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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 30(a) OF THE INVESTMENT
COMPANY ACT OF 1940 AND SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-23772
IDS Certificate Company
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(Exact name of registrant as specified in its charter)
Delaware 41-6009975
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IDS Tower 10, Minneapolis, Minnesota 55440
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1998
150,000 Common shares
Registrant is a wholly owned subsidiary of American Express Financial
Corporation, which is a wholly owned subsidiary of American Express Company, and
Registrant meets the conditions set forth in General Instruction H(1) (a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
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FORM 10-Q
IDS CERTIFICATE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished reflects all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for these interim
periods. Certain amounts from the prior year have been reclassified to conform
to the current year presentation.
IDS CERTIFICATE COMPANY
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
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($ Thousands)
<S> <C> <C>
Qualified Assets:
Investments in unaffiliated issuers (note 1) $3,928,470 $3,919,198
Receivables 48,801 50,452
Investments in and advances to affiliates 3,900 6,772
Other 73,184 56,127
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Total qualified assets 4,054,355 4,032,549
Other assets 21,306 21,099
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Total assets $4,075,661 $4,053,648
==================== ======================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $3,615,877 $3,724,978
Accounts payable and accrued liabilities 196,809 73,985
Deferred federal income taxes 12,788 15,175
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Total liabilities 3,825,474 3,814,138
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Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 143,844 143,844
Retained earnings 73,442 62,373
Accumulated other comprehensive income-net of tax (note 2) 31,401 31,793
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Total stockholder's equity 250,187 239,510
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Total liabilities and stockholder's equity $4,075,661 $4,053,648
==================== ======================
See notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS (Unaudited)
For the Three Months Ended For the Six Months Ended
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June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
----------------- --------------- --------------- ----------------
($ Thousands)
<S> <C> <C> <C> <C>
Investment income $70,146 $63,467 $140,279 $125,003
Investment expenses 19,998 16,503 39,484 32,322
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Net investment income before provision
for certificate reserves and income tax benefit 50,148 46,964 100,795 92,681
Net provision for certificate reserves 42,723 40,495 87,361 80,445
---------------- ---------------- --------------- -----------------
Net investment income before income tax benefit 7,425 6,469 13,434 12,236
Income tax benefit 191 571 844 1,722
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Net investment income 7,616 7,040 14,278 13,958
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Realized gain (loss) on investments - net 1,343 (83) 1,789 2
Income tax benefit (expense) (470) 29 (626) (1)
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Net realized gain (loss) on investments 873 (54) 1,163 1
---------------- ---------------- --------------- -----------------
Net income - wholly owned subsidiary 82 84 128 149
---------------- ---------------- --------------- -----------------
Net income $8,571 $7,070 $15,569 $14,108
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See notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Unaudited)
For the Six Months Ended
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June 30, 1998 June 30, 1997
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($ Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $15,569 $14,108
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of wholly owned subsidiary (128) (149)
Net provision for certificate reserves 87,361 80,445
Interest income added to certificate loans (612) (724)
Amortization of premiums/discounts - net 10,236 7,165
Provision for deferred federal income taxes (2,176) (2,670)
Net realized gain on investments before income taxes (1,789) (2)
Decrease in dividends and interest receivable 17 644
Decrease in deferred distribution fees 2,892 1,432
Increase in other assets (3,094) -
Increase (decrease) in other liabilities 6,370 (1,115)
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Net cash provided by operating activities 114,646 99,134
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Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities 77,973 35,826
Available-for-sale securities 241,779 188,817
Other investments 43,198 35,534
Sale of investments:
Held-to-maturity securities - 29,391
Available-for-sale securities 178,616 150,097
Certificate loan payments 1,996 2,503
Purchase of investments:
Held-to-maturity securities (1,034) (4,565)
Available-for-sale securities (492,522) (626,659)
Other investments (37,276) (28,176)
Certificate loan fundings (1,924) (2,720)
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Net cash provided by (used in) investing activities $10,806 ($219,952)
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See notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued) (Unaudited)
For the Six Months Ended
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June 30, 1998 June 30, 1997
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($ Thousands)
<S> <C> <C>
Cash Flows from Financing Activities:
Payments from certificate owners $612,463 $644,307
Proceeds from reverse repurchase agreements 593,500 269,500
Dividend from wholly-owned subsidiary 3,000 -
Certificate maturities and cash surrenders (831,415) (644,064)
Payments under reverse repurchase agreements (498,500) (149,500)
Dividend paid (4,500) -
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Net cash (used in) provided by financing activities (125,452) 120,243
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Net Decrease In Cash and Cash Equivalents - (575)
Cash and Cash Equivalents Beginning of Period - 111,331
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Cash and Cash Equivalents End of Period $- $110,756
==================== ====================
Supplemental Disclosures:
Cash (paid) received for income taxes ($5,519) $2,328
Certificate maturities and surrenders through loan
reductions $2,528 $4,068
See notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
($ in Thousands)
1. The following is a summary of investments in unaffiliated issuers:
June 30, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Held-to-maturity securities $681,609 $758,143
Available-for-sale securities 2,998,746 2,911,524
First mortgage loans on real estate 213,005 212,433
Certificate loans - secured by certificate reserves 35,110 37,098
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Total $3,928,470 $3,919,198
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</TABLE>
2. Comprehensive income
Effective January 1, 1998, Registrant adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires the reporting and display of comprehensive income and its components.
Comprehensive income is defined as the aggregate change in stockholder's equity
excluding changes in ownership interests. For Registrant, it is net income and
the unrealized gains or losses on available-for-sale securities net of taxes.
Prior year amounts have been reclassified to conform to the requirements of the
new Statement. The components of comprehensive income, net of related tax, for
the three month and six month periods ended June 30, 1998 and 1997 were:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997
- ----------------------------
-------------------- --------------------
<S> <C> <C>
Net income $8,571 $7,070
Unrealized gains on available-for-sale securities-net 727 17,748
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Total comprehensive income $9,298 $24,818
==================== ====================
Six months Ended June 30, 1998 1997
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Net income $15,569 $14,108
Unrealized gains (losses) on available-for-sale securities-net (392) 181
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Total comprehensive income $15,177 $14,289
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</TABLE>
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IDS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
As of June 30, 1998, total assets increased $22 million, certificate reserves
decreased $109 million and accounts payable and accrued liabilities increased
$123 million from December 31, 1997. The decrease in certificate reserves
resulted primarily from certificate maturities and surrenders exceeding
certificate sales. The increase in accounts payable and accrued liabilities
resulted primarily from net borrowings of $95 million under reverse repurchase
agreements.
Sales of face-amount certificates totaled $257 million and $307 million during
the first and second quarters of 1998, respectively, compared to $268 million
and $327 million during the comparable periods in 1997, respectively.
Certificate sales during the second quarter of 1998 benefited from $19 million
in sales of Registrant's Market Strategy certificate which was first offered for
sale April 29, 1998. Certificate maturities and surrenders totaled $365 million
and $469 million during the first and second quarters of 1998, respectively,
compared to $304 million and $344 million during the comparable periods in 1997,
respectively. The higher certificate maturities and surrenders during the second
quarter of 1998 resulted primarily from $59 million in surrenders of
Registrant's 7-month term Flexible Savings certificate. The surrenders of the
7-month Flexible Savings certificate resulted primarily from lower accrual rates
declared by Registrant at term renewal, reflecting interest rates available in
the marketplace.
Investment income increased 12% during the first six months of 1998 from the
prior year's period primarily reflecting a higher average balance of invested
assets.
Investment expenses increased 22% during the first six months of 1998 from the
the prior year's period. The increase resulted primarily from $2.6 million
higher amortization of premiums paid for index options and $4.7 million of
interest expense on reverse repurchase and interest rate swap agreements entered
into after the first quarter in 1997.
Net provision for certificate reserves increased 8.6% during the first six
months of 1998 from the prior year's period reflecting a higher average balance
of certificate reserves.
The $.9 million decrease in income tax benefit on net investment income resulted
primarily from a lesser portion of net investment income before income tax
benefit being attributable to tax-advantaged income.
Net certificate reserve financing activities used cash of $219 million during
the first six months of 1998 compared to cash provided of $.2 million during the
prior year's period. The change resulted from lower certificate payments
received of $32 million and higher maturities and surrenders of $187 million
during the first six months of 1998 compared to the prior year's period.
During the first six months of 1998, Registrant paid a cash dividend to its
Parent of $4.5 million.
<PAGE>
Effective January 1, 1998, Registrant adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires the reporting and display of comprehensive income and its components.
Comprehensive income is defined as the aggregate change in stockholder's equity
excluding changes in ownership interests. For Registrant, it is net income and
the unrealized gains or losses on available-for-sale securities net of taxes.
Prior year amounts have been reclassified to conform to the requirements of the
new Statement.
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IDS CERTIFICATE COMPANY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are incorporated herein by reference:
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) By-Laws, dated December 31, 1977, filed electronically as Exhibit
3(c) to Post-Effective Amendment No. 10 to Registration Statement
No. 2-89507, is incorporated herein by reference.
10. (a) The Distribution Agreement dated November 18, 1988, between
Registrant and IDS Financial Services Inc., filed electronically as
Exhibit 1(a) to the Registration Statement for the American Express
International Investment Certificate (now called the American
Express Investors Certificate), is incorporated herein by
reference.
(b) The Distribution Agreement dated March 29, 1996, between Registrant
and American Express Service Corporation, filed electronically as
Exhibit 1(b) to Post-Effective Amendment No. 17 to Registration
Statement No. 2-95577 for the IDS Flexible Savings Certificate, is
incorporated herein by reference.
(c) Selling Agent Agreement dated June 1, 1990, between American
Express Bank International and IDS Financial Services Inc., for the
American Express Investors Certificate (formerly known as the IDS
Investors Certificate)and American Express Stock Market Certificate
(formerly known as the IDS Stock Market Certificate) filed
electronically as Exhibit 1(c) to the Post-Effective Amendment No.5
to Registration Statement No. 33-26844 for the IDS Investors
Certificate, is incorporated herein by reference.
(d) Marketing Agreement dated October 10, 1991, between Registrant and
American Express Bank Ltd., filed electronically as Exhibit 1(d) to
the Post-Effective Amendment No. 31 to Registration Statement No.
2-55252 for the Series D-1 Investment Certificate, is incorporated
herein by reference.
(e) 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.
(f) Amendment to the Selling Agent Agreement dated December 12, 1994,
between IDS Financial Services Inc. and American Express Bank
International, filed electronically as Exhibit 16(d) to Post-
Effective Amendment No. 13 to Registration Statement No. 2-95577,
is incorporated herein by reference.
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IDS CERTIFICATE COMPANY
PART II. OTHER INFORMATION (Continued)
(g) Selling Agent Agreement dated December 12, 1994, between IDS
Financial Services Inc. and Coutts & Co. (USA) International, filed
electronically as Exhibit 16(e) to Post-Effective Amendment
No. 13 to Registration Statement No. 2-95577, is incorporated
herein by reference.
(h) 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.
(i) Second amendment to Selling Agent Agreement between American
Express Financial Advisors Inc. and American Express Bank
International dated May 2, 1995, filed electronically as as Exhibit
(1) to Registrant's June 30, 1995, Quarterly Report on Form 10-Q,
is incorporated herein by reference.
(j) The Investment Advisory and Services Agreement between Registrant
and IDS/American Express Inc. dated January 12, 1984, filed
electronically as Exhibit 10(a) to Registration Statement No.
2-89507, is incorporated herein by reference.
(k) Depository 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.
(l) Foreign Deposit Agreement dated November 21, 1990, between IDS
Certificate Company and IDS Bank and Trust, filed electronically as
Exhibit 10(h) to Post-Effective Amendment No. 5 to Registration
Statement No. 33-26844, is incorporated herein by reference.
(m) Form of Letter Amendment dated April 7, 1997, to the Selling
Agent Agreement dated June 1, 1990, between American Express
Financial Advisors Inc. and American Express Bank International,
filed electronically as Exhibit 10(j) to Post-Effective Amendment
No. 14 to Registration Statement No. 33-26844, is incorporated
herein by reference.
24. (a) Officers' Power of Attorney, dated May 17, 1994, filed
electronically as Exhibit 25(a) to Post-Effective Amendment No. 37
to Registration Statement No. 2-55252, is incorporated herein by
reference.
(b) Directors' Power of Attorney, dated February 29, 1996, filed
electronically as Exhibit 24(b) to Post-Effective Amendment No. 39
to Registration Statement No. 2-55252, is incorporated herein by
reference.
(c) Officer's Power of Attorney, dated February 17, 1998, filed
electronically as Exhibit 24(c) to Post-Effective Amendment No. 42
to Registration Statement No. 2-55252, is incorporated herein by
reference.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REGISTRANT IDS CERTIFICATE COMPANY
BY
NAME AND TITLE Jay C. Hatlestad, Vice President and
Controller (Chief Accounting Officer and
officer duly authorized to sign on behalf
of Registrant)
DATE August 12, 1998
