses, including taxes, fees paid to AEFC for investment advisory and other
services, distribution fees paid to AEFAI, and marketing fees paid to AEB, a
wholly-owned indirect subsidiary of American Express Company.
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,
Investors Syndicate Development Corporation, as prescribed by the Securities and
Exchange Commission (SEC) for non-investment company subsidiaries. Certain
reclassifications of prior period amounts have been made to conform to the
current presentation.
Accounting estimates are an integral part of the Financial Statements. In part,
they are based upon assumptions concerning future events. Among the more
significant is investment securities valuation as discussed in detail below.
These accounting estimates reflect the best judgment of management and actual
results could differ.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
Interest income
Interest income is accrued as earned using the effective interest method, which
makes an adjustment for security premiums and discounts, so that the related
security recognizes a constant rate of return on the outstanding balance
throughout its term.
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 original maturities of ninety days or less.
Available-for-Sale investments
Debt securities and marketable equity securities are classified as
Available-for-Sale and carried at fair value. Unrealized gains (losses) on
securities classified as Available-for-Sale are reflected, net of taxes, in
other comprehensive (loss) income as part of Shareholder's Equity.
The basis for determining cost in computing realized gains (losses) on
securities is specific identification. Gains (losses) are recognized in the
results of operations upon disposition of the securities. In addition, losses
are also recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing of
recovery. Indicators of other-than-temporary impairment for debt securities
include issuer downgrade, default or bankruptcy. AECC also considers the extent
to which cost exceeds fair value, the duration of time of that decline and
management's judgment as to the issuer's current and prospective financial
condition. The charges are reflected in net realized gain (loss) on investments
in the statements of operations.
Fair value is generally based on quoted market prices. However, AECC's
investment portfolio also contains structured investments of various asset
quality, which are not readily marketable. As a result, the carrying values of
these structured investments are based on future cash flow projections that
require a significant degree of management judgment as to the amount and timing
of cash payments, defaults and recovery rates of the underlying investments and
as such, are subject to change.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
First mortgage loans on real estate and other loans
First mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses, which is the basis for determining realized gains (losses).
Estimated fair values of mortgage loans on real estate are determined by a
discounted cash flow analysis using mortgage interest rates currently offered
for mortgages of similar maturities. Other loans reflect amortized cost less
reserve for losses. Fair values of other loans represent estimated fair values
when quoted prices are not available.
The reserve for loan losses 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. Additionally, the level of the reserve account is determined based
on several factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the reserve
for loan losses, and believes it is adequate to absorb estimated losses in the
portfolio.
AECC generally stops accruing interest on mortgage loans on real estate 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.
Certificate Reserves
Investment certificates may be purchased either with a lump-sum payment or by
installment payments. Certificate product 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
Distribution fees on sales of certain series of certificate products are
deferred and amortized over the estimated lives of the related certificates,
which is approximately one year and can be up to 10 years. Upon surrender prior
to maturity, unamortized deferred distribution fees are reflected in expenses
and any related surrender charges are reflected as a reduction to the provision
expense for certificate reserves. Products are designed to recover such costs
within the surrender charge period.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
Federal income taxes
AECC's taxable income (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 AEFC 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 AEFC and its subsidiaries that
AEFC will reimburse its subsidiaries for any tax benefits recorded.
Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which addresses
consolidation by business enterprises of variable interest entities (VIEs) and
was subsequently revised in December 2003. An entity is subject to consolidation
according to the provisions of FIN 46, if, by design, either (i) the total
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other parties,
or, (ii) as a group, the holders of the equity investment at risk lack: (a)
direct or indirect ability to make decisions about an entity's activities; (b)
the obligation to absorb the expected losses of the entity if they occur; or (c)
the right to receive the expected residual returns of the entity if they occur.
In general, FIN 46 requires a VIE to be consolidated when an enterprise has a
variable interest for which it is deemed to be the primary beneficiary which
means that it will absorb a majority of the VIE's expected losses or receive a
majority of the VIE's expected residual return.
FIN 46 did not impact the accounting for $27 million in a minority-owned secured
loan trust (SLT) or $6 million in a collateralized debt obligation traunche
(solely supported by a portfolio of high yield bonds), both of which are managed
by third parties, as AECC is not the primary beneficiary. AECC has a 33 percent
ownership interest in the SLT, which provides returns to investors primarily
based on the performance of an underlying portfolio of high yield loans. The
aggregate fair value of the loans related to AECC's pro rata share of this
structure approximates $92.5 million. AECC's maximum exposure to loss as a
result of its investment in this SLT is represented by the carrying value, which
is $27 million at December 31, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards Board
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS No. 149). SFAS No. 149 amends and clarifies accounting
for derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified and hedging relationships designated after June 30, 2003, and
to certain preexisting contracts. SFAS No. 149 did not have a material impact on
AECC's financial statements.
In November 2003, the FASB ratified a consensus on the disclosure provisions of
Emerging Issues Task Force (EITF) Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments". The
disclosure provisions of this rule, which are addressed in Note 3, require
tabular presentation of certain information regarding investment securities with
gross unrealized losses.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
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 $4.8 billion and $4.5 billion at December 31, 2003 and 2002,
respectively. AECC reported Qualified Assets of $5.1 billion and $4.8 billion at
December 31, 2003 and 2002, respectively, excluding net unrealized pretax
appreciation on Available-for-Sale securities of $74 million and $135 million at
December 31, 2003 and 2002, respectively, and unsettled investment purchases of
$9 million and $264 million at December 31, 2003 and 2002, respectively.
Qualified Assets are valued in accordance with such provisions of Minnesota
Statutes as are applicable to investments of life insurance companies. 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 (accounted for on
a trade date basis) of AECC were deposited as follows:
December 31, 2003
-----------------------------------------
Required
(Thousands) Deposits Deposits Excess
- ---------------------------------------------------------------------------------------
Deposits to meet certificate liability
requirements:
Pennsylvania (at market value) $ 162 $ 100 $ 62
Texas, Illinois, New Jersey (at par value) $ 215 $ 185 $ 30
Central Depository (at amortized cost) $5,004,553 $4,742,572 $261,981
- ---------------------------------------------------------------------------------------
December 31, 2002
-----------------------------------------
Required
(Thousands) Deposits Deposits Excess
- ---------------------------------------------------------------------------------------
Deposits to meet certificate liability
requirements:
Pennsylvania (at market value) $ 166 $ 100 $ 66
Texas, Illinois, New Jersey (at par value) $ 215 $ 185 $ 30
Central Depository (at amortized cost) $5,020,340 $4,472,886 $547,454
- ---------------------------------------------------------------------------------------
The assets on deposit with the central depository at December 31, 2003 and 2002
consisted of securities and other loans having a deposit value of $4.6 billion
at both balance sheet dates, mortgage loans on real estate of $331 million and
$339 million, respectively, and other investments of $74 million and $73
million, respectively. Additionally, these assets on deposit include unsettled
purchases of investments in the amount of $9 million and $264 million at
December 31, 2003 and 2002, respectively.
American Express Trust Company is the central depository for AECC. See Note 7.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS IN UNAFFILIATED ISSUERS
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, among other things, review
of market indexes, price levels of current offerings and comparable issues,
price estimates, estimated future cash flows, and market data from independent
brokers.
Investments classified as Available-for-Sale securities at December 31 are
distributed by type as presented below:
2003
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
Mortgage and asset-backed securities $2,605,686 $35,954 $(10,975) $2,630,665
Corporate debt securities 1,710,353 53,497 (7,762) 1,756,088
Stated maturity preferred stock 44,340 1,178 (34) 45,484
Structured Investments 32,592 1,788 -- 34,380
Perpetual preferred stock 17,782 270 -- 18,052
U.S. Government & agency obligations 15,355 350 -- 15,705
State and municipal obligations 9,539 6 (214) 9,331
Common Stock -- 21 -- 21
- -------------------------------------------------------------------------------------------------------
Total $4,435,647 $93,064 $(18,985) $4,509,726
- -------------------------------------------------------------------------------------------------------
2002
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
Mortgage and asset-backed securities $2,938,348 $ 94,528 $ (1,728) $3,031,148
Corporate debt securities 1,172,446 53,394 (15,540) 1,210,300
Stated maturity preferred stock 82,554 1,876 (383) 84,047
Structured Investments 33,470 2,175 -- 35,645
Perpetual preferred stock 17,782 266 -- 18,048
State and municipal obligations 9,424 385 -- 9,809
U.S. Government & agency obligations 362 37 -- 399
- -------------------------------------------------------------------------------------------------------
Total $4,254,386 $152,661 $(17,651) $4,389,396
- -------------------------------------------------------------------------------------------------------
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
The following table provides information about Available-for-Sale securities
with gross unrealized losses and the length of time that individual securities
have been in a continuous unrealized loss position as of December 31, 2003:
(Thousands) Less than 12 months 12 months or more Total
- ------------------------------------------------------------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------
Corporate debt securities $ 444,318 $ (7,147) $15,789 $ (615) $ 460,107 $ (7,762)
Mortgage and other
asset-backed securities 1,006,572 (9,513) 13,742 (1,462) 1,020,314 (10,975)
State and municipal obligations 8,790 (214) -- -- 8,790 (214)
Other -- -- 454 (34) 454 (34)
- ------------------------------------------------------------------------------------------------------------
Total $1,459,680 $(16,874) $29,985 $(2,111) $1,489,665 $(18,985)
- ------------------------------------------------------------------------------------------------------------
Approximately 114 investment positions were in an unrealized loss position as of
December 31, 2003. The gross unrealized losses on these securities are
attributable to a number of factors including changes in interest rates and
credit spreads, and specific credit events associated with individual issuers.
As part of its ongoing monitoring process, management has concluded that none of
these securities are other-than-temporarily impaired at December 31, 2003. AECC
has the ability and intent to hold these securities for a time sufficient to
recover its amortized cost. See the Available-for-Sale Investments section of
Note 1 for information regarding AECC's policy for determining when an
investment's decline in value is other-than-temporary.
The amortized cost and fair value of Available-for-Sale securities, by
contractual maturity at December 31, 2003 are shown below. Cash flows may differ
from contractual maturities because issuers may call or prepay obligations.
Amortized Fair
(Thousands) Cost Value
- ---------------------------------------------------------------------------
Due within one year $ 136,654 $ 138,877
Due from one to five years 1,302,466 1,343,323
Due from five to ten years 370,043 374,833
Due in more than ten years 3,016 3,955
- ---------------------------------------------------------------------------
$1,812,179 $1,860,988
Mortgage and asset-backed securities 2,605,686 2,630,665
Perpetual preferred stock 17,782 18,052
Common Stock -- 21
- ---------------------------------------------------------------------------
Total $4,435,647 $4,509,726
- ---------------------------------------------------------------------------
Mortgage and other asset-backed securities primarily reflect GNMA, FNMA, and
FHLMC securities at December 31, 2003 and 2002.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
Gross realized gains on sales of securities classified as Available-for-Sale,
using the specific identification method, were $47.1 million, $23.4 million and
$20.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Gross realized losses on sales were ($2.8 million), ($15.7
million) and ($83.9 million) for the same periods. AECC also recognized losses
of ($36 million), ($15.8 million) and ($27.9 million) in other-than-temporary
impairments on Available-for-Sale securities for the years ended December 31,
2003, 2002 and 2001, respectively.
AECC's net losses in 2001 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 were associated with AECC'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.
Investments in securities with fixed maturities comprised 90 percent and 85
percent of AECC's total investments at December 31, 2003 and 2002, respectively.
Securities are rated by Moody's and Standard & Poors (S&P), or by AEFC's
internal analysts, using criteria similar to Moody's and S&P, when a public
rating does not exist. Ratings are presented using S&P's convention and if the
two agency's ratings differ, the lower rating is used. A summary of investments
in securities with fixed maturities, at amortized cost, by rating of investment
is as follows:
Rating 2003 2002
- --------------------------------------------------------------------------------
AAA 60% 69%
AA 2 1
A 16 11
BBB 18 16
Below investment grade 4 3
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
Of the securities rated AAA, 94 percent at December 31, 2003 and 2002, are U.S.
Government Agency mortgage-backed securities that are rated by a public rating
agency. At December 31, 2003 and 2002, approximately 6 percent and 9 percent,
respectively, of securities with fixed maturities, other than U.S. Government
Agency mortgage-backed securities, are rated by AEFC's internal analysts.
At December 31, 2003 and 2002 no one issuer, other than U.S. Government Agency
mortgage-backed securities, is greater than 1 percent 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. AECC's board
of directors, using the aforementioned procedures and factors, determine fair
values of such restricted securities.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
In the event AECC were to be deemed to be a distributor of the restricted
securities, it is possible that AECC would be required to bear the costs of
registering those securities under the Securities Act of 1933, although in most
cases such costs would be incurred by the issuer of the restricted securities.
4. INVESTMENTS IN FIRST MORTGAGE LOANS ON REAL ESTATE AND OTHER LOANS
The carrying amounts and fair values of first mortgage loans on real estate and
other loans at December 31 are below
2003 2002
------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------
First mortgage loans on real estate $337,489 $355,442 $342,147 $366,198
Other loans 141,356 138,356 114,319 113,319
Reserve for losses (9,536) -- (4,223) --
- -----------------------------------------------------------------------------------------------------
Net first mortgage and other loans $469,309 $493,798 $452,243 $479,517
- -----------------------------------------------------------------------------------------------------
During the year ended December 31, 2003, AECC held investments in impaired
mortgage or other loans totaling $9.9 million. AECC recognized $0.4 million of
interest income related to such investments for the year ended December 31,
2003. AECC did not hold any investments in impaired mortgage loans or other
loans during 2002 and 2001.
The reserve for loss on mortgage loans and other loans increased to $9.5 million
on December 31, 2003, from $4.2 million at December 31, 2002 and $1.9 million at
December 31, 2001.
At December 31, 2003 and 2002, approximately 7 percent, 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 December 31, is as follows:
Region of the United States of America 2003 2002
- --------------------------------------------------------------------------------
South Atlantic 18% 18%
West North Central 15 15
East North Central 12 13
Mountain 10 13
West South Central 17 17
Pacific 16 12
New England 7 6
Middle Atlantic 5 6
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
Property Type 2003 2002
- --------------------------------------------------------------------------------
Office buildings 42% 41%
Retail/shopping centers 23 20
Apartments 10 14
Industrial buildings 14 15
Other 11 10
- --------------------------------------------------------------------------------
Total 100% 100%
- --------------------------------------------------------------------------------
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
At December 31, 2003 and 2002, commitments for funding of first mortgage loans
on real estate, at market interest rates, aggregated $9.8 million and $13.4
million, 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 first mortgage loans on real estate is restricted to
80 percent or less of the market value of the real estate at the time of the
loan funding. Fair values for these commitments were not substantial at December
31, 2003 and 2002.
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 December 31 were as
follows:
2003
-----------------------------------------
Average Gross Average
Reserve Accumulation Additional
(Dollars in Thousands) Balance Rates Credit Rates
- -----------------------------------------------------------------------------------------
Installment certificates:
Reserves to mature:
With guaranteed rates $ 11,153 4.00% .50%
Without guaranteed rates (a) 134,899 -- .80%
Additional credits and accrued interest 3,514 3.22% --
Advance payments and accrued interest (b) 499 3.35% --
Other 32 -- .32%
Fully paid certificates:
Reserves to mature:
With guaranteed rates 90,149 3.21% .01%
Without guaranteed rates (a) and (c) 4,483,365 -- .53%
Additional credits and accrued interest 64,114 3.05% --
Due to unlocated certificate holders 92
- -----------------------------------------------------------------------------------------
Total $4,787,817
- -----------------------------------------------------------------------------------------
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
2002
-----------------------------------------
Average Gross Average
Reserve Accumulation Additional
(Dollars in Thousands) Balance Rates Credit Rates
- -----------------------------------------------------------------------------------------
Installment certificates:
Reserves to mature:
With guaranteed rates $ 12,663 3.50% .50%
Without guaranteed rates (a) 156,294 -- 1.04%
Additional credits and accrued interest 3,988 3.20% --
Advance payments and accrued interest (b) 564 3.30% --
Other 34 -- .18%
Fully paid certificates:
Reserves to mature:
With guaranteed rates 95,941 3.20% .01%
Without guaranteed rates (a) and (c) 4,181,407 -- .73%
Additional credits and accrued interest 42,311 3.08% --
Due to unlocated certificate holders 170 -- --
- -----------------------------------------------------------------------------------------
Total $4,493,372
- -----------------------------------------------------------------------------------------
(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) Certain series of installment certificates guarantee accrual of interest on
advance payments at an average of 3.26 percent. AECC's rate of accrual is
currently set at 4 percent, which is in effect through April 30, 2004.
(c) American Express Stock Market Certificate, American Express Market Strategy
Certificate and American Express Equity Indexed Savings Certificates 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 52 weeks and may continue for up to 20 successive terms. The
reserve balance on these certificates at December 31, 2003 and 2002 was
$1.3 million and $1 million, respectively.
Certificate maturities and surrenders through loan reductions during the years
ended December 31, 2003 and 2002 were $2.4 million and $3.1 million,
respectively.
On certain series of single payment certificates, additional interest is
pre-declared for periods greater than one year. The retained earnings
appropriated for the pre-declared additional interest at December 31, 2003 and
2002 was $184 thousand and $811 thousand, respectively, which reflects the
difference between certificate reserves on these series, calculated on a
statutory basis, and the reserves maintained per books.
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.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
The carrying amounts and fair values of certificate reserves at December 31,
consisted of the following:
2003 2002
------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------
Reserves with terms of one year or less $4,322,321 $4,320,182 $4,007,664 $4,005,622
Other 465,496 471,427 485,708 497,689
- ----------------------------------------------------------------------------------------------------
Total certificate reserves $4,787,817 $4,791,609 $4,493,372 $4,503,311
Unapplied certificate transactions 3,499 3,499 801 801
Certificate loans and accrued interest (15,798) (15,798) (18,824) (18,824)
- ----------------------------------------------------------------------------------------------------
Total $4,775,518 $4,779,310 $4,475,349 $4,485,288
- ----------------------------------------------------------------------------------------------------
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 one percent on such series of certificates have
been authorized by AECC. This restriction has been removed for 2003 and 2004 by
AECC's declaration of additional credits in excess of this requirement.
7. RELATED PARTY TRANSACTIONS
Investment advisory, joint facilities, technology support, and treasury services
The investment advisory and services agreement with AEFC provides for a
graduated scale of fees equal on an annual basis to 0.750 percent on the first
$250 million of total book
value of assets of AECC, 0.650 percent on the next $250 million, 0.550 percent
on the next $250 million, 0.500 percent on the next $250 million and 0.107
percent 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 and other loans,
real estate and any other asset on which AECC pays an outside advisory or
service fee. The fee paid to AEFC for managing and servicing bank loans is 0.35
percent.
Distribution services
Fees payable to AEFAI on sales of AECC's certificates are based upon terms of
agreements giving AEFAI 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 AEFAI may be
lowered. There were no changes to the distribution fees for the promotion of the
American Express Flexible Savings Certificate, which occurred March 26, 2003 to
May 13, 2003.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
The aggregate fees payable under the agreements is $25 per $1,000 face amount of
installment certificates sold on or after April 30, 1997. The aggregate fees
payable for the first year is $2.50 and the remaining $22.50 aggregate fees is
payable over nine subsequent years.
Fees on the American Express Investors Certificate are paid at an annualized
rate of 1 percent 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,
twelve, twenty-four or thirty-six month term.
Fees on the American Express Preferred Investors Certificate are paid at a rate
of 0.165 percent of the initial payment on issue date of the certificate and
0.165 percent of the certificate's reserve 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 percent of the purchase price at the time
of issuance and 0.08 percent 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 percent of the purchase price at time of issuance and 0.20 percent
of the reserves maintained for these certificates at the beginning of the second
and subsequent quarters from issue date.
Effective April 25, 2001 fees on the American Express Cash Reserve Certificate
are paid at a rate of 0.0625 percent of the purchase price at the time of
issuance and 0.0625 percent 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 percent of the
purchase price at the time of issuance and 0.20 percent of the reserves
maintained for these certificates 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 AEFAI, and American Express Market Strategy Certificates are paid at a
rate of 0.90 percent. For certificates sold from April 30, 1997 to April 27,
1999, fees were paid at the rate of 0.70 percent. 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 percent. For certificates sold from April 28, 1999 to April 25,
2000, fees were paid at the rate of 1.00 percent. For certificates sold from
April 30, 1997 to April 27, 1999, fees were paid at a rate of 1.25 percent. 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 Certificates are paid at a
rate of 1.00 percent of the initial investment on the first day of each
certificate's term and 1.00 percent of the certificate's reserve at the
beginning of each subsequent term.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
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
Maintenance charge for assets held 50 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 on an
annualized basis is 1.25 percent of the reserves maintained for the certificates
on an amount from $100,000 to $249,999, 0.80 percent on an amount from $250,000
to $499,999, 0.65 percent on an amount from $500,000 to $999,999 and 0.50
percent 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 six, twelve,
twenty-four, or thirty-six month terms.
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 January 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 January 1, 1998, AEFC
provided this service to AECC under the investment advisory and services
agreement.
Dividends
In 2001, AECC effectively paid a $167 million dividend to AEFC by transferring
at book value certain CDOs. In part, the dividend was paid to allow AEFC to
transfer the CDOs and related accrued interest into a securitization trust.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES
Income tax (expense) benefit as shown in the Statements of Operations for the
three years ended December 31 consists of:
(Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Federal:
Current $(44,777) $(24,367) $26,007
Deferred 17,804 3,288 9,792
- ----------------------------------------------------------------------------------------------------
(26,973) (21,079) 35,799
State (1,354) (156) (120)
- ----------------------------------------------------------------------------------------------------
Total income tax (expense) benefit $(28,327) $(21,235) $35,679
- ----------------------------------------------------------------------------------------------------
Income tax (expense) benefit differs from that computed by using the federal
statutory rate of 35%. The principal causes of the difference in each year are
shown below:
(Thousands) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Federal tax (expense) benefit at federal statutory rate $(28,449) $(23,581) $30,752
Dividend exclusion 998 2,462 4,971
Other, net 478 40 76
- ----------------------------------------------------------------------------------------------------
Federal tax (expense) benefit $(26,973) $(21,079) $35,799
- ----------------------------------------------------------------------------------------------------
Deferred income taxes result from the net tax effects of temporary 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
December 31, were:
(Thousands) 2003 2002
- --------------------------------------------------------------------------------
Deferred tax assets
Certificate reserves $18,454 $ 1,793
Investments 34,425 14,649
Purchased/written call options -- 689
Other, net 140 245
- --------------------------------------------------------------------------------
Total deferred tax assets $53,019 $ 17,376
- --------------------------------------------------------------------------------
Deferred tax liabilities
Investment unrealized gains, net $23,814 $ 44,720
Deferred distribution fees 2,259 2,091
Purchased/written call options 17,501 --
Other, net 124 121
- --------------------------------------------------------------------------------
Total deferred tax liabilities 43,698 46,932
- --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 9,321 $(29,556)
- --------------------------------------------------------------------------------
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.
Net income taxes paid during the years ended December 31, 2003 and 2002 were
$71.6 million and $22.2 million, respectively.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
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. AECC
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 Offering Rate (LIBOR) as the
certificate products reset at shorter intervals than the average maturity of the
investment portfolio. AECC's goal is to manage interest rate sensitivity by
modifying the length of the interest crediting rate reset interval on
certificate products so that movements in interest rates do not adversely affect
the interest credited to such certificate products. 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. AECC 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 interest rate
fluctuations 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. AECC is required to pay counterparties 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 other comprehensive income. Amounts are reclassified from other comprehensive
income to investment income 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 years ended December 31, 2003 and 2002, AECC recognized no losses on the
derivatives as a result of ineffectiveness. AECC reclassified into earnings
pretax losses of ($5.3 million) and ($9.8 million) during 2003 and 2002,
respectively. An estimated ($6 million) of the unrealized losses accumulated in
other comprehensive income related to derivatives designated as cash flow hedges
will be reclassified into earnings by December 31, 2004. This effect will occur
at the same time as AECC realizes the benefits of lower market rates of interest
on its certificates. The longest period of time over which AECC is hedging
exposure to the variability in future cash flows is 14 months.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
Effective January 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. The
adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative after-tax
reduction of $0.4 million and $2.2 million to net income and other comprehensive
income, respectively.
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 AECC related to SMC will positively or negatively impact
reported earnings. As a means of hedging its obligations under the provisions
for these certificates, AECC purchases and writes call options on the major
market index. AECC 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 economically hedge its obligations. The futures are
marked-to-market daily and exchange traded, exposing AECC 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
is reflected in certificate reserves. Gains (losses) on options and futures are
reflected in investment income on the statements of operations. Changes in fair
values of embedded derivative instruments are reflected in provision expense for
certificate product reserves.
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. AECC monitors credit risk related to derivative financial
instruments through established approval procedures, including setting
concentration limits by counterparty, reviewing credit ratings and requiring
collateral where appropriate.
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, cash flow and
income effects of such derivatives generally offset effects of the underlying
certificate product reserves.
American Express Certificate Company -- Notes to Financial Statements
- --------------------------------------------------------------------------------
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 AEFC 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 December 31, is as
follows:
2003 2002
-----------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) Value Value Value Value
- -----------------------------------------------------------------------------------------------------------
Financial assets:
Assets for which carrying values
approximate fair values $ 101,105 $ 101,105 $ 298,870 $ 298,870
Investment securities (Note 3) $4,509,726 $4,509,726 $4,389,396 $4,389,396
First mortgage loans on real estate and
Other loans (Note 4) $ 469,309 $ 493,798 $ 452,243 $ 479,517
Derivative financial instruments (Note 9) $ 153,162 $ 153,162 $ 34,403 $ 34,403
Financial liabilities:
Liabilities for which carrying values
approximate fair values $ 24,444 $ 24,444 $ 315,961 $ 315,961
Net certificate reserves (Note 5) $4,775,518 $4,779,310 $4,475,349 $4,485,288
Derivative financial instruments (Note 9) $ 116,680 $ 116,680 $ 29,579 $ 29,579
- -----------------------------------------------------------------------------------------------------------
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 American Express Client Service Corporation (AECSC)
Withdrawals, transfers, inquiries
(800) 846-4852 TTY Service
For the hearing impaired
* You may experience delays when call volumes are high.
- --------------------------------------------------------------------------------
(logo)
AMERICAN
EXPRESS
(R)
- --------------------------------------------------------------------------------
American Express Certificate Company
70100 AXP Financial Center
Minneapolis, MN 55474
Web site address:
http://www.americanexpress.com
Distributed by
American Express
Financial Advisors Inc.
Investment Company Act File #811-00002
S-6492 K (4/04)
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
2001 American Express Special Deposits 11,585,244.00
2002 American Express Special Deposits 9,792,888.00
2003 American Express Special Deposits 13,341,309.00
(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 $549,636.58 in 2001, $446,326.20 in 2002 and $263,897.87 in
2003.
(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 Registrant's
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 10(q)(2) to Post-Effective Amendment No. 31 to
Registration Statement No. 2-95577, 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 3, 2004, filed
electronically as Exhibit 24(a) to Post-Effective Amendment
No. 31 to Registration Statement No. 2-95577 is incorporated
herein by reference.
(b) Directors' Power of Attorney dated March 3, 2004, filed
electronically as Exhibit 24(b) to Post-Effective Amendment
No. 31 to Registration Statement No. 2-95577 is incorporated
herein by reference.
25. through 27. -- None.
(b) The financial statement schedules for American Express Certificate
Company, filed electronically as Exhibit 16(b) in Post-Effective
Amendment No. 31 to Registration Statement No. 2-95577 for American
Express Flexible Savings Certificate, 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 27, 2004.
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
27, 2004.
Signature Capacity
/s/ Paula R. Meyer President and Director
- ---------------------- (Principal Executive Officer)
Paula R. Meyer
/s/ Brian J. McGrane Vice President and Chief Financial Officer
- ---------------------- (Principal Financial Officer)
Brian J. McGrane
/s/ Jeryl A. Millner Vice President and Controller
- ---------------------- (Principal Accounting Officer)
Jeryl A. Millner
/s/ Rodney P. Burwell** Director
- -----------------------
Rodney P. Burwell
/s/ Director
- ----------------------
Jean B. Keffeler
/s/ Thomas R. McBurney** Director
- ------------------------
Thomas R. McBurney
/s/ Kent M. Bergene** Director
- ---------------------
Kent M. Bergene
/s/ Karen M. Bohn** Director
- -------------------
Karen M. Bohn
/s/ Walter S. Berman* ** Director and Treasurer
- ----------------------
Walter S. Berman
* Signed pursuant to Officers' Power of Attorney dated March 3, 2004, filed
electronically as Exhibit 24(a) to Post-Effective Amendment No. 31 to
Registration Statement No. 2-95577, by:
/s/ Paula R. Meyer
- ----------------------
Paula R. Meyer
** Signed pursuant to Directors' Power of Attorney dated March 3, 2004, filed
electronically as Exhibit 24(b) to Post-Effective Amendment No. 31 to
Registration Statement No. 2-95577, by:
/s/ Paula R. Meyer
- ----------------------
Paula R. Meyer