PAGE 1
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, 2000
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
American Express Certificate Company
(formerly 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.)
200 AXP Financial Center, Minneapolis, Minnesota 55474
------------------------------------------------- -----------
(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, 2000
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
AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS Sept. 30, Dec. 31,
------
2000 1999
(Unaudited)
----------------- -----------------
($ Thousands)
<S> <C> <C>
Qualified Assets:
Cash and cash equivalents $223,191 $47,086
Investments in unaffiliated issuers (note 2) 3,676,917 3,492,337
Receivables 44,079 42,537
Investments in and advances to affiliates 422 422
Other 69,933 123,845
----------------- -----------------
Total qualified assets 4,014,542 3,706,227
----------------- -----------------
Other assets:
Deferred federal income taxes 41,612 42,590
Other 9,908 12,251
----------------- -----------------
Total other assets 51,520 54,841
----------------- -----------------
Total assets $4,066,062 $3,761,068
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY
--------------------------------------
Liabilities:
Certificate reserves $3,794,954 $3,536,659
Accounts payable and accrued liabilities 116,547 82,707
----------------- -----------------
Total liabilities 3,911,501 3,619,366
----------------- -----------------
Stockholder's equity:
Common stock 1,500 1,500
Additional paid-in-capital 143,844 143,844
Retained earnings 69,904 62,099
Accumulated other comprehensive loss (60,687) (65,741)
----------------- -----------------
Total stockholder's equity 154,561 141,702
----------------- -----------------
Total liabilities and
stockholder's equity $4,066,062 $3,761,068
================= =================
</TABLE>
See notes to financial statements.
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<TABLE>
<CAPTION>
AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
STATEMENT OF OPERATIONS (Unaudited)
-----------------------
For the Three Months Ended For the Nine Months Ended
-------------------------------------- ---------------------------------------
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
----------------- ----------------- ------------------ ------------------
($ Thousands)
<S> <C> <C> <C> <C>
Investment income $67,093 $64,107 $196,215 $189,266
Investment expenses 22,400 19,374 64,708 57,226
----------------- ----------------- ------------------ ------------------
Net investment income before
provision for certificate reserves
and income tax benefit (expense) 44,693 44,733 131,507 132,040
Net provision for certificate reserves 40,590 34,814 113,017 103,046
----------------- ----------------- ------------------ ------------------
Net investment income before income tax
benefit (expense) 4,103 9,919 18,490 28,994
Income tax benefit (expense) 306 (1,443) (437) (3,599)
----------------- ----------------- ------------------ ------------------
Net investment income 4,409 8,476 18,053 25,395
----------------- ----------------- ------------------ ------------------
Realized gain (loss) on investments - net 669 (48) (8,075) 1,460
Income tax benefit (expense) (234) 17 2,826 (511)
----------------- ----------------- ------------------ ------------------
Net realized gain (loss) on investments 435 (31) (5,249) 949
----------------- ----------------- ------------------ ------------------
Net income $4,844 $8,445 $12,804 $26,344
================= ================= ================== ==================
</TABLE>
See notes to financial statements.
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PAGE 4
<TABLE>
<CAPTION>
AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
---------------------------------
For the Three Months Ended For the Nine Months Ended
-------------------------------------- ---------------------------------------
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
----------------- ----------------- ------------------ ------------------
($ Thousands)
<S> <C> <C> <C> <C>
Net income $4,844 $8,445 $12,804 $26,344
----------------- ----------------- ------------------ ------------------
Other comprehensive income (loss)
Unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses)
arising during period 2,221 (23,819) (13,534) (77,465)
Income tax (expense) benefit (777) 8,336 4,737 27,112
----------------- ----------------- ------------------ ------------------
Net unrealized holding gains (losses)
arising during period 1,444 (15,483) (8,797) (50,353)
Reclassification adjustment for (gains)
losses included in net income (741) (1,061) 2,099 (2,246)
Income tax expense (benefit) 259 372 (735) 786
----------------- ----------------- ------------------ ------------------
Net reclassification adjustment for
(gains) losses included in net income (482) (689) 1,364 (1,460)
----------------- ----------------- ------------------ ------------------
Net other comprehensive income (loss) 962 (16,172) (7,433) (51,813)
----------------- ----------------- ------------------ ------------------
Total comprehensive income (loss) $5,806 ($7,727) $5,371 ($25,469)
================= ================= ================== ==================
</TABLE>
See notes to financial statements.
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<TABLE>
<CAPTION>
AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------
For the Nine Months Ended
--------------------------------------
Sept. 30, 2000 Sept. 30, 1999
----------------- -----------------
($ Thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $12,804 $26,344
Adjustments to reconcile net income to net
cash provided by operating
activities:
Net provision for certificate reserves 113,017 103,046
Interest income added to certificate loans (687) (781)
Amortization of premiums/discounts - net 29,991 20,629
Provision for deferred federal income taxes (1,743) 2,627
Net realized loss (gain) on investments before income taxes 8,075 (1,460)
(Increase) decrease in dividends and interest receivable (1,474) 6,143
Decrease in deferred distribution fees 2,343 2,783
Decrease in other assets - 1,083
Decrease in other liabilities (4,253) (25,654)
----------------- -----------------
Net cash provided by operating activities 158,073 134,760
----------------- -----------------
Cash Flows from Investing Activities:
Maturity and redemption of investments:
Held-to-maturity securities 97,463 118,806
Available-for-sale securities 335,933 365,690
Other investments 60,194 56,720
Sale of investments:
Available-for-sale securities 251,438 77,321
Certificate loan payments 2,605 3,191
Purchase of investments:
Held-to-maturity securities (161) (6,830)
Available-for-sale securities (806,581) (481,773)
Other investments (37,529) (87,513)
Certificate loan fundings (2,308) (2,797)
----------------- -----------------
Net cash (used in) provided by investing activities ($98,946) $42,815
----------------- -----------------
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AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
STATEMENT OF CASH FLOWS (Continued) (Unaudited)
-----------------------------------
For the Nine Months Ended
--------------------------------------
Sept. 30, 2000 Sept. 30, 1999
----------------- -----------------
($ Thousands)
Cash Flows from Financing Activities:
Payments from certificate owners $1,367,911 $1,154,664
Proceeds from reverse repurchase agreements - 98,500
Certificate maturities and cash surrenders (1,220,933) (1,091,861)
Payments under reverse repurchase agreements (25,000) (239,500)
Dividends paid (5,000) (25,000)
----------------- -----------------
Net cash provided by (used in) financing activities 116,978 (103,197)
----------------- -----------------
Net Increase In Cash and Cash Equivalents 176,105 74,378
Cash and Cash Equivalents Beginning of Period 47,086 -
----------------- -----------------
Cash and Cash Equivalents End of Period $223,191 $74,378
================= =================
Supplemental Disclosures:
Cash paid for income taxes $2,558 $11,021
Certificate maturities and surrenders through loan
reductions $3,070 $2,926
</TABLE>
See notes to financial statements.
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AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
NOTES TO FINANCIAL STATEMENTS (Unaudited)
-----------------------------------------
($ in Thousands)
1. The name of the company changed on April 26, 2000, from IDS Certificate
Company to American Express Certificate Company.
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. Certain amounts from the prior year have been reclassified to conform
to the current year presentation.
2. The following is a summary of investments in unaffiliated issuers:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Held-to-maturity securities $367,486 $464,648
Available-for-sale securities 2,922,173 2,620,747
First mortgage loans on real estate 361,043 378,047
Certificate loans - secured by certificate reserves 26,215 28,895
----------------- -----------------
Total $3,676,917 $3,492,337
================= =================
</TABLE>
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AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
Results of operations:
As of September 30, 2000, total assets and certificate reserves increased $305
million and $258 million, respectively, from December 31, 1999. The increase in
total assets resulted primarily from certificate payments exceeding certificate
maturities and surrenders by $147 million and purchases of investment securities
of $83 million late in the third quarter of 2000 that will settle in October
2000. The increase in certificate reserves resulted primarily from interest
accruals of $113 million and the excess of certificate payments over certificate
maturities and surrenders.
Sales of face-amount certificates totaled $435 million and $380 million during
the second and third quarters of 2000, respectively, compared to $387 million
and $427 million during the comparable periods in 1999, respectively.
Certificate maturities and surrenders totaled $491 million and $306 million
during the second and third quarters of 2000, respectively, compared to $318
million and $443 million during the comparable periods in 1999, respectively.
For the nine months ended September 30, 2000 and 1999, sales of face-amount
certificates totaled $1,247 million and $1,093 million, respectively.
Certificate maturities and surrenders during these same periods totaled $1,224
million and $1,095 million, respectively.
Investment income increased 3.7% during the first nine months of 2000 from the
prior year's period primarily reflecting a higher average balance of invested
assets and higher investment yields.
Investment expenses increased 13% during the first nine months of 2000 from the
prior year's period. The increase reflects higher amortization of premiums paid
for index options of $9.2 million. This increase was partially offset by lower
interest expense on reverse repurchase and interest rate swap agreements of $.5
million and $1.1 million, respectively.
Net provision for certificate reserves increased 9.7% during the first nine
months of 2000 from the prior year's period reflecting a higher average balance
of certificate reserves and higher accrual rates.
During the first nine months of 2000, Registrant realized net losses on
investments of $8.1 million compared to net realized gains of $1.5 million
during the prior year's period. During the first nine months of 2000,
write-downs of $9.1 million were recorded on Registrant's below-investment-grade
securities and the reserve for possible losses on first mortgage loans was
increased by $0.3 million. These losses were partially offset by net realized
gains of $1.3 million on investment security sales and redemptions.
At September 30, 2000, approximately 8.3% of Registrant's invested assets were
below- investment-grade bonds, compared to 9.4% at December 31, 1999. During the
year 2000, the industry-wide default rate on below-investment-grade bonds has
increased significantly and this trend is expected to continue over the next
several months and possibly beyond.*
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Additional writedowns of Registrant's below-investment-grade securities
throughout the remainder of 2000 are likely but the amount of any such
writedowns cannot be estimated at this time.* Registrant's management believes
that there will be no adverse impact on the certificate owners of any such
losses.*
Net certificate reserve financing activities provided cash of $147 million
during the first nine months of 2000 compared to cash provided of $63 million
during the prior year's period.
Accounting developments:
In June 1998, the Financial Accounting Standards Board (FASB) issued, and
subsequently amended, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective January 1, 2001. This Statement establishes accounting and reporting
standards for derivative instruments, including some embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Changes in the fair value of a derivative will
be recorded in income or directly to other comprehensive income, depending on
the instrument's designated use. Management believes the transition effect from
the adoption of SFAS No. 133, as amended, at September 30, 2000, would not have
had a material impact on Registrant's net income or financial position. However,
the final financial effects of transition at January 1, 2001 will be measured
based on the derivatives positions, market conditions, and the interpretive
guidance issued by the FASB as of that time.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The SAB outlines the basic criteria that must be met to recognize
revenue, and provides guidelines for disclosure related to revenue recognition
policies. This guidance is required to be implemented in the fourth quarter of
2000. In addition, on October 12, 2000, the SEC staff issued a Frequently Asked
Questions document, which provides the Staff's response to the many inquiries
they have received since the issuance of SAB No. 101. Registrant does not expect
SAB No. 101 to have a material impact on its financial position or results of
operations.
*Statements in this discussion of Registrant's results of operations 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, changes in
the industry-wide and Registrant's default rate on below-investment-grade bonds
over the next several months and beyond, changes in economic conditions, such as
a recession or a substantial increase in prevailing interest rates, or other
factors that could cause a slowdown in the economy, and changes in government
regulation that affects the ability of issuers to repay their debt.
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PAGE 10
AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed electronically herewith:
24. (a) Directors' Power of Attorney dated October 12, 2000
(b) Officers' Power of Attorney dated October 12, 2000.
(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 AMERICAN EXPRESS CERTIFICATE COMPANY
(formerly IDS Certificate Company)
BY
/s/ Paul R. Meyer
NAME AND TITLE Paula R. Meyer, President and
Director (Principal Executive Officer)
DATE November 13, 2000
BY
/s/ Philip C. Wentzel
NAME AND TITLE Philip C. Wentzel, Vice President and
Controller (Principal Accounting Officer)
DATE November 13, 2000
