Item 1. Business
IDS Certificate Company (IDSC) is incorporated under the laws of Delaware. Its principal executive offices are located in the IDS Tower, Minneapolis, Minnesota, and its telephone number is (612) 671-3131. IDS Financial Corporation (IDS), a Delaware corporation, IDS Tower 10, Minneapolis, Minnesota 55440-0010, owns 100% of the outstanding voting securities of IDSC. IDS is a wholly owned subsidiary of American Express Company (American Express), a New York Corporation, with headquarters at American Express Tower, World Financial Center, New York, New York.
IDSC is a face-amount certificate investment company registered under the Investment Company Act of 1940 (1940 Act). IDSC is in the business of issuing face-amount certificates. Face-amount certificates issued by IDSC entitle the certificate holder to receive, at maturity, a stated amount of money and interest or credits declared from time to time by IDSC, in its discretion.
IDSC is continuously engaged in new product development. IDSC currently offers seven certificates to the public: "IDS Future Value Certificate", "IDS Cash Reserve Certificate", "IDS Flexible Savings Certificate" (formerly "IDS Variable Term Certificate"), "IDS Installment Certificate", "IDS Stock Market Certificate", "IDS Investors Certificate" and "IDS Special Deposits". The IDS Special Deposits is only offered for sale in London, England, and is not registered for sale in the United States. All certificates are currently sold without a sales charge. The IDS Installment Certificate, the IDS Flexible Savings Certificate, the IDS Stock Market Certificate, the IDS Investors Certificate and the IDS Special Deposits currently bear surrender charges for premature surrenders. All of the above described certificates, except the IDS Special Deposits, are distributed pursuant to a Distribution Agreement with IDS Financial Services Inc., an affiliate of IDSC. With respect to the IDS Investors Certificate and the IDS Stock Market Certificate, IDS Financial Services Inc., in turn, has a Selling Agent Agreement with American Express Bank International, a subsidiary of American Express, for selling the certificate. IDS Financial Services Inc. also distributes the IDS Stock Market Certificate. With respect to the IDS Special Deposits, IDSC has a Marketing Agreement with American Express Bank Ltd., a subsidiary of American Express, for marketing the certificate.
IDSC also offers one certificate in connection with certain employee benefit plans available to eligible IDS employees, financial planners and retirees. This certificate is called the Series D-1 Investment Certificate.
Except for the IDS Investors Certificate and the IDS Special Deposits, all of the certificates are available as qualified investments for Individual Retirement Accounts (IRAs), or 401(k) plans and other qualified retirement plans.
The specified maturities of the certificates range from four to twenty years. Within that maturity period, most certificates have terms ranging from three to thirty-six months. Interest rates change and certificateholders can surrender their certificates without penalty at term end.
The IDS Future Value Certificate is a single payment certificate that guarantees interest in advance for a 4, 5, 6, 7, 8, 9 or 10-year maturity, at the buyer's option.
The IDS Cash Reserve Certificate is a single pay certificate that permits additional investments and guarantees interest in advance for a three-month term.
The IDS Flexible Savings Certificate is a single payment certificate that permits a limited amount of additional payments and guarantees interest in advance for a term of 6, 12, 18, 24, 30 or 36 months, at the buyer's option.
The IDS Installment Certificate is an installment payment certificate that declares interest in advance for a three-month period and offers bonuses in the third through sixth years for regular investments.
The IDS Stock Market Certificate is a single payment certificate that offers the certificate holder the opportunity to have all or part of his interest tied to stock market performance, as measured by a broad stock market index, with guaranteed return of principal. The holder can also choose to earn a guaranteed fixed rate of interest. In addition to being sold to IDS clients pursuant to a Distribution Agreement with IDS Financial Services Inc., this certificate is sold by American Express Bank International (AEBI), under a Selling Agent Agreement with IDS Financial Services Inc. to AEBI's clients who are neither citizens nor residents of the United States.
The IDS Investors Certificate is a single payment certificate that permits additional payments within 15 days of term renewal. Interest rates are guaranteed in advance for a term of 1, 2, 3, 6, 12, 24 or 36 months, at the buyer's option. This certificate is currently sold by AEBI, through a Selling Agent Agreement with IDS Financial Services Inc., only to AEBI's clients who are neither citizens nor residents of the United States.
The IDS Special Deposits is a single payment certificate that permits additional payments within 15 days of term renewal. Interest rates are guaranteed in advance for a term of 1, 2, 3, 6, 12, 24 or 36 months, at the buyer's option. This certificate is currently sold by American Express Bank Ltd. ("AEB") in the London office, through a Marketing Agreement with IDSC, only to AEB's clients who are neither citizens nor residents of the United States. This certificate is not registered for sale in the United States.
IDSC is by far the largest issuer of face-amount certificates in the United States. However, such certificates compete with many other investments offered by banks, savings and loan associations, mutual funds, broker-dealers and others, which may be viewed by potential clients as offering a comparable or superior combination of safety and return on investment. In particular, some of IDSC's products are designed to be competitive with the types of investment offered by banks and thrifts. Since IDSC's face-amount certificates are securities, their offer and sale are subject to regulation under federal and state securities laws. IDSC's certificates are backed by its qualified assets on deposit and are not insured by any governmental agency.
For all of the certificates, except for the IDS Investors Certificate and the IDS Special Deposits, IDSC's current policy is to re-evaluate the certificate rates weekly to respond to marketplace changes. For the IDS Investors Certificate and the IDS Special Deposits, IDSC's current policy is to re-evaluate the rates on a daily basis. For each product, IDSC refers to an independent index to set the rates for new sales. Except for IDS Special Deposits, IDSC must set the rates within a specified range of the rate from such index. For renewals, IDSC uses such rates as an indication of the competitors' rates, but is not required to set rates within a specified range.
For the IDS Flexible Savings Certificate, IDS Cash Reserve Certificate and the IDS Series D-1 Investment Certificate, the published rates of the BANK RATE MONITOR National Index (trademark) for various length bank certificates of deposit are used as the guide in setting rates. For the IDS Installment Certificate, the average interest rate for money market deposit accounts, as published by the BANK RATE MONITOR National Index (trademark), North Palm Beach, FL, is used as a guide in setting rates. For the IDS Future Value Certificate, the average quoted yields of certain U.S. Treasury Bonds for similar maturities, as published in the Wall Street Journal and the New York Times, are used as a guide in setting rates. For the IDS Investors Certificate and IDS Special Deposits, the published average rates for comparable length dollar deposits available on an interbank basis, referred to as the London Interbank Offered Rates (LIBOR), are used as a guide in setting rates.
To compete with popular short-term investment vehicles such as certificates of deposit, money market certificates and money market mutual funds that offer comparable yields, liquidity and safety of principal, IDSC offers the IDS Cash Reserve Certificate and the IDS Flexible Savings Certificate. The yields and features on these products are designed to be competitive with such short-term products. The IDS Investors Certificate and IDS Special Deposits also compete with short-term products but use LIBOR rates. The IDS Future Value Certificate has certain features similar to those of zero coupon bonds and is intended to compete with that type of investment as well as with intermediate to long-term certificates of deposit. The IDS Installment Certificate is intended to help clients save systematically and may compete with passbook savings and NOW accounts. The IDS Stock Market Certificate is designed to offer interest tied to a major stock market index and guaranteed principal. Certain banks offer certificates of deposit that have features similar to the Stock Market Certificate.
IDSC's gross income is derived principally from interest and dividends generated by its investments. IDSC's net income is determined by deducting from such gross income its provision for certificate reserves, and other expenses, including taxes, the fee paid to IDS for advisory and other services and the distribution fees paid to IDS Financial Services Inc. and AEBI and marketing fees paid to AEB.
The following table shows IDSC's sales and surrenders of certificates for the three years ended December 31, 1993:
1993 1992 1991 Single Payment* (Cash Basis) ($ in millions) Non-Qualified Sales $ 822.5 $1,046.3 $1,208.0 Surrenders 1,162.9 1,368.3 1,536.0 Qualified Sales 115.4 136.5 157.6 Surrenders 220.4 249.1 232.6
Installment Payment (Face-amount Basis) Non-Qualified Sales 369.0 392.7 358.3 Surrenders 327.5 330.9 333.8 Qualified Sales 6.1 9.9 20.2 Surrenders 23.1 48.5 47.6
*Includes Cash Reserve, Flexible Savings, Single Payment, Future Value, Investors, Stock Market and IDS Special Deposits certificates.
In 1993 approximately 12% of single payment certificate sales and 2% of installment certificate sales were of tax-qualified certificates for use in IRAs, and 401(k) plans and other qualified retirement plans.
The certificates offered by IDS Financial Services Inc. are sold pursuant to a distribution agreement which is terminable on 60 days' notice and is subject to annual approval by IDSC's Board of Directors, including a majority of the directors who are not "interested persons" of IDS Financial Services Inc. or IDSC as that term is defined in the 1940 Act. The agreement provides for the payment of distribution fees to IDS Financial Services Inc. for services provided thereunder. IDS Financial Services Inc. is a wholly owned subsidiary of IDS. For the distribution of the IDS Investors Certificate, IDS Financial Services Inc., in turn, has a Selling Agent Agreement with AEBI. For distribution of IDS Special Deposits, IDSC has a Marketing Agreement with AEB. Both agreements are terminable upon 60 days' notice and similarly subject to annual approval of the disinterested directors of IDSC.
IDSC receives advice, statistical data and recommendations with respect to the acquisition and disposition of securities for its portfolio from IDS, under an investment management agreement which is subject to annual renewal by IDSC's Board of Directors, including a majority of the directors who are not "interested persons" of IDS or IDSC.
IDSC is required to maintain "qualified investments" meeting the standards of Section 28(b) of the 1940 Act. The carrying value of said investments must be at least equal to IDSC's net liabilities on all outstanding face-amount certificates plus $250,000. IDSC's qualified assets consist of cash and cash equivalents, first mortgage loans on real estate, U.S. government and government agency securities, municipal bonds, corporate bonds, preferred stocks and other securities meeting specified standards. IDSC is subject to annual examination and supervision by the State of Minnesota, Department of Commerce (Banking Division).
Distribution fees on sale of certain certificates are deferred and amortized over the estimated lives of the related certificates, which is approximately 10 years. Upon surrender, unamortized deferred distribution fees are charged against income. Thus, these certificates must remain in effect for a period of time to permit IDSC to recover such costs.
Item 2.
Item 2. Properties
None.
Item 3.
Item 3. Legal Proceedings
Registrant has no material pending legal proceedings other than ordinary routine litigation incidental to its business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Item omitted pursuant to General Instructions J(1)(a) and (b) of Form 10-K.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
There is no market for the Registrant's common stock since it is a wholly owned subsidiary of IDS and, indirectly, of American Express. Frequency and amount of dividends declared during the past two years are as follows:
Dividend Payable Date Cash In-Kind*
For year ended December 31, 1993: February 9, 1993 $11,000,000 $ - May 13, 1993 13,000,000 - August 10, 1993 13,000,000 - November 10, 1993 12,500,000 - December 31, 1993 15,000,000 - Total $64,500,000 $ - Dividend Payable Date Cash In-Kind*
For year ended December 31, 1992: February 10, 1992 $ 7,300,000 $ - May 8, 1992 15,200,000 - August 10, 1992 21,250,000 - November 10, 1992 40,000,000 - December 30, 1992 - 64,557,994 Total $83,750,000 $64,557,994
* Consisted of an investment security at amortized cost.
Restriction on the Registrant's present or future ability to pay dividends:
Certain series of installment certificates outstanding provide that cash dividends may be paid by IDSC only in calendar years for which additional credits of at least 1/2 of 1% on such series of certificates have been authorized by IDSC. This restriction has been removed for 1994 and 1995 by action of IDSC on additional credits in excess of this requirement.
Appropriated retained earnings resulting from the predeclaration of additional credits to IDSC's certificate holders are not available for the payment of dividends by IDSC. In addition, IDSC will discontinue issuance of certificates subject to the predeclaration of additional credits and will make no further predeclaration as to outstanding certificates if at any time the capital and unappropriated retained earnings of IDSC should be less than 5% of net certificate reserves (certificate reserves less certificate loans). At December 31, 1993, the capital and unappropriated retained earnings amounted to 5.84% of net certificate reserves.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
IDS Certificate Company's (IDSC) earnings are derived from the after-tax yield on invested assets less investment expenses and interest credited on certificate reserve liabilities. Significant changes and trends occur largely due to interest rate changes and the difference between rates of return on investments, rates of interest credited to certificate holder accounts and the mix of fully taxable and tax-advantaged investments in the IDSC portfolio.
In 1989 and 1990, total assets and certificate reserve liabilities increased due to certificate sales exceeding certificate maturities and surrenders. The increases in total assets in 1989 and 1990 also reflect capital contributions from its parent, IDS Financial Corporation (IDS). (See Liquidity and Cash Flow Discussion)
Total assets and certificate reserve liabilities decreased in 1993, 1992 and 1991 due to certificate maturities and surrenders exceeding certificate sales. The excess of certificate maturities and surrenders over certificate sales in 1993, 1992 and 1991 resulted primarily from lower accrual rates declared by IDSC in those years, reflecting lower interest rates available in the marketplace.
1993 Compared to 1992
Gross investment income decreased 20 percent due to a lower balance of invested assets and lower investment yields.
The 6.1 percent decrease in investment expenses resulted primarily from lower distribution fees due to lower certificate sales, and lower investment advisory and services fee due to a lower asset base on which the fee is calculated. These decreases were partially offset by higher amortization of interest rate caps. The higher amortization reflects additional purchases and accelerated amortization of certain interest rate caps in 1993.
Net provision for certificate reserves decreased 31 percent reflecting lower accrual rates and a lower average balance of certificate reserves.
The $7.1 million decrease in income tax benefit resulted primarily from lower tax-advantaged income in 1993. The impact of the change in Federal statutory income tax rate in 1993 was an increase in income tax benefit of $.6 million of which $.4 million reflects the increase in rate on the Dec. 31, 1992 balance of temporary differences.
1992 Compared to 1991
Net investment income of $58.7 million in 1992 was 16 percent higher than in 1991. The primary reason was an interest rate environment in 1992, that resulted in slightly lower long-term investment yields than in 1991 while short-term rates declined significantly. As a result, IDSC's investment yields decreased, however, interest rates credited on certificate reserve liabilities were significantly lower due to the short-term repricing nature of certificate products.
Gross investment income decreased 16 percent due to a lower balance of invested assets and lower investment yields.
The 10 percent increase in investment expenses resulted primarily from higher amortization of premiums paid for interest rate caps and index options used as hedges against changes in rates credited on certificate liabilities. Distribution fees were lower due primarily to lower certificate sales. Investment advisory and services fee was lower due a lower asset base on which the fee is calculated.
Net provision for certificate reserves decreased 31 percent reflecting lower accrual rates and a lower average balance of certificate reserves.
The decrease in income tax benefit resulted primarily from higher pretax income and lower tax-advantaged income in 1992.
LIQUIDITY AND CASH FLOW
IDSC's principal sources of cash are reserve payments from sales of face-amount certificates and cash flows from investments. In turn, IDSC's principal uses of cash are payments to certificate holders for matured and surrendered certificates, purchase of investments and payments of dividends to IDS.
Although certificate sales volume decreased 18 percent in 1993, total sales remained strong reflecting clients' ongoing desire for safety of principal. Sales of single payment certificates totaled $.9 billion compared to $1.1 billion during 1992, $1.4 billion during 1991 and $1.6 billion during both 1990 and 1989.
IDSC, as an issuer of face-amount certificates, is affected whenever there is a significant change in interest rates. In view of the uncertainty in the investment markets and due to the short-term repricing nature of certificate reserve liabilities, IDSC continues to invest in securities with relatively short maturities and in securities that provide for more immediate, periodic interest/principal payments, resulting in improved liquidity. To accomplish this, IDSC continues to invest much of its cash flow in mortgage-backed securities and in sinking-fund preferred stock.
IDSC's investment program is designed to maintain an investment portfolio that will produce the highest possible after-tax yield within acceptable risk standards with additional emphasis on liquidity. The program considers investment securities as investments acquired with the intent and ability to hold for the foreseeable future and is designed to meet anticipated certificate holder obligations. IDSC normally holds its portfolio securities until maturity or retirement, at which time the carrying values are expected to be recovered. At Dec. 31, 1993, securities carried at cost decreased to $2.4 billion from $2.9 billion at Dec. 31, 1992. These securities, which comprise 85 percent of IDSC's total invested assets, are highly rated and well diversified. 96 percent are of investment grade and, other than U.S. Government Agency mortgage-backed securities, no one issuer represents more than two percent of these securities. See note 3 to Financial Statements for additional information on ratings and diversification.
Gross unrealized gains and gross unrealized losses on investment securities carried at cost were $119 million and $6.5 million, respectively, at Dec. 31, 1993.
In 1993, in reaction to the changing interest rate environment, IDSC continued to restructure a portion of its investment security portfolio by selling $349 million of investment securities. The sales included $253 million of mortgage-backed securities purchased at a premium. These securities were sold to decrease exposure to prepayment activity on the underlying pool of mortgages that could have had a negative impact on future yields on these securities. Cash flows of $897 million from operating activities, scheduled maturities, and redemptions of investments in 1993, were more than adequate to fund the net cash outflow of $603 million related to certificate obligations.
During 1992, IDSC charged earnings with $23.7 million of write-downs in the value of certain interest-only, mortgage-backed securities that resulted from high prepayments due to refinancing and additional payment activity on the underlying pool of mortgages due to declining interest rates. At Dec. 31, 1992, the carrying value of these securities was $30.2 million. During 1993, additional write-downs of $.6 million were recorded and all of these securities with a carrying value of $27.4 million were sold for $14.3 million.
During 1993, IDSC's reserve for possible losses on its below investment grade securities was reduced by $12.2 million from $14.2 million at Dec. 31, 1992 to $2.0 million at Dec. 31, 1993. The reduction reflects sales and exchanges of certain of these issues in 1993. IDSC does not generally invest in below investment grade securities and is limited by regulation as to the amount of such securities it can hold. IDSC's holdings in these securities result principally from the downgrading of the securities subsequent to purchase by IDSC. Management believes that reserves for possible losses on securities owned at Dec. 31, 1993, are adequate, however, future economic factors could impact the ratings of securities owned and additional reserves for losses may need to be recognized.
Impact of New Accounting Standards
In May of 1993, the Financial Accounting Standards Board issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which IDSC will implement, effective Jan. 1, 1994. Underthe new rules, debt securities that IDSC has both the positive intent and ability to hold to maturity will be carried at amortized cost. Debt securities that IDSC does not have the positive intent and ability to hold to maturity and all marketable equity securities will be classified as available-for-sale and carried at fair value. Unrealized gains and losses on securities classified as available-for-sale will be carried as a separate component of Stockholder's Equity. The effect of the new rules will be to increase Stockholder's Equity by approximately $4 million, net of taxes, as of Jan. 1, 1994.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," is expected to have no material impact on IDSC's results of operations or financial condition.
Dividends
Cash dividends ranging from $17.9 million to $83.8 million were declared during each of the years 1989 to 1993. In addition, dividends-in-kind were declared consisting of an investment security of $64.6 million in 1992 and a reduction in the notes receivable from IDS of $25.5 million and $1.5 million in 1991 and 1989, respectively. As a result of projected adequate earnings in 1994 and capital in excess of regulatory requirements, IDSC anticipates declaring regular cash dividends of approximately $50 million in 1994.
Capital Contributions
IDSC received capital contributions from IDS of $54.7 million in Fund American Companies, Inc. preferred stock in 1990 and $18.5 million in cash and $85.9 million in Fund American Companies, Inc. preferred stock in 1989. American Express Company made capital contributions to several subsidiaries in 1989 and IDSC, through IDS, was able to take advantage of this special opportunity. The contributions benefited IDSC by providing support for the increased certificate sales volumes in 1991, 1990 and 1989, allowing for future growth and for payment of regular dividends.
Due to the decrease in IDSC's assets in 1992, IDSC felt its holding in Fund American Companies, Inc. preferred stock was too large an exposure to a single credit risk, resulting in IDSC's dividend-in-kind of the issue to IDS. IDS subsequently contributed capital to IDSC of $52.3 million. The contribution was necessary in management of IDSC's regulatory capital requirements.
Ratios
The ratio of stockholder's equity to total assets less certificate loans at Dec. 31, 1993, was 5.59 percent, compared to 5.34 percent in 1992. IDSC intends to manage this ratio to five percent in 1994, which meets current regulatory requirements. IDS CERTIFICATE COMPANY
Item 8.
Item 8. Financial Statements and Supplementary Data
1. Financial Statements and Schedules Required under Regulation S-X
Index to Financial Statements and Schedules Page
Financial Statements:
Report of Independent Auditors 21
Responsibility for Preparation of Financial Statements 22
Balance Sheet, December 31, 1993 and 1992 23-24
Statement of Operations, year ended December 31, 1993, 1992 and 1991 25-26
Statement of Stockholder's Equity, year ended December 31, 1993, 1992 and 1991 27
Statement of Cash Flows, year ended December 31, 1993, 1992 and 1991 28
Notes to Financial Statements 29-43
Schedules:
I - Investments in Securities of Unaffiliated Issuers, December 31, 1993
II - Investments in and Advances to Affiliates and Income Thereon, December 31, 1993, 1992 and 1991
III - Mortgage Loans on Real Estate and Interest earned on Mortgages, year ended December 31, 1993
V - Qualified Assets on Deposit, December 31, 1993
IX - Supplementary Profit and Loss Information, three years ended December 31, 1993
XI - Certificate Reserves, year ended December 31, 1993
XII - Valuation and Qualifying Accounts, year ended December 31, 1993, 1992 and 1991
Schedules III and XI for the year ended December 31, 1992 and Schedule XI for the year ended December 31, 1991 are included in Registrant's Annual Reports on Form 10-K for the fiscal years ended December 31, 1992 and December 31, 1991, respectively, Commission file 2-23772, and are incorporated herein by reference.
2. Supplementary Data None
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
PART III
Items omitted pursuant to General Instructions J(1)(a) and (b) of Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List the following documents filed as a part of the report:
1. All financial statements. See Item 8.
2. Financial statement schedules. See Item 8.
3. Exhibits
(1)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 IDS Investors Certificate), is incorporated herein by reference.
(1)b. Form of the Distribution Agreement for the American Express Savings Certificate between Registrant and American Express Service Corporation, filed electronically as Exhibit 1(b) to the Registration Statement for the American Express International Investment Certificate (now called the IDS Investors Certificate), is incorporated herein by reference.
(1)c. Selling Agent Agreement dated June 1, 1990, between American Express Bank International and IDS Financial Services Inc., for the IDS Investors and IDS Stock Market Certificates, 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.
(1)d. Marketing Agreement dated October 10, 1991, between Registrant and American Express Bank Ltd., filed electronically as Exhibit 1(d) to Post-Effective Amendment No. 31 to Registration Statement No. 2-55252 for the Series D-1 Investment Certificate, is incorporated herein by reference.
(3)a. The ISA Certificate of Incorporation and ISA By- Laws, filed electronically as Exhibit 3(a) and 3(c) to Post-Effective Amendment No. 2 to Registration Statement No. 2-95577 are incorporated herein by reference.
(3)c. Certificate of Amendment, dated April 2, 1984, to ISA's Certificate of Incorporation filed electronically as Exhibit 3(b) to Post-Effective Amendment No. 2 to Registration Statement No. 2-95577 is incorporated herein by reference.
(4) Forms of Cash Reserve Certificate, Future Value Certificate, Installment Investment Certificate, Series D-1 Investment Certificate and Variable Term Certificate filed electronically as Exhibit 4 to Post- Effective Amendment No. 2 to Registration Statement No. 2-95577 are incorporated by reference. Form of Certificate for IDS Stock Market Certificate filed electronically as Exhibit 4 to Pre-Effective Amendment No. 2 to Registration Statement No. 33-22503, is incorporated herein by reference.
(10)a. The Investment Advisory and Services Agreement between ISA and IDS/American Express Inc. dated January 12, 1984 filed electronically as Exhibit 10(a) to Post- Effective Amendment No. 2 to Registration Statement No. 2-95577 is incorporated herein by reference.
(10)b. 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. 2 to Registration Statement No. 2-95577 is incorporated herein by reference.
(10)c. Loan Agreement between Registrant and Investors Syndicate Development Corporation dated October 13, 1970, filed electronically as Exhibit 10(c) to Post- Effective Amendment No. 2 to Registration Statement No. 2-95577 is incorporated herein by reference.
(10)d. Agreement for the servicing of Residential Mortgage Loans between ISA and Advance Mortgage Company, Ltd., dated August 31, 1980, filed electronically as Exhibit 10(d) to Post-Effective Amendment No. 2 to Registration Statement No. 2-95577 is incorporated herein by reference.
(10)e. Agreement for the servicing of Commercial Mortgage Loans between ISA and FBS Mortgage Corporation, dated October 1, 1980, filed electronically as Exhibit 10(e) to Post-Effective Amendment No. 2 to Registration Statement No. 2-95577 is incorporated herein by reference.
(10)f. Agreement by and between registrant and IDS/American Express Inc. ("IDS") providing for the purchase by IDS of a block of portfolio securities from registrant, filed as Exhibit 10.5 to the September 30, 1981 Quarterly Report on Form 10-Q of Alleghany Corporation, is incorporated herein by reference.
(10)g. Transfer Agent Agreements for the servicing of the American Express Savings Certificate, filed electronically as Exhibit 10(g) to Pre-Effective Amendment No. 1 to Registration Statement No. 33-25385, are incorporated herein by reference.
(10)h. Foreign Deposit Agreement dated November 21, 1990, between IDS Certificate Company and IDS Bank & Trust, filed electronically as Exhibit 10(h) to Post- Effective Amendment No. 5 to Registration Statement No. 33-26844, is incorporated herein by reference.
(25)a. Officers' Power of Attorney dated February 1, 1994, filed as Exhibit 25(a) to Post-Effective Amendment No. 34 to Registration Statement No. 2-55252, is incorporated herein by reference.
(25)b. Directors' Power of Attorney dated February 1, 1994, filed as Exhibit 25(b) to Post-Effective Amendment No. 34 to Registration Statement No. 2-55252, is incorporated herein by reference.
(b) Reports on Form 8-K filed during the last quarter of the period covered by this report.
None SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT IDS CERTIFICATE COMPANY
/s/ Stuart A. Sedlacek BY BRUCE A. KOHN NAME AND TITLE Stuart A. Sedlacek* ** President DATE March 29, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BY BRUCE A. KOHN NAME AND TITLE Stuart A. Sedlacek* ** President Principal Executive Officer and Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE John M. Knight,* Controller (Principal Accounting Officer) DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE Morris Goodwin,* Treasurer and Principal Financial Officer DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE David R. Hubers,** Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE Charles W. Johnson,** Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE Edward Landes,** Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE Peter A. Lefferts,* Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE John V. Luck,** Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE James A. Mitchell, Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE Harrison Randolph,** Director DATE March 29, 1994
BY BRUCE A. KOHN NAME AND TITLE Gordon H. Ritz,** Director DATE March 29, 1994
* Signed pursuant to Officers' Power of Attorney dated February 1, 1994 filed as Exhibit 25(a) to Post-Effective Amendment No. 34 to Registration Statement No. 2-55252, incorporated herein by reference.
_______________________ Bruce A. Kohn
** Signed pursuant to Directors' Power of Attorney dated February 1, 1994 filed as Exhibit 25(b) to Post-Effective Amendment No. 34 to Registration Statement No. 2-55252, incorporated herein by reference.
_______________________ Bruce A. Kohn
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Security Holders IDS Certificate Company:
We have audited the accompanying balance sheets of IDS Certificate Company as of December 31, 1993 and 1992, and the related statements of operations, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the index at item 8. These financial statements and schedules are the responsibility of the management of IDS Certificate Company. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. Our procedures included confirmation of investments owned as of December 31, 1993 and 1992 by correspondence with custodians and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IDS Certificate Company at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG Minneapolis, Minnesota February 3, 1994 IDS Certificate Company
Responsibility for Preparation of Financial Statements
The management of IDS Certificate Company is responsible for the preparation of the financial statements and related notes included in this Form 10-K. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances, and include amounts based on the best judgment of management. Financial information included elsewhere in this Form 10-K is consistent with these financial statements.
In recognition of its responsibility for the integrity and objectivity of data in the financial statements, management maintains a system of internal accounting controls. This system includes an organizational structure with clearly defined lines of responsibility and delegation of authority. To ensure the effective administration of internal control, employees are carefully selected and trained, written policies and procedures are developed and disseminated, and appropriate communication channels are provided to foster an environment conducive to the effective functioning of controls.
The system is supported by an internal auditing function that reports its findings to management throughout the year. IDS Certificate Company's independent auditors are engaged to express an opinion on the year-end financial statements. They objectively and independently review the performance of management in carrying out its responsibility for reporting operating results and financial condition. With the coordinated support of the internal auditors, they review and test the system of internal accounting controls and the data contained in the financial statements.
Notes to Financial Statements ($ in thousands unless indicated otherwise) - -------------------------------------------------------------------
1. Summary of Significant Accounting Policies
IDS Certificate Company (IDSC) is a wholly owned subsidiary of IDS Financial Corporation (IDS), which is a wholly owned subsidiary of American Express Company.
IDSC is in the business of issuing face-amount investment certificates.
Described below are certain accounting policies that are important to an understanding of the accompanying financial statements.
Basis of Financial Statement Presentation
The accompanying financial statements are presented on a historical cost basis without adjustment of the net assets attributable to the 1984 acquisition of IDS by American Express Company. They include only the accounts of IDSC. IDSC uses the equity method of accounting for its investment in its wholly owned unconsolidated subsidiary, which is the method prescribed by the Securities and Exchange Commission (SEC) for issuers of face-amount certificates. Certain amounts from prior years have been reclassified to conform to the current year presentation.
Fair Values of Financial Instruments
The fair values of financial instruments disclosed in the notes to financial statements are estimates based upon current market conditions and perceived risks, and require varying degrees of management judgment.
Preferred Stock Dividend Income
IDSC recognizes dividend income from cumulative redeemable preferred stocks with fixed maturity amounts on an accrual basis similar to that used for recognizing interest income on debt securities.
Securities
Cash equivalents are carried at amortized cost, which approximates fair value. IDSC has defined cash and cash equivalents as cash in banks and highly liquid investments with a maturity of three months or less at acquisition and are not interest rate sensitive.
IDSC's investment program considers investment securities as long-term investments and is designed to meet contractual investment certificate obligations. IDSC has the ability to hold these securities to their maturities and has the intent to hold them for the foreseeable future. Notes to Financial Statements (continued) - -------------------------------------------------------------------
Marketable equity securities and other securities without fixed maturity dates are carried at aggregate cost or market value, whichever is lower. A valuation allowance is established for net unrealized depreciation on marketable equity securities and is charged against stockholder's equity. Bonds and notes, and preferred stocks that either must be redeemed by the issuer or may be redeemed by the issuer at the holder's request are carried at amortized cost. The basis for determining realized gains and losses on securities is the amortized cost of bonds and notes on a "first-in, first-out" basis and the average cost of individual issues of stocks. When there is a decline in value, that is other than temporary, the securities are carried at estimated realizable value.
First Mortgage Loans on Real Estate
Mortgage loans are carried at amortized cost, less reserves for losses, which is the basis for determining any realized gains or losses. When economic evaluations of the underlying real estate indicate a loss on a loan is likely to occur, an allowance for such loss is recorded. IDSC generally stops accruing interest on loans for which interest is delinquent more than three months.
Certificates
Investment certificates may be purchased either with a lump-sum payment or by installment payments. Certificate holders are entitled to receive at maturity a definite sum of money. Payments from certificate holders are credited to investment certificate reserves. Investment certificate reserves accumulate at specified percentage rates. Reserves also are maintained for advance payments made by certificate holders, accrued interest thereon, and for additional credits and accrued interest thereon. On certificates allowing for the deduction of a surrender charge, the cash surrender values may be less than accumulated investment certificate reserves prior to maturity dates. Cash surrender values on certificates allowing for no surrender charge are equal to certificate reserves. The payment distribution, reserve accumulation rates, cash surrender values, reserve values and other matters are governed by the Investment Company Act of 1940 ("the 1940 Act").
Deferred Distribution Fee Expense
On certain series of certificates, distribution fees are deferred and amortized over the estimated lives of the related certificates, which is approximately 10 years. Upon surrender, unamortized deferred distribution fees are charged against income.
Federal Income Taxes
IDSC's taxable income or loss is included in the consolidated federal income tax return of American Express Company. IDSC provides for income taxes on a separate return basis, except that, Notes to Financial Statements (continued) - -------------------------------------------------------------------
under an agreement between IDS and American Express Company, tax benefits are recognized for losses to the extent they can be used in the consolidated return. It is the policy of IDS and its subsidiaries that IDS will reimburse a subsidiary for any tax benefits recorded.
2. Deposit of Assets and Maintenance of Qualified Assets
A. Under the provisions of its certificates and the 1940 Act, IDSC was required to have qualified assets (as that term is defined in Section 28(b) of the 1940 Act) in the amount of $2,767,057 and $3,244,505 at Dec. 31, 1993 and 1992, respectively. IDSC had qualified assets of $2,931,737 at Dec. 31, 1993 and $3,411,173 at Dec. 31, 1992, including investment securities loaned to brokers of $nil and $1,643 at Dec. 31, 1993 and 1992, respectively.
Qualified assets are valued in accordance with such provisions of the Code of the District of Columbia as are applicable to life insurance companies. Qualified assets for which no provision for valuation is made in such Code are valued in accordance with rules, regulations or orders prescribed by the SEC. These values are the same as financial statement carrying values, except for securities which are carried at the lower of aggregate cost or market in the financial statements but are valued at cost for qualified asset and deposit maintenance purposes.
B. Pursuant to provisions of the certificates, the 1940 Act, the central depositary agreement and to requirements of various states, qualified assets of IDSC were deposited as follows:
Net unrealized gains on fixed maturities amounted to $112,712 and $77,435 at Dec. 31, 1993 and 1992, respectively.
IDSC's reserve for possible losses on its below investment grade securities was $2,049 at Dec. 31, 1993 compared to $14,210 at Dec. 31, 1992. The decrease reflects sales and exchanges of certain of these issues in 1993.
The amortized cost and fair value of investments in securities with fixed maturities by contractual maturity, are shown below. Cash flows will differ from contractual maturities because issuers may have the right to call or prepay obligations.
Proceeds from sales of investments in securities with fixed maturities during 1993 and 1992 were $330,851 and $420,713, respectively. Gross gains of $3,272 and $17,514 and gross losses of $19,927 and $2,730 were realized on those sales during 1993 and 1992, respectively.Notes to Financial Statements (continued) - -------------------------------------------------------------------
B. Investments in securities with fixed maturities comprised 85 percent and 88 percent of IDSC's total invested assets at Dec. 31, 1993 and 1992, respectively. Securities are rated by Moody's and Standard & Poors (S&P), or by IDS internal analysts, using criteria similar to Moody's and S&P, when a public rating does not exist. A summary of investments in securities with fixed maturities by rating of investment is as follows:
Rating 1993 1992 - ------------------------------------------ Aaa/AAA...................... 35% 35% Aa/AA........................ 4 4 Aa/A......................... 1 1 A/A.......................... 22 21 A/BBB........................ 3 6 Baa/BBB...................... 31 28 Below investment grade....... 4 5 - ------------------------------------------ 100% 100% - ------------------------------------------ Of the securities rated Aaa/AAA, 87 percent at Dec. 31, 1993 and 89 percent at Dec. 31, 1992, are U.S. Government Agency mortgage-backed securities that are not rated by a public rating agency. Approximately 23 percent at Dec. 31, 1993 and 25 percent at Dec, 31, 1992 of other securities with fixed maturities are rated by IDS internal analysts. No investment in any one issuer at Dec. 31, 1993 and 1992, is greater than two percent and one percent, respectively, of IDSC's total investment in securities with fixed maturities.
At Dec. 31, 1993 and 1992, approximately ten percent and seven percent, respectively, of IDSC's invested assets were first mortgage loans on real estate. A summary of first mortgage loans by region and by type of real estate is as follows:
Region 1993 1992 Property Type 1993 1992 - -------------------------------- -------------------------------------- South Atlantic....... 23% 21% Apartments................. 40% 46% East North Central... 23 25 Retail/shopping centers.... 28 19 West North Central... 21 24 Industrial buildings....... 13 11 Middle Atlantic...... 14 16 Office buildings........... 10 12 West South Central... 8 6 Hotels/motels.............. 1 2 Mountain............. 6 3 Retirement homes........... 1 1 Pacific.............. 3 2 Residential................ - 3 New England.......... 2 3 Other...................... 7 6 - -------------------------------- -------------------------------------- 100% 100% 100% 100% - -------------------------------- -------------------------------------- Notes to Financial Statements (continued) - ------------------------------------------------------------------- The carrying amounts and fair values of first mortgage loans on real estate are as follows at Dec. 31. The fair values are estimated using discounted cash flow analysis, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
At Dec. 31, 1993 and 1992, commitments for fundings of first mortgage loans, at market interest rates, aggregated $nil and $30.6 million, respectively. IDSC employs policies and procedures to ensure the creditworthiness of the borrowers and that funds will be available on the funding date. IDSC's first mortgage loan fundings are restricted to 75 percent or less of the market value of the real estate at the time of the loan funding. Management believes there is no fair value for these commitments.
C. IDSC reserves freedom of action with respect to its acquisition of restricted securities that offer advantageous and desirable investment opportunities. In a private negotiation, IDSC may purchase for its portfolio all or part of an issue of restricted securities. Since IDSC would intend to purchase such securities for investment and not for distribution, it would not be "acting as a distributor" if such securities are resold by IDSC at a later date.
The fair values of restricted securities are determined by the Board of Directors using the procedures and factors described in paragraph A of note 3.Notes to Financial Statements (continued) - -------------------------------------------------------------------
In the event IDSC were to be deemed to be a distributor of the restricted securities, it is possible that IDSC would be required to bear the costs of registering those securities under the Securities Act of 1933, although in most cases such costs would be borne by the issuer of the restricted securities.
D. IDSC will implement, effective Jan. 1, 1994, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under the new rules, debt securities that IDSC has both the positive intent and ability to hold to maturity will be carried at amortized cost. Debt securities that IDSC does not have the positive intent and ability to hold to maturity and all marketable equity securities will be classified as available-for-sale and carried at fair value. Unrealized gains and losses on securities classified as available- for-sale will be carried as a separate component of Stockholder's Equity. The effect of the new rules will be to increase Stockholder's Equity by approximately $4,304, net of taxes, as of Jan. 1, 1994. The measurement of unrealized securities gains and losses in Stockholder's Equity is affected by market conditions, and therefore, subject to volatility. The new rules will not have a material impact on IDSC's results of operations.
4. Certificate Reserves
Reserves maintained on outstanding certificates have been computed in accordance with the provisions of the certificates and Section 28 of the 1940 Act. The average rates of accumulation on certificate reserves at Dec. 31, 1993 and 1992 were:
Notes to Financial Statements (continued) - -------------------------------------------------------------------
A. There is no minimum rate of accrual on these reserves. Interest is declared periodically, quarterly or annually, in accordance with the terms of the separate series of certificates.
B. On certain series of single payment certificates, additional interest is predeclared for periods greater than one year. At Dec. 31, 1993, $2,726 of retained earnings had been appropriated for the predeclared additional interest, which represents the difference between certificate reserves on these series, calculated on a statutory basis, and the reserves maintained per books.
C. Certain series of installment certificates guarantee accrual of interest on advance payments at an average of 3.05 percent. IDSC has increased the rate of accrual to 3.51 percent through April 30, 1995. An appropriation of retained earnings amounting to $25 has been made, which represents the estimated additional accrual that will result from the increase granted by IDSC.
D. IDS Stock Market Certificate enables the certificate holder to participate in any relative rise in a major stock market index without risking loss of principal. Generally the certificate has a term of 12 months and may continue for up to 14 successive terms. The reserve balance at Dec. 31, 1993 and 1992 was $402,801 and $445,021, respectively.
E. The carrying amounts and fair values of certificate reserves consisted of the following at Dec. 31, 1993 and 1992. Fair values of certificate reserves with interest rate terms of one year or less approximated the carrying values less any applicable surrender charges. The fair values for other certificate reserves is a discounted cash flow analysis using interest rates currently offered for certificates with similar remaining terms, less any applicable surrender charges.Notes to Financial Statements (continued) - -------------------------------------------------------------------
5. Dividend Restriction
Certain series of installment certificates outstanding provide that cash dividends may be paid by IDSC only in calendar years for which additional credits of at least one-half of 1 percent on such series of certificates have been authorized by IDSC. This restriction has been removed for 1994 and 1995 by action of IDSC on additional credits in excess of this requirement.
6. Fees Paid to IDS and Affiliated Companies ($ not in thousands)
A. The basis of computing fees paid or payable to IDS for investment advisory and services is:
The investment advisory and services agreement with IDS provides for a graduated scale of fees equal on an annual basis to 0.75 percent on the first $250 million of total book value of assets of IDSC, 0.65 percent on the next $250 million, 0.55 percent on the next $250 million, 0.50 percent on the next $250 million and 0.45 percent on the amount in excess of $1 billion. The fee is payable monthly in an amount equal to one-twelfth of each of the percentages set forth above. Excluded from assets for purposes of this computation are first-mortgage loans, real estate and any other asset on which IDSC pays a service fee.Notes to Financial Statements (continued) - -------------------------------------------------------------------
B. The basis of computing fees paid or payable to IDS Financial Services Inc. (an affiliate) for distribution services is:
Fees payable to IDS Financial Services Inc. on sales of IDSC's certificates are based upon terms of agreements giving IDS Financial Services Inc. the exclusive right to distribute the certificates covered under the agreements. The agreements provide for payment of fees over a period of time. The aggregate fees payable under the agreements per $1,000 face amount of installment certificates and $1,000 purchase price of single payments, and a summary of the periods over which the fees are payable, shown by series are:
Fees on Cash Reserve and Flexible Savings (formerly Variable Term) certificates are paid at a rate of 0.25 percent of the purchase price at time of issuance and 0.25 percent of the reserves maintained for these certificates at the beginning of the second and subsequent quarters from issue date.
Fees on the Investors Certificate are paid at an annualized rate of 1 percent of the reserves maintained for the certificates. Fees are paid at the end of each term on certificates with a one, two or three-month term. Fees are paid each quarter from date of issuance on certificates with a six, 12, 24 or 36-month term.
Fees on the Stock Market Certificate are paid at a rate of 1.25 percent of the purchase price on the first day of the certificate's term and 1.25 percent of the reserves maintained for these certificates at the beginning of each subsequent term.
(a) At the end of the sixth through the 10th year, an additional fee is payable of 0.5 percent of the daily average balance of the certificate reserve maintained during the sixth through the 10th year, respectively.Notes to Financial Statements (continued) - -------------------------------------------------------------------
C. The basis of computing depositary fees paid or payable to IDS Bank & Trust (an affiliate) is:
- ------------------------------------------------------------------- Maintenance charge per account..... 5 cents per $1,000 of assets on deposit
Transaction charge................. $20 per transaction
Security loan activity: Depositary Trust Company receive/deliver................ $20 per transaction Physical receive/deliver......... 25 per transaction Exchange collateral.............. 15 per transaction - -----------------------------------------------------------------------
A transaction consists of the receipt or withdrawal of securities and commercial paper and/or a change in the security position. The charges are payable quarterly except for maintenance, which is an annual fee.
D. The basis for computing fees paid or payable to American Express Service Corporation (an affiliate) in connection with the American Express Savings certificate was:
Distribution Fees - Fees were paid at a rate of 0.25 percent of the reserves maintained at the end of the first and subsequent calendar quarters.
Transfer Agent Fees - Fees of $3.50 per certificate account were paid each month.
E. The basis for computing fees paid or payable to American Express Bank Ltd. (an affiliate) for the distribution of the IDS Special Deposits certificate on an annualized basis is 0.80 percent of the reserves maintained for the certificates on an amount from $250,000 to $499,000, 0.65 percent on an amount from $500,000 to $999,000 and 0.50 percent on an amount $1,000,000 or more. Fees are paid at the end of each term on certificates with a one, two or three-month term. Fees are paid at the end of each quarter from date of issuance on certificates with a six, 12, 24 or 36-month term. Notes to Financial Statements (continued) - ------------------------------------------------------------------- 7. Income Taxes
Income tax expense (benefit) as shown in the statement of operations for the three years ended Dec. 31, consists of:
Income tax expense (benefit) differs from that computed by using the U.S. statutory rate of 35 percent for 1993 and 34 percent for 1992 and 1991. The principal causes of the difference in each year are shown below:
Deferred income taxes result from the net tax effects of temporary differences. Temporary differences are differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in differences between income for tax purposes and income for financial statement purposes in future years. Principal components of IDSC's deferred tax assets and liabilities as of Dec. 31, are as follows:
9. Options
IDSC offers a series of certificates which pay interest based upon the relative change in a major stock market index between the beginning and end of the certificates' term. The certificate holders have the option of participating in the full amount of increase in the index during the term (subject to a specified maximum) or a lesser percentage of the increase plus a guaranteed minimum rate of interest. As a means of hedging its obligations under the provisions of these certificates, IDSC purchases and writes call options on the major market index. The options are cash settlement options, that is, there is no underlying security to deliver at the time the contract is closed out. There is the risk that the counterparties to the purchased call option contracts may be unable to fulfill their obligations. IDSC employs policies and procedures to ensure the adequacy of the creditworthiness of counterparties. Following is a summary of open option contracts at Dec. 31, 1993 and 1992. Notes to Financial Statements (continued) - -------------------------------------------------------------------
The option contracts are less than one year in term and are carried at the aggregate of the amortized cost and underlying intrinsic value of the contracts. These carrying amounts may be different than fair value depending on market conditions and other factors. The amortization of the cost of purchased and the proceeds of written call options is included net in investment expenses and the changes in the intrinsic value of the contracts are included net in provision for certificate reserves, in the statement of operations. The purchased options are included in other qualified assets and the written options are included in other liabilities.
The carrying amounts and fair values of options consisted of the following at Dec. 31, 1993 and 1992. Fair values are determined using the procedures and factors described in paragraph A of note 3.
PAGE 44 SCHEDULE I
NOTES:
(a) The classification "residential" includes single dwellings only. business".
(b) Real estate taxes and easements, which in the opinion of the Company are not undue burden on the properties, have been excluded from the determination of "prior liens".
(c) In this schedule III, carrying amount of mortgage loans represents unpaid principal balances plus unamortized premiums less unamortized dicounts and allowance for loss.
(d) Interest in arrears for less than three months has been disregarded in computing the total amount of principal subject to delinquent interest. The amounts of mortgage loans being forclosed are also included in amounts subject to delinquent interest.
(e) Information as to interest due and accrued at the end of the period is shown by type of mortgage loan. Information as to interest due and accrued for the various classes within the types of mortgage loans is not readily available and the obtaining thereof would involve unreasonable effort and expense.
The Company does not accrue interest on loans which are over three months delinquent.
(f) Information as to interest income by type and class of loan has been omitted because it is not readily available and the obtaining thereof would involve unreasonable effort and expense. In lieu thereof, the average gross interest rates (exclusive of amort- tization of discounts and premiums) on mortgage loans held at December 31, 1993 are shown by type and class of loan.
The average gross interest rates on mortgage loans held at December 31, 1993, 1992 and 1991 are summarized as follows:
1993 1992 1991 First mortgages: ----- ----- ----- Insured by Federal Housing Administration 7.076% 5.817% 5.765% Partially guaranteed under Servicemen's Readjustment Act of 1944, as amended 8.000 6.719 6.447 Other 9.055 9.282 9.628 ----- ----- -----
Combined average 9.055% 9.207% 9.433% ===== ===== =====
(g) Following is a reconciliation of the carrying amount of mortgage loans for the years ended December 31, 1993, 1992 and 1991.
1993 1992 1991 ---- ---- ---- [S] [C] [C] [C] Balance at beginning of period $ 233,796 $ 145,055 $ 96,083 Additions during period: New loans acquired: Nonaffiliated companies 59,183 98,314 61,990 Allowance for loss transferred to real estate 530 350 0 Allowance for loss real estate 220 0 0 Amortization of discount/premium 90 61 129 ---------- ---------- ---------- Total additions 60,023 98,725 62,119 ---------- ---------- ---------- 293,819 243,780 158,202 ---------- ---------- ---------- Deductions during period: Collections of principal 5,908 9,484 12,147 Cost of mortgages sold 6,046 0 0 Allowance for loss 0 500 782 Writeoff 0 0 218 ---------- ---------- ---------- Total deductions 11,954 9,984 13,147 ---------- ---------- ---------- Balance at end of period $ 281,865 $ 233,796 $ 145,055 ========== ========== ==========
(h) The aggregate cost of mortgage loans for federal income tax purposes at December 31, 1993 was $282,865.
(i) At December 31, 1993, an allowance for loss of $961 is recorded to reduce the carrying value of conventional loans since evidence indicates that a loss is likely to occur.
Part 4 - Amounts Periodically Credited to Certificate Holders' Accounts to Accumulate the Maturity Amount of Installment Certificates.
Information as to (1) amounts periodically credited to each class of security holders' accounts from installment payments and (2) such other amounts periodically credited to accumulate the maturity amount of the certificate (on a $1,000 face-amount certificate basis for the term of the certificate), is filed in Part 4 of Schedule IX as part of Post- effective Amendment No. 9 to Registration Statement No. 2-17681, Post effective Amendment No. 1 to Registration Statement No. 2-23772 and Post-effective Amendment No. 1 to Registration Statement No. 2-258081 and is incorporated herein by reference.