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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 March 31, 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 April 30, 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.
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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.
IDS CERTIFICATE COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS March 31, December 31,
1999 1998
(Unaudited)
--------------- ----------------
($ Thousands)
Qualified Assets:
Cash and cash equivalents $49,818 $-
Investments in unaffiliated issuers (note 1) 3,527,370 3,669,983
Receivables 46,381 49,664
Investments in and advances to affiliates 418 418
Other 102,820 96,213
--------------- ----------------
Total qualified assets 3,726,807 3,816,278
Other assets 22,131 17,966
--------------- ----------------
Total assets $3,748,938 $3,834,244
=============== ================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $3,414,140 $3,404,883
Accounts payable and accrued liabilities 128,240 207,328
--------------- ----------------
Total liabilities 3,542,380 3,612,211
--------------- ----------------
Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 143,844 143,844
Retained earnings 62,351 67,343
Accumulated other comprehensive (loss) income-net of tax (1,137) 9,346
--------------- ----------------
Total stockholder's equity 206,558 222,033
--------------- ----------------
Total liabilities and
stockholder's equity $3,748,938 $3,834,244
=============== ================
</TABLE>
See note to financial statements.
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS (Unaudited)
For the Three Months Ended
-----------------------------------
<S> <C> <C>
Mar. 31, 1999 Mar. 31, 1998
-----------------------------------
($ Thousands)
Investment income $62,195 $70,133
Investment expenses 19,397 19,486
--------------- ----------------
Net investment income before provision
for certificate reserves and income tax (expense) benefit 42,798 50,647
Net provision for certificate reserves 34,137 44,638
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Net investment income before income tax (expense) benefit 8,661 6,009
Income tax (expense) benefit (746) 653
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Net investment income 7,915 6,662
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Realized gain on investments - net 130 446
Income tax expense (37) (156)
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Net realized gain on investments 93 290
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Net income - wholly owned subsidiary - 46
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Net income $8,008 $6,998
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See note to financial statements.
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IDS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended
-----------------------------------
Mar. 31, 1999 Mar. 31, 1998
-----------------------------------
($ Thousands)
Net income $8,008 $6,998
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Other comprehensive loss
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period (16,126) (1,163)
Income tax benefit 5,644 407
--------------- ----------------
Net unrealized holding losses arising during period (10,482) (756)
Reclassification adjustment for gains included in
net income (2) (558)
Income tax expense 1 195
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Net reclassification adjustment for gains included
in net income (1) (363)
--------------- ----------------
Net other comprehensive loss (10,483) (1,119)
--------------- ----------------
Total comprehensive (loss) income ($2,475) $5,879
=============== ================
See note to financial statements.
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IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Unaudited)
For the Three Months Ended
-----------------------------------
Mar. 31, 1999 Mar. 31, 1998
-----------------------------------
($ Thousands)
Cash Flows from Operating Activities:
Net Income $8,008 $6,998
Adjustments to reconcile net income to net cash provided by operating
activities:
Net income of wholly owned subsidiary - (46)
Net provision for certificate reserves 34,137 44,638
Interest income added to certificate loans (255) (298)
Amortization of premiums/discounts - net 7,023 4,868
Provision for deferred federal income taxes 682 (3,019)
Net realized gain on investments before income taxes (130) (446)
Decrease in dividends and interest receivable 6,543 3,511
Decrease in deferred distribution fees 1,080 1,542
Decrease in other assets 1,082 -
(Decrease) increase in other liabilities (16,048) 10,722
--------------- ----------------
Net cash provided by operating activities 42,122 68,470
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Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities 94,312 42,231
Available-for-sale securities 164,180 124,500
Other investments 13,975 27,430
Sale of investments:
Held-to-maturity securities - -
Available-for-sale securities - 13,328
Certificate loan payments 1,142 941
Purchase of investments:
Held-to-maturity securities (1,856) (1,034)
Available-for-sale securities (24,958) (268,708)
Other investments (51,311) (19,461)
Certificate loan fundings (888) (712)
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Net cash provided by (used in) investing activities $194,596 ($81,485)
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See note to financial statements.
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IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued) (Unaudited)
For the Three Months Ended
-----------------------------------
Mar. 31, 1999 Mar. 31, 1998
-----------------------------------
($ Thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $299,264 $280,427
Proceeds from reverse repurchase agreements 98,500 195,000
Dividend from wholly owned subsidiary - 3,000
Certificate maturities and cash surrenders (332,164) (363,912)
Payments under reverse repurchase agreements (239,500) (101,500)
Dividend paid (13,000) -
--------------- ----------------
Net cash (used in) provided by financing activities (186,900) 13,015
--------------- ----------------
Net Increase In Cash and Cash Equivalents 49,818 -
Cash and Cash Equivalents Beginning of Period - -
--------------- ----------------
Cash and Cash Equivalents End of Period $49,818 $-
=============== ================
Supplemental Disclosures:
Cash (paid) received for income taxes ($7,623) $505
Certificate maturities and surrenders through loan
reductions $925 $1,180
See note to financial statements.
IDS CERTIFICATE COMPANY
NOTE TO FINANCIAL STATEMENTS (Unaudited)
($ in Thousands)
1. The following is a summary of investments in unaffiliated issuers:
Mar. 31, Dec. 31,
1999 1998
--------------- ----------------
Held-to-maturity securities $500,400 $592,815
Available-for-sale securities 2,621,025 2,710,545
First mortgage loans on real estate 374,526 334,280
Certificate loans - secured by certificate reserves 31,419 32,343
--------------- ----------------
Total $3,527,370 $3,669,983
=============== ================
</TABLE>
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IDS CERTIFICATE COMPANY
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of March 31, 1999, total assets decreased $85 million while certificate
reserves were relatively flat from December 31, 1998. The decreases in total
assets and in accounts payable and accrued expenses, primarily reflects net
repayments under reverse repurchase agreements of $141 million offset by an
increase in payable for securities purchased in March 1999 which will settle in
early April.
Sales of face-amount certificates totaled $279 million during the first quarter
of 1999 compared to $257 million during the prior year's period. Certificate
maturities and surrenders totaled $333 million during the first quarter of 1999
compared to $365 million during the prior year's period.
Investment income decreased 11% during the first three months of 1999 from the
prior year's period primarily reflecting a lower average balance of invested
assets.
Net provision for certificate reserves decreased 24% during the first three
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.
The $1.4 million decrease in income tax benefit on net investment income during
the first three 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 used cash of $33 million during the
first three months of 1999 compared to cash used of $83 million during the prior
year's period. The change resulted from higher certificate payments received of
$19 million and lower maturities and surrenders of $31 million during the first
three 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's 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).
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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 systems maintained by American Express and AEFC, the first three phases
referred to above have largely been completed for both Millenniax and Business
T. In addition, the remediation/decommission phase for critical systems is
nearly complete. As of March 31, 1999, for Millenniax for American Express, the
remediation/decommission, testing and implementation phases for critical and
non-critical systems in total are 91%, 85% and 74% complete, respectively. For
Millenniax for AEFC, such phases are 99%, 98% and 97% complete, respectively.
For Business T for American Express, such phases are 94%, 85% and 84% complete,
respectively. For Business T for AEFC, such phases are 85%, 80% and 80%
complete, respectively.
American Express' cumulative costs since inception of the Y2K initiatives were
$427 million through March 31, 1999 and are estimated to be in the range of $90
- - $116 million for the remainder through 2000.* AEFC's cumulative costs since
inception of the Y2K initiatives were $59 million through March 31, 1999 and are
estimated to be in the range of $12 - $13 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%
and 1% of the AET budget for the years 1999 and 2000.
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 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, the
readiness of third parties overall varies across the spectrum. The failure of
external parties to resolve their own Y2K issues in a timely manner could result
in a material financial risk to American Express, AEFC or Registrant.
At this point, with remediation and testing of individual internal systems
substantially complete, American Express' and AEFC's primary focus is on testing
of systems on an integrated basis, independent validation of such testing and
completing Y2K contingency plans. The contingency planning effort 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
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PAGE 9
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 developing American Express' and AEFC's own
technology infrastructure in lieu of those provided by third parties.
Such plans encompass the creation of both remediation and business resumption
contingency plans, generally in accordance with guidelines established by the
Federal Financial Institutions Examination Council. For critical systems that
are not yet Y2K compliant, American Express and AEFC are on track to achieve
remediation by the second quarter of 1999*; to the extent that unforeseen
circumstances arise that result in non-compliance of any such systems,
remediation contingency plans are also being developed to mitigate such risk.
American Express' and AEFC's business resumption contingency planning effort is
divided into four phases: (i) establishing organizational planning guidelines;
(ii) completing a business impact analysis; (iii) developing the business
resumption contingency plans and (iv) validating and verifying the business
resumption contingency plans. The first two of these phases have essentially
been completed, and have identified and assessed the need for Y2K business
resumption contingency plans for American Express' and AEFC's most critical core
business processes. Such processes include, but are not limited to, credit
authorization, Cardmember billing, merchant payment, client investments, funds
transfer, securities settlement, and travel reservations. The contingency plans
also address third party systems that American Express' and AEFC's businesses
interface with and rely upon, such as international telecommunications networks,
global financial payment and clearing systems, and airline and other travel
systems. American Express and AEFC expect that the development phase of their
business resumption contingency plans will be substantially complete by the
second quarter of 1999.* The final phase, which will include independent
validation and verification of these plans, will take place during the third
quarter of 1999.* American Express and AEFC will continue to refine their
contingency 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, reputational damage and legal
liability to third parties.
For a more complete discussion of the Y2K issue, see pages 14, 15 and 16 of
Registrant's 1998 10-K report.
*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 required to fix the affected systems, the costs of labor
and consultants related to such efforts, the continued availability of such
resources, and the ability of third parties that interface with American Express
or AEFC to successfully address their Y2K issues.
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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 filed electronically herewith:
3. (a) Certificate of Amendment dated April 30, 1999.
24. (a) Directors' Power of Attorney dated April 26, 1999.
(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
/s/Paula R. Meyer
NAME AND TITLE Paula R. Meyer, President and
Director (Principal Executive Officer)
DATE May 13, 1999
BY
/s/Jay C. Hatlestad
NAME AND TITLE Jay C. Hatlestad, Vice President and
Controller (Principal Accounting Officer)
DATE May 13, 1999
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EXHIBIT INDEX
Exhibit 3(a): Certificate of Amendment
Exhibit 24(a): Directors' Power of Attorney
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CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
IDS Certificate Company, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said Corporation has given
written consent to the adoption of a resolution proposing and declaring
advisable the following amendment to the Certificate of Incorporation of said
Corporation:
RESOLVED, That the Certificate of Incorporation of IDS Certificate
Company be amended by adding a revised Article Thirteenth set forth
below in its entirety:
THIRTEENTH: No director shall be personally liable to the
Corporation or its stockholder for monetary damages for breach of duty
as a director, except (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholder; (ii) for acts or
omissions not in good faith or that involve intentional misconduct, a
knowing violation of law, willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of the director's office; (iii) for acts or omissions giving rise to
liability under Section 174 of Delaware General Corporation Law; (iv)
for any transaction from which the director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the
adoption of this Article Thirteenth.
SECOND: That the sole stockholder has given written consent to said
amendment in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 and 228 of the General Corporation Law
of the State of Delaware.
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IN WITNESS WHEREOF, said IDS Certificate Company has caused this
certificate to be signed by Paula R. Meyer, its President, and attested by Mary
Jo Olson, its Assistant Secretary, this 30th day of April, 1999.
IDS CERTIFICATE COMPANY
/s/Paula R. Meyer
President
ATTEST:
/s/Mary Jo Olson
Assistant Secretary
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IDS CERTIFICATE COMPANY
POWER OF ATTORNEY
City of Minneapolis
State of Minnesota
Each of the undersigned as a director of IDS Certificate Company, a face-amount
certificate company registered under the Investment Company Act of 1940, hereby
constitutes and appoints Richard W. Kling, Paula R. Meyer, Jay C. Hatlestad,
Timothy S. Meehan, Bruce A. Kohn and Jeffrey S. Horton, or any one of them, as
his or her attorney-in-fact and agent, to sign for him or her in his or her
name, place and stead any and all registration statements and amendments thereto
(with all exhibits and other documents required or desirable in connection
therewith) that may be prepared from time to time in connection with said
Company's existing or future face-amount certificate products--whether pursuant
to the requirements of the Securities Act of 1933, the Investment Company Act of
1940 or otherwise--and periodic reports on Form 10-K, Form 10-Q and Form 8-K
required pursuant to provisions of the Securities Exchange Act of 1934, and any
necessary or appropriate filings with states or other jurisdictions, and grants
to any or all of them the full power and authority to do and perform each and
every act required or necessary or appropriate in connection with such
signatures or filings.
Signed on this 26th day of April, 1999.
/s/Rodney P. Burwell /s/David R. Hubers
Rodney P. Burwell David R. Hubers
/s/Charles W. Johnson /s/Jean B. Keffeler
Charles W. Johnson Jean B. Keffeler
/s/Richard W. Kling /s/Thomas R. McBurney
Richard W. Kling Thomas R. McBurney
/s/Paula R. Meyer
Paula R. Meyer
