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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, 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
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(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 July 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.
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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.
<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
BALANCE SHEET
ASSETS June 30, December 31,
1999 1998
(Unaudited)
($ Thousands)
<S> <C> <C>
Qualified Assets:
Cash and cash equivalents $13,645 $-
Investments in unaffiliated issuers (note 1) 3,581,955 3,669,983
Receivables 46,104 49,664
Investments in and advances to affiliates 418 418
Other 123,335 96,213
Total qualified assets 3,765,457 3,816,278
Other assets 34,594 17,966
Total assets $3,800,051 $3,834,244
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Certificate reserves $3,553,052 $3,404,883
Accounts payable and accrued liabilities 67,708 207,328
Total liabilities 3,620,760 3,612,211
Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in capital 143,844 143,844
Retained earnings 60,242 67,343
Accumulated other comprehensive (loss) income-net of tax (26,295) 9,346
Total stockholder's equity 179,291 222,033
Total liabilities and
stockholder's equity $3,800,051 $3,834,244
See note to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF OPERATIONS (Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
($ Thousands)
<S> <C> <C> <C> <C>
Investment income $62,964 $70,146 $125,159 $140,279
Investment expenses 18,455 19,998 37,852 39,484
Net investment income before provision
for certificate reserves and income tax (expense) benefit 44,509 50,148 87,307 100,795
Net provision for certificate reserves 34,095 42,723 68,232 87,361
Net investment income before income tax (expense) benefit 10,414 7,425 19,075 13,434
Income tax (expense) benefit (1,410) 191 (2,156) 844
Net investment income 9,004 7,616 16,919 14,278
Realized gain on investments - net 1,378 1,343 1,508 1,789
Income tax expense (491) (470) (528) (626)
Net realized gain on investments 887 873 980 1,163
Net income - wholly owned subsidiary - 82 - 128
Net income $9,891 $8,571 $17,899 $15,569
See note to financial statements.
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
($ Thousands)
<S> <C> <C> <C> <C>
Net income $9,891 $8,571 $17,899 $15,569
Other comprehensive (loss) income
Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains arising during period (37,520) 1,061 (53,646) (102)
Income tax benefit (expense) 13,132 (371) 18,776 36
Net unrealized holding (losses) gains arising during period (24,388) 690 (34,870) (66)
Reclassification adjustment for (gains) losses included in
net income (1,183) 57 (1,185) (501)
Income tax expense (benefit) 413 (20) 414 175
Net reclassification adjustment for (gains) losses included
in net income (770) 37 (771) (326)
Net other comprehensive (loss) income (25,158) 727 (35,641) (392)
Total comprehensive (loss) income ($15,267) $9,298 ($17,742) $15,177
See note to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Unaudited)
For the Six Months Ended
June 30, 1999 June 30, 1998
($ Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $17,899 $15,569
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income of wholly owned subsidiary - (128)
Net provision for certificate reserves 68,232 87,361
Interest income added to certificate loans (521) (612)
Amortization of premiums/discounts - net 14,496 10,236
Provision for deferred federal income taxes 281 (2,176)
Net realized gain on investments before income taxes (1,508) (1,789)
Decrease in dividends and interest receivable 3,460 17
Decrease in deferred distribution fees 1,982 2,892
Decrease (increase) in other assets 1,083 (3,094)
(Decrease) increase in other liabilities (23,585) 6,370
Net cash provided by operating activities 81,819 114,646
Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities 107,591 77,973
Available-for-sale securities 253,104 241,779
Other investments 32,851 43,198
Sale of investments:
Held-to-maturity securities - -
Available-for-sale securities 37,031 178,616
Certificate loan payments 2,270 1,996
Purchase of investments:
Held-to-maturity securities (1,856) (1,034)
Available-for-sale securities (311,580) (492,522)
Other investments (76,737) (37,276)
Certificate loan fundings (2,012) (1,924)
Net cash provided by investing activities $40,662 $10,806
See note to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
IDS CERTIFICATE COMPANY
STATEMENT OF CASH FLOWS (Continued) (Unaudited)
For the Six Months Ended
June 30, 1999 June 30, 1998
($ Thousands)
<S> <C> <C>
Cash Flows from Financing Activities:
Payments from certificate owners $706,376 $612,463
Proceeds from reverse repurchase agreements 98,500 593,500
Dividend from wholly owned subsidiary - 3,000
Certificate maturities and cash surrenders (649,212) (831,415)
Payments under reverse repurchase agreements (239,500) (498,500)
Dividends paid (25,000) (4,500)
Net cash used in financing activities (108,836) (125,452)
Net Increase In Cash and Cash Equivalents 13,645 -
Cash and Cash Equivalents Beginning of Period - -
Cash and Cash Equivalents End of Period $13,645 $-
Supplemental Disclosures:
Cash paid for income taxes $10,518 $5,519
Certificate maturities and surrenders through loan
reductions $2,113 $2,528
See note to financial statements.
</TABLE>
IDS CERTIFICATE COMPANY
NOTE TO FINANCIAL STATEMENTS (Unaudited)
($ in Thousands)
1. The following is a summary of investments in unaffiliated issuers:
<TABLE>
<CAPTION>
June 30, Dec. 31,
1999 1998
<S> <C> <C>
Held-to-maturity securities $487,150 $592,815
Available-for-sale securities 2,678,832 2,710,545
First mortgage loans on real estate 385,480 334,280
Certificate loans - secured by certificate reserves 30,493 32,343
Total $3,581,955 $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 June 30, 1999, total assets decreased $34 million while certificate
reserves increased $148 million from December 31, 1998. The decreases in total
assets and in accounts payable and accrued liabilities, primarily reflects net
repayments under reverse repurchase agreements of $141 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 $279 million and $387 million during
the first and second quarters of 1999, respectively, compared to $257 million
and 307 million during the comparable periods in 1998, respectively. Certificate
sales during the first and second quarters 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 first and second quarters of 1999
totaled $43 million and $125 million, respectively.
Certificate maturities and surrenders totaled $333 million and $318 million
during the first and second quarters of 1999, respectively, compared to $365
million and $469 million during the comparable periods in 1998, respectively.
Investment income decreased 11% during the first six months of 1999 from the
prior year's period primarily reflecting a lower average balance of invested
assets.
Investment expenses decreased 4.1% during the first six months of 1999 from the
prior year's period. The decrease resulted primarily from lower distribution
fees of $2.7 million, lower interest expense on reverse repurchase and interest
rate swap agreements of $3.5 million, and lower investment advisory and transfer
agent fees of $.4 million. These lower expenses were partially offset by higher
amortization of premiums paid for index options of $5.0 million.
Net provision for certificate reserves decreased 22% during the first six 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 $3.0 million decrease in income tax benefit on net investment income during
the first six 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 $57 million during
the first six months of 1999 compared to cash used of $219 million during the
prior year's period. The change resulted from higher certificate payments
received of $94 million and lower maturities and surrenders of $182 million
during the first six months of 1999 compared to the prior year's period.
<PAGE>
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. 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). 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 for both American Express and AEFC, 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
$471 million through June 30, 1999 and are estimated to be in the range of $46 -
$72 million for the remainder through 2000.* AEFC's cumulative costs since
inception of the Y2K initiatives were $63 million through June 30, 1999 and are
estimated to be in the range of $6.5 - $8 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 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
performing additional targeted integration testing of systems that support their
most critical business functions, independent validation of such testing and
completing Y2K contingency plans for all critical systems and, to a lesser
extent, certain non-critical systems. A substantial portion of the integrated
testing and related validation has been completed, with the remainder scheduled
to be completed during the third quarter of 1999.*
<PAGE>
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 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, setting-up manual
back-up processes, creating command centers, establishing additional roll-over
management procedures and scheduling the availability of key personnel.
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. The first three of these 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. The final phase of American Express' and AEFC's
contingency planning, which will include validation and verification of the
contingency 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.* 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.
*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) The following exhibits are filed electronically herewith:
10 (a) 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.
(b) 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.
(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
/s/Paula R. Meyer
NAME AND TITLE Paula R. Meyer, President and
Director (Principal Executive Officer)
DATE August 13, 1999
BY
/s/Jay C. Hatlestad
NAME AND TITLE Jay C. Hatlestad, Vice President and
Controller (Principal Accounting Officer)
DATE August 13, 1999
<PAGE>
EXHIBIT INDEX
Exhibit 10 (a): Letter Agreement dated July 28, 1999,
amending the Selling Agent Agreement dated June 1,
1990
(b): Letter Agreement dated July 28, 1999, amending the
Marketing Agreement dated October 10, 1991
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July 28, 1999
American Express Bank International
1221 Brickell Avenue, 8th Floor
Miami, FL 33131
Ladies and Gentlemen:
This is to confirm our agreement that:
(3) Effective only from August 1, 1999, through December 31, 2000, in
Section 2(I)(a) of Schedule A to the Selling Agent Agreement made as of
June 1, 1990, by and between American Express Financial Advisors Inc.
(formerly IDS Financial Services Inc.) and American Express Bank
International, as subsequently amended (the "Selling Agent Agreement"),
".60%" shall replace ".50%";
(4) effective August 1, 1999, in Section 2(I)(a) of Schedule A to the
Selling Agent Agreement, ".40%" shall replace ".30%"; and
(5) the payment in August 1999 to American Express Bank International
pursuant to the Selling Agent Agreement shall also include a special
sales incentive fee of $52,000.
Please note that this is the fourth amendment to the Selling Agent Agreement or
a schedule thereto.
Very truly yours,
AMERICAN EXPRESS FINANCIAL ADVISORS INC.
By: /s/ Paula R. Meyer By: /s/ Mary Jo Olson
Print name: Paula R. Meyer Print name: Mary Jo Olson
Print title: VP - Assured Assets Print title: Assistant Secretary
Accepted and agreed to by
AMERICAN EXPRESS BANK INTERNATIONAL
By: /s/ Jay L. Costello By: ________________________
Print name: Jay L. Costello Print name:__________________
Print title: Senior Director Print
Date: 07/28/99 Date: ___________________
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July 28, 1999
American Express Bank Ltd.
American Express Tower
World Financial Center
New York, NY 10285
Ladies and Gentlemen:
This is to confirm our agreement that:
(1) effective only from August 1, 1999, through December 31, 2000, in Section
2(a) of Schedule A and of Schedule B to the Marketing Agreement made as of
October 10, 1991, by and between IDS Certificate Company and American
Express Bank Ltd., as subsequently amended (the "Marketing Agreement"),
".60%" shall replace ".50%", and
(2) the payment in August 1999 to American Express Bank Ltd. Pursuant to the
Marketing Agreement shall also include a special marketing incentive fee of
$12,500.
Please note that this is the second amendment to the Marketing Agreement or a
schedule thereto.
Very truly yours,
IDS Certificate Company
By: /s/ Paula R. Meyer By: /s/ Mary Jo Olson
Print name: Paula R. Meyer Print name: Mary Jo Olson
Print title: President Print title: Assistant Secretary
Accepted and agreed to by
AMERICAN EXPRESS BANK LTD.
By: /s/ Mary Ann Fitzgibbon By: /s/ Labeeb Abboud
Print name: Mary Ann Fitzgibbon Print name: Labeeb Abboud
Print title: Senior Director Print title: Assistant Secretary
Date: 07/28/99 Date: 7/28/99
