<PAGE>
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 September 30, 1999
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
_________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 41-6009975
____________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IDS Tower 10, Minneapolis, Minnesota 55440
_____________________________________ ___________
(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 October 31, 1999
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.
<PAGE>
FORM 10-Q
IDS CERTIFICATE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished reflects all adjustments (none of which were other
than of a normal recurring nature) which are, in the opinion of management,
necessary to a fair statement of the results for these interim periods
presented.
<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
BALANCE SHEET
ASSETS Sept. 30, Dec. 31,
1999 1998
(Unaudited)
-------------------- --------------------
<S> <C> <C>
($ Thousands)
Qualified Assets:
Cash and cash equivalents $74,378 $-
Investments in unaffiliated issuers (note 1) 3,571,458 3,669,983
Receivables 43,421 49,664
Investments in and advances to affiliates 418 418
Other 67,323 96,213
-------------------- --------------------
Total qualified assets 3,756,998 3,816,278
Other assets 41,603 17,966
-------------------- --------------------
Total assets $3,798,601 $3,834,244
==================== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $3,576,448 $3,404,883
Accounts payable and accrued liabilities 50,589 207,328
-------------------- --------------------
Total liabilities 3,627,037 3,612,211
-------------------- --------------------
Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in capital 143,844 143,844
Retained earnings 68,687 67,343
Accumulated other comprehensive (loss) income-net of tax (42,467) 9,346
-------------------- --------------------
Total stockholder's equity 171,564 222,033
-------------------- --------------------
Total liabilities and
stockholder's equity $3,798,601 $3,834,244
==================== ====================
See note to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS (Unaudited)
For the Three Months Ended For the Nine Months Ended
--------------------------------- -----------------------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- ---------------- ---------------- -----------------
($ Thousands)
<S> <C> <C> <C> <C>
Investment income $64,107 $65,989 $189,266 $206,268
Investment expenses 19,374 18,818 57,226 58,302
---------------- ------------- -------------- -----------------
Net investment income before provision
for certificate reserves and income tax (expense) benefit 44,733 47,171 132,040 147,966
Net provision for certificate reserves 34,814 41,368 103,046 128,729
---------------- ------------- ------------------ ---------------
Net investment income before income tax (expense) benefit 9,919 5,803 28,994 19,237
Income tax (expense) benefit (1,443) 358 (3,599) 1,202
---------------- ------------- ------------------ ---------------
Net investment income 8,476 6,161 25,395 20,439
---------------- ------------- ------------------ ---------------
Realized gain (loss) on investments - net (48) 2,327 1,460 4,116
Income tax (expense) benefit 17 (815) (511) (1,441)
---------------- -------------- ------------------ ---------------
Net realized gain (loss) on investments (31) 1,512 949 2,675
---------------- ------------- ------------------ ---------------
Net income - wholly owned subsidiary - 66 - 194
---------------- ------------- -------------------- -------------
Net income $8,445 $7,739 $26,344 $23,308
================ ============= ==================== =============
See note to financial statements.
<PAGE>
IDS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended For the Nine Months Ended
---------------------------------- -----------------------------
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- ----------------- --------------- ----------------
($ Thousands)
Net income $8,445 $7,739 $26,344 $23,308
------------ ----------------- -------------- ----------------
Other comprehensive (loss) income
Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains arising during period (23,819) 17,103 (77,465) 17,001
Income tax benefit (expense) 8,336 (5,986) 27,112 (5,950)
------------ ------------------ -------------- ---------------
Net unrealized holding (losses) gains arising during period (15,483) 11,117 (50,353) 11,051
Reclassification adjustment for gains included in
net income (1,061) (1,410) (2,246) (1,911)
Income tax expense 372 494 786 669
------------ ---------------- --------------- ---------------
Net reclassification adjustment for gains included
in net income (689) (916) (1,460) (1,242)
------------ ---------------- --------------- ---------------
Net other comprehensive (loss) income (16,172) 10,201 (51,813) 9,809
------------ -------------- ------------------- ---------------
Total comprehensive (loss) income ($7,727) $17,940 ($25,469) $33,117
=========== ================= ================= ===============
See note to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Unaudited)
For the Nine Months Ended
---------------------------------------------
Sept. 30, 1999 Sept. 30, 1998
-------------------- --------------------
<S> <C> <C>
($ Thousands)
Cash Flows from Operating Activities:
Net Income $26,344 $23,308
Adjustments to reconcile net income to net
cash provided by operating activities:
Net income of wholly owned subsidiary - (194)
Net provision for certificate reserves 103,046 128,729
Interest income added to certificate loans (781) (900)
Amortization of premiums/discounts - net 20,629 16,100
Provision for deferred federal income taxes 2,627 1,489
Net realized gain on investments before income taxes (1,460) (4,116)
Decrease in dividends and interest receivable 6,143 6,188
Decrease in deferred distribution fees 2,783 4,131
Decrease (increase) in other assets 1,083 (4,200)
Decrease in other liabilities (25,654) (3,383)
-------------------- --------------------
Net cash provided by operating activities 134,760 167,152
-------------------- --------------------
Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities 118,806 120,291
Available-for-sale securities 365,690 362,523
Other investments 56,720 64,156
Sale of investments:
Held-to-maturity securities - 6,245
Available-for-sale securities 77,321 342,100
Certificate loan payments 3,191 2,941
Purchase of investments:
Held-to-maturity securities (6,830) (1,034)
Available-for-sale securities (481,773) (590,182)
Other investments (87,513) (94,030)
Certificate loan fundings (2,797) (2,925)
-------------------- --------------------
Net cash provided by investing activities $42,815 $210,085
-------------------- --------------------
See note to financial statements.
<PAGE>
IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued) (Unaudited)
For the Nine Months Ended
---------------------------------------------
Sept. 30, 1999 Sept. 30, 1998
-------------------- --------------------
($ Thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $1,154,664 $910,515
Proceeds from reverse repurchase agreements 98,500 650,500
Dividend from wholly owned subsidiary - 3,000
Certificate maturities and cash surrenders (1,091,861) (1,182,625)
Payments under reverse repurchase agreements (239,500) (672,500)
Dividends paid (25,000) (4,500)
-------------------- --------------------
Net cash used in financing activities (103,197) (295,610)
-------------------- --------------------
Net Increase In Cash and Cash Equivalents 74,378 81,627
Cash and Cash Equivalents Beginning of Period - -
-------------------- --------------------
Cash and Cash Equivalents End of Period $74,378 $81,627
==================== ====================
Supplemental Disclosures:
Cash paid for income taxes $11,021 $3,405
Certificate maturities and surrenders through loan
reductions $2,926 $4,417
See note to financial statements.
IDS CERTIFICATE COMPANY
NOTE TO FINANCIAL STATEMENTS (Unaudited)
($ in Thousands)
1. The following is a summary of investments in unaffiliated issuers:
Sept. 30, Dec. 31,
1999 1998
-------------------- --------------------
Held-to-maturity securities $480,849 $592,815
Available-for-sale securities 2,684,643 2,710,545
First mortgage loans on real estate 376,161 334,280
Certificate loans - secured by certificate reserves 29,805 32,343
-------------------- --------------------
Total $3,571,458 $3,669,983
==================== ====================
</TABLE>
<PAGE>
IDS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of Sept. 30, 1999, total assets decreased $36 million while certificate
reserves increased $172 million from Dec. 31, 1998. The decreases in total
assets and in accounts payable and accrued liabilities, primarily reflect net
repayments under reverse repurchase agreements of $141 million. The decrease in
total assets reflects also, a decrease in net unrealized appreciation on
investment securities classified as available for sale of $80 million. The
increase in certificate reserves resulted primarily from interest accruals, and
certificate payments exceeding certificate maturities and surrenders.
Sales of face-amount certificates totaled $387 million and $427 million during
the second and third quarters of 1999, respectively, compared to $307 million
and $273 million during the comparable periods in 1998, respectively.
Certificate sales during the second quarter of 1999 benefited from a special
promotion of Registrant's 7-month term Flexible Savings Certificate. The special
promotion was offered from March 10, 1999 to June 8, 1999, and applied only to
sales of new certificate accounts during the promotion period. Interest rates
for sales of certificates during the promotion period were determined on a
weekly basis at one to one and a half percentage points above the Bank Rate
Monitor Top 25 Market AverageTM for 6-month term CDs. Sales of the 7-month term
Flexible Savings Certificate during the second quarter of 1999 totaled $125
million. The higher certificate sales during third quarter of 1999 resulted
primarily from higher sales of the American Express Investors Certificate. Sales
during the third quarter of 1999 were $90 million greater than during the
comparable period in 1998.
Certificate maturities and surrenders totaled $318 million and $443 million
during the second and third quarters of 1999, respectively, compared to $469
million and $353 million during the comparable periods in 1998, respectively.
For the nine months ended Sept. 30, 1999 and 1998, sales of face-amount
certificates totaled $1,093 million and $837 million, respectively. Certificate
maturities and surrenders during these same periods totaled $1,095 and $1,187
million, respectively.
Investment income decreased 8.2% during the first nine months of 1999 from the
prior year's period primarily reflecting a lower average balance of invested
assets.
Investment expenses decreased 1.8% during the first nine months of 1999 from the
prior year's period. The decrease resulted primarily from lower distribution
fees of $3.3 million, lower interest expense on reverse repurchase and interest
rate swap agreements of $4.7 million, and lower investment advisory and transfer
agent fees of $.6 million. These lower expenses were partially offset by higher
amortization of premiums paid for index options of $7.6 million.
Net provision for certificate reserves decreased 20% during the first nine
months of 1999 from the prior year's period reflecting a lower average balance
of certificate reserves, and lower accrual rates primarily related to surrenders
of the seven- and 13-month Flexible Savings Certificate during the last three
quarters of 1998.
<PAGE>
The $4.8 million decrease in income tax benefit on net investment income during
the first nine months of 1999 from the prior year's period resulted primarily
from a lesser portion of net investment income before income tax (expense)
benefit being attributable to tax-advantaged income.
Net certificate reserve financing activities provided cash of $63 million during
the first nine months of 1999 compared to cash used of $272 million during the
prior year's period. The change resulted from higher certificate payments
received of $244 million and lower maturities and surrenders of $91 million
during the first nine months of 1999 compared to the prior year's period.
Year 2000:
Registrant is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly owned subsidiary of American Express
Company (American Express). All of the major systems used by Registrant are
maintained by AEFC and are utilized by multiple subsidiaries and affiliates of
AEFC. American Express is coordinating Year 2000 (Y2K) efforts on behalf of all
of its businesses and subsidiaries. Representatives of AEFC are participating in
these efforts.
American Express and AEFC began addressing the Y2K issue in 1995 and have
established a plan for resolution, which involves the remediation,
decommissioning and replacement of relevant systems, including mainframe,
mid-range and desktop computers, application software, operating systems,
systems software, data back-up archival and retrieval services, telephone and
other communications systems, and hardware peripherals and facilities dependent
on embedded technology. The Y2K compliance effort is divided into two
initiatives. The first, known as "Millenniax," relates to mainframe and other
technological systems maintained by the American Express Technologies
organization (AET). The second, known as "Business T," relates to the
technological assets that are owned, managed or maintained by American Express'
individual business and staff units, including AEFC. American Express' and
AEFC's plans for remediation of the Y2K issue include the following program
phases: (i) employee awareness and mobilization, (ii) inventory collection and
assessment, (iii) impact analysis, (iv) remediation/decommission, (v) testing
and (vi) implementation. With respect to the Millenniax systems and Business T
assets, all of the program phases referred to above are at least 99 percent
complete.
American Express' cumulative costs since inception of the Y2K initiatives were
$495 million through Sept. 30, 1999 and are estimated to be in the range of $22
- - $48 million for the remainder through 2000.* AEFC's cumulative costs since
inception of the Y2K initiatives were $66 million through Sept. 30, 1999 and are
estimated to be in the range of $2 - $3 million for the remainder through 2000.*
These costs, which are expensed as incurred, relate to both Millenniax and
Business T, and have not had, nor are they expected to have, a material adverse
impact on American Express', AEFC's or Registrant's results of operations or
financial condition.* Y2K costs related to Millenniax represent 6 percent and 1
percent of the AET budget for the years 1999 and 2000, respectively.*
American Express' and AEFC's major businesses are heavily dependent upon
internal computer systems, and all have significant interaction with systems of
third parties, both domestically and internationally. American Express and AEFC
are working with key
<PAGE>
external parties, including merchants, clients, counterparties, vendors,
exchanges, utilities, suppliers, agents and regulatory agencies to mitigate the
potential risks to American Express and AEFC of Y2K. As part of their overall
compliance program, American Express and AEFC are actively communicating with
third parties through face-to-face meetings and correspondence, on an ongoing
basis, to ascertain their state of readiness. Although numerous third parties
have indicated to American Express and AEFC in writing that they are addressing
their Y2K issues on a timely basis, American Express and AEFC do not directly
control the remediation efforts of such parties, and therefore cannot provide
assurances that they will be Y2K compliant. The failure of external parties to
resolve their own Y2K issues in a timely manner could have a material adverse
effect on American Express, AEFC or Registrant.*
During the third quarter of 1999 American Express' and AEFC's plans for targeted
integrated testing of systems that support their most critical business
functions, and independent validation of such testing, were completed. At this
point, American Express and AEFC are in the process of finalizing specific Y2K
contingency plans and establishing plans to address their year-end activities
related to Y2K. The contingency planning effort, which addresses all critical
systems and, to a lesser extent, certain non-critical systems, is a full-scale
initiative that includes both internal and external experts under the guidance
of an American Express-wide steering committee. The contingency plans, which are
based in part on an assessment of the magnitude and probability of potential
risks, primarily focus on proactive steps to prevent Y2K-related failures from
occurring, or if they should occur, detecting them quickly, minimizing their
impact and expediting their repair. The Y2K contingency plans supplement
disaster recovery and business continuity plans already in place, and include
measures such as selecting alternative suppliers and channels of distribution
and setting up manual back-up processes.
The Y2K contingency plans have been developed generally in accordance with
guidelines established by the Federal Financial Institutions Examination
Council. This effort is divided into four phases: (i) establishing
organizational planning guidelines, (ii) completing a business impact analysis,
(iii) developing the contingency plans and (iv) validating and verifying the
contingency plans. These phases are to be followed by a detailed year-end plan.*
All four of the above phases have essentially been completed, and have
identified and assessed the need for, and developed, Y2K contingency plans for
American Express' and AEFC's most critical core business functions. Such
functions include, but are not limited to, credit authorization, Cardmember
billing, merchant payment, client investments, funds transfer, securities
settlement and travel reservations. These contingency plans also address third
party systems that American Express' and AEFC's businesses interface with and
rely upon, such as international telecommunications networks and utilities,
global financial payment and clearing systems, and airline and other travel
systems.
Going forward, American Express' and AEFC's primary focus will be on planning
year-end activities related to Y2K.* Such activities include the establishment
of global command centers; scheduling the availability of key personnel;
establishing additional roll-over management procedures, including proactive
monitoring of select critical functions and assets; the development of Y2K
incident tracking and reporting tools; and the establishment of specific
Y2K-related communications.* Additionally, rehearsals of these year-end
activities will be conducted during the fourth quarter of 1999.*
<PAGE>
American Express and AEFC will continue to refine their contingency and year-end
planning activities throughout 1999 as additional information related to their
exposures is gathered.* To the extent that there are Y2K failures that affect
major internal processes or third party systems that American Express or AEFC
relies upon, including but not limited to those described above, such failures
could have a material impact on American Express and its businesses or
subsidiaries, including Registrant, through business interruption or shutdown,
financial loss, regulatory actions, reputational damage and legal liability to
third parties.* At this point it appears that some of the major industries in
certain countries outside the United States, such as telecommunications and
utilities, have made less progress in the Y2K compliance effort and, as a
result, may present a somewhat greater exposure to American Express, AEFC and
Registrant.*
For additional information relating to the Y2K issue, see pages 14, 15 and 16 of
Registrant's 1998 10-K report, and Registrant's 10-Q reports for the quarterly
periods ended March 31, 1999 and June 30, 1999.
*Statements in this Y2K discussion marked with an asterisk are forward-looking
statements which are subject to risks and uncertainties. Important factors that
could cause results to differ materially from these forward-looking statements
include, among other things, the ability of American Express or AEFC to
successfully identify all systems containing two-digit codes, the nature and
amount of programming and resources required to fix and test the affected
systems, the costs of labor and consultants related to such efforts as well as
those involving the development and implementation of contingency plans, the
continued availability of such personnel, the ability of third parties that
interface with American Express or AEFC to successfully address their Y2K
issues, and the ability of American Express and AEFC to assess potential
internal and external Y2K exposures and develop effective contingency plans in
connection therewith.
<PAGE>
IDS CERTIFICATE COMPANY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
<PAGE>
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 /s/Jeffrey S. Horton
Jeffrey S. Horton, Vice President and
Treasurer (Principal Financial Officer and
officer duly authorized to sign on behalf
of Registrant)
DATE November 12, 1999
<PAGE>
November 12, 1999
Securities and Exchange Commission
450 Fifth Street N.W.
Attn: Document Control - EDGAR
Washington, D.C. 20549-1004
Re: IDS Certificate Company
File Number 2-23772
Dear Sir or Madam:
Enclosed for filing is a current report on Form 10-Q for IDS
Certificate Company.
Please contact Terry Vestermark at (612) 678-2132 or me if you have any
questions or comments.
Sincerely,
/s/Bruce A. Kohn
Bruce A. Kohn
Vice President and General Counsel
(612) 671-2221
BAK/TV/lal
